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Headwinds Fail to Deter News Corp.

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Amidst rumors of business divestment, hullabaloo on the leadership of Rupert Murdoch, and the phone hacking scandal that resulted in the closure of ‘The News of the World’, News Corporation (NWSA) posted better than-expected third-quarter 2012 financial results, beating the Zacks’ expectations on both lines.

However, the company came in full support for Rupert Murdoch, rebutted the speculation that it will offload its publishing business, which includes the issues of The Australian and the Wall Street Journal, and added that they are presently comfortable with their current stake of 39% in British Sky Broadcasting Group.

Coming to the quarter’s earnings, healthy performances across cable networks and film studio business were the catalysts. News Corporation’s quarterly earnings of 37 cents a share beat the Zacks Consensus Estimate of 31 cents, and increased 42% from 26 cents earned in the year-ago quarter.

On a reported basis, including one-time items, News Corporation’s quarterly earnings came in at 38 cents, up from 24 cents delivered in the year-ago quarter.

News Corporation, a diversified media conglomerate, hinted that total revenue nudged up 2% year over year to $8,402 million, reflecting growth across Cable Network Programming (up 16% to $2,375 million) and Filmed Entertainment (up 11% to $1,722 million), partially offset by Television (down 16% to $1,208 million) and Publishing (down 3% to $2,025 million). Direct Broadcast Satellite Television revenue remained flat at $923 million. The Other segment’s revenue plunged 31% to $149 million. Total revenue also surpassed the Zacks Consensus Estimate of $8,230 million.

Total adjusted segment operating income grew 16% to $1,375 million during the quarter. However, when including phone hacking probing charges of $63 million for the reported quarter and a litigation settlement charge of $125 million in the year-ago quarter, operating income showed an increase of 23% to $1,312 million. The series of investigation procedures will adversely impact the company’s future profits. Sans these investigation costs, management reaffirmed its low to mid-teens growth guidance in operating income for fiscal 2012, with a prejudice towards the lower end of the guidance range.

The guidance appears to be somewhat conservative, as management fears that the results of the Film Entertainment segment would struggle during the fourth quarter on account of difficult comparison when compared with the prior-year quarter due to the successful release of Rio and X-Men last year. Moreover, the result will also be adversely affected by the cost related to the big releases scheduled for June and July. Management further added that total adjusted operating income would also be impacted due to lower contribution from the Publishing segment versus the year-ago quarter, which benefited from one extra week — the 53rd week.

Another media conglomerate and one of the competitors of News Corporation, Time Warner Inc. (TWX) posted first-quarter 2012 quarterly earnings of 67 cents a share that beat the Zacks Consensus Estimate of 64 cents, and increased 16% from 58 cents posted in the prior-year quarter. Total revenue grew 4% to $6,979 million from the prior year-quarter and handily beat the Zacks Consensus Estimate of $6,809 million.

Segment Discussion

Operating income at Cable Network Programming jumped 15% to $846 million, boosted by revenue growth, and reflects a 17% increase in the domestic cable channels’ operating income and 9% higher contribution from the international cable channels.

At the domestic cable channels, affiliate revenue grew 15%, reflecting increased rates across all networks, with growth primarily driven by Regional Sports Networks and the FOX News. Advertising revenue climbed 10% on the back of growth registered across all networks, but principally led by FOX News and the National Geographic Channels.

At the international cable channels, affiliate revenue grew 31%, reflecting growth at the Fox International Channels in Latin America and Asia, and due to the consolidation of the Fox Pan American Sports network. Advertising revenue rose 7% on improvement witnessed in advertising marketplace and viewership trends with strength witnessed particularly at Fox International Channels.

Filmed Entertainment operating income rose 10% to $272 million, reflecting the success of – theatrical releases, Alvin and the Chipmunks: Chipwrecked and The Descendants, the home entertainment performance of Rise of the Planet of the Apes, and pay television performance of Rio.

Television segment’s operating income fell 11% year over year to $171 million, as the prior-year quarter advertising revenue and operating profit benefited from the broadcast of the National Football League Super Bowl XLV, which was absent in the reported quarter. However, the twofold rise in retransmission consent revenue offset the decline to some extent.

Direct Broadcast Satellite Televisionor SKY Italia posted segment operating income of $40 million, reflecting a sharp improvement from an operating income of $17 million in the year-ago quarter, on the back of rise in advertising and subscription revenues.

SKY Italia ended the quarter with a subscriber base of 4.94 million, representing a reduction of about 86,000 subscribers on account of sluggish economic environment in Italy.

Publishing segment reported an operating income of $130 million, down from $161 million in the prior-year quarter, which excludes the litigation settlement charge of $125 million. News Corporation hinted that the drop in operating income was due to the closure of the publication of ‘The News of the World’ in the United Kingdom, and fall in advertising revenue at the Australian and U.K. newspapers, partly offset by gains from Dow Jones, HarperCollins and the integrated marketing services business.

The Other segment posted an operating loss of $147 million, reflecting an improvement of $18 million over the prior-year quarter attributable to the absence of losses from the businesses divested, which include Myspace, partially offset by an investigation charge of $63 million. 

Other Financial Details

News Corporation ended the quarter with cash and cash equivalents of $10,686 million, total borrowings of $15,460 million, reflecting debt-to-capitalization ratio of 36%, and shareholders’ equity of $27,907 million, excluding non-controlling interests of $538 million.

On July 12, 2011, the company’s board of directors approved a share buyback program that raised the remaining authorization of $1.8 billion under the previous program to $5 billion. Through May 8, 2012, News Corporation has bought back approximately $3.9 billion of shares at a price of $17.51 per share.

The company’s board of directors recently approved another $5 billion stock repurchase program, increasing the remaining authorization of $1.1 billion under the previous program to $6.1 billion.

Currently, we have a long-term ‘Neutral’ recommendation on News Corporation. Moreover, the stock holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

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