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Executives

Reed Nolte - SVP, IR

Rupert Murdoch - Chairman & CEO

Chase Carey - President & COO

Dave DeVoe - CFO

Analysts

Alan Gould - Soliel

Jessica Reif Cohen - Banc of America

John Janedis - Wells Fargo

Doug Michelson - Deutsche Bank

Michael Nathanson - Sanford Bernstein

Rich Greenfield - Pali Capital

Imran Khan - JP Morgan

Spencer Wang - Credit Suisse

Andrew Clark - The Guardian

Ken Li - The Financial Times

Shira Ovide - The Wall Street Journal

Claire Atkinson - Lead Business

Claire Delahunty - The Business Spectator

Ryan Nakashima - The Associated Press

News Corporation (NWS) F2Q10 (Qtr End 12/31/09) Earnings Call February 2, 2010 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the News Corp second quarter 2010 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct the question and answer session. (Operator Instructions).

And also as a reminder this teleconference is being recorded. And at this time I will turn the conference call over to your host Senior Vice President Investor Relations for News Corp Reed Nolte. Please go ahead sir.

Reed Nolte

Thanks very much. 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'll then take your question first from the financial community and then from the press. This call may include certain forward looking information with respect to News Corporation's businesses and strategy. Actual results could differ materially from what is said. These operation form 10-Q for three months ended December 31, 2009, identifies risks and uncertainties to cause actual results to differ. And these statements are qualified by the cautionary statements contained in such filing.

Additionally in this quarter, you may have noticed that we have changed the presentation format of the consolidated income statement to no longer display and operating income caption. Instead we provide the measurement of total segment operating income in the earnings released and both to 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, you 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.

And with that I'll turn it over to Dave.

Dave DeVoe

Thank you very much and good afternoon everybody. At the outset of the call I'd like to note that our reported results this quarter reflects a one-time charge related to the previously announced settlement of litigation involving the company's Integrated Marketing Services 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're extremely pleased with the underlying strong financial result 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% factoring in the absence of the results from [NDS] which are no longer consolidated this year. This increase was fueled by in 10% overall revenue growth which further supported by the cost reduction efforts we initiated over the past several years. Our reporting 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 effects of both years 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. Now let's start with the Film segment, where second quarter operating income was $324 million, this is up $212 million over the last year results 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 included Wolverine and Night at the Museum. December quarter also included significant loss, launch cost 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 second quarter a year ago. And this is driven by a 19% higher television station contribution and improved results at MyNetworkTV. And after six consecutive quarters of year-over-year declines, station revenues were up 6% on the current quarter and this reflects improved local advertising trend 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 whole season on FOX.

The growth was achieved despite a significant reduction in football advertising revenues versus last year. And I think it's worth noting that we saw significant improvements at the stations as the quarter progressed. For example, we began with 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 has continued into the current quarter.

Now moving on to 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 general was led by 21% increase in affiliate revenue and high single digit growth in advertising. The largest yea-over-year gains in the quarter was from FOX News channel this is due to higher affiliate rates and additional subscribers and a relatively flat cross space. The international channels from affiliate revenue increases and Ad gain, and the advertising was particularly strong in Europe and Latin American. The regional sports networks, which reflect 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 supplied by the rating strength of our regional channel.

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

In the quarter, SKY Italia's totaled revenues declined 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 assessed] for various price promotions.

Overall costs in the quarter were flat as higher soccer costs were offset by savings and other programming. SKY Italia's subscriber base declined by 63,000 compared with the previous quarter, and as total quarterly gross editions of 150,000 were more than offset by churn. This puts our anti-subscriber levels at approximately 4.75 million.

At quarter end, over quarter end 2.1 million subscribers representing approximately 47% of the subscriber base for taking at least one premium service, compared with approximately 22% of the subscriber base a year ago. Importance of this is that the premium service subscriber's churn rate are about one fifth of the non-premium service subscribers.

Shifting to our Newspaper Information Service segment, our operating income in this year's quarter in $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 in this segment operating income, as is primarily from the relative strengthening of the Australian dollar versus the US dollar. And like in our TV stations comparative advertising revenues that our newspaper improved as the quarter progressed.

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

And in our other segment, we reported a second quarter operating loss of $125 million, compared to a loss $38 million a year ago. Approximately 40% of this change reflects the absence of NDF operating profit this year due to the partial sale of NDF in early February 2009 and NDF is now accounted for as an equity company. Additionally, the digital media group's earnings declined from last year due to lower advertising search revenues at MySpace. This is offset in part by cost reductions following our restructuring efforts.

Before I address our guidance, I just want to make a couple 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 maturities which comes due in March. And today, we're 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 BSkyB. Investors have until March 10 to notify the company of their decision. And also today we announced a 25% increase in the company's dividend of $0.06 a share, to $0.075 share.

And finally, before turning the call over to Rupert to address our guidance for fiscal 2010 and as a reminder as we did at year-end into that our first quarter this year, we measured this guidance excluding from fiscal 2009 segment operating income results, $121 million in operating profit from NDS which is no longer consolidated in our results. So as we look at measuring growth, fiscal 2010, we're comparing it to a base of $3.44 billion of segment operating profit for fiscal 2009. In early November, we gave guidance anticipated in our segment operating income growth rate, fiscal 2010 to be the highest single digit to low double digit range above the $3.44 billion fiscal 2009 adjusted results.

Since that time we performed better than anticipated in several of our businesses. The box office records being set by Avatar have raised our outlook for The Filmed Entertainment segments. US television environment is performing better than we had assumed as our newspapers. The impact of recent negotiations with the cable operators can now be considered. Partially offsetting these improvements, operating conditions in Italy can either to be more difficult than earlier anticipated and it is taking longer than we expect it to achieve our revenue goals at some of our digital media business groups including MySpace.

As a result, taking all of these items into account, and excluding the effect of litigation settlement and our restructuring related charges. We're increasing our segment operating income growth, guidance to a growth rate in the low 20% range above the fiscal 2009 adjusted results.

And with that, I'd like to now turn the call over to Rupert for some additional comments.

Rupert Murdoch

Thank you, Dave. Good afternoon everyone. As David just described, our true operating results for this past quarter were extraordinary. We've endured the most severe recession since the great depression but have emerged from this turbulence and turmoil. I think it's the world's pre-imminent content company. A crisis recast company in the economies. The crisis highlights witnesses and expedites previously in trends.

From a crisis comes clarity, and the strength of our company and our strategy is clear for all to see. Excuse the immodesty, the News Corporation's pre-imminence is a content creator comes as the debate over the policy of content is over. Content is not just king, it is the emperor of all things electronic. We are on the cast of the digital dynasty for 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's 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's worth taking a moment to put the company's content into context. We have the world's leading film studio, which is just made the most successful film in cinematic history. We are thrilled that the confidence we placed in Avatar and its talented team lead by James Cameron have been recognized by appreciative audiences around the world and it's still being recognized. And just this morning, it was nominated for nine Academy Awards including best picture.

The understanding financial success, I am convinced Avatar will be a harbinger of fundamental change in the industry and held an exciting new era of 3D entertainment.

It's worth recalling as Dave explained in the most recent quarter; we booked much of the films cost 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. There's 2D, two other hits included Ice Age 3, and Alvin and the Chipmunks, both of which helped us surpass $4 billion in worldwide box office in 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 just kicked off its ninth season and is as dominant as ever. And this past fall was the strongest in the network's history. Our television production studio along the place for such brand names, brand name shows like, The Simpsons and 24 is now home to more new hit series than any other studios with shows like Modern Family, and The Cleveland Show.

We have American'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-on-year advertising and circulation declines, the opposite is true at the journal. WSJ.com remains the 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 has left other papers far, far behind in the contest for readers. In Australia, we have the largest selling daily paper, the Herald Sun which grew circulation, well the Australian National Daily achieve 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 US. 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 world 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 scraping with crisis, the economic emancipation much of the developing world continue to (inaudible) unprecedented pace as our unique success with STAR in India testifies. And HarperCollins is one of the world's leading publishing houses with much improved profitability. There's no doubt that we've 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 self esteem, passivity and maintenance are not characteristics of our company. A year ago, our (inaudible), but somehow the [proclaim] has become profound and the content plan 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're merely haggling other evaluations. Consumers want content to be delivered immediately and on array of devices to suit their needs and they're willing to be paid, entertained, and they're 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 with the Consumer Electronics Show. The message is the same everywhere. Without content, the ever larger and flatter screens, the tablets, the e-readers and the increasingly sophisticated mobile phones would be lifeless.

Without content, these ingenious and wonderful devices would be unloved and unsold and I'm delighted, they are certainly not complacent that our employees creativity and energy have been, been paid the ultimate compliment by consumers. They've paid for our content. As Dave pointed out, our results almost across the board far outpaced 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 coming months, but the truth is that the advertising cycle has shortened and we all have limited ability to the [pay in] at the future.

The broadcast network business was thought more by many, but we fundamentally changed it's for tunes with a ground breaking re-transmission consent deal we made a few weeks ago. The precedent we have established means that the retransmission fees we will be negotiating with cable and satellite providers as our current dealers expire over the next couple of years will breathe new life into that business.

When it comes to on-line use, they've committed to changing that model too. We're in advanced discussions with other media companies around the world. All of them have turned to our company for ideas and innovations. We're currently in the midst of a very substitutive conversation with device makers on developing a subscription model that will develop high quality journalism to consumers wherever and whenever they wanted. We have to begun to charge for on-line content as a couple of our US titles and we expect to expand to other titles in the coming months. We have the most experience given our success and various digital offerings at the Wall Street Journal.

The success in 3D of Avatar and Ice Age 3, and our experience in being the most innovative broadcaster of sports events, puts us in a prime position for the development of the next generation of 3D consumer technology. Asia manufacturers are well advanced and developing the technology that will transform the home viewing experience. Of course, you'll see more 3D films, bit more fundamentally, there will be exponential growth in 3D programming in the next couple of years. Follow-on that experience in leading the development of high definition viewing at Britain. BSkyB 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, to the remaining few areas of our business that are not performing as well as we would like. That continued to be long-term growth drivers. The first is SKY Italia. As Dave had noted, SKY Italia is faced with tough, with tough economic environment and increased competition. But we're certainly enthusiastic about the potential of this business given the high quality of our service and the low penetration of page elevation in Italy.

The second is our affiliate Sky Deutschland. We've great confidence that the new management team headed up by Brian Sullivan to helped build BSkyB into a power house, would be able to make head way yet another big market, very low pay-TV penetration. As proof our confidence in this business, we just increased our stake by 5 percentage points. Despite the challenges in these markets, we remain firm in our commitment to pay-TV around the world.

And there's MySpace, but it's not yet where we want it. MySpace 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 [carried upon]. We believe the stability points to progress, the new management team has made in repositioning MySpace as the prime place where people share thoughts and ideas about music, entertainment and other popular content.

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

And I have to say, that kind of success comes with having great depth of leadership. At News Corporation, we have the best leaders in the media business. Chase Carey is a wonderful partner and the strategic focus, dynamic ideas and willingness to take on tough issues has helped to reinvigorate all of us. And with some of the recent executives move we've made at Dow Jones, our FOX businesses are our international newspapers and the restructuring of our STAR Asia business, we think we are positioned for an exciting new chapter at The News Corporation. Thank you very much: And now, Chase, Dave and I will be happy to take any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Also the executive team will take question first from members of the financial community and then immediately move to the members of the press. In the interest of time once again we ask you that you limit yourself to one question.

(Operator Instructions). We'll go to our first question in queue that come Alan Gould with Soliel. And your line is open.

Alan Gould - Soliel

I was wonder, Chase, question regarding the retransmission consent. 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 to 5 years, should we be thinking $40 million a month or $100 million a month coming out of retransmission consent?

Chase Carey

I'm probably not going quantify it, with specifically at this point. What is clear that the transforming of that bucket really puts the network on a path where it's a profitable business that generates a type of profit that I think it should for the audience and the importance it represents in the marketplace.

In terms of timing, we've got two of the top ten distributors done, so we've obviously are in early stages, and there really are two sort of, two fronts to this issue. One is through our O&Os where we deal directly with distributors, and then the second is through the affiliate body.

First on the arena where we deal directly. It's about a three to four year process and in the next two years about half of the distribution universe is up with us, and we'll deal with it. In terms of the affiliates we're engaged now, look, we've been with the affiliates, we value the relationship. We think it's important, that we reach a fair conclusion. That being said, we think the network is the most valuable and important programming that we provide to consumers, and we've begun those discussions but those discussions will really probably continue in the months to come, but certainly they will move forward, and we're engaged now and we'll move forward on those. And again probably with the affiliates, their deals come up with distributors likewise and probably that same three plus year timeframe so.

That’s a broad concept, they do think obviously we've a lot of work left to do, but believe this really, kind of does set us on the course and points at a direction that the FOX network can assume the role which should, it's the most important television channel we have. It's the force that drives our television business and it should generate profits to reflect that, we think we've settled on that course.

Alan Gould - Soliel

So this fix is the broadcast business model.

Chase Carey

I think it puts it, probably than overly simply to say everything's fixed. We've got great management there. We've got to run it. We're the number one network. I think it puts us on a course where we can generate the profits we should if we run a good network. So yes, I think simplistically you say 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 occasionally competes with.

Operator

And the next question in queue that will come from the line of Jessica Reif Cohen with Banc of America. Please go ahead.

Jessica Reif Cohen - Banc of America

Thank you very much. I have a question and also a follow-up to the last one. I was hoping you could help us on Avatar, in terms of just the timing of the impact and when do you think you'll have the home video release, and can you discuss any plans for sequels and how the economics may change? And then on TV just to follow-up on Alan's question. Chase, I was hoping that you could comment one on, first of all just the current advertising outlook as we move in the second half of the fiscal '010, and would you expect between re-trans and reverse comp that you will get back the prior levels of TV business of more than $1 million in LA?

Chase Carey

I'll just go at Avatar first. We put in some of the costs of course were taken in the last quarter, Avatar, we think about 50% of the profits have spared will be in the following six months I think over the next two quarters which means if we certainly plan to release the DVD as soon as possible. But it is continuing for a great period it seems in the cinemas.

Rupert Murdoch

We're not going to yank it out of theater which doing $30 million a weekend.

Chase Carey

And it was $30 million here but it was $95 million outside of here. In the rest of the world generally 125 weekend. Even a 100, we'll keep it going.

Jessica Reif Cohen - Banc of America

And on the sequels and any change in the economics?

Rupert Murdoch

Sequels; very early talks about it, Jim has ideas for one. We haven't kind of 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'll be pushing for one.

Jessica Reif Cohen - Banc of America

I'm getting, is it the chance that you'll have more than 40% of the economics in a sequel.

Dave DeVoe

Return to financing. Not necessarily, we're very happy the way that it broke up this time. James Cameron pictures tend to go over budget. We like to layoff the risk a lot. 60/40. 50/50, you are in that area. We don't whether there's still going to be the money there, but I think after the experience of our partners this time though they'll be back.

Chase Carey

Let me rethink the film financing [sort of an] intelligence way to run the business, [and get away with] best we negotiate them going forward. We negotiate. It's like a negotiation like anything else. There's value inherent in the sequel and ask anybody it is very, it would drop a $100 million on [Harry] in a film and we'd like to layoff a lot of the risk

Jessica Reif Cohen - Banc of America

Chase thank you very much. And then on the…

Chase Carey

On the ad market, it really does continue that could be on the positive, it continues to be really a good back, and a very solid strong ad market. The network is still doing, sort of scattered business at 15% through mid teens above the up front. The cable channels kind of really solid double-digits in news. The entertainment business on the cable side, probably in the neighborhood to 20% above up front. The sports which has probably been the one that's probably had the toughest row to hoe, given dependency on some categories like [autos] is actually stronger than it's been. You know the Ad market is really been a solid market in the station business. I think Dave said at the main station business again, we got a quarter that looks like it will be sort of mid to high teens, going up year-on-year. I mean, you still have an environment and I'd say, that you don't have the visibility historically you had, and you know people talk about the economy and how much, how reliable are some of the positive things you're seeing, but certainly with those qualifications, certainly what we're experiencing in dealing with in the marketplace, it all continues to be positive from an advertising perspective, really crop stations network cable.

Dave DeVoe

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

Chase Carey

Yeah. And, to your question…

Rupert Murdoch

And it's obviously one quarter, and newspapers is very hard to say more than 2, 3 weeks.

Chase Carey

And in terms of what is, the longer term profitability of the broadcast business stations network combined, it is certainly, well I'm not going to be specifically, it's certainly a $1 billion plus business.

Operator

And our next question in queue that come from the line of John Janedis with Wells Fargo, please go ahead.

John Janedis - Wells Fargo

I have a question on SKY Italia, it looks like this year you could see margins maybe back to the '07 level, and I assume you think you can increase subs by at least a couple of million over time, so I'm wondering what should we look at maybe a leading indicator for improvement in the business, is a less promotion the economy, political something else and all we are at a point now where the soccer and programming costs are largely fixed, so we can see a start of the margin ramp going forward when you see the sub-gains, thanks.

Chase Carey

I think, as we think look at Sky Italia, I think if I look at the next calendar year roughly, probably it's not up here what we are focused on sub growth, so I think it probably isn’t more stable sub environment. You've still got a tough economy. But we're coming through those things. We're sort of are really getting toward the end of digesting the price increase, the bad increase that occurred close to a year ago, so it helps us as we absorb that.

We had to adjust to some of the issues in terms of selling our product at the loss of advertising space, on the media sat channels and again I think we're making adjustments kind of court has given us the right to do it. But I think we're again, sort of appropriately getting on top of that. I think given that environment our focus in the short-term will again be stabilizing that appropriately, managing the business in a tough environment. I think if you look through, and towards the end of the year going forward we do really still think we have a lot of sub growth in front of us.

It's a market still only 30% pay penetration I think, we've got a great product. And I think we've got a great brand, great franchise in the marketplace. And it really should be able to build on that position as we go forward. The soccer deal is, we have a deal done for three years, so we have CPI type increases in the next three years so we have a fairly predictable. We have pretty predictable situation in terms of those costs. And I think our focus, in the short-term, again will probably be on stabilized business dealing with some of the issues we've had like churn, and churn has been a challenge in this year against some of that was the price increase. The market itself, but I think we feel, we're taking the steps to get on top of it, so I guess then look for something in the short-term. You know I think something like churn, would be the type of measure, we would be focused on improving efficiencies and really stabilizing that business in a tough environment setting it up to ground, which it should.

Operator

Our next question in queue that will come from the line of Doug Michelson with Deutsche Bank.

Doug Michelson - Deutsche Bank

For Rupert and Chase I wanted to ask about growth prospects for cable networks profit have increased over a fourfold from 2004 to now or at least what looks like a 2 plus of EBITDA this , last year too had a good chunk that was driven by FOX dues renewal cell. I was hoping you could help us understand how much growth is left at cable networks, can you breakdown the drivers of growth from here, and also indicate, how much longer can cable nets maintain double digit profit growth? That would be helpful thanks.

Rupert Murdoch

Certainly in SKY news, we've had had most of the effect of the big increase in the price we're charging for, but we have another year to go before everybody clicks in. Probably will not be as big an increase as this year there, but it's a very solid one, turning it a big double figure. And if you look at that overall, we think we have great potential for growth in our existing channels, both as profits and in distribution. So you know we've got quite a long way to go yet when we go and look at the profits of a long established channels like USA, we've got plenty of room for growth.

Chase Carey

Yeah then I'd second that. I mean, I think if you look at it sort of in two levels. The US, I think you're going to head to a period where it's quality over quantity. I think we've said that before I think if you've got really strong channels you should be able to drive them. I think they are more popular than ever. I think continuing to take share and you look at our big driving channels and as Rupert said CapEx is nowhere near you know what USA generates, and Nat Geo nowhere near what something like Discovery generates. FOX News work realistically, FOX News just continues to get stronger and stronger. I don't know that there's a channel that is more important or powerful in television universe.

In the US so, I think that channel, has great upside to it. So I think those powerful channels which are going to drive it have a lot of room left to grow and they were so bullish about and the other international marketplace which is the other front, really at its core is going up, and it's going to get driven as the international pay-TV business really follows the US business in terms of growth and penetration first and foremost.

We're a leader in most of the places we deal we do business, so we're in a great position to take advantage of those markets as they grow in terms of size and penetration and the like. So we think that business has internationally, has enormous growth ahead of it as the market grows and we take advantage of the position, we have in those competitive markets. So I think it's the best that there's lot of room to grow.

I know everybody asks there, where the money has come from realistically. We want good relationships with distributors, but your distributors are making a lot of money with big healthy profit margins so I guess those will be the negotiations we have in the market place that had to get the fair share, get our fair share for the quality of the content that we have.

Rupert Murdoch

It's basically throughout the world outside of America, which is pretty fully developed, you've got about a 20% growth in pay television wherever you look. Wherever it's available, in the world and where we're on those platforms we get that 20% growth. We expect to put other channels on, to build the charge more, to improve them. We've got a very big future ahead of us there. I think we've really only just started.

Doug Michelson - Deutsche Bank

Right thank you.

Operator

Thank you and our next question in queue that will come from the line of Michael Nathanson with Sanford Bernstein. Please go ahead

Michael Nathanson - Sanford Bernstein

I have a couple for Dave. Dave just wanted to know if you could help us stroll down on papers for a second. What percentage of the revenue growth and profit growth that came from currency and what was organic?

Dave DeVoe

It's about $190 million of revenue from currency and about $25 million of the earnings, and that's, as I said before that's related to the Australian dollar strengthened against the US dollar.

Michael Nathanson - Sanford Bernstein

Okay. And then in terms of your guidance for this fiscal year and operating profits does your guidance envision Avatar going to DVD, we're kind of danced around that. Is that part of what you are assuming when you provided guidance?

Dave DeVoe

I didn't get that. I'm sorry

Michael Nathanson - Sanford Bernstein

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

Dave DeVoe

Yes. But it won't be 3D. At this stage, the science is not developed into 3D DVDs, is that correct Chase?

Chase Carey

Yeah. That’s right because we haven't put a data out. I mean, it won't be 3D. We'll have actually a second cut. And we want the opportunities we have is, as it evolves as a 3D Avatar down the road but I don’t not this in this [window], and the one thing I looked at the film that you look at year-to-year we had a pretty good second half last year, sort of what's driving a year-to-year compared when you get to the second half we had a pretty good film, year the second half, so I wouldn't say it's film that's driving the second half.

Operator

That next question will come from the line of Rich Greenfield with Pali Capital, and your line is open.

Rich Greenfield - Pali Capital

I just wanted follow-up on this whole re-trend issue. Chase I think you said at a analyst conference or in a investor conference several months ago that ESPN gets $5 a month, basically why shouldn't FOX be getting $5 a month and I guess you had incredible success with Idol and Season 8 or Season 9, and you've obviously got in re-trends, the cable operators seem increasingly willing to play ball on re-tends in bigger and bigger ways, I'm just wondering what are the issues, is it regulatory? What stops you from literally setting a hard level of something like $4 or $5 a month per sub, for the FOX network? How do you drive this far faster even then you are now, or why aren't you even just pushing it with like with an extra zero in front of it?

Dave DeVoe

We're modest people.

Chase Carey

I guess that in some ways it's relevant and built for the day, but we have important relationships with distributors. I think we want to get fair value for our content, but I think we in all honesty try to approach this constructively. We've built this business (inaudible). We've built valuable cable channels. We have enormous value in the FOX network.

We felt the right thing to do was to try to take a big step forward to get the value of [Fed] FOX content recognized. Could you argue its worth significantly, more? Sure. I mean good. But 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 relationship you have with them on in other businesses. The broader marketplace and try and figure out how do you get this to moving in, get this to a place that at least gets us started in terms of recognizing the fair value for the FOX network. I think what we try not to do is, have a, while it's a difficult negotiation, a negotiation that was ultimately, 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 the business with the distributors as we have over the last, X years.

Rupert Murdoch

I just like to add that, the big cable companies are making really great operating profits and what we're asking for and even if our network competitors ask for the same and get the same is certainly not going to kill the cable companies. I mean, maybe 10% of their operating profits, we still have 2 or 3 years to pass through.

Chase Carey

I think, I agree with what really should have, I think over time we expect we should get a value that's reflective of the value of our content. I think as a matter of how do you get there, in a way that is, I guess no one will tell people would call it aggressive on another level that we try to be, in a respectful of an array of crossing relationships.

Rich Greenfield - Pali Capital

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

Chase Carey

As I said with sort of, again the ones we deal directly with, we probably don't have quite, we have some international affiliates we don't have quite the visibility through the affiliate side of it though I guess it's not dissimilar, this sort of through the, the ones we deal with distributors directly it's a three to four year process, with probably the next two years is about half of on a sub base about half of the universe up.

Operator

The next question in queue will come from the line of Imran Khan with JP Morgan. Please go ahead.

Imran Khan - JP Morgan

Two questions, 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 this still attractive and complimentary asset for a major studio like News Corp? And secondly Cable Networks, which is roughly half of your operating profit, the margins were 34% in this quarter operating profit, how should we think about long-term operating profit margins for this business?

Chase Carey

In terms of film…

Rupert Murdoch

Those two questions, they're film libraries. Whether you like them, it's just a matter of opinion what they were. The big one MGM, is for the most part very old. There are some good [comes] out at the right price, we'd be interested, but it appears that other people are more interested so I think you can count us out of that one altogether. And we don't know how that will end up.

And then I can rule out Miramax right away.

Chase Carey

I think in terms of film libraries, again I think it's certainly a value. You do have to look at DVD market that is not, decline not growth which was a significant part of it. The flip side is television market, particularly overseas pretty healthy. But I guess second issue on film libraries, realistically you need to have current product to currently reinvigorate, you just have to stay, or a library that just sits there and gets stale over time, it's probably a depreciating asset, so I think it's important in a film library to have that current product flowing in that continues to give it a currency and livelihood, liveliness to it. I think in terms of long-term cable margins, I think we believe the business we got, we continue to drive in some ways but their business is as quickly as you take global franchises they probably have opportunities as National Geographic, National Geographic Wild, the type of content that really travels around the world, I think gives us the opportunity to, really create value very cost efficiently. And the likes of and so I think we feel good about where the cable business is and opportunities to continue to drive, those margins forward.

Operator

Thank you, Sir. That will come from the line of Spencer Wang with Credit Suisse, please go ahead.

Spencer Wang - Credit Suisse

My first question is just on the guidance, I believe you guys 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 marketing getting better comps getting easier plus Avatar

Dave DeVoe

I don’t know, when you doubled your guidance there was a deceleration, yeah essentially as Chase mentioned before, we've got a great first half in the film company.

Spencer Wang - Credit Suisse

Okay. And then may be just the second question for Rupert.

Rupert Murdoch

Quarter, this quarter we have fact, we honestly did not have any visibility about the last quarter, and certainly you'll be paying, the usual business of charging up a lot for new films for the next financial year.

Chase Carey

And the biggest (inaudible) in the film was actually we had a very, last year we had a very weak first half and we had a much stronger second half, so we have, comparative to last year, we've got a big benefit in the first half on a comparison from a weak film, business, first 6 months going on fiscal '09.

Spencer Wang - Credit Suisse

And maybe just one quick question for Rupert just on the books business, obviously there's been a bit of controversy over how Apple may price eBooks versus Amazon, so I was wondering if you could just share with us your perspective on retail or wholesale pricing for books in a digital delivery mode? Thanks.

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, but we I think it really devalues books and it hurts all the retailers of the hard cover books. We're not against electronic books, on the contrary we like them very much indeed it's low cost to us, and so on but we want to some room to maneuver in it and Apple in its agreement with us, which is not been disclosed in detail, does allow for a variety of slight of higher prices. There'll be prices very much less than the printed copy of books. But still it will not be fixed in the way that Amazon has been doing it. And it appears that Amazon is now ready to sit down with us again and re-negotiate pricing.

Chase Carey

Before turning to the press inquiries which would be next I'd 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. Over these results, we do not really reflect the degree to which our businesses are truly positioned to grow over the next few years. In broadcasting as we 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 of 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 platform and devices open up new avenues for our new sports and print content. Our cable channels have great momentum both in the US and overseas. In the US we believe quality brands and content will be the real winners, and channels like FOX News and NAT Geo ideally position us. Internationally we built a position of true leadership. That will take advantage of its subscription as TV catches up with US around the world. These businesses as well as our other unique franchises provide New Corporation a great opportunity, drive our profits and cash flow to a whole new level as we grow beyond this year.

Thank you and with that I guess we'll turn to the press.

Operator

Ladies and gentlemen at this time we will transition from the analyst portion of the Q&A to the media of today's Q&A. (Operator Instructions). We'll take our first question from Andrew Clark with The Guardian, please go ahead

Andrew Clark - The Guardian

Yeah I wondered if you could just give us a bit more of an update on where you are with charging for newspaper websites have you made a decision for what kind of model you'll be implementing that there'll be a some sort of (inaudible) membership model and what the kind of funding is looking like?

Rupert Murdoch

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

Andrew Clark - The Guardian

And just to follow up quickly, I don't know if you've had a chance to read Alan Rusbridger's recent lecture, but what

Rupert Murdoch

No.

Andrew Clark - The Guardian

Well, I wonder what you think of people who argue that newspapers are sleep walking into oblivion if they feel that they can buck an irreversible trend of media of content becoming free?

Rupert Murdoch

I think that sounds like B.S. to me.

Andrew Clark - The Guardian

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

Rupert Murdoch

Yeah next question please.

Operator

Our next question in queue that will come from the line of Ken Li with The Financial Times. Please go ahead.

Ken Li - The Financial Times

Rupert, you mentioned earlier that traffic was stabilizing at MySpace, can you give us an update on the traffic commitment at MySpace with regards to Google and will it still fall short by about $100 million on that $900 million agreement? And also…

Rupert Murdoch

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

Chase Carey

I think trend wise, clearly things have improved. It's pretty much work in progress. I think it's better serviced.

Rupert Murdoch

From going down we're beginning to go up, but it's too early to draw big conclusions.

Chase Carey

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

Operator

The next question will come from Shira Ovide with The Wall Street Journal. Please go ahead.

Shira Ovide - The Wall Street Journal

Since the Time Warner Cable deal has been such a focus today, by year four of that deal can you give us a sense if Time Warner Cables agreed to pay more $0.60 a sub for FOX?.

Chase Carey

Again, we're not going to comment on specific contract terms.

Shira Ovide - The Wall Street Journal

Even to give a range?

Chase Carey

We're not going to comment. We feel we've achieved the goals we've set out to achieve but we're not going to comment on specific terms.

Shira Ovide - The Wall Street Journal

Let me, just ask about late night then, do you think you guys should and will start a late night TV show with Conan O'Brien?

Rupert Murdoch

As I said there were different opinions within the network. If, certainly if the program people can show us that we could do it, and be fairly confident of making a profit on it, we'd do it in a flash, but we're giving it a lot of thought and a lot of examination.

Shira Ovide - The Wall Street Journal

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

Chase Carey

I'm sure there've been some conversations, but no if you mean talks, if you mean negotiation real negotiations, no.

Shira Ovide - The Wall Street Journal

Yes. Okay. Thanks.

Operator

Thank you the next question in queue will come from Claire Atkinson with Lead Business, please go ahead.

Claire Atkinson - Lead Business

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

Rupert Murdoch

Wait a minute. January. Its six months away

Claire Atkinson - Lead Business

Its gets earlier and earlier.

Chase Carey

The kick inflation options are pretty cunning. That we are selling scatter pricing at 15% to 20% up it's probably I have to take a cancellation, its, we are in a very good place, in terms of, what we've sold, so.

Rupert Murdoch

We'll be going in the upfront as the number one network and as strongest or stronger than anybody else, but that's about all we can say.

Chase Carey

If things continue as you (inaudible) it can't really predict the uprisings continue as they are now, it will be better, but a lot of time between now and then.

Operator

The next question in queue will come from the line of Claire Delahunty with the Business Spectator, and your line is open.

Claire Delahunty - The Business Spectator

I just wanted to ask, in an Australian context sort of can you give any up take on any plans to charge for online content? And as well what ratings will you be looking to outside the US market [revamp] chatting for online?

Rupert Murdoch

We'll be chatting for online whatever we have publications, certainly we're taking Australia and this country.

Claire Delahunty - The Business Spectator

And any more precise plans for Australia, any specific online publications you'll be looking at next?

Rupert Murdoch

That will be certainly be for all of our publications and we'll see how it develops and it wouldn't surprise me if Australia is a couple of months behind the other countries. Because it's just the tremendous amount of work to do everywhere.

Operator

The next question will come from Ryan Nakashima with The Associated Press. Please go ahead.

Ryan Nakashima - The Associated Press

Kind of 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? And would you potentially run into similar problems that NBC had with affiliates?

Rupert Murdoch

Certainly, very different ones. NBC problem was that their move from 10 to 11 reduced the lead into all their news services, which reduced the news service ratings, which in turn lead into, gave Conan a much worse lead then Leonard 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. And it'll take time to adjust. And when if we would, if we were to decide to go ahead and do it and do it at 11:00 o'clock rather than 11:30 immediately, I'm sure we'll have some difficult negotiations, but I'm speculating. We'll 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

Thank you and ladies and gentlemen this conference will be available for replay after 6:30 pm eastern time today through February 11, 2010, at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1800-475-6701 and entering the access code of 140389. International participants may dial 320-365-3844. Once again those telephones are 800-475-6701 and 320-365-3844 using the access code of 140389. That does concludes your conference call for today. We do thank you for your participation and for using AT&T's executive teleconference. You may now disconnect.

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