Nov 7, 2012

News Corp earnings show fork in the road: print down, TV up

News Corporation's print businesses continue to struggle, propped up by stronger entertainment earnings. There's already been one corporate split -- could it prompt another?

Glenn Dyer — <em>Crikey</em> business and media commentator

Glenn Dyer

Crikey business and media commentator

No wonder the News Corporation board voted in June to separate the company into a good, growing business in its mostly US and UK broadcast and film assets, and a bad business, mostly its UK, Australian and US newspaper assets and book publishing, along with the pay TV arms in Australia and NZ to give it some oomph. The first quarter earnings report from News Corporation confirms the wisdom of that board decision: the newspaper businesses in the US and Australia are suffering what seems to at best be a break-even earnings position in the three months to September, while the US cable operations are soaring ahead. In fact, so weak are the newspaper operations, especially in Australia, that the planned new publishing arm will be dominated financially by the Australian and NZ pay TV businesses, a situation that won't make potential investors happy and could led over time to more pressure for another split. News said this morning it earned an operating profit of $US1.38 billion (almost flat compared with the $US1.39 billion earned in the first quarter of 2011-12). After a series of one-off items, including a $1.4 billion profit from the sale of the NDS business in July, the company earned a total profit for the quarter of $US2.23 billion ($US738 million). The big driver (besides the NDS sale profit) was a $US178 million or 23% increase at the Cable Network Programming segment to $US957 million for the quarter (from $US775 million for the September quarter of 2011). The film studios earned $US53 million more at $US400 million. And the Fox TV business in the US saw a $US23 million rise (to $US156 million) in quarterly profit. News said the cable businesses saw a 16% rise in revenues across the board, but 30% jumps were recorded by Fox News and regional sporting channels. That will be further boosted in the current quarter, especially at the company's local TV stations, by the heavy spending in October and the past week on the US election campaigns. The cable channels will also see a boost, especially Fox News. Offsetting the higher contributions from cable and film (up $US63 million to $US400 million) were falls of at the Direct Broadcast Satellite Television, Publishing and Other segments. "The first quarter results included a $67 million charge related to the costs of the ongoing investigations initiated upon the closure of the News of the World as compared to $17 million in the corresponding period of the prior year," News said. In fact, the publishing segment saw operating income almost halve to $US57 million in the quarter, from $US110 million in the September quarter of 2011 and $US178 million in the September quarter of 2010. News said the fall was "due to lower advertising revenues across all divisions, led by declines at the Australian and US publishing businesses. The declines were partially offset by increased contributions at the UK newspapers, which benefited from the launch of the Sunday edition of The Sun in February 2012, and at HarperCollins, which benefited from the acquisition of Thomas Nelson, Inc, a Christian book publisher." Revenue was down slightly on a year earlier at $US2.018 billion for the publishing businesses. A better guide to the slide can be gleaned from the pre-depreciation and amortisation earnings figures given in the report: they totalled $US172 million, down a third from the $US271 million in the September quarter of 2011. The newspaper publishing business is now earning as little as it did during the last quarter of 2008 and early 2009 when the GFC slashed ad revenues around the world. Indeed, the quarterly result reveals a problem for News as it prepares for the split. The publishing business could be marginally profitable at best (annualised net earnings of $US200 million to $US300 million at best, based on the last couple of quarters and pre-tax earnings of perhaps $US700 million. No wonder it is leaving the pay TV businesses in Australia and NZ in the publishing arm. They will be the most profitable part of the business with combined earnings of well over $US1 billion on a pre-tax basis. That in turn will lead to pressure from investors in the publishing arms for the pay TV businesses (50% of Foxtel, 100% of Fox Sports in Australia and control of Sky in NZ) to be spun out in a repeat of the split News is now planning to make.

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