News Corp's Earnings Meet Estimate

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News Corporation’s (NWSA) third-quarter fiscal 2013 adjusted earnings of 36 cents a share came in line with the Zacks Consensus Estimate but fell 2.7% from 37 cents earned in the prior-year quarter, reflecting higher adjusted effective tax rate.

Including one-time items, News Corporation posted quarterly earnings of $1.22 per share, which rose over threefold from 38 cents delivered in the year-ago quarter.

News Corporation, a diversified media conglomerate, stated that total revenue rose 13.5% year over year to $9,538 million on account of revenue growth across Cable Network Programming (up 17.1% to $2,782 million), Filmed Entertainment (up 17% to $2,014 million), Direct Broadcast Satellite Television division (up 40.8% to $1,300 million) and Television (up 1.4% to $1,225 million), partially offset by revenue decline at the Publishing segment (down 4.3% to $1,938 million). The Other segment’s revenue surged 87.2% to $279 million. Total revenue handily surpassed the Zacks Consensus Estimate of $9,028 million.

Total adjusted segment operating income increased 3.9% year over year to $1,429 million during the quarter. Management projects mid to high single-digit growth rate in operating income for fiscal 2013.

Management anticipates channels businesses to deliver healthy earnings growth on the back of a sustained increase at Cable Networks and growth at international channels, as well as a rise in advertising and affiliate revenue buoyed by FOX News, Regional Sports Networks and FX Network.

The company is also focusing on enhancing its portfolio of regional sports channels to strengthen the company’s Fox Sports Media Group’s position in the lucrative sports entertainment business, where it competes with Walt Disney Company’s (DIS) sports coverage network, ESPN.

In order to bolster its position in the regional sports television business, News Corporation acquired the regional sports network, Sports Time Ohio and a 49% stake in the Yankees Entertainment and Sports Network in Dec 2012. In Nov 2012, the company acquired the remaining 50% stake in ESPN STAR Sports – a joint venture with The Walt Disney Company. Later, News Corporation changed its name to Fox Star Sports Asia. The company is also set to launch Fox Sports Japan.

The company’s list of acquisitions also includes Eredivisie Media & Marketing (acquired 51% stake) and Consolidated Media Holdings Ltd. In Jan 2013, News Corporation increased its stake in Sky Deutschland to 55%.

Segment Discussion

Operating income at Cable Network Programming jumped 17% from the prior-year quarter to $993 million, boosted by revenue growth. Contribution from domestic channels escalated 16% buoyed by growth across the Regional Sports Networks (RSNs) and FX Network, partly offset by higher programming and marketing expenses at FX Networks and National Geographic Channels. Contribution from international cable channels rose 21% gaining from robust operating income growth at Fox International Channels (:FIC). 

At the domestic cable channels, affiliate revenue grew 11%, signifying increased rates across all networks, with growth primarily driven by Regional Sports Networks, FX Network and Fox News Channel. Advertising revenue climbed 2%.

At the international cable channels, affiliate revenue grew 42%, reflecting improvement at FIC and STAR, and gains from Fox Star Sports Asia and Eredivisie Media & Marketing CV (“EMM”), partly mitigated by the strong U.S. dollar. Advertising revenue surged 30%.

Filmed Entertainment’s operating income elevated 6% year over year to $289 million, reflecting strong performance of Life of Pi, Taken 2 and Ice Age: Continental Drift.

Television segment’s operating income grew 15% year over year to $196 million on the back of a more than twofold rise in retransmission consent revenue and lower programming costs at the Fox Broadcasting Company, partially offset by a fall in national and local advertising revenue.

Direct Broadcast Satellite Television or SKY Italia posted a segment operating loss of $11 million, demonstrating a sharp decline from an operating income of $40 million in the year-ago quarter due to the consolidation of Sky Deutschland results and lower contributions from SKY Italia.

SKY Italia ended the quarter with a subscriber base of 4.78 million, representing a net reduction of 51,000 subscribers on account of the sluggish economic environment in Italy.

Publishing segment reported an operating income of $85 million, marking a sharp decline from $130 million in the prior-year quarter. News Corporation hinted that higher contributions from the U.K. newspapers was more than offset by waning advertising revenue at the Australian newspapers and integrated marketing services.

The Other segment posted an operating loss of $190 million wider than the loss of $147 million in the prior-year quarter.

Other Financial Details

News Corporation ended the quarter with cash and cash equivalents of $9,324 million, borrowings of $16,317 million, reflecting a debt-to-capitalization ratio of 32.9%, and shareholders’ equity of $33,249 million.

On May 9, 2012, the company’s board of directors approved a share buyback program that raised the repurchase authorization to $10 billion from $5 billion. Through May 7, 2013, News Corporation bought back approximately $6.6 billion of shares at a price of $19.50 per share.

News of the Split

News Corporation’s decision to split into two separate publicly traded publishing and media and entertainment entities came as major development. The split is expected to be concluded by the year end.

The Publishing Company will comprise publishing businesses, education unit and the integrated marketing services business. On the other hand, Entertainment Company will include cable and television assets, filmed entertainment, and direct satellite broadcasting businesses.

Currently, News Corporation holds a Zacks Rank #3 (Hold). Other stocks to consider in the media and entertainment sector are Time Warner Inc. (TWX) and CBS Corporation (CBS), both of which hold a Zacks Rank #2 (Buy) and look promising.

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