'Avatar' gives News Corp. record film quarter

Murdoch plans announcement on digital content model

NEW YORK -- News Corp. reported a 19% fiscal third-quarter revenue gain after the stock market closed Tuesday, driven by rebounding advertising momentum and the record-breaking boxoffice run of "Avatar," which drove its film unit to a quarterly profit record.

The company's quarterly profit was down due to one-time factors in the year-ago period, but exceeded Wall Street expectations.

Management raised its full fiscal year guidance for operating profit to growth in the high 20% range over the $3.44 billion recorded for the previous year. Previous guidance called for growth in the low 20% range. But CFO David DeVoe cautioned that film unit results in the current quarter will be down by about $100 million despite the DVD release of "Avatar" due to release timing and promotional costs for such upcoming summer releases as "The A-Team."

On a conference call, chairman and CEO Rupert Murdoch spoke of "strong across-the-board growth" in advertising markets, especially in the U.S. and Britain and in the auto and telecom categories. And deputy chairman, president and COO Chase Carey also said that ad markets "on almost all levels look great," with even local sports ad trends improving after previous sluggishness. 

Murdoch Tuesday also faced an analyst question about financial growth in the next fiscal year given the strong film results thanks to "Avatar" and risks of declining ad momentum. Murdoch and Carey both said they see more upside, even though the film division could face some tough comparisons. ""We have a great slate of films coming up, but we don't have an "Avatar,"" Murdoch said. But he signaled confidence in continued ad momentum. Whether News Corp. can deliver double-digit operating profit gains as it has done in most of the past 10 years will depend on various factors, including the timing of film releases and ad trends, he said. Carey emphasized that management couldn't be more excited about the film business.

Murdoch also once again touted the strength of News Corp.'s content, citing such examples as "Avatar," Fox News Channel, which set another quarterly profit record, as well as new Fox TV hit "Glee" and ABC's "Modern Family," which is produced by Fox Television Studios. He mentioned Apple's iPad as a potential game changer, but said that all devices are "entirely dependent" on popular content, such as News Corp.'s.

But Murdoch apparently is also planning to announce in the coming month plans to make News Corp. content available in digital form via a new subscription service. In passing, he mentioned on the call plans for "an innovative subscriber model" for digital content. He later added the company will likely have a news announcement on this front in the next three to four weeks. Asked if the service would be a competitor to Apple's iTunes, he said: "I guess so."

The entertainment conglomerate posted a quarterly profit of $839 million, compared with $2.7 billion in the year-ago quarter, which included two big one-time gains worth a total of $2.4 billion. Revenue jumped 19% to $8.8 billion.

"Today's earnings confirm that no content company is stronger than News Corporation at building both fiscal and operational momentum," said Murdoch. "Our global portfolio of sought-after content is ideally situated to benefit from the increase in consumer spending, advertising and access to new platforms we are seeing across our regions."

Film unit financials benefited from the continued success of "Avatar," boosting the division's operating profit 76% from $282 million in the year-ago period to $497 million -- a film unit record. Also boosting film financials was the theatrical performance of "Alvin and the Chipmunks: The Squeakquel" and the home entertainment runs of such titles as "Ice Age: Dawn of the Dinosaurs," "X-Men Origins: Wolverine" and "Night at the Museum: Battle of the Smithsonian."

News Corp.'s TV unit multiplied its quarterly operating profit from $9 million to $40 million as the Fox Television Stations recorded an 18% revenue gain due to improved local ad trends, particularly in the auto and telecom categories, and improved results at MyNetworkTV. This was partially offset by lower contributions from Fox Broadcasting Company, which suffered
from higher costs for returning shows and lower ad revenue due to lower ratings.

The entertainment giant's cable networks unit grew operating profit 38% to $588 million, primarily reflecting growth at Fox News Channel, which set yet another quarterly profit record, regional sports networks, FX, the Fox international channels and STAR.
"Viewership at FNC was at its highest level ever during the quarter with ratings 188% greater than its nearest competitor in prime-time and 157% higher on a 24-hour basis," the company said.

Management also predicted that the cable networks will continue to grow and boost their contribution to overall company profits.

Said Murdoch: "The unique strengths of our cable channels -- young, vibrant franchises with phenomenal growth and potential -- now generate almost half of our operating profit, ensuring that our stakeholders will continue to benefit from News Corporation?s sustained revenue, profit and cash flow strength for years to come."

Here are some other highlights from the earnings conference call:
* Murdoch said his ad sales team is "really optimistic" about the upcoming upfront ad market.

* He once again said MGM wasn't of interest to News Corp. at the prices it is being shopped for.

* Murdoch said News Corp. feels comfortable looking at options to return money to shareholders now that the financial crisis and recession seem to be over. He signalled a decision in the coming months with increased dividends, stock buybacks, investment in the firm's businesses and possibly acquisitions among the options.

* Carey was asked if the Fox network could start to get part of the retransmission fees distributors pay to the Fox stations, and he said there are talks with the stations about such an arrangement.

* He also said News Corp. is looking at whether it is getting fair compensation from DVD-by-mail rental pioneer Netflix. As release windows continue to evolve, "we must get smarter about it," Carey said.

* Management didn't highlight MySpace and its other digital assets much beyond citing lower search and ad trends. "Clearly, MySpace is a work in progress," Carey said, and Murdoch once again mentioned encouraging trends in traffic and time spent on the site.

* "There is a great opportunity" to really build satellite TV service Sky Deutschland now that new management has settled in, Carey said. "We got it going in the right direction."
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