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Executives

Rupert Murdoch - Chairman and CEO

Peter Chernin - President and COO

Dave DeVoe - CFO

Gary Ginsberg - EVP, Global Marketing and Affairs

Analysts

David Jefferies - Kyodo News

Robert McMillan - Reuters

Ken Lee - Financial Times

Rich Greenfield - Pali Capital

Adam Alexander - JB Were

David Bank - RBC Capital Markets

Benjamin Swinburne - Morgan Stanley

Jolanta Masojada - Credit Suisse

Jason Bazinet - Citigroup

John Janedis - Wachovia

Alan Gould - Natixis

Spencer Wang - Credit Suisse

Jessica Reif-Cohen - Bank of America/Merrill Lynch

Doug Mitchelson - Deutsche Bank

Michael Nathanson - Sanford Bernstein

News Corporation (NWS) F2Q09 (Qtr End 12/31/08) Earnings Call February 5, 2009 4:30 PM ET

Operator

Welcome to the News Corp. 2009 earnings release conference. (Operator Instructions).

I would now like to turn the conference over to Executive Vice President of Global Marketing and Affairs, Gary Ginsberg. Please go ahead.

Gary Ginsberg

Thank you, operator. Hello everyone and welcome to our second quarter fiscal 2009 Earnings Call. On the call today are Rupert Murdoch, Chairman and Chief Executive Officer; Peter Chernin, President and Chief Operating Officer; and Dave DeVoe, our CFO.

Dave will give a detailed presentation of the quarter results at the beginning, followed by Rupert who will offer a more qualitative analysis of the company today and our future prospects. Rupert, Peter and Dave will then take your questions, which given the (inaudible) time, I implore you to limit to just one.

This call may include certain forward-looking information with respect to the News Corp’s business and strategy. Actual results could differ materially from what is said, News Corp’s Form 10-Q for the three months ended December 31st 2008 lists risks and uncertainties that could cause actual results to differ and these statements are qualified by the cautionary statements contained in our filing.

Finally please note that certain financial measures we will use in this call such as adjusted and operating income, adjusted EPS and adjusted net income are expressed on a non-GAAP basis and have been adjusted to exclude impairment charges and other net in the second quarter of fiscal '09.

The GAAP to non-GAAP reconciliation of operating income is included in our press release and the EPS and net income reconciliation is posted on our website on our Investor Relations earnings release page.

And with all that, I will turn the call over to Dave.

Dave DeVoe

Gary, thank you and good afternoon. As you can see in today’s News Corporation’s earnings release, we are operating in a very challenging economic environment and our operating results reflect this.

As a result of the market conditions and the decline in our stock price, we performed a review of our intangible assets during the quarter, which resulted in a pre-tax non-cash impairment charge of $8.4 billion related to goodwill and tangible assets. Because of this charge, reported GAAP operating income for the second quarter was a loss of $7.6 billion as compared to operating income of $1.4 billion for last year.

Excluding this impairment charge, adjusted operating income in the second quarter was $818 million, down 42% as compared to last year’s result, reflecting declines in all segments except magazines and inserts and cable. Bottom-line, the company reported a net loss for the quarter of $6.4 billion as compared to $832 million of net income last year second quarter.

In addition to the impairment charge this quarter, there were a few other comparative items to mention. This quarter's associated entities results include a small ITV write-down at BSkyB as compared to the $270 million charge [recorded] a year ago. Our other expense of $98 million principally reflects the pre-tax loss on the sale of our TV business in Poland, and our tax rate was favorably affected by tax credits from the impairment charge. Our normal tax run rate would approximate 39%.

Including the net income effects of these items in the impairment, adjusted net income was $385 million in the quarter, down 57% from a similarly adjusted second quarter result a year ago. Adjusted earnings per share this quarter was $0.15, down 46% from the adjusted $0.28 in the second quarter a year ago.

Now, I would like to provide some comments on the performance at a number of our businesses. And please note that for comparative purposes, this discussion is based on adjusted operating income and that it excludes the effects of the impairment charge.

Let's begin with the Film and Entertainment segment. This segment reported second quarter operating profit of a $112 million compared to last year’s very strong result of $403 million in profits. Last year's second quarter performance was led by several very strong DVD results, which included the Simpson movie, as well as the pay-TV results of Night at the Museum.

This year’s quarter was led, although at much lower level, by the worldwide home entertainment performance of 'Horton Hears a Who' and 'The Happening' and by the domestic pay-TV performance of 'Juno'. As a result of higher launch cost the results from the current quarter's theatrical releases including 'The Day the Earth Stood Still', 'Australia' and 'Marley & Me' were approximately $60 million lower than films released last year. And additionally, the current year result also reflects a $22 million dollars charge for the bankruptcy of a customer in the United Kingdom.

At our Television segment, adjusted operating income in the quarter was $18 million, as compared to $245 million in the second quarter a year ago. This result reflects the impact of weaker ad markets, higher programming costs at the network and the absence of earnings from the sale of eight stations in July. The eight stations accounted for revenues and earnings declines of $78 million and $23 million respectively.

Revenue at our remaining stations declined 20%. This is right in line with market declines and adjusted operating income decreased 38% in the quarter. The station had good political advertising growth. However, this was more than offset by weaker auto, telecom, movies and fast food categories.

At Fox Broadcast network higher operating losses resulted from higher entertainment and sports programming costs and reduced ratings. On the entertainment side we had increased license fees this year from returning series. While at sports we were particularly affected by this year’s post season baseball results.

And at Star, we experienced a decline in advertising in India, in part due to the ratings impact of the three week broadcast strike and the Mumbai attacks and due to a general softness in the advertising market there.

Now, moving on to the Cable Networks, where we continued to show strong very growth with operating income up 27% over a year ago on increased affiliate and advertising revenues. Our largest year-over-year gains in the quarter were from, the first time operating profit at the Big Ten network, and this reflects the recent distribution agreements in the Midwest, we now have full coverage there. The international channels from advertising and affiliate increases and this is led by our Latin American and European channels.

And finally from the FOX News Channel and this is the result of higher affiliate rates and increased subscribers and ad revenues, which raises our operating profit and margins to record levels. New affiliate deals for the FOX News are now in effect with all major cable and satellite operators, including our most recent deals with Comcast and Equistar.

And just as a reminder, comparative results at this segment are impacted by the sales of the three [RSNs] last year, which contributed $51 million revenues and $23 million in operating profit in the year ago results.

Turning to the Direct Broadcast Satellite segment, or SKY Italia. SKY Italia. reported operating income of $10 million, a $52 million decrease from the second quarter a year ago. Nearly half of this decline results from the shift in the timing of our soccer package revenue recognition, which we described to you all last quarter, with another 10% coming from currency translations. The balance of the decline comes principally from revenue increases being more than offset by higher cost.

While reported US dollar revenue growth show a decline due to changes in currency rates, SKY Italia's local currency revenue grew 6% in the quarter, and this growth would have been even higher, or 3% higher without the shift in our soccer revenues.

In the quarter, our cost increased in excess of this revenue growth, and this is led by programming cost increases, reflecting the expansion of the average subscriber base, increased soccer cost from our new contracts, and the addition of new channels. It also includes the relocation of our Milan facility, and from increased investments and expanding premium services to subscribers.

The additional investments we made in marketing, installation, and technology cost, associated with these new initiatives is driving higher penetration of premium services to our existing subscriber base.

At quarter end, over one million subscribers were taking at least one premium service such as HD, DVR and multiple boxes as compared to 650,000 premium service subscribers a year ago. SKY Italia is the only provider of HD and DVR services in Italy. The rapid penetration of these products is designed to achieve a longer life and more profitable subscriber base.

Also in the quarter, gross additions were approximately 300,000 while net additions were approximately 150,000 and this brings SKY Italia's closing subscribers at the end of December to $4.7 million. Our monthly ARPU in the quarter averaged 45 euros; this is about even with last year. If you exclude the impact of the soccer revenue recognition change, our monthly ARPU would have been 46 Euros. And finally, we are still on plan for an annual churn rate of slightly more than 10%.

In the Newspaper and Information Service segment, adjusted operating income in this year's quarter was $179 million, and this is down 9% versus last year. This result reflects the inclusion of $59 million in Dow Jones adjusted operating income. Now this is net of about $17 million in purchase accounting amortization.

Additionally, while we had $51 million of lower depreciation expense this year from our UK press project, this amount was offset by a similar amount from the effect of strengthened US dollar on a reported basis. So if you look at the segment, absent these items, adjusted operating income declined $82 million and this is primarily due to reduced advertising revenues.

In the United Kingdom, advertising revenues were down 10% overall from declines in classified and non-color display advertising, principally at a quality title. However color display advertising increased and this was led by our tabloids principally, The Sun. In addition, our circulation revenues in the UK were up 2%, primarily due to higher pricing.

In Australia, overall advertising revenues were down 6% compared to a year ago. Classified advertising revenues declined 13%, primarily from reduced employment ads while display ad revenues were down 3%. Again circulation revenues here, similar to the UK, were at similar levels and a year ago as cover price increase offset fewer copies sold.

Turning to the Book Publishing segment, second quarter operating income contributions were down $44 million compared to last year. This decline reflects the weaker retail book market, the lack of comparable strong releases versus a year ago and a charge of $6 million for the bankruptcy of a customer.

And finally at our other segments, we reported a second quarter operating loss of $38 million, $61 million less than a year ago. This decline is principally due to higher cost at Fox Interactive Media and lower contributions from NDS.

At Fox Interactive Media revenues in the quarter of $226 million were down 3% compared to a year go. This is primarily due to reduced subscription levels at IGN. Search and advertising revenues were similar to year ago levels. Our cost increases particularly from the development launch of MySpace Music, expanded international operations and the addition of new MySpace features reduced FIM's earnings contribution to around $7 million in the quarter.

Before I turn to guidance for fiscal 2009, I would also like to make a few comments related to our financial health and our balance sheet strength. At December month-end we had $13.3 billion in gross debt and $3.6 billion in cash with net debt of $9.7 billion. This represents an improvement of over $900 million in 12 months from the net debt position at the end of December 2007.

Additionally earlier today we closed the NDS transaction, which increases our cash position by over $800 million. The company has approximately $450 million in debt maturities in early 2010 including a $250 million puttable bond.

Additionally, $1.6 billion in debt convertible into shares of BSkyB owned by News Corporation could be put to us in March of 2010. News Corporation can elect to settle this put in cash, shares of BSkyB, or shares of News Corporation.

Our current cash balance alone is sufficient to repay all of these maturities, as well as all other maturities coming due through 2015. And despite the current financial crisis and the related difficult trading conditions, we continue to generate significant annual free cash flow.

So, while we recognize we are operating in a challenging environment, the competitive position of our franchises and the strength of our balance sheet is significant asset as we manage through this period.

And finally, let me address our guidance for fiscal 2009. And as a reminder, you will recall that we mentioned this guidance, excluding from 2008 results the $253 million in operating profit contributions from businesses or assets sold in fiscal 2008, which are no longer included in our ongoing results, namely the eight TV stations, the three RSNs sold to Liberty, and the UK land sale.

So as we look at measuring comparisons in fiscal 2009, we are comparing it to a base of $5.13 billion in operating profit for fiscal 2008 and our fiscal 2009 outlook excludes the effect of the impairment charges we took this quarter.

In early November, we indicated that we were anticipating our change in operating income for fiscal 2009 to be a decline in the low to mid-teens from the $5.13 billion fiscal 2008 result. At that time we indicated that in developing our outlook, we had limited visibility into trading additions for the remainder of our fiscal year. In addition, our outlook assumed that advertising trends and market conditions would remain where they were at that time.

Since that time we have seen a more significant deterioration in the economic conditions and consumer confidence. The direct impact of this to us has been a further weakening of our advertising driven businesses, including our local television stations, our newspapers, Fox Interactive, and to a lesser extent Fox Broadcast Network and cable networks. Additionally, the weakness in consumer discretionary retail sales is also negatively impacting our DVD and book sales, as well as the performance of some of our releases.

As a result taking all of these factors into account and considering that we still have less than perfect visibility into our fiscal ‘09 advertising and currency trends, we are reducing our fiscal 2009 operating income outlook now to be down approximately 30% from the $5.13 billion fiscal 2008 results. This guidance assumes there will be no further weakening in the advertising markets and economic conditions. And I want to stress again that we still have less than perfect visibility into the markets.

Looking at this change in our outlook from November till today, roughly 60% of the change is from the further deteriorating ad markets, which reduces our expectations of our advertising sensitive businesses. A further 25% of the change is related to weakened retail sales of home entertainment and book titles, the remainder of the change reflects updated views on our other aspects of our operations. While we are continuing to run our businesses on a least cost base, we are also intensely focused on cost reductions to respond to these revenue challenges.

And with that, I would like to turn the call over to Rupert.

Rupert Murdoch

Thank you Dave. Good afternoon everyone. The results Dave just outlined are a direct reflection of the recession that is deep than anyone predicted. Indeed it is the worst global economics crisis we witnessed since News Corp, was established more than 50 years ago.

While it's impossible to be completely prepared for a downturn of this magnitude, we began priming ourselves for a weakening economy earlier last year. We have implemented strict cost cutting measures across all our operations.

We have reduced headcount in individual businesses where appropriate and we've scaled back on capital expenditures. Even in plush times, we have never been a company that tolerates fat. So in times like these, we are better positioned to weather this cycle than our competitors.

We've also consistently maintained a strong balance sheet, which today following our completion of the partial sale of NDS posts approximately $4.5 billion in cash. Given our strong financial position, we have the reserves on hand to cover over seven years of upcoming debt repayments. And we intend to operate our businesses and balance sheet as conservative as usual.

It is important to point out that while our earnings are challenged and there are variables we cannot control, chief enough among them the weakening advertising market, we can control how we manage our businesses. I can tell you we are doing everything we possibly can strategically, operationally, and financially to position ourselves to emerge stronger when the economy returns to some semblance of normalcy.

One of the things about our company, which I am most proud, is this. We are never content to accept the status quo, to not challenge conventional assumptions or challenge ourselves and coming up with new business models or new approaches.

That’s the reason why we revolutionized network television with FOX or cable news with Fox News. It is the reason the UK and Italy enjoy choice in TV that they do. Why the Wall Street Journal today, is the only newspaper in the country to be growing, or why social networking is now a part of the cultural landscape.

We are also leaders in almost every segment in which we operate, from cable television and pay-TV, in newspapers and digital media, for the simple reason that we have not been afraid to take risks where others have flinched.

I mention all this today not to chest beat or go up the scape. We are offering perspective on how we are approaching our business within this difficult environment. We are not sitting still waiting for things to change or to get better, but acting now when things are perhaps the bleakest. To strengthen our businesses, challenge our assumptions and come up with new approaches that will solidify our leadership positions into the future.

We are putting all of our established businesses through the usual rigorous, strategic reviews to see if old models can be revitalized or new models created. We are making judicious, highly targeted investments to ensure that our developing businesses continue to grow. We have some of the word's most recognized vibrant media franchises in the world today, and now is the time to strengthen these franchises.

We are also working to improve operating margins at all of our divisions by streamlining costs. And as always, we are intensely focused on market share. I am capturing an even larger share of the markets in which we operate.

So how are we, for example, making targeted investments to better improve our competitive position? Consider SKY Italia; the numbers for the quarter as Dave explained were down year-over-year. Some of this is timing, some is currency. But what may not be evident from the numbers is, how much stronger our competitive position is becoming from the steps we are taking today.

Most significantly, we’re making investments that will both strengthen our relationship with our customers while ensuring we remain market leaders long into the future. For instance, we launched nine new channels in Italy during this quarter, 13 in the past six months, invested in high-quality original entertainment programming, moved people up to higher programming tiers and increased our penetration of premium services, the single best hedged against churn.

So this quarter's results actually reflect many growth and retention initiatives. But what’s most encouraging is despite these investments, we’re still on track to reach 90% of our original subscriber target for the year and a higher level of profitability over last year's record numbers. We are adopting the same strategy at Dow Jones and our other news brands.

Over the past year at the Wall Street Journal, we have added new pages and launched a luxury magazine that has attracted 30 new advertisers to the franchise. We have also revamped our website, developed mobile applications and upwardly revised our pricing policy. I should say strongly revising our pricing policy.

At the same time we realized more than $100 million in cost savings since acquiring Dow Jones last December and continue this process throughout the coming months. Today, the Wall Street Journal is the only major newspaper to grow its individually paid circulation year-over-year, up 2.4%, when nearly every other newspaper in the country is experiencing declines.

And the most recent BBC reporting period, the Weekend Journal became the country's biggest selling weekend newspaper in individually paid sales, surpassing The Sunday New York Times for the first time and the Wall Street Journal Digital Network, which includes WSJ.com, MarketWatch.com, Barrons.com, AllThingsD.com has increased visitor traffic by 76% over the past year.

The same is true at Fox Interactive Media, where we have been investing and expanding MySpace into a global social portal, a destination that is as much about entertainment and lifestyle as it is about social networking. We have launched MySpace Music, which is off to a great start with partnerships with a number of major and independent labels and high profile artists.

With MySpace Video we are making deals with film and television producers for original content that will not need drive increased viewer engagement but also deliver enhanced sponsorship opportunities and revenue. And MySpace Mobile is a great success story with new device applications now running on the iPhone and Blackberry and a popular website.

Despite a slight downturn in revenue this quarter, let's not lose sight that after five years MySpace still leads the social networking category in the US and has become a substantial business that we believe will continue to grow.

Our cable division is another leading example of judicious investment. We went from no subscribers to more than 400 million monthly subscribers in under 10 years, because we launch properties wisely, gave them room to grow and capitalized on their success with new carriage deals. It is all in the US I might say.

[On demonstration], the Big Ten Network which we launched just over a year ago today is profitable and is broadly distributed in Big Ten markets. And the Fox International Channels, which no had heard of a few years ago, continues to expand globally and is becoming one of our fastest and most durable growth drivers. Of course the biggest success story is the Fox News Channel, which has been the number one cable news channel for 28 consecutive quarters and by a big margin.

And we continue to invest in quality movies because we know that in good times or in bad, people want to be entertained and will pay for the experience either in the theaters or at home. So while our quarterly film number is up sharply from last year, there are many reasons to be extremely optimistic about this segment for the rest of the year and beyond. First, we are emboldened by the success of our Christmas slate, particularly the strong performance of Marley and Me, and the Oscar nominated Slumdog Millionaire.

We absorbed their cost in the second quarter, and will now reap the benefits of their box office success. Going forward, we have three sequels, the blockbuster films, which give us tremendous confidence; Ice Age 3, Night at the Museum 2, and X-Men Origins: Wolverine.

One of the reasons we are willing to make investments in our businesses and in quality content is that we have never bought in the pervasive fear that all is lost when the business hits a recession. That advertising is gone, never to return. That consumers won't pay for entertainment.

Sure, there is reason to be concerned and we are running our businesses to respond to their concern. Historically, every time we have seen a recession, mild or major, we have endured this panic and come out better. And every time the economy rebounds, advertising comes back, usually stronger than before. I am not being flippant. I recognize that we may never return to record levels, but we do believe we can recapture a large percentage of the advertising that does return.

That's why we continue to believe in newspapers and their brand extensions and television and film as mass media. Quite simply, as long as advertisers need to move their product and build brands, these industries will remain strong and the market leaders will be the strongest.

And when this recession ends, we will be better positioned than anyone else because we have been aggressively building market share in these businesses and we will make no compromise in that sector.

So just don't take my word, consider these facts. The Fox Network, it will win the Season’s the 5th successive year on the strength of American Idol, which in its eighth season continues to dominate prime time and serve as an effective launch pad for new programs. In fact, American Idols’ rating exceeds its closest competitor by 69%, in adults 18 to 49.

Our station group, which is the number one US station group in terms of market share. Sure, margins in this business have contracted drastically. Though we continue to best our competition because we are aggressively cutting costs and expanding into what makes these station franchises and be local news.

Today everything is on the table at the station group. We are looking at new revenue streams, we’re making inroads on the web and we are doing strategic news gathering partnerships.

We continue to gain market share in the newspaper business. Beyond gains at the Wall Street Journal, market share in the UK is up year-over-year with gains at The Sun, The Times, The Sunday Times and the News of the World. And we are also very lucky that the vast majority of our titles are not at all dependent on classified advertisements.

To put it in perspective, times may be tough right now but if our forecast is correct, we’ll make in excess of $3.5 billion of adjusted operating income this fiscal year. We also always have a strong balance sheet. We are working hard to grow our franchises and we have the best run businesses in the media sector. This downturn will eventually end and News Corporation will emerge better positioned, better capitalized, a better business than our peers.

Thank you, everybody and now Peter, Dave and I are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Michael Nathanson, Sanford. Bernstein. Please go ahead.

Michael Nathanson - Sanford Bernstein

Thanks, I want to go to Rupert for a second, it sounds like, as you say there has been a little fat at News Corp over the years. So, when you described the opportunity to take out costs, which businesses do you think you have the best opportunities to take out cost and how big will those savings be?

Rupert Murdoch

We are taking them out everywhere. I mean, I am out in Australia at the moment and the local management is in the process of combining all their back-offices between the States of (inaudible). There are many different processes we are doing that goes right across the company, which is going to save a lot of people and a lot of money. And then there are other things, at the Wall Street Journal, there are so many numerous small things. We are combining the back-office of the Wall Street Journal and New York Post, which will eventually save about $7 million, certainly $4.5 million in the immediate future. We have also renegotiated nearly all of our delivery contractors across the whole of United States with a saving just starting now of $5 million a year and it goes on and on. It seems like we are chiseling away small things, but they do add up to a lot of money.

Michael Nathanson - Sanford Bernstein

How about on the studio side? Can you talk about that?

David DeVoe

Yeah, we have cut out I think just under $400 million in cost out of all Fox so far this year and it’s a combination of headcount and looking at all of our marketing things, looking at all of our vendor deals, and I think we have been extremely aggressive in looking at headcounts. We have been trying to do it without layoffs, but we have eliminated I think just under 800 positions from the company. We have put a headcount freeze at the beginning of the fiscal year and then recently we just eliminated two-thirds of the open jobs. So, we are down about 800 heads across all of the Fox Companies.

Michael Nathanson - Sanford Bernstein

Thanks.

Operator

And our next question comes from Doug Mitchelson, Deutsche Bank. Please go ahead.

Doug Mitchelson - Deutsche Bank

Thanks very much. Rupert, you and Dave talked about your strong balance sheet. I imagine you’ll be ultra-conservative in this environment, but should we have any expectation that you will look outside the company for growth opportunities? Thanks.

Rupert Murdoch

Now if they come to us and they are screaming bargains and they would fit us very well, we may well do that. But we haven't seen any or any sign of that yet. I have looked around and I really haven't seen any businesses that I really want to buy.

Doug Mitchelson - Deutsche Bank

Right, thank you.

Rupert Murdoch

…or that would fit. We would like Premiere eventually. But we want businesses where we will have a direct relationship with the customers.

Doug Mitchelson - Deutsche Bank

And so can I follow up on that, on BSkyB do you anticipate any change in your relationship with the stock near a long-term low?

Rupert Murdoch

No, it is a long term low.

Gary Ginsberg

Next question operator.

Doug Mitchelson - Deutsche Bank

Thanks.

Operator

And our next question comes from Jessica Reif-Cohen, Bank of America. Please go ahead.

Jessica Reif-Cohen - Bank of America/Merrill Lynch

Thank you, Bank of America/Merrill Lynch. Just a few questions for Peter; could you comment on what you are seeing for calendar second quarter cancellations for the broadcasting cable networks and what you are seeing in this scatter market in calendar Q1. And I guess your views of how much of this DVD slow down is cyclical versus circular? Thanks.

Peter Chernin

First of all, what we are seeing scatter is that we are writing scatter. In the current quarter. I think we have written about $50 million of scatter at upfront pricing or better. I think a lot of that is due to ratings shortfall in the marketplace but we feel we are probably doing better than our competitors. In terms of cancellations we have extended a couple of things; right now we are probably at about 8% of total dollars canceled for the fourth quarter and we would expect that to end up at 11%. And just to put that in context, for the past several years we have run in the 7% to 8%. So, we are a little bit higher than we’ve been running the past several years. But I think honestly, we are probably feeling that it is a little better than we expected on the cancellation side.

And then I would say the National Cable Networks are a mixed bag depending upon whether you are exposed to auto advertising and the mix of advertisers, but in general, I think that the National Cable Networks are running fairly similarly to the broadcast networks.

In terms of the DVD marketplace, what we saw was, it was [in this year], we were actually up slightly in the first half of the year. Clearly, the marketplace was down in the second half of the year, I think down about 11%. But most importantly, the sell-through market and was down close to 15%, primarily October to December. So we’ve seen some pretty rough numbers in that period.

Interestingly, we have seen the sell-through market bounce back a little bit in January. I think the numbers we are looking at for January say, see sell-through down about 9%. So better than they were in the October quarter. You know, I read with interest, Bob's comments and I clearly think it is important to keep a close eye on the business.

But I think given the depths of the consumer recession that we are in the middle of, I think it is too soon to -- there is so much consumer pressure and a number of retail trips are down, the size of baskets that what people are doing here. I think it is too soon to -- while I think it’s important to be mindful and to look at our cost structure, and to look at that business closely. I think in my opinion given the depths of the consumer recession that certainly is a pretty good way to account for most of what’s going on out there right now.

Jessica Reif-Cohen - Bank of America/Merrill Lynch

Okay.

Operator

Our next question comes from Spencer Wang, Credit Suisse. Please go ahead.

Spencer Wang - Credit Suisse

Thanks, good afternoon. Rupert I guess the question is, as you look out a couple of years assuming the market stabilizes and the economy stabilizes. How do you think about the asset base of the company and your exposure to the local TV station business and newspaper business? And then just one quick housekeeping item for Dave. Through the first half of the fiscal year cash flow from operations and free cash flow were negative. It looks mostly like because of working capital. Is that just timing or is there something else, thank you?

David DeVoe

(inaudible) I will go first quickly. Probably know we generate --

Rupert Murdoch

I am extremely happy with all of our newspapers. I think that they are good newspapers they are increasing their share of market. There has never been a greater appetite for news in the community. And we will be able to capitalize on that pretty well. I have got great faith and if we continue the way we are going, we may even get lucky and not have so much competition at the end of it all. But we are in good shape in the newspapers. On the television stations we are doing everything we can.

We are in a process of some major cost cutting, which will take place over the next 12 months. And the big thing about the local, there will always be room for good local stations supplying good local news. That is what the demand is for, and that is what we are expanding, and which incidentally is cheaper programming to do than buying a lot of syndicated material.

But will we return to the big profits of two years ago? I don't know. But we will certainly be seeing much better profits than we’re seeing at this moment.

Spencer Wang - Credit Suisse

Okay.

Rupert Murdoch

We were down about -- Dave you can correct me -- about 20% I think in revenue in the first half, certainly in this quarter that we’re looking at, and we are expecting and I think it may prove pessimistic, it may not, to be down 30% in the second half of the fiscal year and that is built into our forecast. But the big thing that really is killing us is the lack of automobile advertising. In local stations, automobile advertising was at least 30% of total revenue and there is precious little of it around at the moment.

Other categories are down too, but nothing like that. So, it is a fight day-by-day there and we have had a little bit of encouragement over the last couple of weeks, but I wouldn't want to build false hopes on it.

David DeVoe

With respect to your question on the cash flow, you are correct, the timing issue as you probably remember, the vast majority of our cash flow was generated in the second half of the fiscal year and as I said before in my opening remarks, we will generate significant free cash flow in the current year.

Spencer Wang - Credit Suisse

Okay.

Rupert Murdoch

Our underlying philosophy here is and I think it could be, most of you would agree with it, that on a global basis, we see in our business an increasing shift to subscription businesses; but will mass media still be a big factor? Absolutely.

Gary Ginsberg

Alright, next question Operator?

Operator

Thank you and our next question is from Alan Gould, Natixis. Please go ahead.

Alan Gould - Natixis

Yes, thank you. Dave, could you tell us -- have you taken any reserves for bankruptcies in either the TV end or the cable end as some of your competitors have. And if you think back to, I think it was the late 80s, you had a slew of TV station bankruptcies that hit all these companies. Are you concerned about that in the near future?

Dave DeVoe

Yes, we have taken reserves and I mentioned a couple of them in my remarks. I don't want to get into the details of all of this. We have taken a reserve on Tribune and some others. And I think we feel for the moment adequately reserved.

Alan Gould - Natixis

Happy with that Tribune reserve or are there reserves on the firm’s entertainment side?

Dave DeVoe

Yes, the Tribune was $10 million and the -- I think I mentioned the $22 million write-down for a customer actually in the United Kingdom as well. In the results I think we took around $50 million of provisions in reserves in the quarter.

Alan Gould - Natixis

Okay, thank you.

Peter Chernin

I think it’s important to note that Tribune is currently continuing to make payments on time to us.

Gary Ginsberg

Next question please.

Operator

And our next question comes from John Janedis, Wachovia. Please go ahead.

John Janedis - Wachovia

Hi, thank you. At the Wall Street Journal it looks like calendar ‘09 is starting off much like ’01 when your ad volume fell nearly 40% and EBITDA by a lot more. So I’m wondering, what are you hearing from the core financial and tech advertisers and where are you on the expected $100 million in savings that you talked about in the past?

Rupert Murdoch

We have made the $100 million there in the bank. And the increase in circulation revenue is, as I explained to you, it is going to be a slow process although a very strong one. I think no one has been moved up by less than about 40%; but [those aren’t true] no one less than by $40 a year, some by $100 a year depending on their status.

The revenue I have got to tell you and particularly in January was bad, it always is bad. But it is very short-term. And it is very hard to get a visibility into the future there. We have the New York Times cutting rates against us. We will not cut our rates. So, we are down at the moment about 20% in advertising.

Gary Ginsberg

Next question please.

Operator

And our next question comes from Jason Bazinet with Citi. Please go ahead.

Jason Bazinet - Citigroup

I have a question for Mr. Murdoch and please correct me if I mischaracterize your views. I think back in the late '90s you were sort of not a believer of internet advertising. And when we came out of the last recession, which was mild and you saw less of a rebound, I think sort of a light bulb burned off, that a lot of ads were migrating to the internet. You then bought some assets. Obviously it worked well for you for a while and I was just wondering at this juncture, how you are sort of thinking about the long-term viability of the internet as a medium? Are you bullish on it, and this is all cyclical or is it not sort of panning out. You sort of have questions about the viability?

Rupert Murdoch

I think there are -- and Peter would have views on this, too. In the social networking area (inaudible) we are getting 80% or 90% of the total revenue, but not that that is a particularly relevant number. Clearly, people in the search business are onto a very good thing.

The general display advertising, if it can be very specific such as it is with the Wall Street Journal, where we have a very healthy increase and I think our group, they are going to do about a $120 million this year in advertising that is fine. But overall, you have a problem in that. There is an almost infinite increase in inventory for websites and for display. So, there is constant downward pressure on the rates you can get. We have to find new ways to monetize our huge audiences.

Jason Bazinet - Citigroup

Okay. Thank you very much.

Operator

And our next question comes from…

Rupert Murdoch

I think I will just add that by being more data driven is good, and will be increasingly important, and we’re doing a lot to be able to refine and learn about our customers and our viewers on the web and that is showing some very promising returns. I’m sorry, go ahead.

Operator

And our next question comes from Jolanta Masojada, Credit Suisse. Please go ahead.

Jolanta Masojada - Credit Suisse

Thanks very much. I have a question for Dave to follow-up on the guidance that you’ve given. Can you just talk through the advertising assumptions you’re making now for full year guidance, compared with the advertising assumptions you were making in November?

Rupert Murdoch

Is this for Dave or me?

Jolanta Masojada - Credit Suisse

For Dave, or either.

David DeVoe

We are not going to go through every single segment but as Rupert mentioned, we can talk about the TV stations where we were selling in the first -- of our guidance down about 20%. We gave guidance in November, now we are assuming guidance down 32%. So it’s that type of change and I don’t want to go through every single one of our businesses.

Jolanta Masojada - Credit Suisse

Can you just (inaudible) the UK and Australia more broadly?

Rupert Murdoch

I would say that, just if I may say that the downturn in Australia hit very late. It is beginning to hit now and I don't know what the exact figure is but we are not yet feeling it the way we have felt it in Britain. In Britain, it’s interesting. We have in the Sunday Times a totally dominant newspaper in the quality market, with the circulation a lot greater than its combined circulation with its competitors. Yet, what could be broadly called classified, whether it is jobs or travel or whatever, we have lost out on. I would say we are getting all the business at full rates that are available. But the profit of the Sunday Times is down quite seriously.

On the other hand, on the Sun, it’s in a different market, it’s a popular market and it’s holding nicely over $3 million, is a great job. There were some weeks, thanks to price wars that were there in November and December where we had all-time record advertising revenues. That is not true at the moment but it is not down seriously.

Jolanta Masojada - Credit Suisse

Thank you.

Rupert Murdoch

So there it’s a mixed bag. And everywhere we are increasing our share of the market, whether it's in our local television stations in America or whether it is our newspapers in Britain.

Gary Ginsberg

Next question, please?

Operator

And our next question comes from Benjamin Swinburne, Morgan Stanley. Please go ahead.

Benjamin Swinburne - Morgan Stanley

Thank you. A question for either Rupert or Peter or both related to your station group. You're looking at the ratings across your network and on the station side. What is your view on retransmission payments starting to kick-in more significantly over the next few years? Is the model as it's set-up today appropriate for the audience delivery you are generating?

Is there any scenario where you took that to the extreme and went to the FCC, gave Spectrum back and turned the network and station group over to effectively a cable network? I realize it's a little draconian, but what's your view on sort of the scenario that we are looking at here?

Rupert Murdoch

Well, I think Peter can answer better than me. We are active in the area of looking for retransmission charges. I'll say no more than that. Other people are doing that too, and we think that cable will have to contribute to these big mass programs. They are extremely important to them. They cannot drop us, particularly when we have things like the NFL franchise.

We've been using them in the past. We've been giving people some retransmission rights in return for extended numbers of homes for our cable channels. So it's not that we're being unrewarded by that . We've been using this as a big asset to leverage cable distribution, the results of which you can see.

Peter Chernin

I would just both echo and add, most of our retrans deals don't come up for two to three years, but when they do come up, we would expect to be clearly partners with the cable guys. We are pretty aggressive. We are the number one network. We are generally the number one station.

We've made heavy investments in the quality of our programming in sports and entertainment and in local programming on our stations. I guess we'd expect to outperform the market and what the value of retrans is, given we're the number one market and the number one station group. But most of our retrans deals are two to three years out.

Benjamin Swinburne - Morgan Stanley

If I could sneak one follow up in. Rupert, I don't know if you have a view on the Obama administration, the new FCC, we don't know who the Chairman is but assuming it's Genachowski, how does that, if at all, affect the News Corporation in terms of tax policy or FCC views across ownership?

Rupert Murdoch

(Inaudible) to people in Washington and we look forward to working with him positively. We're not expecting any enormous changes, but we do expect a more decisive and better run FCC.

Benjamin Swinburne - Morgan Stanley

Thank you.

Operator

Our next question comes from David Bank, RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Thank you. A couple of questions. First, could you remind us of the progression of cancellation options if you could go through the fourth quarter, first quarter and second quarter? In connection with that, can you remind us of the spread on scatter versus upfront pricing and how that spread has been trending for the fourth quarter through recently, has it changed recently, has it narrowed materially recently?

And second, the Eastern European and Russian assets, can you give us an update on what's happening with those? Thanks very much.

David DeVoe

Yes. On the cancellations, as I said earlier, we expect to end up this fourth quarter at about 11% and the third quarter we were somewhere in the 7% to 8% range, although I could be off on that. And so, we're seeing an increase, but not an increase all that dramatically. As I said earlier, the last several years it's been running at 7% to 8%. So I don't have it quarter-to-quarter, but that's what it looks like.

In terms of scatter, we see the scatter market was probably a little bit stronger in the fourth calendar quarter. But, overall, as I said earlier, we have written $50 million of scatter at upfront pricing and we still think it's going along pretty well.

David Bank - RBC Capital Markets

Okay. So, no material change in the last couple of weeks?

David DeVoe

No.

David Bank - RBC Capital Markets

Thank you.

David DeVoe

I would say it's very erratic. We'll have a bad week, and then we'll have two good weeks. But that's been going on for the past four or five months. And so, we see no material trend changes.

Gary Ginsberg

Next question, please?

Operator

And our next question comes from Adam Alexander, JB Were. Please go ahead.

Adam Alexander - JB Were

Good afternoon. I've got a quick question for either Rupert or Peter on SKY Italia. The high VAT charge came in from the 1st of January. I'm wondering whether or not you've seen an increase in June or an impact on net ads. And considering this quarter's results, do you still expect year-on-year growth in that business in US dollar terms?

And then, of course, connected with that, there are reports you are in discussions with Telecom Italia about a stake in that business. I'm just wondering how any relationships there would impact SKY Italia.

Rupert Murdoch

We haven't seen much effect from that the VAT except anger by our viewers against the government. We have actually in our broadcast put in an extra $50,000 churn because of it. So far, and it's very early days, we see no evidence of that happening and we're still very confident. The year will see an increase in subscribers of 350,000.

Peter Chernin

We're confident of our growth not only in US dollars for the business, but also for the euro.

Rupert Murdoch

I didn't get a chance to answer an earlier question about Bulgaria and Russia. The answer is that Bulgaria is just fine. Russia is challenging to say the least, but certainly is still profitable. We may come back later to market with both those assets.

Adam Alexander - JB Were

Rupert, is there anything in your discussions with Telecom Italia?

Rupert Murdoch

No. I don't think there's anything further to say about Telecom Italia.

Gary Ginsberg

Operator, we'll take one last question, and then we'll go to the press.

Operator

Thank you. Your next question will come from Rich Greenfield, Pali Capital. Please go ahead.

Rich Greenfield - Pali Capital

Just a couple of questions. One, on myNetworkTV, just given the potential at CW, it sounds like it may not survive the next year in the current environment. Just wondering how are you thinking about myNetwork, and if there is a change at myNetwork, what that would mean for the stations?

Peter Chernin

Look, I would say on the one hand we are pleased with the ratings increases. I think our ratings are up about 50%. But, clearly, the market has gotten a lot tougher and we are extremely focused on the cost basis other than to see if we can get the cost basis down. We think that the most important piece for the stations is the wrestling franchise, which we have wrapped up.

So, we're looking at it pretty tightly. We feel good about the ratings performance, but it seems a very, very tough marketplace.

Rich Greenfield - Pali Capital

Just a follow-up, when you look at the advertising performance of what you're seeing at the core Fox stations, is it notably worse at myNetwork or are you seeing something similar at the current time?

Peter Chernin

I would characterize it as being worse, not notably worse.

Rich Greenfield - Pali Capital

Thanks.

Gary Ginsberg

Okay. Operator, we'll now end the investor protocol and go right into the press call.

Operator

(Operator Instructions)

Gary Ginsberg

Are there any questions from the press?

Operator

Okay. Our first question comes from Ken Lee, Financial Times. Please go ahead.

Ken Lee - Financial Times

Hi. Peter, you stopped short of calling the declines in DVD sales a secular trend. But can you talk about how the company plans to respond to these declines? For instance, any plans to boost the pipeline of films into on-demand channels or the Internet?

Peter Chernin

First of all, I just said I think it's too early to say it's a secular decline and that we should look at it really closely. It very well may be, we just don't know yet. As a result of that, we are not sort of [chained on]. We are being aggressive, I think, about as aggressive as anybody about looking at every avenue of distribution. I think it's sort of the cornerstone of the way the company looks at things.

Our view is we should be in the business of making the best possible content and distributing it as widely as possible. So we have seen pretty significant increases. I think on an industry basis we've seen the pay-per-view video on demand grow by about 25%. We've seen electronic sell-through grow in excess of 50%, and we are participating aggressively in all those areas.

Obviously, as a company, we're extremely excited about and interested in Hulu, which we look at as being ultimately both a good asset for us as a company, but more importantly a way to maximize our revenues and distribution.

Ken Lee - Financial Times

Given the current environment, is this an opportunity to tweak the windowing?

Peter Chernin

I think the window certainly between theatrical and in-home steadily decreased over the past several years. I think we'd probably see that continue, but I do think, particularly, right now, we're seeing pretty good theatrical marketplace and we want to constantly be alert that we don't in any ways compromise that.

Ken Lee - Financial Times

Thank you.

Operator

And our next question comes from [George July], Hollywood Reporter. Please go ahead.

Unidentified Analyst

Gentlemen, I was wondering if you have some color on how the contract talks with Peter are going at this stage.

Rupert Murdoch

I'd just say that Peter and I are continuing our conversations and they're private, and that's all there is to it. Nothing more for me to say and we won't take any further questions on that. It's a confidential matter.

Gary Ginsberg

Next question, please?

Operator

And our next question comes from Jane Schulze, The Australian. Please go ahead.

Jane Schulze - The Australian

Hi, Mr. Murdoch. I'm just wondering from your experience in previous downturns, when do you start to get a return of confidence from the advertising sector? Where do they first tend to put their money, into which segment, like do they go to TV or newspapers? And do you think when there is a return to confidence that a lot more of the advertising share may go to the Internet at this time? Secondly, can I have some comments from you please on how you think the film Australia has fared?

Rupert Murdoch

Many a time the advertising is certainly going to rush to the Internet. Whether it goes to newspapers or television or outdoor, I think it will depend on the advertiser. We'll see it across the whole board.

As far as the film Australia, it has done extremely well on a worldwide basis, disappointingly in the United States. It was a pretty expensive film, but we will not lose money on it. We will make a small profit on it. Well, Peter can answer that, but I think that's correct.

Peter Chernin

Yes, that's correct.

Gary Ginsberg

Next question, please.

Operator

And next question comes from Robert McMillan with Reuters. Please go ahead.

Robert McMillan - Reuters

Mr. Murdoch, you were saying before that you didn't think there were any companies out there so far that you could see that made a good strategic potential fit for News Corp. Lots of people like to talk about why the New York Times would or wouldn't make a good fit for News Corp and I'm curious about what you think about that fit in general?

Rupert Murdoch

I think that it's just that I've got no interest, but if you want me to comment further, I have got no desire to be an even bigger public enemy or target.

Robert McMillan - Reuters

All right. And then, the one follow-up was why is cable up and I'm wondering if that is a long-term trend. That meat of the question is pretty much for anybody on the call right now. What's going on with the consumer that they keep signing up? It seems like it's really kind of going in the right direction at a time when other consumer trends are going in the wrong one?

Rupert Murdoch

People are spending more time at home. They're watching more television and they are enjoying wonderful choice. So you naturally get the audience fragmented somewhat, which is [hurting] over the air. But there is no question that good entertaining programs can be monetized very successfully.

Robert McMillan - Reuters

All right. Thank you very much.

Rupert Murdoch

That all right, Peter.

Peter Chernin

No, I completely agree. I think that as people cut back on other options they're spending more time at home and they need the entertainment and information and sports that comes through cable. I think it's showing resiliency not only in the US, but around the world on our SKY platforms and some of our international cable assets.

Gary Ginsberg

We'll take our one more question please.

Operator

And that question comes from David Jefferies with Kyodo News. Please go ahead.

David Jefferies - Kyodo News

Hello. This question is for Mr. Murdoch. I was wondering similar to the New York Times a lot of Japanese newspapers are currently struggling with respect to individual subscribers and the influence of advertising, and I was wondering what you foresaw for the media industry as kind of a global entity and where you saw it going particularly once this recession…

Rupert Murdoch

I think it's fine. I think it's just a matter of the state of the economy and dependence. Different newspapers have differing dependence on advertising. Those that are most dependent on are particularly classified advertising are getting hurt the most, but it's a cyclical matter.

David Jefferies - Kyodo News

Thank you.

Gary Ginsberg

Thank you very much everybody. This will conclude our call. If you have any additional questions or other analyst perspective or press perspective, please call us in New York. We'll be happy to answer any more of your questions.

Thank you and have a good day.

Operator

Ladies and gentlemen, this conference will be available for replay after 6:30 PM today through Midnight February, 15. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 983571. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 983571.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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