Subscriptions, Digital Real Estate To Drive News Corp’s Fiscal 2019

News Corp‘s (NASDAQ: NWSA) second quarter earnings per share and revenues came in ahead of market expectations. In Q2, the company’s revenues grew 21% year-over-year (y-o-y) to $2.6 billion, primarily due to continued growth in the Digital Real Estate business, Book Publishing segment and Subscription Video Services. It should be noted that News Corp consolidated Foxtel and Fox Sports Australia (including Sky News), reflecting in the revenue segment Subscription Video Services. This consolidation will make circulation and subscription revenues the biggest revenue stream for News Corp for the first time, guarding the company against the volatile advertising market. In addition, the company’s total earnings before interest, taxes, depreciation, and amortization (EBITDA) grew more than 13% y-o-y, and it posted a net profit of $95 million as reported.

Our $17 price estimate for News Corp’s stock is almost 30% ahead of the current market price. We have created an interactive dashboard on What To Expect From News Corp’s Fiscal 2019 Earnings which outline our forecasts for the company’s full-year fiscal 2019 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

What Drove News Corp’s EBITDA?

News Corp’s overall EBITDA grew due to the continued strength in the Book Publishing and Digital Real Estate Services segments. The company’s net income, restructuring charges, and D&A expenses grew year-over-year, leading to growth in total EBITDA. Below, we illustrate the various factors that were responsible for the company’s EBITDA growth.

 Q3 Trends

In Subscription Video services, News Corp could see additional costs of $25 to $30 million related to cricket and $10 to $15 million incremental marketing for Kayo Sports. In Book Publishing, overall trends remain favorable with digital contribution rising modestly. The upcoming release slate includes Girl, Stop Apologizing, On the Come Up, and We Are the Gardeners, in addition to strong backlist sales. At News and Information Services, the company expects higher costs at Dow Jones in the third quarter to drive execution growth initiatives, including expansion into live events. In addition, the company expects continued challenges at News America Marketing, mostly related to FSI advertising.

Digital Real Estate – The Engine Of Growth

Digital Real Estate is News Corp’s fastest-growing segment. The segment contributes 44% of the total company EBITDA, which is almost four times the amount of the company’s other segments individually. This is largely due to the relatively low-cost nature of the business. In Q2, Digital Real Estate segment revenues increased 7% y-o-y to $311 million, and the segment’s EBITDA grew 2% y-0-y, largely due to continued growth at REA Group and Move. In Q3, the company expects continued reinvestment to drive revenue growth at realtor.com and Opcity, including high marketing and product development.

Future Outlook

The combination of the Digital Real Estate Services and Subscription Video Services segments is expected to account for well over half of News Corp’s profits. At News and Information Services, while pre-advertising trends continue downwards, they have been relatively stable though visibility remains limited. As a consequence, the company is focused on driving higher penetration of digital paid subscriptions, particularly in Australia and at News UK in fiscal 2019. At Subscription Video Services, the company will focus on launching new OTT products, 4K, the next generation of the IQ Box and managing its broadcast base. In Book Publishing, underlying trends seem relatively stable and the company will be focused on its foreign language penetration.

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