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News Corporation (NASDAQ:NWSA)

F4Q09 Earnings Call

August 5, 2009 4:30 pm ET

Executives

Gary Ginsberg - Executive Vice President, Investor Relations

David F. DeVoe - Chief Financial Officer

K. Rupert Murdoch - Chief Executive Officer

Chase Carey - President, Chief Operating Officer

Analysts

Jessica Reif Cohen – BAS-ML

Michael Nathanson - Sanford C. Bernstein

Spencer Wang - Credit Suisse

Anthony Diclemente - Barclays Capital

Richard Greenfield - Pali Capital

Doug Mitchelson - Deutsche Bank

Adam Alexander – Goldman Sachs JBWere

Mark Wienkes - Goldman Sachs

Benjamin Swinburne - Morgan Stanley

Michael Morris – UBS

John Janedis - Wells Fargo Securities

Jason Bazinet - Citi

Jolanta Masojada - Credit Suisse

Imran Khan - J.P. Morgan

Jason Helfstein - Oppenheimer & Co.

David Joyce - Miller Tabak & Co.

Media

Andrew Clark - Guardian News

Ben Fricks - The Los Angeles Times

James Quinn – Daily Telegraph

George Zollie - Hollywood Reporter

Brian Steinberg - Advertising Age

Shira Ovide - Wall Street Journal

Staci Kramer - paidContent

Robert McMillan - Reuters

Operator

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the News Corporation fourth quarter 2009 earnings release conference call. (Operator Instructions) I would now like to turn the call over to our host, Executive Vice President, Mr. Gary Ginsberg.

Gary Ginsberg

Hello everyone and welcome to our fourth quarter fiscal 2009 earnings conference call. On today's call are Rupert Murdoch, Chairman and Chief Executive Officer, Chase Carey, President and Chief Operating Officer, and Dave Devoe, our CFO.

As with our custom, we will start with a detailed presentation of the earnings from Dave and then Rupert and Chase will offer their perspectives on the future prospects of the company. We'll then take your questions.

This call may include certain forward-looking information with respect to News Corp.'s business and strategy. Actual results could differ materially from what is said. News Corp.'s Form 10-K for the year ended June 30, 2009, lists risks and uncertainties that could cause actual results to differ from these statements and are qualified by the cautionary statements contained in such filings.

Finally, please note that certain financial measures used on this call are on a non-GAAP basis. The GAAP to non-GAAP reconciliation of our operating income is included in our earnings release and the EPS and net income reconciliation is posted on our Web site on our Investor Relations Earnings Release page.

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

David F. DeVoe

As you can see in today's earnings release, we closed out fiscal 2009 with full-year's earnings well below last year's level. This is primarily due to the challenging economic conditions we experienced across most of our businesses during the year.

Besides the impact of our core financial results, which I will cover in a moment, these economic conditions resulted in non-cash pre-tax impairment charges of $8.9 billion and restructuring charges of more than $300.0 million for the year. Of these amounts, $452.0 million of impairment and $228.0 million of restructuring charges were recorded in the fourth quarter. These charges primarily related to the actions we have previously announced as FIM. In the prior year we had $19.0 million of such charges. My reference to adjusted operating income today reflect our operating results, excluding these charges, as well as the United Kingdom land sale gain in fiscal 2008.

I would comment that our restructuring activities were designed to better align our costs with revenues so that as our revenues improve the profit margins of our businesses will improve. With that background, I will start with some summary comments on the fiscal year and then address the fourth quarter.

Let's start with our full year results. We reported a GAAP net loss of $3.4 billion for the year, or $1.29 per share. We reported adjusted operating income for the full year of $3.6 billion, which is in line with the expectations we provided to you six months ago and reiterated it in May.

Our cable channel businesses were the clear stand-out segment for the year with 32% profit growth, partially offsetting the declines we had across our other segments, most notably television and newspaper and information services.

In addition to the impairment and restructuring charges, there were a number of non-operating items that also affected the net loss for the year. This year the result includes $1.3 billion of income and other, primarily resulting from the partial sale of our NDS ownership, which was completed in February.

Also, this year's equity earnings of affiliates includes a $422.0 million write-down of our carrying value Primera as well as $121.0 million write-down at BSkyBaby and My TV's investment. Excluding the net income effects of these items, adjusted net income was $3.04 billion this year, as compared to a similarly adjusted $3.5 billion last year. Adjusted earnings per share this year was $1.16, as compared to an adjusted earnings per share of $1.18 for fiscal 2008.

In addition, as I mentioned last quarter, this year's net income includes a required, one-time, non-cash tax benefit of approximately $1.1 billion, due to the completion of certain multi-year tax audits, which contributed $0.42 to our EPS. With that, I will focus the remainder of my comments on the fourth quarter results.

Adjusted operating income for the fourth quarter of fiscal 2009 was $948.0 million, a decline of 30% from last year. The year-ago results have been adjusted to exclude $125.0 million of income from the gain on the United Kingdom land sale. Consistent with the full year, this operating income decline primarily reflects reduced contributions from the majority of our business segments that more than offset strong growth in our cable channels.

We reported a GAAP net loss of $203.0 million for the quarter. In addition to the impairment restructuring charges, this year's fourth quarter net income also includes other net losses of approximately $82.0 million related to the disposition of certain investments.

Excluding the net income effects from these items, adjusted earnings per share was $0.19 this quarter as compared to a similarly adjusted $0.30 in the fourth quarter of fiscal 2008.

I would now like to take a moment to provide some comments on the performance of a number of our businesses for the most recent quarter. And let's start with the film entertainment segment. We recorded fourth quarter operating profit of $203.0 million and this is about 8% lower than last year's result, primarily reflecting reduced library contributions from our television production business and the pre-release costs for Ice Age Three.

Momentum at our movie business continues to improve from the number of recent box offices successes including Wolverine, Night at the Museum, and Ice Age Three. We expect that the home entertainment contributions from these films will help drive first half fiscal 2010 film performance.

At our television segment, adjusted operating income in the quarter was $95.0 million as compared to $279.0 million in the fourth quarter a year ago. This result reflects weaker ad markets, higher entertainment programming costs at the networks, and the absence of eight stations that were sold last July. And for your reference, the eight stations sold accounted for revenue and earnings of $76.0 million and $22.0 million respectively.

Revenue at our remaining stations declined 26%. This is slightly less than the overall TV station market decline of 27%. Virtually every category is down in the quarter with continued weakness from autos, financial, and retail categories.

Fox Broadcast Networks operating performance is the effect of a higher programming cost versus a year ago. As you may recall, last year's costs were unusually low due to the writer's strike that precluded running the entirety of a 24 life season that resulted in the broadcasting of several low-price shows. Licensees of returning shows increased this year and we had lower prime time ad sales reflecting ratings. And at STAR, earnings contributions were down reflecting the general softness in local advertising markets in India.

Moving down to the cable network segment, we continued to show very strong growth with operating income up 39% in the quarter and this is driven by an 8% revenue increase. The total segments affiliate fees for the quarter were up 13% in aggregate and advertising revenues were down 10%.

From a channel perspective, the largest year-over-year gains in the quarter were from the Fox News Channel, which achieved its highest quarterly operating profit ever due to higher affiliate rates and increased subscribers.

June quarters prime time and total day range were up 31% over a year ago and prime time was up 45% for the year. The channel was the third highest ranked channel of all basic cable in prime time. FX contributed to higher profits, reflecting increased advertising and affiliate revenues in conjunction with lower program costs.

The Fox International channels also contributed substantially. This is from higher revenue growth, especially in Latin American and continental Europe. And the Big 10 Network reported operating profits as compared to losses a year ago, reflecting last fall's distribution agreements in the Midwest.

Turning to Direct Broadcast Satellite segment, Sky Italia reported operating income of $155.0 million. This is a 57% decrease from the record fourth quarter of a year ago. Over 40% of this decline results in the shift in the timing of our software package revenue recognition, which we have described in each of our last three quarterly earnings calls. The remaining decline is mostly attributable to higher programming costs for the larger subscriber base, increased software costs, and the addition of 12 new channels.

As against our initial plans, the slowdown of the Italian economy coupled with the unexpected doubling of the DATC to subscribers reduced our growth in 2009. Despite these factors, Sky Italia's local currency revenues were 2% in the quarter, driven by a 6% increase in the average subscriber base as compared to the prior year.

Monthly ARPU for the year averaged 44 Euros, which is flat compared to the prior year. The positive effect to the September 2008 price increase and our ARPU was more than offset by price promotion.

As a result of the VAT increase and the weak operating environment, churn increased to 13.6% for the year. Gross additions in the quarter were approximately $167,000, although they were fully offset by churn resulting in zero net additions in the quarter. This quarter, by the way, is normally our lowest net additions quarter of the year, principally due to the conclusion of Italian soccer and we typically have lower marketing costs in this quarter.

Net additions for the year are approximately $235,000 and year-end closing subscriber base was 4.8 million.

At year end over 1.3 million subscribers were taking at least one premium service, such as HD, PVR, or Second Dock and this represents about 28% of our subscriber base.

In the newspaper and information service segment, adjusted operating income in this year's quarter was $96.0 million. This is down $167.0 million from last year's fourth quarter primarily reflecting significantly weaker advertising trends in all markets.

In the United Kingdom, local currency advertising revenues were down 18% overall, principally from volume and pricing declines at our broadsheet titles plus our reductions in classified advertising.

In Australia, advertising revenues were down 18% on a local currency basis compared to a year ago. Classified advertiser revenues declined 30%, primarily from reduced employment, property, and auto advertising, while the display revenues were down approximately 12%, reflecting a weak real estate category. Circulation revenues in Australia were similar to a year ago.

And at Dow Jones, operating results declined largely due to a 14% decrease at the Wall Street Journal for both display and classified declines, as well as lower information and service revenues. The reduced ad revenues were partially offset by our circulation revenues at the Wall Street Journal's print and online versions.

At our book publishing segment, fourth quarter adjusted operating income contributions were roughly break-even. This is down $29.0 million compared to last year. And here, this decline reflects a general weaker book market in a reduced number of strong releases versus a year ago.

In our other segment, we recorded a fourth quarter adjusted operating loss of $136.0 million, $79.0 million unfavorable to a year ago. The decline reflects the deconsolidation of NDS's operating results for this partial sale of early February. Reduced revenues had a [inaudible] our advertising business primarily from market declines and weaker Fox Interactive Media results.

FIMs revenue in the quarter of $192.0 million were down 15% compared to a year ago, primarily due to a 22% lower advertising revenue, which includes reductions in advertising revenue at My Space.

As you know, we initiated a restructuring of the FIN business this quarter, including the reduction of over 700 employees. While this restructuring resulted in a pre-tax charge of approximately $180.0 million for this quarter, these actions will enable our interactive business to operate much more effectively going forward.

Additionally, we performed a review of our intangible assets during the quarter, which resulted in a non-cash impairment charge of approximately $450.0 million. And I might add, the majority of a $180.0 charge was the result of the charge we took for excess facility space that we no longer need.

And finally, let me address our guidance for fiscal 2010. As we mention our guidance, we are starting from the fiscal 2009 adjusted operating profit of $3.56 billion that we have just recorded and excluding from this the $121.0 million in operating profit contribution from India, which was sold in fiscal 2009 and which will no longer be included in our results.

So as you look at measuring growth in fiscal 2010 we are comparing it to a base of $3.44 billion in operating profit for fiscal 2009.

And as we look at fiscal 2010 we expect many of our businesses will generate year-over-year earnings growth. These include further growth in our cable networks, led by new affiliation deals at Fox and further expansion of our international channels, moderate growth from Sky Italia and new subscriber additions. Our film division should show gains led by the Home Entertainment and other release windows from the three most recent films which I mentioned previously.

Overall, we expect that the economy that we operate in will not be significantly worse in the first half of fiscal 2010 than the current environment and that we will begin to show moderate improvement in the latter half of fiscal 2010, although we still have limited visibility on that point thus far.

As a result, given that the downturns in our markets in this past fiscal year didn't fully impact us until our second quarter, we will face some challenging comparisons for the first quarter and the majority of our growth will occur in the last three quarters.

In addition, we are currently now forecasting for the restructuring of impairment charges for fiscal 2010, therefore our guidance does not reflect any such charges.

Taking all these items into account and based on only assumptions inherent in our projections, we anticipate our operating income growth rate for fiscal 2010 to be in the high single digit range, above the $3.4 billion full fiscal 2009 level that I discussed earlier.

With that I would now like to turn the call over to Rupert for his comments.

K. Rupert Murdoch

The last year has been one of the toughest we've faced in our history and the results Dave just outlined for fiscal 2009 clearly reflect this dour economic environment that affected our businesses throughout the year.

Advertising markets who were weakened particularly after the slump in cars and finance are showing some good signs of life. But the tumultuous and unprecedented change affecting the entire media sector, and particularly newspapers and broadcasters cannot be ignored. I think the worst may be behind us but there are no clear signs yet of a fast economic recovery.

Despite these challenges, we were well prepared to weather this cycle. Early on we restructured and are continuing to transform our businesses to operate even more efficiently.

We disposed of non-core businesses and have since managed down our already lean headcount by more than 5%. But the rapid changes facing the media business means that no company is going to cost-cut its way to global competitiveness. Adjustments have to be made continuously and new opportunities taken to cover this fast-changing scenario.

We have a strong balance sheet with $6.5 billion in cash after generating $1.1 billion of free cash flow, net of capital expenditures for the year. And we intend to use this exceptional position to follow our long-held strategy and better align our businesses at all stages of development that teaches growth opportunities.

We have taken advantage of this prolonged downturn to strong increase the market share of our leading franchises across the globe, including our already market-leading U.S. TV stations. The returns on our many great franchises emerged from this period stronger, bigger, and more powerful.

There are a few specific things worth noting that give me great hope for next year and beyond. First is the return of Chase Carey as President and Chief Operating Officer. Chase has been the highly Chief Executive Officer of Direct TV and we bought the major shareholding in that company. This was after many successful years at Fox and News Corporation, and it is great to welcome him back.

Chase has been a close advisor and friend for years and has proven, both inside and outside the company, that he knows how to build audiences, manage complex staffs, and operate businesses properly.

We also brought in John Miller as Chief Digital Officer this past year and he will [inaudible] within the company. He's already making his mark across our global digital portfolio, tackling head on the restructuring at My Space and leading a company-wide effort to establish a new economic model to profitably transition our print properties to digital.

The digital revolution has opened many new and inexpensive methods of distribution but it has not made content free. Accordingly, we intend to charge for four of News’ Web sites. The Wall Street Journal's wsj.com is the world's most successful paid news site and we will be using our profitable experience there and the resulting unique skills throughout News Corporation to increase our revenues from all our content.

Second is the operational strength we continue to see across vast array of our asset base. Most noticeably, we were encouraged by the strength of our [inaudible] met with programming businesses. The full year operating income increased by 32% to $1.7 billion.

Fox News Channels operating profit in 2009 was a full 15% higher than last year and ratings are still sky rocketing. The network has now held the number one position in cable news for 90 consecutive months with prime time ratings up 45% compared with last year. As more and more people rely on Fox News for their source of unfettered news and commentary our fees for affiliates are now beginning to reflect the strong preference.

The Big 10 Network achieved its first year of profitability in only its second year of operation and gained distribution in all major pay-TV platforms in Big 10 markets.

At Fox Business Network, we are well ahead of our subscriber targets. As we close our second year of operations, FBN is now seen by close to 50.0 subscribers and after completing our recent deal for Ecco staff, expect those numbers to continue to grow quicky.

We are seeing even more growth aboard where we continue our long-term strategy of strong brands with a subtle foothold in emerging markets. Fox international channels added 25 more channels this last year in Europe, Latin and South America and saw operating income increase in all areas.

We are also pleased with our pay-TV leadership in Europe where we have more focus than ever on developing direct customer relationships. Italy for example, despite high taxes, high competition, and a dismal economy, Sky Italia increased its penetration to 4.8 million subscribers.

As Dave mentioned, this growth driver is facing some challenges but we are increasing our competitive edge in this under-penetrated pay-TV market with better technology and more choice to service a more stable and profitable subscriber base.

In Britain, BSkyBaby's edge in high definition, personal recording, broadband services, and telephony, has also helped to increase subscriptions. BSkyBaby is by far the U.K.'s leading pay-TV provider and now the country's fastest growing telephony provider.

With the rebranding of our affiliate, Primera, as Sky Voiceland, we will bring the same high service and premium products that have done so well in other European markets and perhaps the continent's richest economy.

It's not just [inaudible] either. In the world's largest democracy, Sky India is now a huge national broadcaster of Hindi independent. Of the country's 20 major land district, we now address half and our acquisition of [inaudible] India, will only increase our original strength.

We recently commenced a full operational review of APSTAR to take advantage of the opportunities we will have in Asia in 2010 and beyond.

In global entertainment, although we knew we would be down compared to last year's record result, we did enjoy a very good second half of the year with major releases beginning with Molly and Me and Take Her. More recently we had hits with Night at the Museum II, X-Men Origins Wolverine, and July's animated blockbuster, Ice Age Three, which is the highest grossing animated film ever outside the U.S.

Together, these three releases have gross more than $1.4 billion to date and are poised to generate robust profits as they go through secondary markets in 2010 and beyond. Year-over-year box office for the entire film industry is up 7% thanks largely to a reinvigorated approach to 3D and we have high expectations, very high expectations, for James Cameron's 3D Avatar during the holidays as well as the album The Chipmunks. We have an extremely promising slate of movies planned throughout 2010.

Finally, let me specifically address truthfully some of the challenges facing our print businesses. As I always have said before the traditional income and business model has to [inaudible] rapidly to ensure that our journalistic enterprises can return to their old margins profitability. The extended downturn has only increased the drumbeats of change but the secular challenge is clear. Classified advertising revenues will never again reach the levels that print once offered.

Quality journalism is not cheap and an industry that gives away its content is simply cannibalizing its ability to produce good reporting. The increase we have seen in our Wall Street Journal subscriptions since we acquired the paper proves to me that the market is willing to pay for that quality without any special market.

And we have tens of millions of readers. In Britain, the Times of London has a digital audience that now reaches more than 16.0 million people across the globe every day. In the U.S. the Journal is the only newspaper that has actually expanded both as print and online subscriptions during this recession. Additionally, you can now also read the Journal on your Blackberry or iPod.

We can be platform-neutral but never free. Intense research and development is being done by many companies to produce convenient and inexpensive mobile reading devices. Right now we are working with software, hardware, and other publishers within the industry to develop a model that works for consumers. Beyond the economics, it is crucial we maintain a direct relationship with our customers.

In closing, as Dave mentioned a few minutes ago, we expect to improve our operating income in fiscal 2010 by high single digits as the current year. In spite of a very good July, we expect a tough few months ahead but we are confident we will achieve those numbers.

We are entering fiscal 2010 with a solid portfolio of streamlined businesses, the right management team, with a firm resolve to improve and expand all our products.

With that I would like to turn it over to Chase. There are a few words he would like to say before we take your questions.

Chase Carey

I am extremely excited to be here at News Corp. I enjoyed my tenure at Direct TV and believe that business has an exciting future ahead of it, however, the unique array of content distribution businesses that compete across the globe without peer at News Corp. really made this opportunity irresistible.

These are businesses I know well and they have great management teams almost across the board and Rupert Murdock providing the overall organization a vision, ambition, and energy that has defined News Corp. for the more than 20 years I've known it.

One thing that made News Corp. uniquely appealing at this point in time is that I believe the company has a great opportunity to take our business to a whole new level in the next few years. I'm not making light of today's issues. We're in an industry that seems to be in a state of shock from the combination of the economic crisis and the digital revolution. As Rupert noted in commenting on 2009, we certainly have felt the impact of these changes.

Nonetheless, there are opportunities at News Corp. today to both take businesses that are performing well to new levels and to address more troubled businesses with plans to maximize their value, advances for businesses performing well and through our cable networks and distribution platforms, although these businesses are still not close to their potential.

Our cable channel group should continue to get stronger and expand, both in the U.S. and in the international markets. Likewise, our international platforms will grow if the world follows the U.S. in expanding pay-television platforms.

Realistically, the international market as a whole represents a great growth opportunity for News Corp. I believe international growth will achieve that in the U.S. at our business and we are positioned to take advantage of it.

We clearly have other businesses like broadcasting and print that have struggled in the last few years. On the broadcasting side we have an ad-supported business model that doesn't work. We need to get value for our great event product like the NFL and American Idol. We need to build new distribution models in a digital world that generate real value for our product. Other networks and stations need that cost structure to make sense for the business looking forward.

From a print perspective, we fully recognize the challenges facing the newspaper world. We are better positioned than most with the unique franchise and the Wall Street Journal that serves the different type of core customer and market-leading franchises in the U.K. and Australia. However, we know we are not immune to the issues facing the business.

We believe customers value quality journalism. We need to get paid for our product as it shifts to the digital world. We need to be disciplined in operating these businesses with our eyes open to the risks and challenges, to ensure we build lasting values and returns on our investment.

We must have plans in place for every business from My Space to the Dow Jones newswires to maximize the potential value, while establishing priorities for News Corp. as a whole.

I guess my overall message is that we know we have to attack every business with a sense of urgency and focus. We also need to be opportunistic about building ways businesses work together in new business models. For example, at Fox, why shouldn't the production network and cable businesses work with each other in this rapidly changing world. All these issues are opportunities, are great value that our industry is going to change in every way. Rules of the existing cost structures will have to change as will the company competing.

This uncertainty creates an opportunity to those who can build them in strengths, act decisively in building new, profitable business models, be disciplined in allocating resources where there are rewards or as the investment, and the determination to do what it takes to succeed.

News Corp. is ideally positioned to win in that department.

Gary Ginsberg

We'll start taking questions from the investment community now.

Question-and-Answer Session

Analysts

Operator

(Operator Instructions) Your first question comes from Jessica Reif Cohen – BAS-ML.

Jessica Reif Cohen – BAS-ML

Dave, within the guidance, can you give us what your revenue assumption is?

David F. DeVoe

With respect to just overall our revenue, respect to the newspapers and television businesses, down roughly low double digits, very low double digits. And overall, if you look at the company overall, our advertising should be about flat.

Jessica Reif Cohen – BAS-ML

And for the company overall for revenue, can you say anything?

David F. DeVoe

About flat advertising.

K. Rupert Murdoch

We have built in drag from the cable networks.

Jessica Reif Cohen – BAS-ML

But the non-advertising is what you're saying. The non-advertising businesses will grow?

David F. DeVoe

We specifically don't give guidance, but roughly 4% growth rate, 4% revenue growth in total.

Jessica Reif Cohen – BAS-ML

Rupert, just to follow up on what you were discussing the balance sheet, when you look at gross, can you flush out what kind of opportunities are exciting to you, and you are inclined to buy or invest within, so like a buy or a build strategy.

K. Rupert Murdoch

We've always found that we get better returns by building rather than buying. That's not to say that we wouldn't take any particularly great opportunity.

We have a lot to do and I think Chase mentioned it and I mentioned it, we have to face the challenges facing free to viewer television and digital newspapers.

Operator

Your next question comes from Michael Nathanson - Sanford C. Bernstein.

Michael Nathanson - Sanford C. Bernstein

You mentioned in your comments that you had a very good July. Can you talk a bit about what made July very good?

K. Rupert Murdoch

I think it's across the board. Not in newspapers but elsewhere. We saw some life in the advertising market. And we had great success with our film, Ice Age Three. We're well ahead of budget there.

Michael Nathanson - Sanford C. Bernstein

Clearly what Chase said in his comments, getting paid for quality TV like the NFL, does this mean you will start seeking pay for carriage for local stations from cable operators? And if so, what kind of timing has to be done, given that you have to renegotiate some of your cable deals for Fox News.

Chase Carey

I guess it was probably a holistic comment that really addressed it on every label. I mean, I think from a network perspective you need to deal with—there's production costs and rates if you have a production producer to affiliates to certainly the digital world, every transmission and service article. And I guess as with all our deals that come up at various points and time, but I think we have to use all the tools we have and we certainly have tools. I think some tools we probably haven't used well enough recently, but to use all those things to really address the issues in that business. We need to work on every front we can to really get value for that property.

Operator

Your next question comes from Spencer Wang - Credit Suisse.

Spencer Wang - Credit Suisse

Dave, in the context of your 2010 guidance can you help us understand how you think currency and FX will impact the guidance you put forth, and how much in cost savings is in your guidance from the restructuring charges you took in 2009 in your 2010 guidance?

And Rupert, can you can talk a little bit about what you're seeing in the upfront market in terms of CPM and sellout for both the broadcast network as well as the cable channels.

David F. DeVoe

With respect to our guidance FX has very little effect. If you look at the rates that we're using at year end, they're pretty much the rates that we're assuming. So today there's probably a bit of a benefit, which is not in our guidance because of the weakness of the dollar.

With respect to the cost cutting we have done, if you look at this broadly, we would have taken about 2% of our costs out in 2009 and another 2% of our costs will come out in 2010. Unfortunately, that's being offset largely by around 4% revenue find over the same period of time. But it's about at that level.

K. Rupert Murdoch

On the upfront, we are quite happy with the progress that we are making. All I would say is that we are doing well, we think we're doing well, on the [inaudible] but we will probably keep more open for spot later in the year. The spot market at the moment is very active. We are selling a lot of spots either at last year's upfront or better. So there is money around. I'm not saying there's a fast recovery or anything like that. But we are in the process of reaching understandings with a lot of advertisers.

Operator

Your next question comes from Anthony Diclemente - Barclays Capital.

Anthony Diclemente - Barclays Capital

Rupert, how much in terms of operating losses at some of your structurally-challenged businesses are you willing to sustain at this point? Example, take newspapers, I'm wondering in your mind how do you evaluate that? Is it possible that you may decide to shut down some of those businesses?

K. Rupert Murdoch

Anything is possible but that's certainly not a prospect at the moment. For instance, we could do a lot of cutting. For instance with the Times, and Sunday Times in London, but we are keeping the quality. We are not touching the journalist and if anything, we're improving it. Every other type of cost associated it we're cutting but we want t come out of this with much stronger franchises than we started and there are already signs, publicly admitted, of pain and possible closures of one or two of our competitors.

So no, our policy is to win.

Operator

Your next question comes from Richard Greenfield - Pali Capital.

Richard Greenfield - Pali Capital

A question on your film business. Roughly 25% of your operating profit, is going to come from film entertainment this past year and I assume even more next year, that's going to be one of your key growth drivers. When you look at what's going on in the home entertainment market, on the DVD side, specifically with Red Box and the growth of rental, there seems to be widely different views among the Hollywood studios. I'm curious how you plan to deal with it, what you are and aren't doing with Red Box and how that evolves.

And a follow-up for Dave, if you could clarify on Dow Jones, could you give us a sense of what Dow Jones' profit either for the quarter or the year was, how to just think about the actual business. And you had given some detail on it in the past.

Chase Carey

I would say on Red Box, I think it's a real issue for us. I think that our product rented at a dollar in the rental end is grossly under value and I think it's a real issue. And we're actively determining how to deal with it.

K. Rupert Murdoch

Just to add to that. The home entertainment market, I understand, at the moment, not including VOD, is down about 5%. And it would be too early to say whether that's secular or the recession.

Richard Greenfield - Pali Capital

But within that 5% the selling of DVDs is down a lot more with rental picking it up, which is I think less profitable for you.

Chase Carey

It's a pretty recent phenomenon. I think if you look at the numbers as a whole, it's probably not a big driver. I'm diminishing the issue. I think Red Box is—a dollar rental is clearly an issue for use and certainly the sale business is the heart of it. And it still is the driving aspect of the DVD business.

David F. DeVoe

The Dow Jones number was flat year-over-year in the quarter.

Operator

Your next question comes from Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Chase and Rupert, curious what your view is on the TV Everywhere concept for your cable networks. Rupert, you mentioned you wanted to be paid for your online news sites. Do you think online viewing of your cable network should be free or an incremental fee and Chase, you're a fresh set of eyes to all these business models, with your return, I would be interested in both of your comments on TV Everywhere.

Chase Carey

Again, I do think we have to move our business places where we're developing dual strings revenue. I think TV Everywhere has benefits to it that is probably in some ways more defensive than offensive, so I think we need to likewise develop offensive ways, that we're creating incremental value. The heart of TV Everywhere looks like it's really defending existing models, defending the unique and existing models essentially. Cable networks and the like. But it is an important step and I think we need to develop what I guess that I call as more offensive ways through whether it's through windows or other vehicles sort of availability and other business models to create incremental value for our product.

Doug Mitchelson - Deutsche Bank

Does that mean you would pursue TV Everywhere and then try to do incremental things, or are you saying that TV Everywhere doesn't accomplish those goals?

Chase Carey

I think TV Everywhere had benefits to it but I don't think that is the answer, there needs to be a broader, larger strategy that is really geared towards growth and expansion. So I think it's a part of it but I think it needs a wider and broader strategy. But again, as ways of generating incremental revenues out of it, not again what I think at the heart of this is mostly defending existing businesses.

Operator

Your next question comes from Adam Alexander – Goldman Sachs JBWere.

Adam Alexander – Goldman Sachs JBWere

Chase, I was interested in your comments saying that the international growth provides a great opportunity for News Corp. I was wondering if either yourself or Rupert had given some thought to consolidating some of the businesses internationally which may have high growth in your core business, such as BSkyBaby, Premira, Foxtel, or Sky New Zealand.

Chase Carey

I think those are great businesses. I do think we are uniquely positioned, not just in the strength and the breadth of our businesses but our ability to operate businesses in places like that. I think it's a competitive environment in those environments in many ways. And that certainly compared to the U.S. and clearly is nowhere near the same level of maturity. And I think those businesses are going to, in a lot of ways, follow what you've seen in the U.S. So I think if do look at and like it we're going to take advantage of it.

One of the specific structures—again, I probably wouldn't comment on a specific structure other than to say that that whole list is list of places that are real opportunities for us that [inaudible]. The Fox international channels have become a real growth area for us, we ought to continue to build them, just reduce in channel size, to really drive those together, to really continue to distinguish ourselves in the international marketplaces.

Adam Alexander – Goldman Sachs JBWere

They're obviously becoming a much more material driver of growth for the cable networks business. Are you able to break out where you think that business can sort of get to a farview view, at the operating income line.

Chase Carey

The international channels. Look, I think in many ways the international market obviously is not at the same level of development, so there is a lot of room. We've got some places we're probably further along. Latin American business is strong but there are lots of places that we can—

K. Rupert Murdoch

We think that on a worldwide basis in these developing markets, pay television, whether it be satellite or cable, is expanding steadily, 15% per annum. And we intend to ride that and we will see that in the results from international channels.

Chase Carey

And there are places that are above that. I mean, I think there are markets that still haven't gotten their experts at I think because there is all the distribution to get straightened out at some of these places and we will obviously be a big beneficiary.

K. Rupert Murdoch

They're all hungry for content as they develop.

Operator

Your next question comes from Mark Wienkes - Goldman Sachs.

Mark Wienkes - Goldman Sachs

With respect to Sky Italia, I was curious as to how you think about growth there over the next year. Specifically as you think about the impact from the VAT increase and the new competitive satellite TV launch in August and then the RAI?

K. Rupert Murdoch

We aren't totally relaxed about both matters of the [inaudible] and the free satellite service that's been set up against us. Does that answer the question?

Mark Wienkes - Goldman Sachs

What percent of viewing is on RAI? Is there anything you can do to keep that or are you just not worried?

K. Rupert Murdoch

We're just not worried. But I don't know the answer for any [inaudible]. Sorry.

Operator

Your next question comes from Benjamin Swinburne - Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

On the newspaper side you talked about the fact that classified revenue is sort of going away and is not going to come back, at least to the level it was before. That's a big percentage of the overall top line. It sounds like you think you can largely replace that with digital fees, either on the advertising side or subscription fees. Can you walk us through how that takes place?

And do you think that can actually occur if your new competitors, New York Times, or maybe more local papers in other markets, if they don't follow that model, can you in fact go through with that and make that work on your assets.

K. Rupert Murdoch

I think that we all are working on different models at the moment, but we're certainly satisfied that we can produce significant revenues, or we're very hopeful we can build significant revenues from the sale of digital delivery of newspapers, news content.

Benjamin Swinburne - Morgan Stanley

Any guidance you can give us or how much you think you'll be investing in Sky Deutschland. As you know, Germany has been a tough market for a long time for pay-TV operators to drive a lot of ARPU gains. They don't spend as much money in Germany as they do in the U.K. and the U.S. How do you change that dynamic?

David F. DeVoe

Based on the capital rate that was just concluded in Germany, the business should be fully funded through cash [inaudible] so we wouldn't anticipate putting any more money in it at the moment.

Operator

Your next question comes from Michael Morris – UBS.

Michael Morris – UBS

Given your somewhat more optimistic outlook for the marketplace over the next year, what do you need to see to re-enter the market for your shares under the existing repurchase plan? What is your target leverage ratio in terms of net debt to EBITDA?

And also, if you were to re-enter the market, what drives the decision to purchase voting shares versus non-voting shares and are there any limitations there or is it simply an economic decision?

K. Rupert Murdoch

It's simply an economic decision. I think any regrets we have is that we didn't take advantage of the $4.99 price four months ago.

Operator

Your next question comes from John Janedis - Wells Fargo Securities.

John Janedis - Wells Fargo Securities

You had net subscriber additions of about 235,000 in Sky Italia last year. With the increased competition, to what extent do you think you'll need a pickup in promotion to marketing and how much pressure do you think there is in ARPU and with the weak economy what level of net additions are you looking for, for 2010?

K. Rupert Murdoch

I think we're deliberately in light of the Italian economy, aiming rather lower this year in terms of net additions. In other words, we are not spending more money on marketing. Less if anything.

David F. DeVoe

We expect to have less additions.

K. Rupert Murdoch

In this climate, we'll just grow a little more slowly.

David F. DeVoe

I do think we certainly are expecting to hold ARPU up.

K. Rupert Murdoch

Definitely.

Operator

Your next question comes from Jason Bazinet – Citi.

Jason Bazinet - Citi

On the $450.0 million impairment in the quarter, did you say that was all related to FIM?

David F. DeVoe

It was. Yes.

Jason Bazinet - Citi

Since you paid 580 for that asset are you essentially sort of saying to the best of your ability you're not going to –

K. Rupert Murdoch

We paid a lot more than that for FIM.

Jason Bazinet - Citi

I'm sorry. I was confusing it with My Space.

David F. DeVoe

I'm not sure what you question is, though.

Jason Bazinet - Citi

My question is are you essentially saying you don't see material profits coming out of FIM, given the magnitude of the write-down? Is that the right take away or that's the wrong take away?

David F. DeVoe

I don't think that's the right take away. What we did is we have an obligation to build up on our assets based on certain accounting rules. At the end of the year that's what we did. And as a result of that evaluation, we took a write-down. That does not change our belief and the outlook or expectations for the business.

Operator

Your next question comes from Jolanta Masojada - Credit Suisse.

Jolanta Masojada - Credit Suisse

Could you address any investment opportunities that you see in FY2010 either through acquisition or through business start up and talk to the motivation for the increased share holding at Sky Deutschland.

David F. DeVoe

I think we answered the Sky Deutschland already.

K. Rupert Murdoch

What acquisitions might we be looking at? There's just nothing. We're not looking at anything of a major nature at this moment.

Operator

Your next question comes from Imran Khan - J.P. Morgan.

Imran Khan - J.P. Morgan

A couple of questions related to Fox Network. First, if you can give us some sense of what percentage of revenue for the year came from the international market and what kind of markings you had compared to your domestic markings.

And secondly, can you give us some sense what are the domestic cable advertising growth versus international local cable advertising growth in Q4.

David F. DeVoe

I don't have that. But the margins in the business are around 30% on both the international and the national. I don't have a breakdown of that. If you want to follow back—

K. Rupert Murdoch

In comparing the domestic and international, Fox International is much smaller in its contribution.

Operator

Your next question comes from Jason Helfstein - Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co.

Does our outlook for entertainment for the year, as far an improvement in 2010, I think you talked about assume an improvement in home videos, specifically sell-through.

And then can you give us any comments on an expected tax rate for fiscal 2010?

David F. DeVoe

The tax rate for 2010 is about 35%.

With respect to the growth rate, with respect to our guidance, the expectations are that our sell-through, I'm going to go through the details of it, but it reflects our expectations for the sell-through of our principal titles.

Chase Carey

And I think it reflects what has been recent experience in the video business.

K. Rupert Murdoch

We find that the release of the big hits sell extremely strong and good. It's lively content if it's a big hit.

Jason Helfstein - Oppenheimer & Co.

So you're not assuming an improvement in library, just kind of steady state and then the new releases based on your box office model.

K. Rupert Murdoch

More or less. As the growth of Blu-Ray is effective we think of account, for library.

Chase Carey

Yes, I think library. And some of the secondary, that are some of the things that probably had a little more of some of the TV product I think has probably not had as much piece of market as it did before, but I think it's reflecting a market that's by and large is relative for what we've been seeing in the recent times.

Operator

Your next question comes from David Joyce - Miller Tabak & Co.

David Joyce - Miller Tabak & Co.

Could you discuss what level of cross-platform ad sales do you currently have with your film divisions and say, your TV stations and network? Or how that might be changing now with some new management in place.

Chase Carey

I don't actually know offhand but I would end up saying that certainly it's small part of it.

K. Rupert Murdoch

I think that regardless that we are focusing My Space very much and that's why we're able to reduce the many things that they were attempting and not doing very well, a lot of them. For My Space, we think music, we think games, we think video. And we're going to improve those in every way we can.

Media

Operator

(Operator Instructions) Your first question comes from Andrew Clark - Guardian News.

Andrew Clark - Guardian News

Just on the subject of charging for newspaper Web sites, I wondered how much of a risk do you think it is to be the first to do this? What can you do to stop readers simply migrating to sites that remain free that are part of other media organizations?

K. Rupert Murdoch

Just make our content better and differentiate it from other people. And I believe if we're successful, we will be followed by all the media. Frankly, the big free competition will be coming from the BBC.

Andrew Clark - Guardian News

Can you give any indication on timing on this?

K. Rupert Murdoch

No, but we're thinking in terms of this fiscal year.

Operator

Your next question comes from Ben Fricks - The Los Angeles Times.

Ben Fricks - The Los Angeles Times

The three movies you've had this summer that have done very well, I'm wondering how you're thinking about them in home entertainment going forward. You said you'll make a lot of money there but you also said the home entertainment market is declining, more people are renting from Red Box for just $1 per night. Do you think these movies can make as much in home entertainment as they would have if they came out a year or two ago? And if not, what are you doing to try to address that?

K. Rupert Murdoch

We think it's down like 5% but I don't think it will affect those big movies. And certainly as far as iPage goes, I'm not worried about the rental. Let the Philippine people buy it for their young children and use it as baby sitters.

Chase Carey

And the lion's share of our business is sell-through. And we think Red Box is [inaudible] but it is fairly a large sell-through business.

Operator

Your next question comes from James Quinn – Daily Telegraph.

James Quinn – Daily Telegraph

I'm just following up on Andrews question on paying for news Web sites. In the past there have exceptions that news sites of quality newspapers would be charged for. In the market you're looking at, would you be charging for the [inaudible] U.K.

K. Rupert Murdoch

Well, I think they are very, very high quality and they're entertaining.

James Quinn – Daily Telegraph

But the type of celebrity journalism they focus on, particularly the pictures, which is what makes their Web sites comes alive, are available across the Web, paid for or not.

K. Rupert Murdoch

Not if they're ours. We will be asserting our copyright at every point. If you want to see—if it's about Celebrity, I think you will find that we normally have a Celebrity scoop, the number of hits we get now are astronomical. We get huge piece. So you can snare it up from the Telegraph, but I'm sure your great scoop, the two [inaudible] parliamentary expenses, people would be very happy to have been paying for that on a Web site.

James Quinn – Daily Telegraph

You hinted at the talk over the weekend about the possible closure of the Observer earlier on.

K. Rupert Murdoch

I didn't say that.

James Quinn – Daily Telegraph

You talked about signs of pain and possible closure of one or two of our competitors in the U.K.

K. Rupert Murdoch

Right.

James Quinn – Daily Telegraph

Any thoughts on the Observer?

K. Rupert Murdoch

No, but I did read that document that went to the Star or the Guardian, which swore everlasting allegiance to the Guardian, yet it made no mention of the Observer. I think I made the same sort of mental conclusion others did.

James Quinn – Daily Telegraph

No interest in the Observer?

K. Rupert Murdoch

No, why?

Operator

Your next question comes from George Zollie - Hollywood Reporter.

George Zollie - Hollywood Reporter

Chase, I was wondering if you could talk a little bit more about getting paid for TV content in the digital age. What are you thinking is more like to model, charging consumers or charging cable operators, let's say for the broadband system?

Chase Carey

I think this is a work in progress so I've just been here 30 days. We need to develop, we need to look at it from every possible angle, so I'm probably not going to get out in front of this and provide a preference for one or the other. I think the general directions, I think it's quite clear and I think we need to look at it in every which way and I'm multi-dimensional. I think we can use Windows, I think we can use a lot of tools there to try to get an opportunity. It's a great thought that if we don't get hung up in trying to respect the past and try to defend those rules, you can really look at taking advantage of these things and that we can create a business model that would set a pace for great profit.

Operator

Your next question comes from Brian Steinberg - Advertising Age.

Brian Steinberg - Advertising Age

We talked to ad buyers, they estimate that all the five broadcast networks in the U.S. are down for prime time volume between 10% and 15% and the sell out is 70% versus 80% in last year's market. Can you tell us if Fox came in those ranges or if it did better or worse?

K. Rupert Murdoch

You're talking 10% or 15% in cost of thousand?

Brian Steinberg - Advertising Age

Prime time volume. Total dollars.

K. Rupert Murdoch

I don't know. We haven't finished through the season yet.

Brian Steinberg - Advertising Age

Or how about the scatter, the sell out numbers?

K. Rupert Murdoch

Oh, we would rather keep availability for scatter than to lower our rates.

Brian Steinberg - Advertising Age

You would rather get more money in scatter than lower rates now. Hold out for more expensive scatter advertising.

K. Rupert Murdoch

We're not frightened by the year end at all. We think we have a great program and [inaudible] leadership amongst the networks and if the scatter market continues, we'll do better in it.

Operator

Your next question comes from Shira Ovide - Wall Street Journal.

Shira Ovide - Wall Street Journal

I was hoping to piggyback on the discussion about digital delivery and the discussion with hardware and then software firms. Is it possible that the company would build its own software products or own hardware product, along the lines of a Kindle or Sony reader?

K. Rupert Murdoch

No, we have our software product and we have a lot of unique software that we use with Wall Street Journal. Would we have our own reader or receiver? No, I think that's highly unlikely. We're not in the hardware business.

Shira Ovide - Wall Street Journal

And just to glance on what you said earlier when you said you want to charge for all the news sites, did you mean news sites including things like Fox News or you meant just newspapers and Web sites?

K. Rupert Murdoch

I would certainly include Fox News. It has a huge, loyal, and profitable audience. Already. I'm talking about its Web site.

Operator

Your next question comes from Staci Kramer – paidContent.

Staci Kramer - paidContent

Could you tell me where you stand with charging for the Wall Street Journal on Blackberry and on iTune. And also if you've have any further conversations with Amazon about finding a way to develop customer relationships through the Kindle.

K. Rupert Murdoch

No, we are changing the price of the Journal on the Kindle and we will get a better share of the revenue, though I can't say that I'm satisfied. It's the final result of the [inaudible], but it will be a lot better. But it's not a big number and we're not encouraging it at all because we don't get the names of the subscribers. Kindle treats them as their subscribers, not as ours. And I think that will eventually cause a break between us.

Staci Kramer - paidContent

Does the same situation exist with iTunes then and Apple?

K. Rupert Murdoch

Well, the same would apply to them. I can't answer that exactly. Apple is said to be coming out with a reader before the end of the year. Certainly Sony is doing that and we're in active discussions with them and they certainly accept that the subscribers would be our subscribers.

Staci Kramer - paidContent

And in terms of iTunes, how is it different there and when will you start charging?

K. Rupert Murdoch

I don't know. How many people are going to pay, that's all.

Operator

Your final question comes from Robert McMillan – Reuters.

Robert McMillan - Reuters

The Federal Communications Commission of the United States I think is going to do a scheduled look at the media ownership laws in 2010 to see whether it needs to change anything, for what companies are allowed to own in particular markets. Any chance that you will be talking to your Congressman, to anybody down there in Washington, D.C. regarding changes that News Corp. would like to see so that perhaps it can change its footprint in places like New York?

K. Rupert Murdoch

No, I think we're very happy with our footprint in New York. And I'm yet to make a call on the new chairman of the FCC. But we were certainly very welcoming of his appointment because of his experience in the industry and his knowledge of it.

Gary Ginsberg

Thank you everybody for joining us on this call.

Operator

This conference will be made available for replay after 6:30 p.m. today until August 15th at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 106787. International participants, please dial 1-320-365-3844.

This concludes today’s conference call.

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