News Corporation: How Did The Company Turn Profitable After 2 Years Of Heavy Losses?

by Trefis Team
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After posting heavy losses in the previous two years, News Corporation (NASDAQ: NWSA) has successfully been able to turn its business around. Although News Corporation Revenues (NWSA’s business model and segment-wise revenue break-up) increased at a CAGR of 11.3% over the last two years to reach $10.1 billion in FY 2019, the company reported losses in 2017 and 2018. However, the company’s net income margin came in at 1.5% in FY 2019, compared to -9.1% and -16.8% in FY 2017 and FY 2018, respectively. Margin growth was primarily led by:

  • Healthy increase in revenue base
  • Lower equity losses of affiliates resulting from the absence of the $957 million non-cash write-down of the carrying value of the Company’s investment in Foxtel recognized in 2018
  • Lower impairment and restructuring charges resulting from the absence of non-cash impairment charges related to the impairment of goodwill and intangible assets at the News America Marketing reporting unit and at the FOX SPORTS Australia reporting unit
  • Partially offset by higher depreciation and amortization, and interest expense

You can view the Trefis interactive dashboard – News Corp Profitability: Margin and Cost Analysis – to better understand the cost-break up and margin movements. In addition, here is more Trefis Media data.

Revenue Growth

  • NWSA added over $1.9 billion to its revenue base from 2017 and 2019, led by sharp growth in the Subscription Video Services and Digital Real Estate Services segments.
  • Inorganic growth strategies, such as important business combinations – Foxtel and FOX Sports – along with key acquisitions – Smartline, Hometrack, and Opcity – has led to healthy revenue growth in recent years.

Cost Decline

Total expenses increased by $1.04 billion from 2017 to 2019, lower than the revenue rise, which pushed the margins higher. Following is the cost break-up and analysis for NWSA:

(a) Operating Expenses

  • After decreasing in 2018, operating expense as a % of revenue increased in 2019 due to additional expenses related to the combination of Foxtel Group and FOX Sports.
  • Though expense is likely to go up further due to the transaction, the revenue addition/benefit from it will outweigh the cost increase in the next two years.

(b) SG&A Expense

  • Despite acquisitions and other transactions, SG&A as a % of revenue decreased in 2019, led by healthy growth in revenue and foreign currency effect.
  • With revenue expected to increase only marginally in the next two years, we expect the metric to remain flat in the near term.

(c) Depreciation Expense

  • Depreciation expense increased sharply in 2019, led by an increase in asset base in the Subscription Video Services Segment, driven by the Foxtel-FOX combination.
  • The metric is expected to remain elevated due to increased asset base.

(d) Impairment & Restructuring

  • Impairment charges have seen a significant reduction in the recent years, in the absence of impairment charges related to the impairment of goodwill and intangible assets at the News America Marketing reporting unit and at the FOX SPORTS Australia reporting unit.

(e) Interest Cost

  • As a result of the company consolidating outstanding debt of about $1.8 billion due to acquisitions, its interest expense has shot up significantly in 2019.

(f) Equity Losses of Affiliates

  • Equity losses of Affiliates improved from $1 billion in 2018 to $17 million in 2019, primarily due to the absence of a $957 million non-cash write-down of the carrying value of the Company’s investment in Foxtel.
  • News Corp ceased accounting for Foxtel as an equity method investment and began consolidating its results in the fourth quarter of fiscal 2018.

(g) Effective Tax Rate

  • For FY2019 the Company recorded a tax expense of $126 million on pre-tax income of $354 million resulting in an effective tax rate (35.6%) that was higher than the U.S. statutory tax rate.
  • The higher tax rate was primarily due to lower tax benefits on impairments, valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses, and the impact from foreign operations which are subject to higher tax rates.

(h) Other Expenses

  • Other expenses decreased drastically in 2019, due to the absence of a large loss related to the Foxtel-FOX deal, primarily resulting from the write-off of the FOX SPORTS Australia channel distribution agreement intangible asset, along with the absence of the negative impact of the Tax Act recognized in FY 2018.

Outlook

  • Revenue is expected to increase by 0.5% to $10.1 billion in 2020 and further by 0.6% to $10.2 billion in 2021, as most of the acquisition benefits have already been realized.
  • Near term revenue growth is expected to be driven by subscription and real estate divisions, due to increased advertising on the digital platforms and changing consumer preferences, partially offset by lower print advertising revenue and book sales.
  • Net income margin is expected to see only a marginal improvement in the near term, with it rising from 1.5% in FY 2019 to 1.6% and 1.7% in the next two years, on the back of lower operating expenses, and restructuring and impairment cost.

Thus, in contrast to the previous two years, NWSA’s operations are expected to remain profitable at least in the near term.

As per News Corp Valuation by Trefis, we have a price estimate of $15 per share for News Corp’s Stock.

 

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