Shares of News Corporation (NWSA Quick QuoteNWSA - Free Report) have increased 7.9% during after-trading hours on Feb 4, thanks to better-than-expected performance in second-quarter fiscal 2021. Moreover, the bottom line increased on a year-over-year basis.

Further, revenue growth across all the company’s segments, except News Media, was encouraging. The quarter also reflected gains from the ongoing digital transformation of the business. In fact, it delivered the largest profits for Dow Jones since the company’s buyout in 2007. This Zacks Rank #2 (Buy) company is also witnessing rapid expansion at Move. Markedly, the New York Post delivered its first profit in modern times.

We note that shares of this diversified media and information services company have gained 40.3% in the past year compared with the industry’s rise of 31.4%.

Quarterly Details

News Corporation delivered adjusted earnings of 34 cents per share that beat the Zacks Consensus Estimate of 9 cents. Markedly, the bottom line increased 88.9% from 18 cents reported in the year-ago quarter.

Total revenues of $2,414 million surpassed the Zacks Consensus Estimate of $2,160 million but declined 3% from the prior-year quarter’s levels. The year-over-year decline in revenues reflects negative impact of $191 million stemming from the divestiture of News America Marketing and softness in the print advertising market. The top line was under pressure due to negative impacts worth $34 million triggered by the closure or digital transitioning of certain regional and community newspapers in Australia. These declines were partly offset by growth witnessed in the Book Publishing, Digital Real Estate Services and Dow Jones segments along with a 2% (or $75 million) positive impact from foreign currency movements.

Excluding the impact of acquisitions, divestitures and foreign currency fluctuations, adjusted revenues were $2,324 million, up 2% year over year.

Total segment EBITDA was $497 million, reflecting an increase of 40% from the prior-year quarter’s levels. The year-over-year growth resulted from robust performance by key segments, buoyed by a combination of improved operating trends and cost declines, and $18-million favorable foreign currency impacts. Further, adjusted total segment EBITDA increased 39% to $486 million.

Segment Details

Revenues at the Digital Real Estate Services segment increased 15% year over year to $339 million, including a 4% positive impact from foreign currency fluctuations. Adjusted revenues for the segment improved 11%, while adjusted EBITDA surged 19%.

Revenues in REA Group grew 6% year over year to $184 million, driven by a 7% positive impact from foreign currency fluctuations. Moreover, modest declines in the commercial and Asian businesses were compensated by improvement in Australian residential depth revenues.

Further, revenues in Move went up 28% to $155 million on account of higher real estate revenues. Real Estate revenues, which represented 83% of total Move revenues, had improved 30% on consistent strength in the referral model and recovery of the traditional lead generation product. These were buoyed by increased average monthly lead volume and transaction volume. Additionally, Move’s internal data reveals that average monthly unique users of realtor.com’s web and mobile sites in the second quarter improved 37% to 80 million.

The Subscription Video Services segment’s revenues were $511 million, up 2% year over year including a 7% gain from foreign currency fluctuations and increased revenues from OTT products. The upsides were somewhat offset by impact of fewer residential broadcast subscribers as well as a 2% negative impact from lower commercial subscription revenues arising out of the continuing limitations on pubs, clubs and other commercial venues due to the pandemic. However, adjusted revenues for the segment fell 7% and adjusted EBITDA decreased 9%.

Foxtel’s total closing paid subscribers were roughly 3.314 million as of Dec 31, 2020, reflecting a rise of 12%. The growth resulted from increased subscribers at Kayo and the launch of Binge, partially offset by reduced commercial and residential broadcast subscribers. Broadcast subscriber churn was 17.5% in the quarter under review compared with 16% in the prior year. Meanwhile, Broadcast ARPU improved 3% to A$80 (US$58).

Revenues at the Dow Jones segment rose 4% year over year to $446 million mainly due to increased subscription and digital advertising revenues, and circulation revenues, partially countered by reduced revenues from print advertising. The segment’s digital revenues represented 70% of total revenues compared with 64% in the prior-year quarter. Adjusted revenues also improved 1%, while adjusted EBITDA grew 47%.

Notably, circulation and subscription revenues improved 8% during the quarter under review, driven by consistent strength in digital-only subscriptions, partly offset by reduced single-copy and amenity sales owing to COVID-19. This also included a 1% favorable impact of foreign currency fluctuations. Further, professional information business revenues improved 4%. Markedly, strong growth in digital-only subscription supported circulation revenue rise. Digital circulation revenues represented 63% of circulation revenues versus 57% in the year-ago period.

However, advertising revenues dropped 4%, mainly due to a 39% decline in print advertising revenues on account of general market weakness and lower print volume across The Wall Street Journal and Barron’s owing to COVID-19, partly compensated by a 29% rise in digital advertising revenues. Markedly, this was the highest improvement rate in 10 years. Digital advertising represented 58% of total advertising revenues in the reported quarter.

During the quarter, total subscriptions to Dow Jones’ consumer products reached roughly 4.03 million average subscriptions, reflecting an increase of 18% from the year-ago period. We note that digital-only subscriptions surged 29%. Subscriptions to The Wall Street Journal rose 19% to approximately 3.22 million average subscriptions. Digital-only subscriptions to The Wall Street Journal increased 28% to more than 2.46 million average subscriptions in the reported quarter and represented 76% of its total subscriptions.

The Book Publishing segment reported revenues of $544 million, up 23% year over year. This included a 1% gain from foreign currency exchange rates. The segment’s revenue growth was mainly driven by augmented sales in each category with the success of titles like Didn’t See That Coming by Rachel Hollis, The Happy in a Hurry Cookbook by Steve Doocy, The Greatest Secret by Rhonda Byrne and Code Name Bananas by David Walliams. Digital sales, which constituted 18% of Consumer revenues, surged 15% mainly on growth in e-books and downloadable audiobook sales. Adjusted revenues in the segment went up 19%, while adjusted EBITDA rose 60%.

Revenues at the News Media segment plunged 29% year over year to $573 million in the reported quarter despite a 3% positive impact from foreign currency fluctuations. The segment’s revenue decline was mainly due to a 24% adverse impact stemming from the divestiture of News America Marketing in May 2020. The segment was also hurt to the tune of 4% due to the closure or digital transitioning of certain regional and community newspapers in Australia as well as a weak print advertising market. Additionally, within the segment, revenues at News Corp Australia and News UK went down 11% and 5%, respectively. Adjusted revenues for the segment fell 9%.

Circulation and subscription revenues improved by $12 million, backed by growth in digital subscribers, positive impact from foreign currency movements as well as price rises. These were partly offset by reduced single-copy sales revenues, mainly at News UK and the New York Post. Further, advertising revenues tumbled 48% year over year owing to the divestiture of News America Marketing, persistent softness in the print advertising market and closure or digital transitioning of some regional and community newspapers in Australia. These were somewhat mitigated with a $10-million positive impact from foreign currency fluctuations and digital advertising growth at the New York Post and News UK.

Digital revenues contributed 31% to the News Media segment revenues compared with 22% in the year-ago quarter. Digital revenues accounted for 29% of the combined revenues of the newspaper mastheads. As of Dec 31, 2020, The Times and Sunday Times closing digital subscribers were 335,000. Closing digital subscribers at News Corp Australia’s mastheads were 738,300. The Sun’s digital offering reached nearly 130 million global monthly unique users in December 2020, while New York Post’s digital network reached about 141 million unique users in the same month.

Other Financial Aspects

News Corporation ended the quarter with cash and cash equivalents of $1,562 million, borrowings of $1,044 million and shareholders’ equity of $8,131 million, excluding non-controlling interest of $943 million.

Net cash provided by operating activities of $483 million, for the six months ended Dec 31, 2020, was higher than $192 million in the prior-year quarter. Capital expenditures amounted to $173 million in the first six months. Foxtel’s capital expenditures in the same period were $79 million. Free cash flow available to News Corporation was $277 million.

Further, management declared a semi-annual cash dividend 10 cents a share for Class A common stock and Class B common stock. The dividend is payable Apr 14, 2021 to stockholders of record as on Mar 17.

Key Things to Note

The impact of the pandemic along with ways undertaken to control its spread have been creating major economic disruptions, which in turn, has been affecting News Corporation’s business in several ways.

Digital Real Estate Services: Social-distancing practices, business closures as well as economic volatility owing to the pandemic have been and may keep impacting real estate markets in Australia, Asia and the United States. Markedly, REA Group anticipates fiscal 2021 core operating costs to be largely in tandem with the year-ago level. Management expects second-half results to reflect impacts of the consolidation of Elara. In the United States, Move is gaining on solid consumer demand – with exclusive users and leads witnessing all-time highs, even though active listings across the industry have been at historically low levels. In January, unique users at realtor.com surged 37% to a record 94 million. The company expects higher anticipated revenues (thanks to a rise in traffic and lead volumes) to sponsor reinvestments in the second half of fiscal 2021. Management further anticipates investing an incremental $40 million toward brand marketing as well as product development in order to boost market share and expand into adjoining verticals.

Subscription Video Services: Revenue trends at Foxtel have been better than expected in first-half fiscal 2021 on increased ARPU offsetting greater churn, which in turn resulted in reduced revenue declines in residential broadcast. Broadcast churn is likely to remain high owing to the suspension of government stimulus payments as well as Foxtel’s continued focus on ARPU. Moreover, increased average OTT subscribers until January should lead to greater-than-anticipated OTT revenues in the full year. However, commercial subscription revenues are likely to keep bearing the brunt of the hurdles in the clubs and pubs operations (owing to government restrictions) along with reduced hotel occupancy across Australia on account of limitations on travel amid the pandemic. Owing to Foxtel’s constant investments in OTT products, together with increased costs stemming from greater revenues, management now anticipates overall net cost reductions of lesser than $73 million (A$100 million) –  in comparison with net A$160 million ($117 million) estimated earlier.

Dow Jones and News Media: The pandemic is having worsening impacts on print advertising. It is also hurting weekday print volumes owing to high economic volatility and reduced demand for single copy and amenity newspapers – which in turn is stemming from low foot traffic. The recent lockdown in the U.K.; continuation of remote working trends in the United States and domestic travel limitations in Australia (to an extent) are likely to keep weighing on these revenue streams in second-half fiscal 2021. Nonetheless, the company has witnessed improvements in digital paid subscriptions as well as digital audience gains at the online versions of a number of its news properties. Apart from this, management undertook stringent discretionary cost-control efforts toward fiscal 2020-end as a result of the pandemic-led volatility. In the News Media segment, cost reductions are likely to moderate in the second half, compared with the decline rate in the first half. At Dow Jones, management anticipates expenses to rise modestly in the second half of fiscal 2021 compared with the year-ago level, given the first-half fiscal 2021 performance. These are likely to stem from the company’s reinvestments in digital assets to drive growth in the long run.

Book Publishing: Although the company has gained on changing consumer behavior, including increased free time to read and a rise in average number of books bought amid the pandemic, management continues to observe the sustainability of these patterns. Presently, management anticipates its performance to moderate in second-half fiscal 2021, especially in the fourth quarter, partly owing to comparisons with solid performance in the previous year (that gained on higher demand at the onset of the pandemic).

Other: Management anticipates costs to rise by at least $50 million in the second half of fiscal 2021, mainly owing to escalated employee costs; absence of the bonus cuts for certain workers that was implemented in the prior year due to the pandemic as well as initial investment expenditure as management accelerates its global shared services initiative.

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