Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

News Corporation (NASDAQ:NWSA)

F2Q10 Earnings Call

February 2, 2010 4:30 pm ET

Executives

Reed Nolte – Senior Vice President, Investor Relations

Dave DeVoe – Senior EVP and CFO

Rupert Murdoch – Chairman and CEO

Chase Carey – Deputy Chairman, President and COO

Analysts

Allan Gould – Soleil

Jessica Reif Cohen – Bank of America/Merrill Lynch

John Janedis – Wells Fargo

Doug Mitchelson – Deutsche Bank

Michael Nathanson – Sanford Bernstein

Rich Greenfield – Pali Capital

Imran Khan – JP Morgan

Spencer Wang – Credit Suisse

Media

Andrew Clark – The Guardian

Ken Li – The Financial Times

Shira Ovide – Wall Street Journal

Claire Atkinson – Broadcasting and Cable

Claire Delahunty – The Business Spectator

Ryan [Nakatumo] – The Associated Press

Operator

Welcome to the News Corporation second quarter 2010 earnings release conference call. (Operator instructions) At this time I will turn the conference over to your host, Senior Vice President of Investor Relations for News Corp., Reed Nolte. Please go ahead, Sir.

Reed Nolte

Thank you very much, operator. Hello everyone and welcome to our second quarter fiscal 2010 earnings conference call. On the call today are Rupert Murdoch, Chairman and Chief Executive Officer; Chase Carey, President and Chief Operating Officer and Dave DeVoe, our CFO.

Dave will give a detailed presentation of the quarter results followed by Rupert who will give his own perspective and color on the quarter. We will then take your questions, first from the financial community and then from the press.

This call may include certain forward-looking information with respect to News Corporation's business and strategy. Actual results could differ materially from what is said. News Corporation's Form 10-Q for the three months ended December 31, 2009, identifies risks and uncertainties that could cause actual results to differ, and these statements are qualified by the cautionary statements contained in such a filing.

Additionally in this quarter you might have noticed that we have changed the presentation format of the consolidated income statement to no longer display an operating income caption. Instead we provide the measurement of total segment operating income in the earnings release and our financial statements. As contrasted to our prior reporting of operating income the only difference is that total segment operating income excludes impairment and restructuring charges. Prior periods have been revised to conform to this new presentation.

Total segment operating income is a non-GAAP financial measure. The definition of and a reconciliation of total segment operating income to income before taxes is provided in both the earnings release and our 10-Q filing. In addition, we may refer to other non-GAAP financial measures. A reconciliation of these non-GAAP financial measures can be found on our website. If you have any questions on the presentation you can contact me after the call.

With that, I will turn it over to Dave.

Dave DeVoe

Thank you, and good afternoon everybody. At the outset of the call I would like to note that our reported results this quarter reflect a one-time charge related to the previously announced settlement of litigation involving the company’s integrated marketing service segment. The related $500 million pre-tax settlement charge is reflected in this quarter’s segment operating income and it had a $315 million or$0.12 per share net income effect.

After adjusting for this item we are extremely pleased with the underlying strong financial results we reported for the second quarter of fiscal 2010 where total segment operating income reached $1.2 billion. This is an improvement of 44% from a year ago and this improvement rises to 50% when factoring in the absence of the results from NDS which are no longer consolidated this year.

This increase was fueled by a 10% overall revenue growth and was further supported by the cost reduction efforts we initiated over the past several years. Our reported net income in the quarter was $254 million with earnings per share of $0.10. This compares to a reported loss of $6.4 billion or $2.45 per share last year. However, excluding the net income effect of both tiers of one-time items such as the litigation charge this year and the impairment charge we took last year, second quarter earnings per share this year were $0.25 as compared to the year-ago results of $0.15.

Now I would like to provide some context on some of the results in our segments. Let’s start with the film segment where second quarter operating income was $324 million. This is up $212 million over last year’s result with revenue growth of 28%. This strong performance was led by the worldwide home entertainment release of Ice Age, Dawn of the Dinosaurs and also reflected other home entertainment releases including Wolverine and Night at the Museum.

The December quarter also included significant launch costs for our very successful theatrical releases of Avatar and Alvin and the Chipmunks. The profits from these films will begin to flow in the next quarter which is our third quarter of the year.

At our television segment operating income in the quarter of $29 million improved by $31 million as compared to the second quarter a year ago. This was driven by 19% higher television station contribution and improved results at My Network TV. After six consecutive quarters of year-over-year decline, station revenues were up 6% on the current quarter and this reflects improved local advertising trends particularly in the telecommunications, retail, fast food and finance sectors as well as improved sports advertising from considerably higher ratings in the Major League Baseball post-season on Fox.

The growth was achieved despite a significant reduction in political advertising revenues versus last year and I think it is worth noting we saw significant improvements at the stations as the quarter progressed. For example, we began in October being down 14% versus a year ago and ended up in December being up 28% and these positive trends which Rupert will probably talk more about have continued into the current quarter.

Now moving onto the cable network segment where we continue to show very strong growth with record segment operating income contributions of $604 million, this is up 35% from last year on revenue growth of 18%. The revenue growth was led by a 21% increase in affiliate revenue and high single digit growth in advertising. The largest year-over-year gains in the quarter were from the Fox News Channel due to higher affiliate rates and additional subscribers and a relatively flat cost base.

The international channels from affiliate revenue increases, ad gains and the advertisements were particularly strong in Europe and Latin America. The regional sports network which reflects higher advertising rates and essentially flat advertising revenues and at Star which has been included in this segment since last quarter we had significant growth in advertising revenues in India led by the ratings strength of our regional channel.

Turning to our paid television business, Sky Italia generated a segment operating loss of $30 million as compared to income of $10 million in the second quarter a year ago. Sky Italia continues to operate in an extremely challenging business and economic environment. Subscriber growth is clearly below our expectations. However, it is important to note this is a very profitable business and we remain confident in the longer term growth in this under penetrated market.

In the quarter Sky Italia saw revenues decline by 2% in local currency terms as compared to the prior year’s quarter. Monthly ARPU in the quarter averaged around €43, as compared to last year’s €45 and this reflects the lower average tier mix, reduced pay per view revenue and the lag effect of various price promotions. Overall costs in the quarter were flat as higher soccer costs were offset by savings in other programming. Sky Italia’s subscriber base declined by 63,000 compared with the previous quarter and has total quarterly growth additions of 150,000 is more than offset by churn. This puts our ending subscriber levels at approximately 4.75 million.

At quarter end over 2.1 million subscribers represented approximately 47% of the subscriber base were taking at least one premium service compared with approximately 22% of the subscriber base a year ago. The importance of this is the premium service subscriber churn rate are about 1/5 of the non-premium service subscribers.

Shifting to our newspaper and information service segment our operating income in this year’s quarter was $259 million and this is up 30% from what we reported a year ago. This improvement is largely driven by higher advertising at the Wall Street Journal and lower operating expenses throughout all of our newspaper businesses. Our newspaper results also benefited from a favorable foreign exchange impact on revenues and segment operating income primarily from the relative strength of the Australian dollar versus the U.S. dollar. Like at our TV stations, comparative advertising revenues at our newspapers improved as the quarter progressed.

At our book publishing segment operating income contributions of $65 million for the quarter increased by $42 million primarily due to higher revenues in our general book and children’s books divisions as well as reduced operating expenses resulting from last year’s restructuring efforts.

In our other segment we reported a second quarter operating loss of $125 million which compares to a loss of $38 million a year ago. Approximately 40% of this change reflects the absence of NDS operating profit this year due to the partial sale of NDS in early February 2009 and NDS is now accounted for as an equity company.

Additionally the digital media group’s earnings declined from last year due to lower advertising and search revenues at My Space. This was offset in part by cost reductions and restructuring efforts.

Before I address our guidance I just want to make a couple of comments related to our balance sheet. We reported a cash balance at quarter end of nearly $7.3 billion. A portion of this balance will be used to reduce debt in the current quarter as we have $150 million senior note maturity which comes due in March. Today we committed to satisfying cash. The put if exercised by holders on the $1.7 billion of debt that is convertible to shares that we own at [inaudible]. Investors have until March 10th to notify the company of their decision. Also today we announced a 25% increase in the company’s dividend from $0.06 per share to $0.075 per share.

Finally before I turn the call over to Rupert I would like to address our guidance for fiscal 2010. As a reminder, as we did at year end and at our first quarter this year we measure this guidance excluding from fiscal 2009 segment operating income results of $121 million in operating profit from NDS which is no longer consolidated in our results. So as we look at measuring growth in fiscal 2010 we are preparing to a base of $3.44 billion with segment operating profit for fiscal 2009.

In early November we gave guidance anticipating our segment operating income growth rate for fiscal 2010 to be in the high single digit to low double digit range, above the $3.44 billion fiscal 2009 adjusted results. Since that time we have performed better than anticipated in several of our businesses and the box office records being set by Avatar has raised our outlook for the film entertainment segment. The U.S. television market is performing better than we had assumed as are our newspapers.

The impact of recent negotiations with cable operators can now be considered. Partially offsetting these improvements operating conditions in Italy continue to be more difficult than earlier anticipated and it is taking longer than we expected to achieve our revenue goals in some of our digital media business groups including My Space. As a result and taking all of these items into account and excluding the effect of the litigation settlement and restructuring related charges we have increased our segment operating income growth guidance to a growth rate in the low 20% range above the fiscal 2009 adjusted results.

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

Rupert Murdoch

Thank you Dave. Good afternoon everyone. As Dave has just described our true operating results for this past quarter were extraordinary and we have endured the most severe recession since the Great Depression but have emerged from this turbulence and turmoil I think as the world’s preeminent content company.

The crisis recasts companies in weak economies. The crisis highlights weaknesses and expedites pre-existing trends. From a crisis comes clarity and the strength of our company and our strategy is clear for all to see. Excuse the immodesty but News Corporation’s preeminence as a content creator comes at the debate over the primacy of content is over. Content is not just king. It is the emperor of all things electronic. We are on the cusp of a digital dynasty in which our company and our shareholders will profit greatly.

Devices and platforms are proliferating but this clever technology is merely an empty vessel without any great content. Machines are not powered by batteries but by creativity and ingenuity. By content that is original, accessible and trusted. Those characteristics define the nature of our company and are the pillars on which we are building a profitable future. It is worth taking a moment to put the company’s content into context.

We have the world’s leading film studio which has just made the most successful film in cinematic history. We are thrilled that the confidence we placed in Avatar and its talented team led by James Cameron has been recognized by appreciative audiences around the world and is still being recognized. Just this morning it was nominated for nine Academy Awards including Best Picture. Beyond the stunning financial success, I am convinced Avatar will be a harbinger of fundamental change in the industry and herald an exciting new era of 3D entertainment.

It is worth recalling as Dave explained, in the most recent quarter we booked much of the film’s costs and only a small portion of the receipts. In the current quarter and beyond, Avatar will provide a strong stream of revenue for our company. The studio other hits included Ice Age 3 and Alvin and the Chipmunks, both of which helped us surpass $4 billion in worldwide box office this past year, an industry record.

Also we have the number one broadcast network in the United States, FBC, which has been the top rated network for the past six seasons on the strength of shows like American Idol which has just kicked off its ninth season and is as dominant as ever. This past fall was the strongest in the network’s history. A television production studio [along] in place with such brand names shows like The Simpsons and 24 is now home to more net hit series than any other studio with shows like Modern Family, Glee and the Cleveland Show.

We have America’s number one newspaper in the Wall Street Journal, number one in terms of circulation, influence and quality. While other prominent papers are still suffering year-over-year advertising and circulation declines the opposite is true at the Journal. WSJ.com remains a digital model for newspapers around the world with a strong subscription base and still growing advertising revenue.

In the United Kingdom we have the number one newspaper in the Sun which had record weeks of advertising revenues during this past quarter and had left other papers far behind in the contest for readers. In Australia we have the largest selling daily paper, the Herald Sun, which improved circulation while the Australian National Daily achieved strong advertising marketing share growth as well as increasing its position as the most influential paper in the country.

The Fox News Channel is certainly the number one news channel in the U.S. winning an ever greater share of an audience that is both loyal and lucrative. Roger Ailes has done a remarkable and admirable job in building the worlds most influential and profitable news network. Through Fox International Channels we have launched more cable channels around the globe than any other company and we are profiting from continuing growth in Asia and rapidly expanding middle class audiences elsewhere in the world. While the west was coping with the crisis, the economic emancipation in much of the developing world continued enormous unprecedented pace as our unique success with Star in India testifies.

Harper Collins is one of the world’s leading publishing houses with much improved profitability. There is no doubt we have been at the forefront of the global debate about the value of content. At times that debate has been intense but that was essential when the stakes were so high. Far too many content companies were passive in the face of predatory behavior and self-serving [sophistry]. Passivity and meekness are not characteristics of our company. A year ago our criticism was thought heretical. But somehow the profane has become profound and the content clan has gathered around our ideas.

As I said earlier, the value of content is now clear. Instead of the existential debate about value now we are merely haggling over valuations. Consumers want content to be delivered immediately and on a ray of devices that suit their needs and they are willing to pay to be entertained and informed. Our mission is clear and coherent. It is to create great content and customize it to suit our expanding audiences around the world.

In the last couple of months I have toured the most innovative Asian research laboratories and walked the floor of the Consumer Electronics Show. The message is the same everywhere. Without content the ever larger and flatter screens, the tablets, e-readers and the increasingly sophisticated mobile phones would be lifeless. Without content these ingenious and wonderful devices would be unloved and unsold. I am delighted though certainly not complacent that our employee’s creativity and energy have been paid the ultimate compliment by consumers. They have paid for our content.

As Dave pointed out our results almost across the board far outpace those of the same quarter last year. Our revenues have revived and should remain strong. Local and national television advertising markets have been surprisingly strong. The signs are that this trend will continue in the coming months. The truth is the advertising cycle has shortened and we all have limited visibility to peer into the future.

The broadcast network business was thought [more] by many but we fundamentally changed its fortunes with the ground breaking retransmission consent deal we made a few weeks ago. The precedent we have established means that the weak transmission fees we will be negotiating with cable and satellite providers as our current deals expire over the next couple of years will breathe new life into that business.

When it comes to online use, we are committed to changing that model too. We are in advanced discussions with other media companies around the world, all of them who have turned to our company for ideas and innovation. We are currently in the midst of very substantive conversations with device makers and developing a subscription model that will deliver high quality journalism to consumers wherever and whenever they want it. We have begun to charge for online content at a couple of our U.S. titles and we expect to expand to other titles in the coming months. We have the most experience given our success in various digital offerings of the Wall Street Journal.

The success in 3D of Avatar and Ice Age 3 and our experience in being the most innovative broadcast of sports events puts us in a prime position for the development of the next step generation of 3D consumer technology. Asian manufacturers are well advanced in developing the technology that will transform the home viewing experience. Of course you will see more 3D films but more fundamentally there will be exponential growth in 3D programming in the next couple of years. Follow-on experience in leading the development of high definition viewing in Britain, [inaudible] will be launching a 3D channel in the very near future. Only last night they made their first 3D broadcast.

As well positioned as we are, there remain a few areas of our business that are not performing as well as we would like that continue to be long-term growth drivers. The first is Sky Italia. As David noted, Sky Italia is faced with the tough economic environment and increased competition but we are certainly enthusiastic about the potential of this business given the high quality of our service and the low penetration of pay television in Italy. The second is our affiliate Sky Deutschland. We have great confidence that the new management team headed by Brian [Sullivan] who helped build [V Sky B] into a powerhouse, will be able to make headway in yet another big market with very low paid TV penetration.

As proof of our confidence in this business we just increased our [standing] by five percentage points. Despite the challenges in these markets we remain firm in our commitment to pay TV around the world.

There is My Space but it is not yet where we want it. My Space remains one of the world’s top web destinations and during the past quarter we started to see signs of traffic stabilization as its mission was clarified. We believe this stability points to progress the new management team has made in repositioning My Space as the prime place where people share thoughts and ideas about music, entertainment and other popular content.

Finally, after all I have just said about the recent achievements of our company I think the most important point I can make overall is these businesses are growing, not just surviving but thriving. The majority of our business segments reported double digit revenue growth this past quarter clearly driving our higher operating profits. It is a widespread improvement that we believe will continue in the coming quarters.

I have to say that kind of success comes with having great depth of leadership. At News Corporation we are the best leaders in the media business. Chase Carey is a wonderful partner and his strategic focus, dynamic ideas and willingness to take on tough issues has helped to reinvigorate all of us. With some of the recent executive moves we have made at DOW Jones, our Fox businesses our international newspapers and the restructuring of our Star Asia business we think we are positioned for an exciting new chapter for News Corporation.

Thank you very much. Now Chase, Dave and I will be happy to take any of your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Allan Gould – Soleil.

Allan Gould – Soleil

How big a deal is this retransmission consent, when are there a lot more coming up in the near future and over the next 3-5 years should we be thinking $40 million a month or $100 million a month coming out of retransmission consent?

Chase Carey

I am probably not going to quantify it with specificity at this point. What is clear is it is a transforming event. It really puts the network on a path where it is a profitable business that generates the type of profit I think it should for the audience and the importance it represents in the marketplace. In terms of timing, we have two of the top ten distributors done. We are obviously in very early stages. There really are two fronts to this issue. One is through our O&O’s where we deal directly with distributors. The second is through the affiliate body.

First, in the arena where we deal directly it is about a 3-4 year process and in the next two years about half of the distribution universe is up with us we will deal with it. In terms of the affiliates who are engaged now, we think we value the relationship. We think it is important that we reach a fair conclusion. That being said we think the network is the most valuable and important programming we provide to consumers. We have begun those discussions but those discussions will really probably continue in the months to come. Certainly they will move forward. We are engaged now and we will move forward on those. Again with the affiliates their deals come up with distributors likewise and probably that same 3 plus year timeframe.

I think that is the broad context. Obviously we have a lot of work left to do but I think this really does set us on course and points us in a direction that Fox Network can assume the role it should. It is the most important television channel we have. It is the force that drives our television business and it should generate profits that reflect it and we think we stand on that course.

Allan Gould – Soleil

So this fixes the broadcast business model?

Chase Carey

I think it puts us…overly simplistic to say everything is fixed. We have great management there. We are a number one network. I think it puts us on a course where we can generate the profits we should at the network. So yes, I think it is simplistically it fixes it but it certainly puts it in a competitive place where it has a dual revenue stream like successful cable networks does and those that it competes with.

Operator

The next question comes from the line of Jessica Reif Cohen – Bank of America/Merrill Lynch.

Jessica Reif Cohen – Bank of America/Merrill Lynch

I was hoping you could help us on Avatar in terms of the timing of the impact, when you think you will have the home video released? Can you discuss any plans for sequels and how the economics may change? Then on TV just to follow-up on Alan’s question I was hoping you could comment one on the kind of current advertising outlook as we move into second half of fiscal 2010? Would you expect between retrans and reverse comp you will get back to prior levels of the TV business of more than $1 billion in OI?

Rupert Murdoch

I will answer on Avatar first. We put in some of the costs of course were taken in the last quarter. Avatar we think about 60% of the profits, perhaps better, will be in the following six months. Over the next two quarters. Which means we certainly plan to release the DVD as soon as possible. But it is continuing for a great period it seems in the cinemas.

Chase Carey

We are not going to yank it out of theaters when it is doing $30 million a weekend.

Rupert Murdoch

It was $30 million here but it was $95 million outside of here in the rest of the world. So we have $125 million a weekend, at even $100 million we will keep it going.

Jessica Reif Cohen – Bank of America/Merrill Lynch

On the sequels and any change in the economics?

Rupert Murdoch

Sequels, we are in very early talks about it. Jim has ideas for one. We haven’t come to any agreement with him or budgets or timing or anything. Being Jim Cameron I wouldn’t hold your breath for an early one.

Chase Carey

We certainly both intend to have one.

Rupert Murdoch

We will be pushing for one.

Jessica Reif Cohen – Bank of America/Merrill Lynch

I guess I am getting is there a chance you will have more than 40% of the economics in a sequel?

Rupert Murdoch

Not necessarily. We are very happy with the way the break up has come. Jim Cameron’s pictures tend to go over budget and we like to lay off the risk of loss. 60/40, 50/50. You are in that area. We don’t know if there is still going to be the money there but I think after the experience of our partners this time they will be back.

Chase Carey

We think film financing is still an intelligent way to run the business. As we negotiate them going forward we negotiate them. It is a negotiation like anything else. There is value inherent in a sequel.

Rupert Murdoch

Ask anybody. It is very easy to drop $100 million in a hurry on a film and we like to lay off a lot of the risk.

Jessica Reif Cohen – Bank of America/Merrill Lynch

On the…

Chase Carey

On the ad market, on a positive it continues to be really good in a very strong ad market. The network is still doing scatter business at 15%, sort of mid teens above the up front. The cable channels really solid, double digits in news. The entertainment business on the cable side probably in the neighborhood of 20% of up front. Sports which has probably been the one that probably had the toughest road to hoe given some things like autos is actually stronger than it has been. So the ad market has really been a solid market. In the station business I think Dave said it the station business we have a quarter that looks like it will be sort of mid to high teen’s year-over-year. So you still have an environment where I would say you don’t have the visibility historically you had and people talk about the economy and how reliable are some of the positive things you are seeing but certainly with those qualifications what we are experiencing and dealing with in the marketplace all continues to be positive from an advertising perspective really across stations, network and cable.

Rupert Murdoch

I think you could say this quarter looks like the stations will be up 18-19% but you must remember we are now beginning to compare with some very bad quarters last year and are we down on the booms years of two years ago? Yes, certainly. But our profits are very well up on last year.

Chase Carey

To your question….

Rupert Murdoch

You can only see one quarter. In newspapers, it is very hard to see more than 2-3 weeks.

Chase Carey

In terms of what is the longer-term profitability of the broadcast business and the network combined, it is certainly…I am not going to be specific. It is certainly $1 billion plus business.

Operator

The next question comes from the line of John Janedis – Wells Fargo.

John Janedis – Wells Fargo

I have a question on Sky Italia. It looks like this year you could see margins maybe back to the 2007 levels. I assume you think you could increase subs by at least a couple of million over time. I am wondering what should we look at as a leading indicator for improvement in the business? Is it less promotion? The economy? Political? Something else? Are we at a point now where the soccer and programming costs are largely fixed so we can see a start of the margin going forward when you see the sub gains?

Chase Carey

I think as we look at Sky Italia, if I look next calendar year roughly probably it is not where we are focused on sub growth. I think it probably is a more stable sub environment. So that tough economy. We sort of really are getting to the end of digesting the price increase, the VAT increase that occurred close to a year ago. So it helps just as we absorb that. I think we had to adjust to some of the issues in terms of selling our product with the loss of advertising space on the media fat channels.

Again, I think we are making adjustments and the court has given us the right to do it. I think we are again, sort of appropriately getting on top of that. Given that environment our focus in the short-term we are looking at stabilizing that appropriately and managing the business in a tough environment. I think if you look through towards the end of the year and going forward we do really still think we have a lot of sub growth in front of us. It is a market that still has only 30% pay penetration. We have a great product. I think we have a great brand and a great franchise in the market place and we really should be able to build on that position as we go forward.

The Soccer deal we have a deal done for three years so we have CPI type increases in the next three years so we have a pretty predictable situation in terms of those costs. And I think our focus in the short-term again we will probably be on stabilize the business dealing with some of the issues we have had like churn. Churn has been a challenge this year and again similar with the price increase. The market itself but I think we feel we are taking the steps to get on top of it but I guess if I had to look for something in the short-term I think something like churn would be the type of measure we would be focused on and improving efficiencies and really stabilizing that business in a tough environment so it can grow which it should.

Operator

The next question comes from the line of Doug Mitchelson – Deutsche Bank.

Doug Mitchelson – Deutsche Bank

I wanted to ask about growth prospects for cable networks. Profits have increased over four fold from 2004 to now to at least what looks like a $2 billion plus of EBIT this year. The last year or two had a good chunk that was driven by Fox News renewals. I was hoping you could help us understand how much growth is left at cable networks. Can you break down the drivers of growth from here? Also indicate how much longer can cable nets maintain double digit profit growth. That would be helpful.

Rupert Murdoch

Certainly in Sky News we have had most of the effect of the big increase in the price we are charging for it but we have another year to go before everybody [cut] kicks in. It probably will not be as big an increase as this year but it is a very solid one, turning a big double figure. Overall, we think we have great potential for growth in our existing channels both in profits and in distribution. We have quite a long way to go yet. When you look at the profits of a long established channel like USA we have got plenty of room for growth.

Chase Carey

I would second that. If you look at it in two levels in the U.S. I think you are going to head into a period where it is quality over quantity and I think we said that before. I think if you got really strong channels you should be able to drive them. I think we are more popular than ever. I think we are continuing to take share and if you look at our big drive channels FX is nowhere near what USA generates. Nat Geo nowhere near where something like Discovery Channel generates. Fox News realistically, Fox News just continues to get stronger and stronger. I don’t know there is a channel that is more important or powerful in the television universe in the U.S. I think that channel has great upside to it.

I think those powerful channels which are going to drive it have a lot of room left to grow and is something we are bullish about. The international marketplace which is the other front really at its core is going to get driven as the international pay TV business really follows the U.S. business in terms of growth and penetration first and foremost. We are a leader in most of the places we deal if we do business so we are in a great position to take advantage of those markets as they grow in terms of size, penetration and the like. We think that business internationally has enormous growth ahead of it as the market grows and we take advantage of the position and we enter those competitive markets.

It is a business that has a lot of room to grow. I know everybody asks where does the money come from. Realistically we want good relationships with distributors but the distributors are making a lot of money with big, healthy profit margins. I guess those will be the negotiations we have in the marketplace to get our fair share for the quality of the content we have.

Rupert Murdoch

Basically throughout the world outside of America which is pretty fully developed you have about 20% growth in Pay television wherever you look, wherever it is available in the world. We are on those platforms and we get that 20% growth. We expect to put other channels on, to charge more and improve them. We have a very big future ahead of us there. I think we have really only just started.

Operator

The next question comes from the line of Michael Nathanson – Sanford Bernstein.

Michael Nathanson – Sanford Bernstein

Dave I wanted to know if you could help us drill down on papers for a second? What percentage of the revenue growth and profit growth has come from currency or what was organic?

Dave DeVoe

It is about $190 million of revenue from currency and about $25 million of the earnings. As I said before, that relates to the Australian dollar strengthening against the U.S. dollar.

Michael Nathanson – Sanford Bernstein

In terms of your guidance for this fiscal year and operating profits does your guidance envision Avatar going to DVD? You kind of danced around that. Is that part of what you are assuming when you provide guidance?

Rupert Murdoch

I didn’t get that. I am sorry.

Michael Nathanson – Sanford Bernstein

No the question we have is within your operating income guidance for this fiscal year does that assume DVD release for Avatar in the current fiscal year?

Rupert Murdoch

Yes but it won’t be 3D. At this stage the science is not developed into 3D DVDs. Isn’t that correct?

Chase Carey

We haven’t put a date out. We are not going to…we will have actually the second copy. We want the opportunity to have it evolve as much as 3D Avatar down road but not in this window. The only thing I will say on the film is if you look year-over-year we had a pretty good second half last year so in terms of what is driving year-over-year compared to when you get to the second half we had a pretty good film year in the second half. I wouldn’t say it is the film that is driving the second half.

Operator

The next question comes from the line of Rich Greenfield – Pali Capital.

Rich Greenfield – Pali Capital

I wanted to follow up on this whole retrans issue. I think Chase you said at an investor conference several months ago that if ESPN gets $5 a month why shouldn’t Fox be getting $5 a month. I guess you had incredible success with Idol and Season 9 and you have obviously gotten retrans and the cable operators seem increasingly willing to play ball on retrans in bigger and bigger ways. I am wondering what are the issues? Is it regulatory? What stopped you from literally setting a hard level of something like $4-5 per month per sub for the Fox Network? How do you drive this far faster even than you are now or why aren’t you even just pushing with an extra zero in front of it?

Rupert Murdoch

We are modest people.

Chase Carey

I guess in some ways Rome wasn’t built in a day. We have important relationships with distributors. We want to get fair value for our content but I think in all honesty we tried to approach this constructively. We built businesses with them. We built valuable cable channels. We feel we have enormous value in the Fox network. We felt with the right thing to do was to try and take a big step forward to get the value of that Fox content recognized.

Could you argue it is worth significantly more? Sure. You could. There are a lot of issues involved. Certainly you did hear noise from an array of fronts and I think you try to take all those factors in terms of the relationship you have with them in other businesses, the broader marketplace and try to figure out how do you get this to a place that at least gets us started in terms of recognizing the fair value for the Fox Network. It doesn’t have…I think what we are trying not to do is while it is a difficult negotiation and a negotiation that ultimately was really destructive to a point that fractured a lot of things in a way that it wasn’t sort of respecting how do we continue to build a business with the distributors as we have over the last X years.

Rupert Murdoch

I would just like to add the big cable companies are making really great operating profits and what we are asking for and even of our network competitors ask for the same and get the same is certainly not going to kill the cable companies. Maybe 10% of their operating profits. We still have 2-3 years to pass through.

Chase Carey

I think over time we expect we should get a value that is reflective of the value of our content. It is a matter of how do you get there in a way that is I guess people would call it aggressive and another level that we tried to be respectful of an array of fronts and relationships.

Rich Greenfield – Pali Capital

When you look at the deals you have outstanding if this is the baseline of your new contract strategy going forward how many years before…is it a 2-year process? Do you get 50% of it in the next 12 months and the other 50% the year after? What kind of is the waterfall to get this to affect the vast majority of the country for you over the next few years?

Chase Carey

I think what I said was again the ones we deal directly with we have some [inaudible] of affiliates but we don’t have quite the visibility through the affiliate side, but my guess is it is not dissimilar. The ones we deal with directly it is a 3-4 year process. Probably in the next few years about half of the sub base about half of them or so.

Operator

The next question comes from the line of Imran Khan – JP Morgan.

Imran Khan – JP Morgan

Can you please talk about your view on the value of film libraries in current conditions? There are two reportedly for sale, MGM and Miramax. Are these two attractive and complimentary assets for a major studio like News Corp.? Secondly, cable networks which is roughly half of your operating profit the markets were 34% in this quarter operating profit. How should we think about long-term operating profit margins for this business?

Rupert Murdoch

There are two questions. Film libraries. It is just a matter of opinion what they are worth. The big one, MGM is for the most part very old and there are some good films there. The right price we would be interested but it appears that others are more interested. I think you can count us out of that one altogether. We don’t know how that will end up. I can rule out Miramax right away.

Chase Carey

I think in terms of film libraries again it is certainly value. You have to look at a DVD market that is in decline not growth which is a significant part of it. On the flip side the television market overseas is pretty healthy. The second issue on film library is you need that current product that clearly reinvigorates. If you just have a stale library that sits there and gets stale over time it is probably a depreciating asset. So I think it is important in a film library that has current product flowing in that continues to give it a currency and liveliness to it.

I think in terms of the long-term cable, long-term cable margins I think we could leave it as we have got it and we continue to drive and in some ways the business is as quickly as you take global franchises that probably have opportunities. National Geographic, National Geographic Wild, the type of content that really travels around the world I think gives us an opportunity to really create value very cost efficiently and the like. So I think we feel good about where the cable business is and opportunities to continue to drive those margins forward.

Operator

The next question comes from the line of Spencer Wang – Credit Suisse.

Spencer Wang – Credit Suisse

On the guidance, I believe you grew EBIT about 26% in the first half so the guidance would seem to imply a little bit of a deceleration in the second half despite the ad market getting better, comps getting easier plus Avatar.

Dave DeVoe

When you doubled your guidance it was a deceleration but…essentially it is the same as we had before. We had a great first half in the film company.

Spencer Wang – Credit Suisse

Then maybe a second question for Rupert.

Rupert Murdoch

This quarter we honestly do not have any visibility on the last quarter and certainly you will be paying the usual business of charging a lot for new films for the next financial year.

Chase Carey

The biggest [tailgate] in the film was we actually had a very good last year a very weak first half and much stronger second half. So we have comparative to last year we got a big benefit in the first half on a comparison from a weak film business the first six months of fiscal 2009.

Spencer Wang – Credit Suisse

Maybe one quick question for Rupert. On the books business obviously there has been a bit of controversy over how Apple may price e-books versus Amazon. I was wondering if you could just share with us your perspective on retail or wholesale pricing with books in a digital delivery mode?

Rupert Murdoch

We don’t like the Amazon model of selling everything at $9.99. They don’t pay us that. They pay us the full wholesale price of $14 or whatever we charge. We think it really devalues books and it hurts all the retailers of the hard cover books. We are not against [inaudible] books. On the contrary we like them very much indeed. It is low cost to us and so on. But we want some room to maneuver in it. Amazon, sorry Apple in its agreement with us which has not been disclosed in detail does allow for a variety of slightly higher prices.

There will be prices very much less than the printed copies of books but still will not be fixed in a way that Amazon has been doing it. It appears that Amazon is now ready to sit down with us again and renegotiate pricing.

Chase Carey

Before turning to the press inquiries which will be next, I would like to leave investors with a few closing comments. We obviously feel good about our second quarter results and the momentum of our business for the rest of the year with our fiscal 2010 guidance doubling from a quarter ago. But with these results do not really reflect the degree to which our businesses are truly positioned to grow over the next few years.

In broadcasting as we have touched on we are now on track to build a dual revenue stream business that enables Fox to achieve a value that equals its strength and its importance to viewers. Our leadership in content creation in both film and television as Rupert said, continues to build as many of our competitors struggle and new technologies like 3D and mobile platforms open up new avenues of revenue growth.

At the same time these new platforms and devices open up new avenues for our new sports and print content. Our cable channels have great momentum both in the U.S. and overseas. In the U.S. we believe quality brands and content will be the real winners. Channels like Fox News and Nat Geo ideally position us. Internationally we have built a position of true leadership that will take advantage of its subscription TV as it catches up with the U.S. and around the world.

These businesses while they are all unique franchises provide News Corporation a great opportunity to drive our profits and cash flow to a whole new level as we grow beyond this year. Thank you. With that I guess we will turn it over to the press.

Operator

The next question comes from the line of Andrew Clark – The Guardian.

Andrew Clark – The Guardian

I wonder if you could just give us an update on where you are with charging for newspaper websites. Have you made a decision for what kind of model you will be implementing whether it will be some sort of metered or membership model and what that climate is looking like?

Rupert Murdoch

We are looking at various alternatives. I don’t think we are ready to announce what they will be. We won’t be ready yet to make an announcement but we are in the midst of a lot of talks with a lot of people that are coming to a head and I think you will hear a lot more from us over the next two months.

Andrew Clark – The Guardian

I don’t know if you had a chance to read Alan [inaudible] recent lecture but I wonder what you think of people who all think that newspapers are sleepwalking into oblivion if they feel they cannot see an irreversible trend of content becoming free?

Rupert Murdoch

I think that sounds like BS to me.

Andrew Clark – The Guardian

So you think that free content strategy is not going to work?

Operator

The next question comes from the line of Ken Li – The Financial Times.

Ken Li – The Financial Times

Rupert you mentioned earlier that traffic was stabilizing at My Space. Can you give us an update on the traffic at My Space with regard to Google and will it still fall short by about $100 million on that $900 million agreement?

Rupert Murdoch

On the search the answer is yes. It does fall short. I think we have seen on both, everybody I think Facebook sees this too that people using social networks do not use search a great deal. But our advertising is showing a little bit better strength for the future. It has been disappointing and there is a lot going on there. We have made tremendous reorganizations and it is really too early to make confident predictions.

Chase Carey

Trend wise clearly things have improved. We have got work in progress. I think it is better service.

Rupert Murdoch

From going down we are beginning to go up. It is too early to draw big conclusions.

Chase Carey

I think in terms of we are pretty much on track with what we talked about a quarter ago.

Operator

The next question comes from the line of Shira Ovide – Wall Street Journal.

Shira Ovide – Wall Street Journal

Since the Time Warner Cable deal has been such a focus today by year four of that deal could you give us a sense if Time Warner Cable has agreed to pay more than $0.60 per sub for Fox?

Chase Carey

We are not going to comment on specific contract terms.

Shira Ovide – Wall Street Journal

Even to give a range?

Chase Carey

No, we are not going to comment. We feel we achieved the goals we set out to achieve. We are not going to comment on specific terms.

Shira Ovide – Wall Street Journal

Let me just ask about late night then. Do you think you should and will start a late night TV show with Conan O’Brien?

Rupert Murdoch

I would say there are different opinions within the network. Certainly if the program people can show us that we could do it and be fairly confident of making a profit on it we would do it in a flash. We are giving it a lot of thought and a lot of examination.

Shira Ovide – Wall Street Journal

But you haven’t started talks with Conan or his representatives?

Rupert Murdoch

I am sure there have been some conversations but no, if you mean real negotiations, no.

Operator

The next question comes from the line of Claire Atkinson – Broadcasting and Cable.

Claire Atkinson – Broadcasting and Cable

I wonder if you might be able to talk about second quarter cancellation options. Are we seeing marketers firming up for next quarter at this point? I wonder if we could get maybe an outlook on the up front whether we think that is going to be a lot stronger than last year’s?

Rupert Murdoch

It is January, that is six months away.

Chase Carey

Given we are selling scatter pricing at 15-20% off, I think we would probably have to take the cancellation. We are in a very good place in terms of what we have sold. So…

Rupert Murdoch

We will be going to the upfront as the number one network and stronger than anybody else but that is about all we can say.

Chase Carey

If things continue, and we can’t really predict the upfront but if they continue as they are now it will be better. There is a lot of time between now and then.

Operator

The next question comes from the line of Claire Delahunty – The Business Spectator.

Claire Delahunty – The Business Spectator

Can you give any uptake for any plans to charge for online content and as well what regions will you be looking to do outside the U.S. market with charging for online?

Rupert Murdoch

We will be charging online wherever we have publications. We certainly plan on Australia, Britain and this country.

Claire Delahunty – The Business Spectator

Any more precise plans for Australia? Any specific online publications you will be looking at next?

Rupert Murdoch

It will certainly be true for all of our publications. We will see how it develops. It wouldn’t surprise me if Australia is a couple of months behind the other countries. It is just a tremendous amount of work to do everywhere.

Operator

The next question comes from the line of Ryan [Nakatumo] – The Associated Press.

Ryan [Nakatumo] – The Associated Press

Repeating the late night question if you do go into talks with Conan O’Brien how are your relationships with affiliates and how would you make that work? Would you potentially run into similar problems that NBC had with affiliates?

Rupert Murdoch

No, certainly very different ones. NBC’s problem was their move from 10 to 11 reduced the lead into all their news services which reduced the news service ratings which in turn gave Conan a much less lead in than Leno had been getting. We don’t have that problem. On the other hand, all our affiliates tend to run syndicated programming from 11 to 11:30. Most of them profitably. It will take time to adjust. If we started to go ahead and do it and do it at 11:00 rather than 11:30 immediately I am sure we would have some difficult negotiations. But I am speculating. We will have to wait and see.

Reed Nolte

Thank you everybody for joining the call today. If you have any further questions please call us in New York.

Operator

Ladies and gentlemen this conference will be available for replay after 6:30 p.m .ET today through February 11, 2010 at midnight. You may access the AT&T teleconference replay system at any time by dialing 800-475-6701 and entering the access code of 140389. International participants may dial 320-365-3844. That does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: News Corporation F2Q10 (Qtr End 12/31/09) Earnings Call Transcript
This Transcript
All Transcripts