Two questions emerge in the aftermath of Paddy Manning’s remarkable revelations in Crikey (here) of the disastrous fall in earnings at News Corp Australia in 2013: why did News Corp take so long to disclose what had happened; and what happened next?
The news from 2014 is not good. News Corp Australia’s publishing operations appear to have dropped another 73 per cent in operating income in 2014, from $88 million to $A24 million. That’s after a 69 per cent drop in 2013. News Ltd was almost certainly losing money in the first half of F2014 before it inched its way back into the black in the second half. Now CEO Robert Thomson talks of “green shoots in the Nullabor”, by which he means it’s currently not actually loss-making. But you can write off this massive economic unit as a serious money earner.
This is the background to Rupert Murdoch’s tweet on July 18: “Just had exciting week in Australia with great team digging company out of many holes.”
First, this was the F2013 result:
|News Corp Australia publishing operations||2012||2013||Change|
It’s a 69.3 per cent drop in operating income in 2013, from $A285 million down to a very very modest $A88 million. Another year like that, with no sign of future improvement, could bury the Australian business. No wonder they wrote close to a billion dollars off the mastheads a year ago when the scale of the disaster became clear.
News Corp provides very few numbers for its Australian operation and the form of those disclosures can change from quarter to quarter. Figures given are only the change in year to year results, never the actual outcomes. I have calculated the following tables from these results (the actual reported results are at the bottom of this post).
First the revenues. And the headline figures are nosebleed territory.
|Qtr1||Qtr 2||Qtr 3||Qtr 4||Full year|
|Ad revenues at Aust newspapers $USm||-101||-79||-77||-57||-314|
|Aust circ revenue $USm||-14||-12||-14||-5||-45|
|News Corp Aust newspaper revenues $USm||-104||-97.2||-108||-49||-358|
These are all comparisons with the previous year, remember, not the actual numbers. But the $US358 million drop in 2014 full-year revenue is larger than the fall in F2013. What’s important to realise, however, is that unlike the 2013 earnings figures published by Crikey, these are US dollar totals.
It’s tricky to make the currency conversion because News Corp calculates the result each quarter at a different level, as currency markets move. But this is my calculation of the change in Australian revenues in Aussie dollars:
|F2014||Qtr1||Qtr 2||Qtr 3||Qtr 4||Full year|
|News Aust revenue net of currency move $USmillion||-46||-43||-48||-22||-159|
The full-year drop in revenue was $A159 million, about half the drop reported in 2013. And you’ll see quarter by quarter the size of the fall halves to $A22 million in the fourth quarter. It’s a good trend. but it’s still going down, which means costs need to keep going down as well.
That’s the revenue side. Compare it with the changes in operating earnings, or rather EBITDA (this is Earnings Before Interest, Tax, Depreciation and Amortisation–something relatively close to the Operating Income figure that News Corp loves to quote. Close but not exactly the same)
|F2014 $US million||Qtr1||Qtr 2||Qtr 3||Qtr 4||Full year|
|EBITDA Aust newspapers||-27||-30||-6||-4||-67|
This shows two bad quarters that knocked $US57m off EBITDA in the first half, then two much better quarters, with EBITDA falling just $US4 million in the fourth quarter.
It’s still $US67 million down for the year. Crucially, News Corp doesn’t say what the change in EBITDA was in Aussie dollars. So now we have to reconstruct it. This is what we know: at the revenue level, News said that the total was down 18 per cent but currency movements reduced the total in US dollars by 10 per cent over the year. In fact the currency change will distort everything by 10 per cent.
What does that mean? Well, we start with the 2013 operating earnings which we know (from Crikey) came to $A88 million. We don’t know the exact currency rates at which this was translated into US dollars for News Corp’s 2013 reported earnings each quarter, but we know that currency movements will have reduced this total by 10 per cent overall. So even if EBITDA in Australian dollars came in completely unchanged, it would still show up as a 10 per cent drop in US dollars.
This is in the order of $US8 million. We do know that 2014 EBITDA dropped $US67 million, so it follows that eliminating the currency effect, the underlying EBITDA dropped $US59 million.
Convert that back into Australian dollars and you have Australian operating earnings dropping around $A64 million. The story told short? In the 2014 financial year, it appears that News Corp Australia’s publishing operations, which account for more than 70 per cent of Australian newspapers, earned in the vicinity of just $A24 million.
In two years, Rupert Murdoch’s original newspaper empire has gone from earning $A285 million to $A24 million. It’s a 92 per cent drop in the two years, after seeing sales fall an eye-popping half a billion dollars since 2012. For all its shortcomings, Fairfax Media’s transition in this same period in both revenue and cost control has been hugely more successful. And News is still propping up loss-making ventures like The Australian. How long can it afford to do this?
That’s the bad news. The silver lining is that almost all of the News EBITDA drop came in the first half of the year. The cost savings introduced in 2013 appear to have come into effect in 2014. Revenue fell much faster than EBITDA, as these figures indicate.
|Costs savings? Revenue drop minus EBITDA drop||23||17||46||19||106|
That brings us back to the EBITDA line again. In the last quarter EBITDA dropped just $US4 million. At least $US2.4 million of that is probably due to currency movement (using the same reasoning as above). Which means essentially News Corp Australia held its ground in the quarter. That’s good. But remember what happened in the first half. If News was holding its own (almost) in the second half, that’s after it was way down in the first two quarters. It strongly suggests that News Corp’s Australian publishing operation actually made an operating loss in the first half of the financial year, before the ship steadied. Unlike Fairfax, which has been bloodied and buised but still makes a decent profit, News went into the red.
And now where are we? It’s like a submarine in a crash dive finally stabilising metres above the ocean floor. It’s still there, it’s back in the black (just); holding on by its fingernails. Sending up little bubbles. Survival is a serious achievement.
Now the hard work really begins. The trick is not to look down . . . because the ground is terrifyingly close.
This is what News Corp said:
|As reported in SEC filings||Year on year comparisons|
|Qtr1||Qtr 2||Hafl year||Qtr 3||Nine months||Qtr 4||Full year|
|Ad revenues at Aust newspapers||-101||-79||-180||-77||-257||-57||-314|
|Aust circ revenue||-14||-12||-26||-14||-40||-5||-45|
|Other Aust newspaper revenue||-6||-2||-12||-20||?||?|
|EBITDA Aust newspapers||-27||-30||-57||-6||-63||-4||-67|
|News Corp Aust newspaper revenues %||-22.0%||-17.0%||-20.0%||-21.0%||-20.0%||?||-18.0%|
|Effect of USD move on revenue %||?||-10.0%||-10.0%||-13.0%||-11.0%||?||-10.0%|
|Effect of USD move on revenue $USm||-58||-54||-112||-60||-172||-27||-199|
These are my reworked numbers
|News Corp Australia results F2104|
|As calculated from original reported figures. $USm unless otherwise stated|
|Qtr1 $USM||Qtr 2||Qtr 3||Qtr 4||Full year|
|Ad revenues at Aust newspapers||-101||-79||-77||-57||-314|
|Aust circ revenue||-14||-12||-14||-5||-45|
|Other Aust newspaper revenue||-6||-2||-12||?||?|
|EBITDA Aust newspapers||-27||-30||-6||-4||-67|
|News Corp Aust newspaper revenues %||-22.0%||-17.0%||-21.0%||?||-18.0%|
|Effect of USD move on revenue %||?||-10.0%||-13.0%||?||-10.0%|
|News Corp Aust newspaper revenues||-104||-97.2||-108||-49||-358.2|
|Effect of USD move on revenue $USm||-58||-54||-60||-27||-199|
|News Aust revenue net of currency move $USm||-46||-43||-48||-22||-159|
|News Aust revenue net of currency move in $A at $0.92||-50||-47||-52||-23||-173|
|Costs savings? Revenue drop minus EBITDA drop||23||17||46||190||106|