Good day, and welcome to the News Corp Fourth Quarter and Full Fiscal Year 2019 Conference Call. Today's conference is being recorded. Media is invited on a listen-only basis. At this time, I would like to turn the conference over to Mike Florin. Please go ahead sir..

Thank you very much, Karina. Hello, everyone, and welcome to News Corp's fiscal fourth quarter 2019 earnings call. We issued our earnings press release about an hour ago, and it's now posted on our website at newscorp.com. On the call today are Robert Thomson, Chief Executive; and Susan Panuccio, Chief Financial Officer.

We'll open with some prepared remarks, and then we'll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to News Corp's business and strategy. Actual results could differ materially from what is said.

News Corp's Form 10-K and Form 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information. Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA and adjusted EPS.

The definitions and GAAP to non-GAAP reconciliations of such measures can be found in our earnings release. With that, I'll pass it over to Robert Thomson for some opening comments..

Girl, Wash Your Face; and Girl, Stop Apologizing, together shipped more than 5 million units during the year. We also saw great success with David Williams, including Ice Monster and World’s Worst Teachers; and Mark Manson had continuing success with his sequel to The Subtle Art of Not Giving an Expletive, with Everything is Expletive.

With that book title, I will hand the call over to Susan for an unvarnished account of our fourth quarter and full year 2019..

Thank you, Robert. Before I review this year’s end quarter financial results, I wanted to highlight five themes from this past fiscal year where we’ve made significant progress. Firstly, we’re making notable progress in stabilizing the News and Information Services segment and entered our fiscal year on a positive note.

Our digital paid subscriber base continues to grow while we continue to focus on streamlining our critical space and investing in new revenue streams. Importantly, the segment posted a higher profitability this year with improvement across our key news publishing business units. The first time we’ve seen this improvement since the Company’s separated.

We will remain focused on these areas in the coming year, and we are optimistic we can build on the current use of this. Secondly, the team at Foxtel have made steady progress on its over-the-top offering, including a successful launch of Kayo in November and further improvement to its premium broadcast product.

Foxtel returned to volume growth, ending the year at the highest closing paid subscriber base since separation. And now with the core platforms in hub, they are focused on improving a path to revenue and profit growth.

The performance in our Book Publishing segment this year underscores the value of premium content and the advantage of a global distribution network, posting record profitability even when facing a very challenging prior year comparable.

Given the rapid rise of downloadable audiobooks and the explosion in demand for premium content globally, we continue to explore ways that HarperCollins can see the leverage its highly valued content into other media.

As Robert mentioned, recent examples of these efforts are our announced partnership with Sony Pictures Entertainment and also with media in Canada our Harlequin division. These are deals with minimum capital outlay which have the potential to monetize content more broadly.

Our businesses in the Digital Real Estate Services segment made strategic acquisitions, expanded their product offering and continue to capture audience share amid a challenging global healthy market. We feel positive about our pace of innovation and investment and believe this segment is well-positioned going into fiscal 2020.

And finally, we continue to actively look at our portfolio. In June, we announced that News America Marketing is undergoing a strategic review, including actively exploring sale, and that process is ongoing. With that, I would now like to discuss our financial results.

For the full-year fiscal 2019, total revenues were $10.1 billion, a 12% increase compared to the prior year. Reported results for fiscal 2019 include the consolidation of Foxtel.

On an adjusted basis, which excludes the impact of the Foxtel consolidation, significant currency headwinds and other items as disclosed in the press release, revenues rose 1%. Total segment EBITDA for the year was $1.24 billion compared to $1.1 billion in the prior year, a 16% increase over the prior-year period.

Adjusted total segment EBITDA for the year rose 4%. Full-year dilution in earnings per share were $0.26 compared to a loss of $2.60 in the prior year, primarily driven by the absence of the non-cash impairment charges and writedowns of $1.2 billion recognized in fiscal 2018.

Adjusted earnings per share for the year were $0.46 versus $0.44 in the prior year. Free cash flow available to the company for the year were $213 million, which included a step up in capital expenditures related to the consolidation of Foxtel. And now to the quarterly financial detail.

We reported fiscal 2019 fourth quarter total revenues of approximately $2.5 billion, down 8% versus the prior year, due in part to the $105 million impact from continued currency headwind. Adjusted revenues declined 5%. Total segment EBITDA for the quarter was $269 million compared to $314 million in the prior year, down 14%.

Adjusted segment EBITDA declined 8%. For the quarter, loss per share was $0.09 compared to a loss of $0.64 a year ago with the improvement mainly due to the absence of the write-off of the FOX SPORTS Australia channel distribution agreement last year. Adjusted earnings per share were $0.07 compared to $0.08 in the prior year.

Turning now to the individual operating segments. In News and Information Services, revenues for the quarter were over $1.2 billion, down approximately 5% versus the prior year. Currency had a $40 million or 3% negative impact and was responsible for the majority of the decline.

Digital revenues to Dow Jones and the newspaper markets represented 37% of combined revenue, approximately 33% of the segments revenue were digital, up from 30% in the prior year. Advertising revenues for the segment were down 8% in the quarter versus the prior year with approximately $18 million or 2% due to negative currency fluctuations.

Circulation and subscription revenues were flat versus the prior year despite $17 million or 3% negative impact from foreign currency.

Segment EBITDA for the quarter was $108 million, up 14% over the prior year and a very strong improvement from the last two quarters, primarily driven by News America Marketing, but also benefiting positive contribution from Dow Jones and News UK. I will now talk through some segment highlights.

At Dow Jones, the consumer circulation revenues in the fourth quarter remained robust, growing 7% for the fourth consecutive quarter, benefiting from 14% growth in digital-only paid subscribers at The Wall Street Journal to over 1.8 million as well a subscription price increases.

Digital paid subscribers accounted for over 69% of total subscriber of The Wall Street Journal, which is up from over 64% last year. Total subscribers in the quarter for Dow Jones consumer products, which also includes Financial News in the UK, reached approximately 3.3 million, again posting record level.

Of that, the digital-only subscribers rose 20% versus the prior year to 2.2 million subscribers. Over the same period, Barron’s expanded its total subscriber base to 579,000, a 16% year-over-year increase.

Within the professional information business, Risk and Compliance grew 23% in the quarter compared to the prior year and as expected, exceeded $139 million in revenues this year. We continue to expect significant growth ahead as we expand our product range. Overall, our professional information business grew 2% this quarter.

Advertising revenues at Dow Jones in the quarters was flat, a notable improvement from last quarter led by an improvement in digital advertising as we had anticipated. For the quarter, digital advertising accounted for 40% of total Dow Jones advertising compared to 39% last year.

Elsewhere across our news portfolio, advertising conditions were overall relatively stable with last quarter. Advertising revenues at News Australia and News UK declined 8% and 7%, respectively, yet both were down only 1% in local currency compared to the prior year, benefiting from higher digital advertising revenues.

Pleasingly, The Times in the UK grew fleet advertising revenue in local currency for the seventh consecutive quarter. On circulation, our digital subscribers around the globe are growing at an impressive rate. Digital subscribers rose 19% to 304,000 at The Times and the Sunday Times.

And they also have approximately 5 million registered users, which is both a source of subscriber acquisitions and an advertising opportunity as we continue to leverage our increasing audience scale.

At News Australia, paid digital subscribers rose over 24% year-over-year to more than 517,000, which include 146,000 digital and bundled subscribed at The Australian. The increase in digital subscription along with cover price increases at News U.K. and News Australia allowed both markets to mitigate print volume decline and currency headwind.

Finally, at News America Marketing, revenues fell 6% driven by continued weakness in free-standing insert products but partially offset by in-store product growth. Cost initiatives help NAM contribute high profitability in the quarter.

Turning to the Subscription Video Services segment, revenues for the quarter was $536 million, down the 12% versus $610 million a year ago, of which $44 million or 7% was due to the negative impact from foreign currency.

Broadcast revenue trends were relatively similar to the prior quarter with the revenue decline driven by a lower broadcast subscriber base and changes to the broadcast subscriber package mix. The revenue decline was partially offset by increased revenue contributions from Foxtel Now and Kayo.

Segment EBITDA in the quarter was $85 million, down 12% with the prior year. From the fourth quarter, we are now comparing like-for-like as we completed the Foxtel consolidation in the fourth quarter of fiscal 2018.

Turning to the KPIs, Foxtel's closing paid subscriber base rose to over 3.1 million as of June 30, with volume growing 12% versus the prior year. Growth was driven by Kayo, strong adoption of Foxtel Now and the inclusion of commercial subscribers at Foxtel Australia.

Of that subscriber base, approximately 2.4 million of the total closing subscribers were broadcast and commercial subscribers and remain consistent of Kayo and Foxtel Now subscription.

We are making steady progress in our OTT strategy, with Kayo claiming subscribers at 331,000 as of June 30, up by over 120,000 since our last update on May 8 and more than doubled since the third quarter, driven by the Cricket World Cup and the expansion of our distribution channel.

Including trials, the total paid subscriber base reached approximately 382,000. Pleasingly thus far, Kayo is not forming a material chain in Foxtel broadcast customer base with an estimated 5% of Foxtel disconnection since Kayo's launch being driven by customers moving to Kayo.

Foxtel Now also performed strongly with total paying subscribers reaching over 446,000 as of June 30, up 36% from last year. While this is down from the May 8 update to due to the conclusion of the Game of Thrones, Foxtel has been focused on retention, and overall, the product has exceeded our expectations.

In the aggregate, Foxtel had a strong and growing base of OTT subscribers, which in total reached 842,000 subscribers at June 30, of which approximately 777,000 were paying subscribers, accounting for 25% of Foxtel's total paying subscriber base and is reflective of Foxtel strategy to monetize existing rights of a multiple platform.

In the fourth quarter, broadcast churn was 14.7% versus 12.5% in the prior year, reflective of a 300 basis points improvement from the third quarter. The outcome in the fourth quarter reflects early successes from leveraging data and analytics to reduce churn despite the price increases.

In addition, the team is focused on stabilizing broadcast ARPU, which is more than AUD78 in the fourth quarter, down 1% versus last year. Capital expenditures related to Foxtel were approximately $300 million for fiscal 2019 which is lower than what we had anticipated, and we expect sizable declines in fiscal 2020.

Approximately 65% of the CapEx was subscriber related. Finally, we issued Foxtel AUD200 million shareholder vote in May at a variable rate of approximately 9% as we continue to work with banks on refinancing upcoming maturity.

At Book Publishing, as expected, we faced an unusually strong prior year comparison with the prior year including a one-time revenue contribution of $28 million for the Tolkien sublicense to Amazon and the release of Magnolia Table by Joanna Gaines.

Revenues for the quarter decreased 14% to $419 million due to the fact that I just noted as well as approximately $18 million of negative impact from the new revenue recognition standard. Segment EBITDA fell to $44 million from $72 million, with the biggest factor impacting profitability being the absence of the Tolkien deal from the prior year.

Notwithstanding the fourth quarter results, HarperCollins have had a very strong year and outperformed our expectations. HarperCollins posted high digital revenues for the quarter and a fiscal year lead by the continued expansion of downloadable audio, which accounts for approximately 1/3 of digital sales today.

They will also move to fairly capitalize our momentum and the depth of their backlist to generate longer-term incremental revenues as they have done via the new deals with Sony and Bell Media. At the Digital Real Estate Services segment, revenues were down 5% to $283 million, primarily related to currency headwinds of $13 million.

On an adjusted basis, revenues were flat. REA Group’s revenues were down 6% and up 1% in local currency as higher yield and increased debt penetration was offset by an overall 19% year-over-year decline in the existing volume during the quarter, which was notably weaker than the third quarter and full year rate of 9% and 8% declines respectively.

Please refer to REA's earnings release and the conference call following this call for additional detail and comments on the outlook. News revenues rose 3% to $123 million versus the prior year with real estate revenues growing 8%.

The increase in real estate revenues, which represents 77% of total revenue, reflect higher yield per lease, a slight improvement in buyer lead volume and the acquisition of Opcity. While lead volumes remain subdued, the business did see an improvement in run rates in June, which should build momentum to this coming fiscal year.

As I mentioned last quarter, we began live testing of performance-based early model in over a dozen markets starting on May 1 to analyze the impact on scalability of this platform. Early results have been promising, with improvements in engagement and leasing rates, which we expect to drive higher conversion rates.

During fiscal 2020, we will continue to allocate lead flow to Opcity, although we expect that in most markets, we will be offering both our existing connection SaaS products along with the Opcity concierge model.

We have, as mentioned last quarter, began to reallocate resources within the realtor.com team to better position and streamline the business to this year and beyond.

On audience, we saw an acceleration versus the third quarter growth rate and average monthly unique users at realtor.com to a record 72 million for the quarter, rising 14% versus the prior year together with notable pickup in engagement. Segment EBITDA fell 15% to $84 million similar to the third quarter rate.

The decline was driven by higher investment in Opcity and the $5 million negative impact from currency. On an adjusted basis, segment EBITDA decreased 7%. I would now like to mention a few things to the fiscal 2020 here.

At News and Information Services, while advertising visibility remains limited, the revenue mix is becoming less dependent on print, and we are encouraged by the pace of global uptake of paid digital subscribers. In fact, excluding NAM, the majority of segment's revenue will be circulation and subscription revenues.

So far, the advertising trends are similar to slightly better in the current quarter, and we continue to remain digital while reinvesting in our digital offerings. Overall, our expectation is a show further stability in this segment and it is pleasing that we finish the year with some strength.

We do note the first quarter will face a challenging comparisons due to the $48 million benefit in the prior year related to News U.K.'s exit of the gaining partnership with Tabcorp. In Subscription Video Services, overall cost increases should be modest in fiscal 2020 absent currency fluctuation.

We will have one additional quarter of domestic Cricket rights approximately $20 million before locking the rights and some additional OTT expenses as we drive further penetration. This will be in conjunction with our continued efforts to seek cost efficiencies.

We also expect a non cash impact of approximately $30 million to $35 million in fiscal 2020 related to a change in amortization methodologies the sports and entertainment programming. We expect CapEx in the Foxtel to decline by approximately 20% compared to fiscal 2019 and overall expect higher cash generation from the business.

In Book Publishing, we will face tougher comparison to the fiscal year given the outperformance in fiscal 2019.

However, we are confident with our slice of tussle, which will be headlined a new releases from Regent Raymond, Ajay Sims, Daniel Silver and David Dwellings in the UK among others, along with expected continued growth in downloadable audiobooks.

Fiscal third quarter releases include Daniel Silva's The New Girl and Ann Patchett’s The Dutch House as well as the tie-in edition of Garth Stein's The Art of Racing in the Rain, which will hit the movie theaters this weekend.

At Digital Real Estate Services, despite a challenging housing market in Australia, REA should benefit from higher debt penetration and higher pricing. Please refer to REA's call for a more detailed outlook.

At realtor's fiscal 2020, we anticipate both higher revenue and higher profit contribution by further expanding the Opcity concierge model, returning the non-listing base advertising back to growth and leveraging the recent cost initiatives. With that, let me hand it over to your operator for Q&A..

Thank you very much. [Operator instructions] And we'll take our first question from Entcho Raykovski with Credit Suisse. Please go ahead..

Hi, Robert. Hi, Susan. A couple of brief questions for me. First one is around costs within news and insight services. So in the quarter, you had the same market, pretty good cost performance given that the EBITDA grow on revenues.

Can you talk to the extent to which that was cost reductions within News America Marketing as opposed to the other segment within news and insight services? I'm just interested particularly in extent to which of those cost reductions can continue into FY 2020. And then on News America Marketing, you've given us a brief update on the sale process.

Can you give us an indication of likely timing that you're looking at? And are you looking at mainly tied to financial bias?.

Hi, Entcho, it’s Susan here. Maybe I'll take the first question and hand over to Robert for the second question. Just in relation to the cost, they declined 7%, but down 4% on an adjusted basis.

So cost distribution, Dow Jones cost are up but we would expect that to be up given the subscriber growth and the investments that we have in the PIB business in Risk and Compliance. Across the other businesses in the UK and Australia posted decline, and within them clearly cost declined by around 12% year-on-year.

We are expecting to see cost continue to increase across the UK and Australia. We have been quite vocal about that over the past couple of years.

The teams across the UK and Australia are very focused on cost reduction and continue to look at ways that they can innovate and drive costs, particularly out of the back office and some of the distribution chain. And we would also expect to see Dow Jones investing in that business going forward.

But I would say that overall, we do balance the cost reductions with investment even within the UK and Australia because it's important that we can support that digital growth coming through in the businesses..

Entcho, obviously at this moment it is a little difficult to be absently specific about the identity of the bidders other than to say there's quite a few. But more broadly, we understand when it comes to the new score, that this is complex, it's not properly valued. And so we have begun a process of simplification that will be ongoing.

The first, most tangible sign of that is the sale process at NAM. That company itself would change characters over the past few years and become more value because there was in-store and digital growth and a little less relevant into News Corp's core business. So it made sense to do that strategic review and that is materially interesting becoming..

Thank you. And so Karina will take our next question please..

Thank you. We'll next hear from Kane Hannan with global – I'm sorry, Goldman Sachs. Please go ahead..

Good morning, guys. Just on the Foxtel OTT strategy, I think in the past, you've said you would only launch an entertainment SVOD if you're happy with Kayo's performance.

But first, just given that growth you reported in the quarter, can you give us a bit of an update on around your plans if they exist for an entertainment SVOD? And just on the NAM business, can you give us a sense of both the EBITDA and margin that business makes? Or how you're thinking about any potential for that transaction?.

Kane, again a little difficult to be specific, but the fundamental principle applies that if we thought Kayo was successful, then we would proceed with the new products. What we are seeing is Kayo is success, and fundamentally what we're seeing is a real growth in a number of Australians prepared to pay for premium programming.

And there is little more premium than exclusive sports runs. So the old story about Foxtel was it had maxed out on subscribers that they were strictly limited number of Australians prepared to pay for content, and we heard that limit.

Frankly, that's clearly not the case, and the doubling of Kayo subscribers has actually been accompanied by a fall during the same period by the rate of churn among sports users, subscribers on broadcast. That is a significant trend and an indication of the success of Kayo..

And Kane, just in relation to News America Marketing, we don't disclose the margins in relation to that business. What I can say is we do disclose the revenues and that is obviously in the release. At this stage, we are obviously exploring the options as Robert said, in relation to the strategic review, and that will including exploring the sale.

But we're not going to comment further biggest that process is being concluded that's what we may do with the cash proceeds..

Thank you, Kane. Karine, we’ll take our next question, please..

Thank you. We'll hear next from Craig Huber with Huber Research Partners. Please go ahead..

Yes. Hi. Thank you. I guess two quick questions.

Robert, Susan, what's changing your mind and your Board's mind to actually potentially put News America Marketing for sale now? I mean why now for that? And also, Susan, can you give us more clarity about how we should think about the cost for Foxtel for fiscal 2020 above and beyond what you've already said? Thank you..

Craig, as I said a little earlier, we understand that the company is complex and that the valuation that we get, really a remarkable collection of asset is not fully realized in the share price.

And so we have begun this process of simplification and that the most obvious outcome at this stage of that is the decision to conduct the strategic review of NAM, and that is well under way..

I think Craig, I'll just also add to that, that one of the things that we've been thinking about is how to allow greater focus on News Corp's primary pillars including the creation and distribution of premium content in the digital segment. So just in addition to the comments that Robert said.

Just in relation to your second question, in relation to Foxtel cost base, in relation to next year, clearly the current year, fiscal 2019 is the investment year for Foxtel. We are very clear about that and transparent particularly in relation to the Cricket rights.

If we cast our lines forward to the next financial year, we would expect to have a one additional quarter of Cricket right so that. US$20 million, we will, no doubt, have some continued investment in OTT as we scale this product and depending on the marketing activities around that.

But more importantly as I mentioned in my comment, we'll have this non-cash impact related to the programming amortization change, which is about $30 million to $35 million. So that will impact on the result. Outside of that, we expect that cost base will be relatively notwithstanding the variable nature of it due to subscribers..

Thank you, Craig. Karine, we’ll take our next question, please..

Thank you. We'll next hear from Brian Han with Morningstar. Please go ahead..

Hi, Robert, I have one question for you. I noticed that Fox recently invested in an online lending company called Credible, I think. And it looks like something that perhaps News Corp could also have been interested in as part of your digital – digitalization strategy.

So my question is has there been situations where News Corp and Fox compete for an acquisition? And if so, how do you guys decide who's going to take the first dibs and who is going to back off?.

Brian, we look after News Corp. [indiscernible] saying about that Fox acquisition is that clearly, the Fox news and Fox Business news, great plasticizers of products. And that particular company has a very broad range of financial products aimed at consumers. So I wouldn't be surprised at all that it was a Fox acquisition.

But we are separate companies and we ourselves are always reviewing our portfolio. Operator, we’ll – any more questions, Karina..

[Operator instructions] And it appears we have no further questions at this time. I'd like to turn the call back over to Mr. Florin for any additional or closing remarks..

Great. Thank you, Karina, and thank you for all participating. We look forward talking to you soon. Have a great rest of the day. Take care..

Once again, that does conclude today’s conference. Thank you for your participation, you may now disconnect your phone line..