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News Corporation (NWS)

Q4 2006 Earnings Conference Call

August 8, 2006 4:30 pm ET

Executives

Gary Ginsberg - IR

Dave DeVoe - CFO

Peter Chernin - President, COO

Rupert Murdoch - Chairman, CEO

Analysts

Aryeh Bourkoff – UBS

Jessica Reif Cohen – Merrill Lynch

Rich Greenfield – Pali Capital

Michael Nathanson – Sanford Bernstein

Douglas Shapiro – Banc of America Securities

William Drewry - Credit Suisse

Vijay Jayant - Lehman Brothers

Tuna Amobi – Standard & Poor’s

Doug Mitchelson – Deutsche Bank Securities

Spencer Wang – Bear Stearns

Anthony Noto – Goldman Sachs

Jason Helfstein - CIBC World Markets

Jolanta Masojada - Credit Suisse First Boston

David Roberts - Goldman Sachs

Alex Pollak - Macquarie Securities

Journalists

Aline van Duyn - The Financial Times

Serina Saito – Dow Jones

John Higgins - Broadcasting and Cable Magazine

Cecile Dorat – Bloomberg News

George Sealy – The Hollywood Reporter

Lisa Murray - Sidney Morning Herald

Josh Wine - Communication Daily

Ken Lee – Reuters

Julia Angwin – The Wall Street Journal

Sally Hoffmeister – L.A. Times

Operator

Ladies and gentlemen, welcome around the world today to our global audience. This is the NWS announcing their fourth quarter 2006 earnings release for investors and analysts conference call. (Operator Instructions) Here with our opening remarks is News Corp's Executive Vice President of Investor Relations and Corporate Communications, Mr. Gary Ginsberg. Good afternoon, sir, and please go ahead.

Gary Ginsberg

Thank you, Brent. It's good to have you back again today. Good afternoon everyone and welcome to today's call to announce News Corporation's fourth quarter and year end results.

Joining me today are Rupert Murdoch, Chairman and CEO of News Corp; Peter Chernin, President and Chief Operating Officer; and Dave DeVoe, our Chief Financial Officer.

As is our usual format, Dave will begin some comments from the quarter and from the year that might not be readily obvious from our press release. Rupert will then offer some general observations about the state of the Company and our Internet progress in particular, before Peter concludes our prepared remarks with an operational overview of the success we've enjoyed at some of our FOX assets. We'll then take your questions.

Given the late hour on the east coast, I would strongly urge you, as I always do, to limit your questions to just one. First though, some quick legalese. Today's call, as you know, is governed by the Safe Harbor provision and on this call we'll make statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those described in our public filings with the SEC, that could cause actual results to be materially different from those in the forward-looking statements.

And with that I'll turn the call over to Dave.

Dave DeVoe

Gary, thank you and good afternoon to everybody in New York and around the world. As you would have seen from today's earnings release, we're very pleased to report we achieved operating income growth for the year of 9%. This the ahead of the guidance that we last provided to you. This continued strong financial performance reflects earnings growth in nearly all segments of the Company, with SKY Italia and our cable networks driving the largest year-over-year gain.

As we previously indicated, our operating income growth was reduced by approximately 4% for the increased redundancy and depreciation costs of approximately $140 million associated with our United Kingdom newspaper print plant projects.

In addition, you should note that this growth is even more robust when considering that the current year's operating income was reduced by approximately $180 million from the following three items:

  1. Equity-based compensation expenses as a result of the adoption of the stock option accounting standards;
  2. Amortization expense related to last year's purchase of the outstanding shares of FOX;
  3. Amortization expense resulting from the acquisition of our Internet businesses in July of last year.

The net impact of these three items is spread among our various reported segments.

For the fourth quarter, operating income was 8% over last year's fourth quarter. This increase was led by double-digit increases at the Company's film, television, cable network and SKY Italia segments, partially offset by reduced profits from our print group.

Our equity earnings of affiliates also performed extremely well, with equity income for the year of $888 million. This is a $533 million increase over last year's level and fourth quarter equity earnings of $278 million, a $77 million improvement. The largest source of this improvement for both the quarter and the year was our share of higher DIRECTV earnings.

Our associate contributions have increased over the last three years, and they are now a major contributor, not only to our net earnings but also to our earnings per share. We reported full year earnings per share before the change in accounting principle of $1.03, an increase of 49% over the prior year.

Our income from continuing operations was $2.8 billion, a 32% increase over the $2.1 billion reported a year ago, and the related earnings per share from continuing operations for the year increased 26% to $0.87.

One thing I'd like to point out, it's important to note that this year's fourth quarter results includes $49 million of other expenses, primarily due to an unrealized loss on the fair value of our exchangeable debt security. This compares to the fourth quarter a year ago when we recognized other income of $163 million, primarily related to an unrealized gain on the fair value of the same exchangeable debt securities. As a result of this item for the fourth quarter, News Corporation's net income from continuing operations and related earnings per share amounts were essentially unchanged from a year ago.

Given you all should have a copy of our earnings release at this time, I'm not going to tie up your time running through the financials for each of our business segments. However, I would like to mention a couple of items that you should be aware of as you look at the numbers.

Our largest earnings growth driver for the year in absolute dollars was SKY Italia. With a $212 million year-over-year improvement, this business is developing extremely well with all key matrix continuing to track well. SKY achieved gross additions in the quarter of approximately 180,000. This is a 44,000 increase over the fourth quarter a year ago, with net additions of 119,000, a $41,000 increase.

These increases reflect the improvement over last year's fourth quarter and this really clearly reflects our full coverage of the World Cup and the related marketing efforts that went into it. SKY finished the year with 3.8 million subscribers. This is an increase of over 500,000 from the prior year end. ARPU for the quarter of approximately 47 euros was up 3% over last year, and this reflects the 2 euro price increase that went into effect last fall.

SAC in the quarter averaged 266 euros per subscriber. This is a slight improvement over a year ago, and the annualized churn in the quarter was approximately 7%, reducing annualized churn for the whole fiscal year to under 9%, Again, this is a slight improvement over last year's fourth quarter and the year.

As you can see from these results, this business continues to perform extremely well and we fully anticipate continued strong growth going forward out of SKY Italia.

At our cable networks, these businesses also generated very solid growth, with full year operating income up $162 million or 23%. These higher contributions were primarily driven by strong double-digit profit growth at the regional sports networks, FOX News channel, SPEED and the FOX International channel.

In the fourth quarter, cable segment operating profits accelerated to 42% over last year, and this is due to continued strong growth at the channels I just mentioned. Also, FX profits rose reflecting favorable timing of both program launches and the associated marketing costs on the timing of the launches. With this segment here, again, the outlook for this segment is very strong, and we look forward to commencing the renewals of FOX News channel during the upcoming fiscal year.

Shifting to our print businesses, I'd like to give you a little more detail behind the newspaper results. While advertising was challenging, particularly in the United Kingdom, the overall trend for the fourth quarter were better than what the reported earnings for this segment would suggest. Circulation revenues for the quarter were relatively flat in both the United Kingdom and Australia, and advertising revenues in the quarter were only down slightly.

However, total newspaper segment operating income for the quarter was down $82 million compared to last year's result, and this is due to number of factors.

In the United Kingdom we no longer have contributions from the TSL Education business that was sold last October. The fourth quarter a year ago included a $21 million operating income from the TSL business. Also in the United Kingdom, we have higher costs reflecting the launch of the consumer magazine division in our third quarter, and in the U.S. last year's fourth quarter included a recovery of about $16 million in plant expenses at the Post, resulting from a favorable legal settlement.

Turning to our capital structure, cash flow in the quarter was strong. We generated $880 million in cash flow from operations less capital expenditures. For the year, cash flow from operations less capital expenditures was $2.3 billion which, as anticipated, was slightly less than a year ago. We continued during the quarter to be active with our share buyback program, bringing the total repurchases to 157 million shares for a total of nearly $2.6 billion since we started the program. Our ending cash balance was $5.8 billion, and with gross debt of $11.4 billion, our net debt position at year end was 5.6.

Finally, let me address our guidance for fiscal 2007. Based on all the assumptions inherent in our projections, we anticipate operating income growth for fiscal 2007 to be in the range of 14% to 16%. This guidance excludes -- and I say excludes -- the gain from the sale of the property in the United Kingdom. If we include the gain on this property, which is expected to be approximately $140 million, then fiscal '07 operating income growth will be approximately 3.5 percentage points higher.

With that I'd like to turn the call over to Rupert for some additional comments.

Rupert Murdoch

Good afternoon and thank you, Dave. Once again, another great quarter and, indeed, we feel another great year. More importantly, a forecast for an even better year in fiscal '07.

I said this before, but I think it's worth repeating again in light of today's results. We are a Company that is built for robust and sustainable growth. Our assets are geographically diverse and of varying maturities. Our established assets, our newspapers, our other print and broadcast properties are stable despite increasingly competitive environments, and afford us the luxury of consistent cash to find our next generation of growth assets.

Our developing assets, our cable channels most prominently, are at key inflection points, having turned the corner to profitability and showing signs of even faster growth as they continue to mature.

Our newest efforts, the most exciting of which for me are our digital media assets represent our next generation of growth, poised to become drivers in the same way SKY Italia or FOX News or STAR are for us today. Indeed we just marked the third anniversary of FOX Interactive Media, fittingly marked with a Google deal we announced yesterday, and I think it's been a year of which we can be very satisfied, though not content.

In the space of just one year we've catapulted ourselves into a leadership position. Much of our success, of course, comes from MySpace, but it's not the only one. We're also enjoying strong performances from our category-leading sites across sports, gaming, lifestyle and entertainment. Our FOX Interactive properties now reach an audience of more than 75 million people a month. In fact, one in four people in America are now on our networks interacting with our content, tools and services. If you factor in our Internet assets, this number grows to more than 100 million people.

In the month of June alone, our web properties at FOX Interactive attained 30 billion page views, second only to Yahoo! and just yesterday served 4 billion ads. Today, more specifically this morning, I'm pleased to report that MySpace registered its 100 millionth user. As our traffic increases, so do our opportunities to monetize this volume directly through advertising and indirectly by bringing consumers to our more traditional content businesses.

The deal with Google, which we are guaranteed $900 million in payments across the next four years, is strong testament to our ability to monetize our vast and growing web presence.

To have achieved this much progress in one year is remarkable, but the real story is how well we are positioned for the future. Beyond the Google deal, and we hope this is just the beginning of a deepening relationship with that company, we're continuing to develop new ways of raising our community of MySpace users. We're also hard at work developing a new sets of co-gen tools to track price and sell advertising, having quadrupled the MySpace sales team to 55 people this year.

We are offering advertisers a new platform to reach consumers in intimate ways and have established working relationships now with 80 of the top 100 brand advertisers. We expect to launch MySpace into nine countries over the next year, having seen the success of our launches in Britain and Australia.

MySpace isn't the only platform with great potential. IGN Entertainment and Games ranks as the number one gaming information category website in the U.S., with 8.4 million unique users. Foxsports.com is the second-most popular sports property on the web. AmericanIdol.com reached 9 million unique visitors in just the month of May, achieving 70% growth year-over-year.

The creation of Mobizzo, our new mobile entertainment shopping mall, could prove to become an entirely incremental global distribution platform for our News Corp and other content.

Clearly, I'm excited about our prospects in interactive media. Previously I'd say that FOX Interactive could expect to generate at least $500 million in revenue this fiscal year. In light of our Google deal and other momentum, that should be pretty easy to reach. Other News Corp sites are generating a further 30 million unique visitors with about $100 million in revenue.

Before we get to Peter, let me reiterate briefly what Dave said about our continued prospects for robust growth in Italy. SKY Italia is progressing exceedingly well and creating significant value for News Corp and its shareholders. The platform delivered more than $212 million in earnings growth in fiscal 2006, and I am confident we'll see another $200 million or more of profit growth in this next fiscal '07.

There's been a fair amount of press about the scandal in Italy and while that drives good headlines, it shouldn't drive down our business in any way. Our focus in Italy continues to be pushing paid TV penetration. Still only about 18%; and on providing an even better video experience for our subscribers to enhance services such as high definition PVRs and new channels.

The goal of providing a better user experience for our customers is what drove our recently-announced broadband initiative at BSkyB. In the three weeks since SKY broadband was announced, customer sign ups have been very, very strong, even exceeding our expectations. As James Murdoch told SKY investors last month, this should prove to be a transformational initiative for SKY, enhancing top line growth, boosting earnings through 2010, and with the benefits of scale, deliver increasingly attractive returns.

Given the size of the U.S. market and emerging technologies here, we think it will also be a good opportunity for DIRECTV to offer an attractive broadband product. Chase Carey spoke a bit about the potential of this in his call this morning so I'll defer any statements, other than to say this is something we're keenly focused on and hope to have a resolution on shortly.

All these initiatives I've talked about today, whether they're about developing interactive platforms for the web or offering additional services such as high definition, broadband or new channels to our satellite customers, are all just extensions of everything we've ever done here at News Corporation, giving lots of people lots of choices they want. We've proven we know how to identify these opportunities and to create value from them, which is why I have every expectation the Company will continue to deliver strong growth for years to come.

And now I'd like to hand it over to Peter Chernin.

Peter Chernin

Thank you very much, Rupert and good afternoon. Dave and Rupert have already touched upon many of the key drivers we expect for fiscal '07, so let me just provide some additional color on a few of the other businesses I believe many of you are focused on.

Over the last several months we have answered what I think were several of the bigger investor questions surrounding a couple of our established businesses, namely the rising cost of national sports contracts, our ability to monetize our Internet assets and the sustainability of our film business.

Beginning with sports rights, as most of you know last month we reached an agreement to broadcast seven more years of Major League Baseball at an annual cost far below what we were previously paying. We said all along in this negotiation that we were prepared to walk away from broadcasting baseball if we felt we were going to lose money on the deal. We were very selective on the baseball package we acquired and are confident going forward that baseball will be profitable for the Company as a whole.

Additionally, by opting out of broadcasting the divisional series, as well as one of the league championship series, we will be able to achieve far better continuity for our prime time line-up, while continuing to have the World Series as an invaluable promotional platform.

With the renewal of MLB, FOX now boasts an unmatched year-long schedule of the marquee sporting events, from the Bowl Championship series to NASCAR to the NFL the Daytona 500 every year, and now the World Series and the All-Star game every year. We fully expect to deliver profits on all of our sports deals, as these rights will become even more valuable with the continued proliferation of PVRs.

Turning to our film business, I believe the past several months should have alleviated any concerns over the sustainability of our film profits. Our recent box office success set us up to have a very strong 2007, this after delivering another year of record film results in fiscal '06.

Some of the highlights include Ice Age 2, which has generated over $635 million in worldwide box office, which is set to be released on DVD November 21. X-Men 3, which has grossed more than $440 million in worldwide box office is also slated to hit the DVD market this fall. To give you an indication of how successful this franchise has already been on DVD, the first two titles have already sold well over 20 million DVDs to date.

Our big budget films aren't the only films to perform well. Our smaller films continue to deliver great returns, as well. There's no better example than the Devil Wears Prada, a modestly-budgeted picture that was ideally counter programmed to this summer's youthful popcorn fare. We've delivered over $110 million in U.S. box office alone following its June 30 release, far exceeding the movie's negative course and, again, we will also enter the DVD market towards the end of the calendar year.

We also have a great slate set for fiscal '07, including the current releases John Tucker Must Die and Little Miss Sunshine. Later this calendar year we will debut the fantasy adventure picture, Aragon, and the much-anticipated Ben Stiller comedy, Night at the Museum.

Now, while we were obviously excited with the developments in our film and sports television businesses over the last few months, we believe our search announcement yesterday with Google is truly a landmark deal for News Corporation. A year ago when we first became aggressive in digital media our goal was simple, but in no way easy; to be at the forefront of shaping how consumers use the web.

We quickly took that leadership role by acquiring what is unquestionably the fastest growing group of web properties, and we continue to expand our audience by providing a wide array of unique products and services.

Yesterday we took the next big step in monetizing the staggering audience we deliver by agreeing to this $900 million deal, which I believe is one of, if not the largest non-equity advertising deal in the history of the Internet. Our 75 million unique users will now benefit from a world-class search experience, enabling them to stay on our network and continue to interact with our deepening product. News Corp will be able to tap into Google’s advertising expertise, further leveraging our vast amount of ad inventory.

We believe this is just an early step in maximizing the value of our growing audience, and we will continue to be innovative and aggressive in pursuing ways to capitalize on our leading digital media platform.

Let me just briefly mention a few of our other key drivers in this year and beyond. Our broadcast network heads into the upcoming season in better shape than ever before. We've now been the number one 18 to 49 network for two years running, we're the number one network for the summer, number one for the past seven weeks, and for the majority of calendar '06. This ratings momentum, combined with our line up for next season, has translated into a lucrative upfront, setting us up to deliver improved network results in '07.

Our station group continues to grow market share to record levels and it too will benefit from a stronger ad environment that should see additional strength provided by political spending this fall. We also see great momentum of our cable networks. FOX News, as most of you know, will begin ramping up its carriage agreements this fall, with nearly 20 million subs up for renegotiation in this fiscal year. FX continues to reap the benefits of renegotiating its original carriage agreements, as well as the impact of their ratings growth this past season.

FOX Sports will further rationalize the newly-acquired RSN-Turner South, while continuing to add additional pro and collegiate events. Fuel and Reality channels have already reached breakeven, and just remember we started both these channels from scratch just a few years ago, and we also look forward to the continued expansion of our international cable channels to over 50 million subs worldwide by the end of the next year.

These are just a few of the growth drivers we are looking forward to capitalizing on over the next 12 months. Combined with the growth engines that Dave and Rupert mentioned earlier, we're in a great position to continue delivering strong results for our shareholders this coming fiscal year and well beyond.

With that we'll be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Let's go to our first question from Aryeh Bourkoff – UBS.

Aryeh Bourkoff – UBS

Thank you very much and good afternoon. Very nice guidance for 2007. Seems like a lot of things are hitting on all cylinders. The first question is related to the guidance for 2007 with the strong EBIT growth. What's the underlying assumption for the FOX media segment for operating income? Is it assumed to be obviously profitable for the full year?

As a second question, Rupert if could you talk about DIRECTV. Obviously there's been a lot of speculation about any sort of merger with Dish on the strategic side, but are there any other options that you would potentially pursue for DIRECTV versus just merging with a satellite operator? Thank you.

Dave DeVoe

On the Fox and DIRECTV piece, I'll go quickly. We're not breaking out the results individually, but what I will say it will be a significant improvement over fiscal '06.

Rupert Murdoch

On DIRECT I would simply say that our prospects are for continued growth. In the last quarter, I recognize the figures were down but we have been changing most of our dealers, getting rid of a lot of dealers and selling more direct and selling a great more through our Advark allies. We think it's just fine.

As for a merger with EchoStar, we're not certain. We have had no negotiations at all. There have been a few friendly conversations but nothing to report.

Operator

Merrill Lynch's Jessica Reif Cohen has our next question.

Jessica Reif Cohen – Merrill Lynch

Thank you. We’ll put this under the category of possible events. Rupert, could you give us any kind of update on where things stand with Liberty and have your TV licenses been transferred into News Corp's name?

There’s been so much speculation on SKY Italia either being sold and you taking a piece of Telecom Italia or even possibly an IPO. What is your thinking about ownership of SKY Italia over the long term?

Rupert Murdoch

On the second part, SKY Italia, we're very proud of SKY Italia. It's doing well. We have no plans. There has been publicity which has been misinterpreted in that we have talked and are at the early stages in the supply of content to Telecom Italia as they move into broadband services. It's only been about content.

On Liberty, we don't wish to talk anymore about that. We are actively in talks with Liberty at this moment but I can't comment beyond that. I'm sorry.

Operator

Representing Pali Capital we go to the line of Rich Greenfield.

Rich Greenfield – Pali Capital

I know you won't give guidance on FOX Interactive Media specifically, but at least to understand the kind of the base of where we're at now, Google did provide the clear visibility for substantial growth; but when you look at just the FOX Interactive piece or if you were to drill down just to MySpace, is it fair to say the losses excluding the amortization that Dave spoke to earlier, that the losses excluding that would be relatively minimal for the fiscal year nine months that you owned it?

Dave DeVoe

Yes. The thing I want to just point out, first of all that is true that the losses excluding amortization and retention are minimal for fiscal '06.

Rich Greenfield – Pali Capital

That would be for both FOX Interactive as well as for MySpace, or just broadly?

Dave DeVoe

Yes, in total. And then the other thing I'd like to point out, just to make sure everybody is aware is that the Google deal is heavily back-end loaded. We've got a lot of work to do in fiscal '07 in terms of getting integrated, getting all the data to them, getting the toolbar loaded. I just want to make sure from a guidance point of view that people recognize that a pretty diminimus amount of that guarantee takes place in fiscal '07, less than 10% of the guarantee.

Rich Greenfield – Pali Capital

And cash would track how you book the dollars from them in terms of your P&L?

Dave DeVoe

We'll book the dollars as they come in. To the degree they exceed the guarantee we'll book them as they come in.

Operator

Representing Sanford Bernstein, our next question comes from Michael Nathanson.

Michael Nathanson – Sanford Bernstein

Thanks. I have one for Rupert. You mentioned that the Italian football scandal has grabbed a lot of headlines in the paper. I wonder, what do you think the impact is going to be on Italy on subscribers from the demotion of the event to Series B, and do you have a right to renegotiate the license fees you're paying to them?

Rupert Murdoch

Yes, but we'll still be broadcasting the event. There will be some movement, we may sign up some other Series B teams in which case it will come off what we're paying the eventors. We do not expect to spend a penny more on football.

Michael Nathanson – Sanford Bernstein

Have you sampled subscribers whether or not they'll stick with it if the even gets demoted?

Rupert Murdoch

If it is demoted for a year or so, but probably only one year and I'm sure its fan base will stay as solid as ever.

Michael Nathanson – Sanford Bernstein

Thanks.

Operator

Douglas Shapiro is our next participant in queue representing Banc of America Securities. Please go ahead, sir.

Douglas Shapiro – Banc of America Securities

At the risk of beating a dead horse, maybe I could take one more stab at the DTH question. I think there is some perception in the market that there's been a philosophical shift at News Corp about your commitment to those businesses.

It sounds like the BSkyB is not seeking a new repurchase authorization, DIRECTV didn't announce one today and there's been all this speculation about your willingness to sell some portion of SKY Italia. All of that begs the question whether you are less enamored with those businesses than you once were?

Dave DeVoe

No, the answer is no. The BSkyB point and the reason we didn't go for another share buyback essentially was the agreement that we reached with the shareholders a year ago that we wouldn’t do it; which is why we didn't go for it.

Rupert Murdoch

We would have loved to have gone ahead and done a lot more buybacks but the shareholders thought that we were getting creeping control or something so we agreed we wouldn't do it for a year.

Peter Chernin

I think it's important to note that we remain bullish on the satellite business as a whole. We've seen great growth in SKY, we've seen great growth in SKY Italia. We think DIRECTV is absolutely on the right course and despite what some people are starting to write, this is a business that continues to grow and outpaces the growth of the cable business. We think it's a great business for us both overall and strategically.

Operator

William Drewry is the next participant in queue representing CSFB.

William Drewry - Credit Suisse

Thanks very much. Just on the FOX Interactive. Just wondering if you could help us at all with what the profitability of the $900 million from Google might look like and just wondering levels in investment spending that you're planning on at MySpace.

Rupert, you also said that you look forward to deepening the relationship with Google. Just wondering if you might expand on that and does that preclude you from working with any other major partners like potentially Yahoo! or Microsoft going forward?

Dave DeVoe

I’ll take a shot and then you can add, Rupert. Look, I think the $900 million as we said earlier is a minimum guarantee. We would hope and expect and Eric Schmidt said the same thing yesterday, that we'll actually deliver a greater amount of profitability since the bulk of the revenues from any ads sold come to us.

There are also key parts of both FIM and the rest of News Corp’s Internet properties that aren't covered, so we think that this should be a deal that generates significant incremental profits over the almost four years of it.

As we said on the conference call yesterday with Eric, we worked really hard over a five or six-day period to get this deal done and it's essentially just a search deal for FIM properties, but there are a lot of other things we can look to work on with them and we've actually been exchanging e-mails today on other things and we're going to start some series of meetings with them and we would like to continue to develop our partnership with them.

It also does not preclude our continuing to do things with other companies. As you know, we remain partnered with Microsoft on FOXSports.com and we continue to have good relationships with the other companies and we'll look to both grow our relationship with Google and also grow any other relationships that we think can be profitable.

Peter Chernin

I guess the only thing I'd add is the really good news here is Rupert and were joking about, it's nice to be attractive to so many people and we had all of the various players seeming to be extremely anxious to deepen their partnerships with FIM and with News Corp overall, and we'll look to continue to benefit from that.

Rupert Murdoch

I would just add that I think Steve has done a brilliant job with this negotiation and I would be shocked if a very, very high percentage of this $900 million is not socked to the bottom line.

Dave DeVoe

I was going to say, Peter, that the level of investment required to generate that $900 million is pretty minimum.

Operator

We go to the line now of Vijay Jayant - Lehman Brothers. Please go ahead.

Vijay Jayant - Lehman Brothers

Thanks. Your comments, Rupert, on negotiations with Liberty it seems that you've extended the rights plan by nearly a year. I just don't understand, if you're in discussions, why would you extend that? I'm maybe a little confused about that.

Second for Peter, any color on the cable upfront and scatter market? Thanks.

Rupert Murdoch

I think we will maintain the right plan until such time as we've completed the deal, if there is to be a deal with Liberty, and we do expect one.

Peter Chernin

As for the cable marketplace, it's actually a very schizophrenic market right now. We're nearing the end of the cable upfront which has been a pretty mediocre upfront for the industry. My sense of the industry as a whole is the upfront is probably down somewhere in the mid to high single-digits in volume, although that's not the case for our properties.

Our properties, which are newer and probably have faster ratings growth are sort of generally up in the low single-digits in terms of volume in the upfront. But schizophrenically, the cable scatter market is actually quite strong right now. We're seeing a pretty strong scatter market in the first fiscal quarter so it's been a tough upfront for the industry, a decent upfront for us and a pretty good scatter market right now.

Operator

Here now a question from the line of Tuna Amobi representing Standard & Poor’s.

Tuna Amobi – Standard & Poor’s

Thank you very much. I'll just keep my question to one. I'm trying to focus on Ice Age here. Clearly your gross on that film has been significantly higher than even the most bullish projections. So as you think about your strategy for CGI films, that's an area where FOX arguably has lagged somewhat, the other studios.

My question is, does the success you've had in this film, does that begin to change your thinking about how you might participate in the CGI, the budget that you have for CGI and the way that you were able to integrate the marketing of Ice Age across MySpace -- I think that was very remarkable.

So do you see this film as potentially changing your thinking on this genre? Related to the same topic, Ice Age, I think if you look at some of the studios that have grossed these kind of numbers, you're looking at potentially about 35 million to 40 million home video units, ultimate. So if you can share with us what you're thinking --

Dave DeVoe

I think that's a little aggressive on the DVD units. Finish the question.

Tuna Amobi – Standard & Poor’s

I'm pretty much done. If you could share with us your thinking on the ultimate units for that film, given the remarkable performance, that would be helpful.

Dave DeVoe

First of all I would say that Ice Age actually doesn't change our thinking about CGI films. I think that we've had a very consistent strategy and I think a very disciplined strategy and I think Ice Age is a real payoff for that.

That strategy includes a couple of things. One is we're really working hard to control our budgets. I think our budgets for CGI movies are probably at least 25% maybe 30% plus lower than most of our competitors. We also don't want to add to the glut of CGI movies in the marketplace. One of the things you're seeing particularly in the last several weeks of this summer is you're just seeing too many CG movies in the marketplace and the average box office has come down significantly.

I think what we're trying to do is maintain a great degree of CGI activity and only make movies we have a tremendous belief in. My guess is that will put us in one movie every 18 months range, maybe every 24 months and we're certainly not going to try and accelerate and make movies that we don't believe in enormously.

Because I think particularly if you look at the July results, when I think we were up to either three or four CG movies in the past month, and all of them have underperformed in some way. I think you're seeing that consumers will get excited about ones that are special and are going to sit at home for ones that don't feel unique to them.

As for the number, the size of the DVD market, I think your numbers are significantly higher than the way the market currently works. I'm not going to predict, but your numbers are significantly higher than any titles are doing right now.

Operator

Thank you for that. Deutsche Bank Securities’ Doug Mitchelson has our next question.

Doug Mitchelson – Deutsche Bank Securities

Thank you very much. My usual August question. Can you give us a sense of the advertising revenue growth underlying your '07 budget, and if you could give us a sense of both the domestic piece and the total global growth rate that would be helpful.

Dave DeVoe

Well, look, I would say that we have multiple assumptions depending on the business. I think that on the network side, it's pretty well-reported that we finished our upfronts up in the very low single-digits CPMs, although I think outperforming most of our competitors.

The gross significantly increased our volume by well over $200 million, and that was really our strategy. The cable upfront I just talked about, I think you'll see us increase our volume in the mid to high single-digits. The station marketplace is actually growing pretty decent right now. It doesn’t have an upfront. So I think we have modest but growth expectations built into our assumptions across the businesses.

Operator

Next we'll go to the line of Spencer Wang representing Bear Stearns.

Spencer Wang – Bear Stearns

Thanks. Dave, you mentioned earlier that free cash flow was down for the full year, down around 7.5% it looks like. It looks like it was mostly because of working capital or the change in working capital being less positive.

Can you give us a sense of where you expect CapEx and working capital to be in fiscal '07, and free cash flow if you'd like to also. Thank you.

Dave DeVoe

We would expect our cash flow for next year would be budgeted to be down from the current year and it’s principally the result of next year will be our highest level of CapEx as we complete our press projects in the United Kingdom and Australia, and the cash taxes that we pay will increase a bit.

For guidance purposes it probably will be down from the current year, however we will see how we do as we progress over the course of the year and we'll try to do better than that as we try to minimize obviously our tax payments and try to see what we can do with respect to our CapEx.

Operator

Anthony Noto representing Goldman Sachs has our next question. Please go ahead.

Anthony Noto – Goldman Sachs

Thank you very much. Peter, you had mentioned that you will continue to be innovative and aggressive as it relates to the digital strategy. A couple years ago it may have seemed ridiculous to ask the following question, but Yahoo! is currently trading at about 11.5 times 2007 EBITDA . They had a monetization problem in search, much in the same way as MySpace did. It’s probably a $300 million or $400 million opportunity that you could quickly close if you acquired the company and did a similar deal with Google.

Additionally, you are generating revenue per thousand on your page views on the branded side, pennies on the dollar compared to their ability at over a dollar in revenue per thousand.

Not to mention, you mentioned a lot of investments you're going to make in scaling Internationally, which they already have the capabilities to do. I am sure there are vertical categories such as weather, news, maps, et cetera that your young audience would love to have.

There seems to be a way that you could rationalize a financial reason to acquire Yahoo! and a strategic reason. Is it completely off the table because of some of the nightmares that still remain in investor's minds from the AOL-Time Warner deal? Or is it something you would consider at the right price?

Separately, on the Google deal, I just want to clarify. I understand the $900 million guarantee but that seems to me like it requires you to deliver the queries and the leads and for them to deliver the revenue per search; and that's the two end of that guarantee. If you could just clarify that. Thanks.

Dave DeVoe

I don't know if you want to say anything about Yahoo!, Rupert.

Rupert Murdoch

I would say that we would buy anything if the price was right, but frankly all the things you mentioned I think we can do ourselves, given time. So we don't see any attraction in that at this time.

Peter Chernin

I would second that. As for the way the guarantees work on both sides, I'll just reiterate what I said which is that we have a multi-part guarantee of impressions and queries that we provided and as I said, that guarantee is significantly lower than our current performance. So we feel pretty comfortable about our ability to achieve it. Google has a minimum guarantee of how much revenue they'll deliver back to us.

If you listened to Eric Schmidt on the call yesterday he said according to their analysis and their modeling, they feel pretty confident in their ability to reach and succeed that guarantee. That's about all I'll add to it.

Anthony Noto – Goldman Sachs

Thank you for the clarification.

Operator

Next in queue we go to the line of Jason Helfstein representing CIBC World Markets. Please go ahead, sir.

Jason Helfstein - CIBC World Markets

Thanks. Shifting back perhaps to the non-digital businesses, if I read it right for the full year you guys spent $100 million as far as restructuring and increased depreciation costs on newspapers. Assuming that business does not see a revenue improvement, I would assume that positions you clearly for margin growth next year.

The second part, are you now looking at doing some kind of similar type of restructuring on the magazine and inserts business?

Rupert Murdoch

No, we don't see any room for that currently in the magazines. For instance, we don't print ourselves and we run an extremely efficient cash business. As for the newspapers, yes, $140 million went in increased depreciation, but over $100 million of that was in signed contracts with over 60% of our print workforce in Britain to retire as we bring on the new plants over the next two-and-a-half years.

So that charge won’t be repeated. A little bit of that charge still to come, but not much.

Dave DeVoe

We’ve basically eliminated 700 out of 1,000 people.

Rupert Murdoch

That's correct. You will see, that $100 million won’t repeat itself and in three years’ time it will greatly grow to an improvement of $50 million a year.

Jason Helfstein - CIBC World Markets

So if I could follow up. How should we think about your outlook for the magazine business perhaps for the next 12 months?

Dave DeVoe

In our magazines and insert business, really our insert business, that’s a very good business. It's a highly profitable business on the margin side, it generates total cash and it's a business that we expect to continue to grow. I think we grew it somewhere around 4% or something in the current year and you’ll see us exceed that as we go to the mid to upper single-digits sort of growth rate.

Rupert Murdoch

This year we expect it to do better.

Jason Helfstein - CIBC World Markets

Thank you.

Operator

And next in queue we go to the line of Jolanta Masojada - Credit Suisse First Boston.

Jolanta Masojada - Credit Suisse First Boston

Thanks very much. I just wondered if you could talk about the advertising expectations you have outside of the U.S. in fiscal '07 with the U.K., Australia and also what you're expecting for Star, whether there is continued investment expectations in that business or if it's going to be a more stable environment.

Rupert Murdoch

I think we'll continue to see growth in Star and in both Australia and the U.K. Some small growth but pretty flat, to be honest. We are increasing our share of market in both places, quite dramatically, and we'll also be having certainly in Britain some selective price rises.

Operator

Thank you very much. Next we go to the line of David Roberts with Goldman Sachs. Please go ahead, sir.

David Roberts - Goldman Sachs

Thanks. A quick question on the guidance in '07. Obviously in '06 a large discrepancy between the growth rates you're achieving at the operating income line and EPS, given the strength in associates.

I was wondering if you could provide with us with a little more color on what you're expecting beyond or below the EBIT line for '07 given the associate profile. And just touch on whether you're expecting any major syndication sales to flow through the film business in '07?

Dave DeVoe

We're really not prepared to give guidance. Principally because we have two very large associate entities, one of which doesn't provide guidance, that is BSkyB and the other, DIRECTV, which is on a calendar year, not on a fiscal year, so we can't really go through the same process that we go through when we provide guidance with respect to the operating income. So on that basis, we can't provide EPS guidance.

Peter Chernin

As for syndication, I think it's already been announced that we're in the process of selling Family Guy into syndication for a September '07 launch, fiscal '08 and we sold it to the Tribune stations and their markets, and we are out in the processes of selling it to additional markets right now.

Operator

Our final question on the analyst side comes from our next participant in queue who is Alex Pollak - Macquarie Securities. Please go ahead, sir.

Alex Pollak - Macquarie Securities

Thanks very much for that. Very quickly, lots rumors floating around about AT&T and DIRECTV, and I think somehow it's tied up with Clear Wire and WiMAX licenses which I think are coming up either today or tomorrow for auction. I just wanted to get some clarification on how you're thinking about the bundling strategy with the satellite platforms on a global basis.

And how you're thinking generally about acquisitions because aside from that which you've done on the digital business, there hasn't been much of that.

Lastly, just a housekeeping question on the level of accelerated depreciation in the U.K. newspapers next year.

Rupert Murdoch

Lot of questions there. I understand your speculation about AT&T. We will, as I've said, be getting into their areas with our deal with Earth Link. But other than that, we have deals with Verizon and still Bell South for another year which are running extremely well for us.

BskyB we've announced we have launched already a triple play which will probably take 18 months to spread out across the whole country. In Italy, we’ll sell to anyone, our product. There is negotiation there on how we would and what price we would sell our product for some broadband arrangement to cover that country.

Dave DeVoe

The accelerated depreciation on the project is 50 million pounds in '07 which is the same as it was in '06.

Rupert Murdoch

Will that be the same in ’08 again?

Dave DeVoe

Yes.

Rupert Murdoch

One more year. Two more years.

Operator

(Operator Instructions) First in queue representing The Financial Times we go to the line of Aline van Duyn . Please go ahead.

Aline van Duyn - The Financial Times

Hello. Good afternoon. I just wanted to ask about SKY Italia. Your comments suggest that there have been absolutely no discussions about taking a stake, some kind of a stake Telecom Italia taking a stake in SKY Italia or some kind of an exchange. Can you confirm that?

Rupert Murdoch

Yes, there is nothing serious going on there. So far all I can say there's been some vague talks about some product.

Aline van Duyn - The Financial Times

So vague talks about content but no discussion about --

Rupert Murdoch

Content, right.

Aline van Duyn - The Financial Times

The second thing I just wanted to ask regarding your references to discussions with Liberty, are you expecting a deal to take place before the shareholder vote on the rights plan?

Rupert Murdoch

Look, I just don't know. I'm not prepared to predict.

Aline van Duyn - The Financial Times

Is a deal likely to involve the television, the U.S. television licenses?

Rupert Murdoch

We're not going to get into that. I'm sorry.

Operator

Thank you very much. Representing Dow Jones we go to the line of Serina Saito. Please go ahead.

Serina Saito – Dow Jones

Hi. Regarding SKY Italia, do you deny you want to sell it to Telecom Italia? I was wondering if now that the Company has been profitable for one year if you would consider an IPO as you have said in the past?

Rupert Murdoch

We may well consider an IPO at a time when we think it is politically appropriate.

Operator

We have John Higgins with Broadcasting and Cable Magazine next in queue.

John Higgins - Broadcasting and Cable Magazine

This moderator has the smoothest voice ever. You should hire him to do voiceovers.

Could you give me a little more color on the U.S. broadcast operations, particularly the fourth quarter where revenues were down but operating income was up? You're talking up to Malone about cutting loose a bunch of the TV stations. Could you tell me which stations those are and what that would do to the TV operation?

Rupert Murdoch

The answer is no to the last one. We can't tell you.

John Higgins - Broadcasting and Cable Magazine

I promise not to tell anyone else.

Dave DeVoe

The accounting is with respect to revenues per unit and we sold our SKY Radio business which is included in our television segment, which is why the revenues were down in the fourth quarter.

John Higgins - Broadcasting and Cable Magazine

What would the number have been if you had adjusted that out?

Dave DeVoe

We don't do those kind of pro forma.

John Higgins - Broadcasting and Cable Magazine

Can you isolate just the FOX Networks and the TV stations for me?

Dave DeVoe

No.

Operator

Next we go to the line of Cecile Dorat – Bloomberg News.

Cecile Dorat – Bloomberg News

Yes, I was wondering whether you are looking at other acquisitions in the digital area; and in particular YouTube the video site has been mentioned. Would you be interested in it?

Rupert Murdoch

No. We don't think so. We already have about 55% as many as they do of downloads of videos and we expect that to increase as we improve that part of MySpace. We are working hard at that right now.

Cecile Dorat – Bloomberg News

Okay. So you're not looking at other acquisitions at this stage?

Rupert Murdoch

Certainly no significant ones.

Peter Chernin

I think just to echo what Rupert said, I think our main strategy right now is the more time we spend with it, the more potent we realize MySpace is and it's a great opportunity to build continued applications on top of MySpace just as they've done with video in such a short time, to really begin to rival YouTube.

So we're really looking more than anything about continuing to invest in MySpace rather than making big additional acquisitions.

Operator

Representing the Hollywood Reporter, George Sealy. Please go ahead.

George Sealy – The Hollywood Reporter

Good evening, gentlemen. Peter, I wanted to ask if we have any update on the FOX Business News channel, what the latest thinking there is and I wanted to ask a general question about stock options. It seems like some companies have been getting in trouble with past option grants. Are you guys doing anything just to triple check your past accounting that it is all good, or you are feeling pretty safe there?

Peter Chernin

Well, on the business channel, we continue on our same track we've been on for a while which is we're hoping to be able to launch early calendar '07 and we still think we're on that track. Again, launch with significant distribution in place. Hopefully about 30 million subs at launch.

Dave DeVoe

We're very comfortable with respect to stock options and as you may or may not know, News Corp as an Australian company, all the stock option grants that were issued to any executive director of the Company had to be approved, which would include the price paid to grant by the shareholders. We have absolutely no issue or concerns with respect to the stock options.

George Sealy – The Hollywood Reporter

Thank you so much.

Dave DeVoe

We haven't issued stock options in over two years.

George Sealy – The Hollywood Reporter

Thanks so much.

Operator

We have Lisa Murray now with Sidney Morning Herald in queue.

Lisa Murray - Sidney Morning Herald

Rupert, last time you were in Australia you expressed some disappointment with the government's media reform plan. They have since unveiled that. I wondered what your view was now, and whether News Corp would be interested in bidding for digital spectrum?

Rupert Murdoch

I think the answer to the latter part of that question is no and frankly, I haven't thought a lot about it since I left Australia a few months ago. Sorry. I know a lot of developments, but I haven't changed my opinion on what those early proposals were.

Lisa Murray - Sidney Morning Herald

So will you be lobbying the government or will you have any involvement in the lobbying here against those proposals?

Rupert Murdoch

No, we don't lobby. We just make public what our position is.

Operator

Next we'll go to the line of Josh Wine with Communication Daily. Please go ahead.

Josh Wine - Communication Daily

I was wondering if you could give us an update on the status of selling videos of TV shows on MySpace? That was launched earlier this year. Has that been successful? Are there plans to take it further or where do things stand?

Peter Chernin

We were very modest. We just sold, I think we just did a small deal with Burger King to sell some episodes of 24 which has done nicely, we are continuing to explore selling electronic sell-through downloads on various video properties. So iTunes which we're already doing, we're looking at selling them on our station's web sites and I assume that we would continue to also sell additional ones on MySpace.

Josh Wine - Communication Daily

Thank you.

Operator

Next in queue we go back to Australia now, John Drewry with The Australian Financial Review. Please go ahead, sir. Unfortunately he has just disconnected himself. If he dials back in we'll try to get right to him.

Representing Reuters, we go to the line of Ken Lee. Please go ahead.

Ken Lee – Reuters

I apologize in advance. I feel like I'm really beating a dead horse here, but regarding the SKY Italia question again, I just want to double check that there have been no discussions on either buying a stake or some sort of share swap to take a stake in Telecom Italia. The Italian press has been buzzing with it every other day.

Rupert Murdoch

The Italian press buzzes a lot. I don't think I have anything to add to what I said before. I'm sorry.

Ken Lee – Reuters

I missed that.

Rupert Murdoch

I have nothing to add to what I said before which is that we've had talks which are not advanced, on sale of content.

Ken Lee – Reuters

Okay. Great. Thank you.

Operator

Representing The Wall Street Journal next we go to the line of Julia Angwin.

Julia Angwin – The Wall Street Journal

You guys just finished a big management conference in Pebble Beach with lots of very well-known speakers. I was wondering if you could talk about the cost of such a conference and what News Corp shareholders get out of this?

Rupert Murdoch

I think the News shareholders will get a tremendous amount out of it. I hope a reinvigorated and more imaginative executive team in which we had 300 people from all over the world, to challenge them to think about change and the future and it was a great experience.

As for the cost of it, I think they just established Gary Ginsberg as the last of the great spenders.

Julia Angwin – The Wall Street Journal

Did you come out with any conclusions out of this conference? Are you going to become a green company or something like that?

Rupert Murdoch

I think we all want to be green but we're not – BskyB has already declared itself carbon neutral. We'll try to spread that right through the company. Depending on the cost and the practicality of it.

Operator

With time now for one more question, we go to the L.A. Times and the line of Sally Hoffmeister.

Sally Hoffmeister – L.A. Times

Thank you for taking one last question. I would like to ask Mr. Murdoch, I believe in an interview with Charlie Rose in mid-July you said that the swap with Malone, the TV stations are no longer at the top of the list of options to swap to him. I just wanted to know whether I was misinterpreting those remarks and whether there's another choice?

I'm not asking what that choice is, but I'm asking is there another choice that's now in the --?

Rupert Murdoch

I would say there are a lot of choices including that one, the first one.

Sally Hoffmeister – L.A. Times

So that's not off the top of the list?

Rupert Murdoch

Not off the list.

Sally Hoffmeister – L.A. Times

But it's not at the top of the list?

Rupert Murdoch

No, it's not at the bottom either. There's no favorite at the moment.

Sally Hoffmeister – L.A. Times

Okay. Very good. Thank you very much.

Operator

Thank you. Back to you Mr. Murdoch and our host panel for any closing remarks.

Gary Ginsberg

We don't have any closing remarks other than if you have any further questions, as always feel free to contact our Reid or Craig in New York or Ender Buscher for press questions in New York. Thank you very much for joining us today. Have a good afternoon.

Operator

Thank you to our host team. That does conclude our earnings release for this fourth quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference Service. You may now disconnect.

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Source: News Corporation Q4 2006 Earnings Conference Call Transcript (NWS)
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