Advertising and channels drive good profit

After starting the 2010 financial year quite tentatively, News Corporation has roared home with net income of $2.5 billion. Advertising has picked up in most areas of the group which is now supporting the runaway train that is the Cable Network Programming division. News is now guiding the market to operating income growth in the low to mid-teens for 2011.

“One factor that may yet help Mr Murdoch’s punt is the rapid emergence of tablet devices”

Big screen impact

Avatar, the biggest movie of all time, pushed the Filmed Entertainment division along to an operating income (OI) of US$1.349 billion for the year. The prior year OI of $848 million included the theatrical releases of Night at the Museum: Battle of the Smithsonian and X-Men Origins: Wolverine, which had been big hits. But the inclusion of Avatar and Ice Age: Dawn of the Dinosaurs and several other popular movies lifted the division to a record for the company.

Channelling even bigger profits

The Cable Network Programming division dwarfed even that effort with operating income of $2.268 billion which represented 57% of group operating income. This business has increased its operating income more than seven-fold in seven years. That’s a compound annual rate of growth of 33.5%. A large part of the growth has been due in recent years to the renewal of the Fox News Channel affiliate fees and the growth of the divisions’ channels internationally. In 2010, the international cable channels increased operating income by 40%.

The renewal of affiliate fees looks set to become a regular feature of this division, although its impact will be less dramatic. That is because the major leap up in fees for the Fox News Channel has already occurred, but we expect renewal deals to continue to tick over and add to the growth of this division on a more regular basis.

Advertising revenue at the domestic cable channels grew 3% over the year and 11% in the fourth quarter. That gives some indication of the momentum in an improving environment for multi-channel television. It helps, of course, if the channel ratings are strong and Fox News has once again emphatically delivered on this front. Total viewers of the Fox News Channel outperformed the combined audience of its main competitors, CNN, MSNBC and CNBC in the fourth quarter.

The international channels are gaining every year as well. Advertising revenue grew 25% over the year and 35% in the fourth quarter, again indicating the improving momentum in this revenue stream.

Overall, higher affiliate fees and total subscriber numbers pushed affiliate revenue up by double-digits in 2010. This division is a juggernaut.

Technical picture

Taking a look at the weekly chart of Newscorp we can see that the uptrend since the March 2009 low has been broken as the share price has been consolidating sideways between the 52 week high of $18.80 and horizontal support at the $13.25 level. The weekly MACD has given a bearish signal during this consolidation but now looks set to register a bullish reversal signal.



The daily chart of NWS shows the recent consolidation in more detail. We can see that the 50 day moving average that had been acting as support during the trend higher now looks to be offering resistance. We have also seen a death cross as the 50 day moving average has crossed below the 200 day moving average. Support lies at c.$13 and resistance looks to be provided by the 50 day moving average and then around $16.60.

Tablets and ‘apps’ to save newspapers

The improvement in advertising markets has also benefited News in most of its other divisions. In newspapers, ad revenue lifted by 15% and 10% in the UK and Australia respectively in the fourth quarter.

The newspaper division has taken the bold step of putting up a paywall on its online newspapers in the UK. There was no comment on how many readers are paying to see the full websites of The Times and the Sunday Times although it is still early days. Other newspaper groups around the world are at least contemplating similar moves with the New York Times set to launch its version early next year. Dispelling the myth that consumers will not pay for online content will be a bold but necessary move if quality journalism is to survive. That’s Mr Murdoch’s view, and he has faced many such crises in his very long media career. It is fair to say that once again, he is making his own luck by taking the lead in this decision.

One factor that may yet help Mr Murdoch’s punt is the rapid emergence of tablet devices. A feature of Mr Murdoch’s presentation and recent commentary on the subject was his expectation for “hundreds and hundreds of millions” of such devices to eventually be sold around the world.

The Apple iPad has set the standard for tablet devices and the competition is hot on its heels. Dell is set to launch a cheaper tablet later this year and other manufacturers will be close behind.

The key aspect that makes Mr Murdoch so interested is the application market that will drive the take up of a new type of newspaper subscription. With no capital intensive printing machinery (and tradespeople) and distribution to pay for, newspaper apps may eventually sell as many subscriptions as printed versions, perhaps even more.

Mobile phones are just as capable of carrying similar data and offer yet more opportunity to distribute newspaper content. Just as importantly, the new distribution media will hit the very target audience that has been eschewing printed newspapers for so long, potentially attracting an audience that was thought to be lost to newspaper businesses altogether.

The Dow Jones group is now part of this division and lifted its ad revenue by 14% in the same period. The newspaper division, often thought of as the backbone of News Corp’s earnings, contributed 13.4% of group operating income.

Subscription TV

Satellite TV group, Sky Italia limped to a full year operating income contribution of US$230 million, down substantially on last year due to higher programming costs associated with the FIFA World Cup and the Olympics. Sky Italia now has 4.7 million subscribers.

In contrast, News’s 39% subsidiary UK pay TV company, BSkyB, contributed US$199 million to the company’s equity earnings. News is offering to buy the remaining shares of BSkyB for £7.00 per share, but the independent directors are asking for more.

Result details

Excluding a US$500 million litigation settlement and the contribution last year from NDS which has since been sold, operating earnings for the year grew by 30%.

The chart below shows the divisional contributions over the last three years. It emphasises the growth and importance of the Cable Network Programming division and highlights the relatively smaller contributions from the traditional media divisions.

News Corp paid a $500 million settlement charge relating to litigation in the Integrated Marketing Services division in the second quarter of the year. The fourth quarter contained a gain on the sale of the Bulgarian TV stations and a favourable BSkyB litigation settlement and a non-cash tax benefit related to the recognition of prior year tax credits. An impairment charge of $217 million in the Outdoor and mobile businesses was also included.

News Corp’s balance sheet is even stronger than this time last year. Gross debt of $13.32 billion was offset by $8.7 billion of cash leaving gearing at just 15.1% on equity of $25.8 billion. Operating cash flow for the year of $3.8 billion was substantially ahead of the prior year allowing for further debt repayment of $2 billion and capital expenditure of $900 million.

The company is now guiding the market to expect low double-digit operating income growth for 2011.

We reiterate our positive view on the company and continue to recommend News Corp as a buy for Members without exposure.