News Corp: The Economy Is Rough, but “The Worst Is Over”
For the past year or so, News Corp. CEO Rupert Murdoch has been a consistent voice of pessimism, and he forecast an ugly economy before his big-media peers did.
And now he’s more upbeat than his fellow media CEOs. Here’s his opening salvo:
“I am not an economist…but it is increasingly clear that the worst is over….As you know, I have been uncharacteristically pessimistic in recent calls, though I would argue that it was a well-founded concern. But there are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier.”
Not only is this a turnaround, it’s a turnaround from just a month ago, when Murdoch professed to be full of bearish sentiment at the cable industry’s annual show.
So what changed? Advertisers have started spending money again, he says: “Everybody was in shock by the economy and all business was falling of a cliff in the last 3 months of last year. Including me.” And that meant ads disappeared in January, February and March. But now they’re coming back. “It’s not back to the old levels. Don’t get me wrong, he says. “But at the very least we seem to have hit the floor.”
There is some nuance to this: When asked by an analyst why that optimism has prompted him to reinvest in his company, via stock buyback, Murdoch hedged: “I want a little more evidence that the worst is over…there is a real feeling that we’ve hit bottom and there is something turning, but this is early days yet.”
As usual, Murdoch’s call was well worth listening to, as he’s the most unbuttoned of the media moguls when it comes to earnings calls. Plenty of good stuff here on the Kindle, the state of the newspaper business, his plans to charge for more online content, etc.
Thanks to a helpful News Corp. (NWS) official for deciphering the company’s earnings for me. The media conglomerate, which owns this Web site via its Dow Jones unit, posted earnings of 16 cents (after factoring out one-time gains and charges) on revenue of $7.4 billion. Wall Street had been looking for 16 cents and $7.7 billion, respectively. The company’s revenue number is down 16 percent from a year ago.
CEO Rupert Murdoch isn’t crowing: “Our third-quarter results directly reflect the continuing weakness of the global economic climate.”
News Corp. doesn’t offer much transparency regarding MySpace, which just recently swapped out its leadership team, or the Fox Interactive Media group MySpace belongs to. But it does say that its “other segment” which includes FIM/MySpace, lost $89 million in the last quarter, down $82 million from a year ago.
“The decline in FIM operating results was driven by lower advertising revenues combined with increased costs associated with the MySpace music joint venture and the launch of new features.”
Expect more detail in the earnings call, which begins at 4:30 Eastern time.
Here’s the sector-by-sector breakdown (click chart to enlarge):
News Corp.’s numbers come a day after Disney’s (DIS). not-as-bad-as-we-feared report. CBS (CBS) reports tomorrow.
Call starting shortly: I’ll be covering live.
Call starting. This will be COO Peter Chernin’s last go-round.
CFO Dave DeVoe starts:
Paper and broadcast TV down, cable doing OK (just like every other media conglomerate).
Some segment notes: Studios are up in part because of “Wolverine,” “Slumdog,” etc. Also because they’re making more TV shows (recall there was a strike a year ago).
TV stations down 28 percent (if you strike out Superbowl revenue from last year). That’s about par for local TV these days (i.e., down 20 percent is the new flat!).
Cable: “Very strong growth.” Operating income up 30 percent, revenue up 11 percent. Affliate fees up 24 percent. Ad revenue down six percent (not bad). Fox News Channel had record operating profit. New affiliate deals in effect with everyone except for Charter and Cox, and those should be set next year.
Newspaper business: Operating income at $7 million, down from $200 million(!) last year. Dow Jones: Advertising down 33 percent at The Wall Street Journal (gulp).
FIM (MySpace): $187 million, down 11 percent. Online ads down 16 percent. That’s a big collapse from last quarter.
Murdoch: “I’m not an economist…but it is increasingly clear the worst is over.” This is meaningful given that Murdoch was an early pessimist, at least by media mogul standards. “We’re beginning to see a number of bright spots that give us encouragement.”
Movie business: “It is booming right now.” “Could not be happier” with “Wolverine” opening.
Lots of praise for Fox News’s “stunning achievement” in closing the gap on NBCU’s USA.
Broadcast ad volume and pricing are holding up well.
Strong growth at WSJ.com, as measured by internal metrics. Ad revenue for site will grow 20 percent year to year in the fourth quarter. Will soon be making pay people “handsomely” for iPhone app.
I believe I heard a challenge to the Kindle, but not sure. Following up with News Corp. PR. Yup: “We will not be sending our content rights to the fine people who created the Kindle. “
“Too many content creators have been passive in the face of obvious violations of property rights….Our content is extremely valuable and the violators recognize that value.”
Re MySpace: Confident in new team that will “spur new growth and new profitability. Profitability, I must say, that has completely escaped our competitors.”
Praise for Hulu. “There are lessons for Hulu’s success in other parts of our company.”
Now praise for Chernin: “I’ve watched him grow from young executive to my trusted deputy”…built strong management team. I’ll miss him, etc.
Chernin: Praising investor community, a bit tongue in cheek. “Also a great privilege to work at News Corp…and a deep, deep privilege to work for” Murdoch.
Murdoch: Cable advertising down six percent this Q but will be up two percent for the year. General purpose cable nets all up:
Q: If worst is over, why not buy back stock?
Murdoch: “I want a little more evidence that the worst is over…there is a real feeling that we’ve hit bottom and there is something turning, but this is early days yet.”
Q: You have $6 billion in cash. What do you want to do with that? Would you spin out any part of business, like newspapers?
Murdoch: We believe that we are a very strong interrelated company and that all of our divisions help each other. And yeah, we have $6 billion. Except that in the first three or four months of next year we do have $2 billion worth of repayment. So let’s deal with that first.
Q: How does local TV business look? And how is home video looking?
Murdoch: A month ago, I would have said that pacings for the quarter looked “frighteningly bad,” but things are improving. Other stats: For the year, Dow Jones will be down 22 percent. Fox Interactive will down four percent. On movies: A big film will do as well as ever. Library a bit doubtful. But we think there are some things in the works. Thinking about Hulu…and Blu-ray will help too. “There are various things that we believe are going to more than make up for the present slight decline in library titles.” Chernin: “We’re seeing strong titles perform strongly. Particularly with “middle-America-type titles like ‘Marley and Me.’”
Q: Have credit markets loosened up?
CFO DeVoe: Yes. Spreads have contracted. Over last week, the markets are open at attractive prices.
Murdoch: There is a lot of money out there, and we would have no trouble raising one or two billion in public bonds.
Q: Want to buy any additional newspapers?
Q: What’s the outlook for cable, once you’re done jacking up affiliate fees for the likes of Fox News?
Murdoch: Same growth.
Chernin: Some channels still have a lot of growth in them: Big Ten channel, Fox Business, etc.
Murdoch: Yeah! We have 140 channels. The growth of cable and satellite and multichannel television is really only beginning in the rest of the world. And we’ll be riding that.
Q: Are more restructuring charges coming? Why isn’t that in guidance?
Devoe: We really don’t know. What it’s going to be, it’s going to be.
Murdoch: We’ll take about $100 million out of the costs of Dow Jones, and we expect it will be another $100 million by this time next year. Like by linking back office of Dow Jones and New York Post. There will be, and I won’t specify it, but there will be “major cost savings at MySpace.”
Devoe: With regard Dow Jones restructuring, important to note that we planned for that in acquisition.
Q: FIM ad revenue down 16 percent. What’s up with that?
Murdoch: Jon Miller has a lot of ideas. We think we’ll have a much more attractive site for people to visit and stay with and just generate a lot more visits. “We are not going for the Facebook model for bringing hundreds and hundreds of millions of people who don’t bring any advertising with them at all.”
Cherin: MySpace Music coming along. Monetization opportunities just beginning. Some signs that things are improving at MySpace ad sales. A lot of this is marketplace-driven.
Q: On management changes: Rupert, can you handle all this reorg and the absence of Chernin?
Q: I assume you have money-losing papers beyond the New York Post.
Murdoch: The only paper that’s in loss is the London Times. And that’s always been the case.
Q: You were so bearish at the cable show a month ago. What’s changed?
Murdoch: “Everybody was in shock by the economy and all business was falling of a cliff in the last three months of last year. Including me.” So we saw the results of ads disappearing in January, February and March. But now they’re coming back. “It’s not back to the old levels. Don’t get me wrong.” Retail is back. Chrysler is advertising – $5 million, I believe. There’s a lot of activity. Not back to the boom days, but “at the very least we seem to have hit the floor.”
Missed Q, but here’s Chernin on piracy: “That’s as big as an act of industrial sabotage that we’ve seen.” In terms of fighting it, there are things that can be done and we are doing it. The “Wolverine” leak was isolated incident, but a “good wake-up call.” Best thing to do is build good alternative business model. That’s Hulu, and that’s other things we’re looking at.
Q: Is the idea to add streaming movies or subscription to Hulu?
Chernin: We already stream movies, but not many. We’re looking at everything. Although I don’t think we’re ready to add subscription yet, although you should talk to Jason Kilar.
Murdoch: Let me stress the importance of Hulu. It’s already the third biggest video site in the country and the only one that collects any real revenue. Very happy with it.
Time for press Q&A:
Q: Can you imagine taking The Wall Street Journal online subscription model to other news sites?
Murdoch: “We’re absolutely looking at that.” You’ll see some stuff “within the next 12 months.”
Q: Hey Peter, what are you going to do after you leave?
Chernin: Now news until July or August.
Murdoch: “I’m very confident Peter will be bringing us a couple of big hits.”
Q: Any plans to spend that $6 billion cash on M&A?
Murdoch: “No. Nothing of any size.” Our best products have been stuff we built ourselves.
Q: When are you going to see digital subscription revenue surpass lost print ad revenue?
Murdoch: “A couple of years.” Looking at a couple things. Charging. Use of mobile readers. “We don’t believe in the business Kindle model,” but it’s significant that people are looking at that for news, and looking at their BlackBerries for news. Lots of way to make money from content over and above advertising. Some of the most advanced companies in the world are looking at reading/mobile devices. We may invest a little bit in one of of them, but we’re neutral. “We’re not appliance makers. There are other great ones in the world.”
Some confusion about a New York Post (owned by News Corp.) story today.
Q: Any thoughts about cost-cutting at local stations because they’re getting hammered?
A: Yes. Making our own news instead of syndication, etc. “We also expect a return to television advertising faster than we see it for newspapers.”
Q: How much can you cut from MySpace to get it profitable?
Murdoch: “It is profitable. We wish to make it really profitable, and we think that’s possible.” But not going into details.
Q: What about buying AOL?
“We’ve never really thought about it, to be honest, perhaps because they’ve always talked about such ridiculous prices.”