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News Corp. Meets EPS, Misses Rev.

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News Corporation’s (NWSA) fourth-quarter 2012 earnings of 32 cents a share came in line with Zacks’ expectations, but fell 9% from 35 cents earned in the prior-year quarter. Robust performance across Cable Networks was more than offset by soft performances across Filmed Entertainment, Television, Direct Broadcast Satellite Television and Publishing.

On a reported basis, including one-time items, News Corporation posted quarterly loss of 64 cents a share, substantially down from earnings of 26 cents delivered in the year-ago quarter.

News Corporation, a diversified media conglomerate, hinted that total revenue dropped 7% year over year to $8,370 million on account of revenue declines across Filmed Entertainment (down 14% to $1,739 million), Television (down 3% to $1,083 million), Direct Broadcast Satellite Television (down 15% to $880 million) and Publishing (down 14% to $2,024 million), partially offset by growth across Cable Network Programming (up 15% to $2,476 million). The Other segment’s revenue plunged 38% to $168 million. Total revenue also fell short of the Zacks Consensus Estimate of $8,713 million.       

Total adjusted segment operating income fell 8% year over year to $1,242 million during the quarter. However, including litigation settlement charges of $57 million, operating income came in at $1,185 million, down 12% from the year-ago quarter. Management now projects high single to low-double digit growth rate in operating income for fiscal 2013.

Another media conglomerate and one of News Corporation’s competitors, Time Warner Inc. (TWX), posted second-quarter 2012 earnings of 59 cents a share that beat the Zacks Consensus Estimate by a penny but dropped 1.7% from 60 cents earned in the prior-year quarter. Total revenue slipped 4% to $6,744 million from the prior year-quarter and also fell short of the Zacks Consensus Estimate of $6,958 million.

Segment Discussion

Operating income at Cable Network Programming jumped 26% from the prior-year quarter to $792 million, boosted by revenue growth, reflecting a 24% increase in the domestic cable channels’ operating income and 31% higher contribution from the international cable channels at both Star and Fox International Channels.

At the domestic cable channels, affiliate revenue grew 16%, signifying increased rates across all networks, with growth primarily driven by Regional Sports Networks and the Fox News Channel. Advertising revenue climbed 5% on owing to the augmentation at Regional Sports Networks and the National Geographic Channels.

At the international cable channels, affiliate revenue grew 31%, reflecting improvement at the Fox International Channels in Latin America and Asia, and the consolidation of the Fox Pan American Sports network. Advertising revenue rose 18% on improvement witnessed in advertising marketplace and viewership trends with strength witnessed primarily in India and Latin America gaining from the consolidation of the Fox Pan American Sports network.

Filmed Entertainment operating income plummeted 43% year over year to $120 million as the prior-year quarter benefited from the strong theatrical release of Rio and successful home entertainment performances of Black Swan and The Chronicles of Narnia.

Television segment’s operating income fell 9% year over year to $213 million, as the twofold rise in retransmission consent revenue was offset by the fall in national advertising revenue.

Direct Broadcast Satellite Television or SKY Italia posted segment operating income of $89 million, demonstrating a sharp decline from an operating income of $145 million in the year-ago quarter. The tough economic climate in Italy, which led to the fall in subscriber base, impacted the result.

SKY Italia ended the quarter with a subscriber base of 4.9 million, representing a net reduction of 42,000 subscribers on account of the sluggish economic environment in Italy.

Publishing segment reported an operating income of $139 million, down significantly from $270 million in the prior-year quarter. 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 the U.K. newspapers and the integrated marketing services business.

The Other segment posted an operating loss of $168 million compared with a loss of $137 million in the prior-year quarter as the absence of losses from the businesses divested, which include Myspace, was more than offset by an investigation charge of $57 million. 

Other Financial Details

News Corporation ended fiscal 2012 with cash and cash equivalents of $9,626 million, total borrowings of $15,455 million, reflecting debt-to-capitalization ratio of 38.5%, and shareholders’ equity of $24,684 million, excluding non-controlling interests of $501 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 August 7, 2012, News Corporation bought back approximately $5.1 billion of shares at a price of $18.18 per share. Management also declared a quarterly dividend of 8.5 cents a share to be paid on October 17, 2012 to shareholders of record as of September 12, 2012.

2013 Outlook

Looking into fiscal 2013, management anticipates channels businesses to deliver healthy earnings growth on the back of sustained double-digit increase at Cable Networks and growth at international channels, as well as increase in advertising and affiliate revenues buoyed by FOX News, Regional Sports Networks and FX Network.

Further, management expects Television division earnings to increase due to sustained growth in retransmission consent revenue and a robust political advertising market due to upcoming elections in November. News Corporation hinted that increase at channels businesses will be partly mitigated by lower contributions from SKY Italia on account of the challenging economic condition in Italy. In addition, management intends to make strategic investments in its education division.

Split Confirmed

The major news regarding News Corporation that hit the headlines was its decision to split into two separate publicly traded publishing and media and entertainment entities. There has been immense pressure from shareholders to divest the publishing arm which has been grappling with lower operating profit compared with the entertainment unit.

We believe that the breakup would help News Corporation reinvent its image, which was tainted due to the phone hacking scandal that resulted in the closure of the publication of ‘The News of the World’ and abstinence from acquiring the remaining 61% stake in the British Sky Broadcasting Group. The split is expected to take a year. Also, News Corporation’s stakeholders will receive one share in each new company formed for each share they currently hold.

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, 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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