News Corp. Q2 revenues up; 'Borat' boosts film unit

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NEW YORK -- A record performance by its film unit led by "Borat" and strong growth at MySpace helped boost fiscal second-quarter revenue at News Corp. by 18%, but the entertainment giant's profit fell 24% compared with a year ago, which included an asset sale gain.

Chairman and CEO Rupert Murdoch emphasized during a conference call Wednesday that he sees "no better use" for News Corp.'s cash than continued stock buybacks, hinting that he has no major acquisitions on his radar. A potential deal with the Chandler family that is trying to buy Tribune Co. is focused on a potential joint operating agreement between Newsday and News Corp.'s New York Post, he said.

Murdoch and president and COO Peter Chernin also spent time laying out financials for News Corp.'s online assets and expressing their disappointment with higher-than-expected launch costs for MyNetworkTV, vowing to turn around the network as the year unfolds with its first major program changes coming in mid-March.

News Corp. reported a fiscal second-quarter profit of $822 million, down from $1.1 billion a year ago, which included a $381 million gain from the sale of its TSL Education division. Excluding that item, profit would have jumped 18%. Revenue rose to $7.8 billion, exceeding Wall Street estimates.

News Corp. shares closed up 2.3% on Wednesday at $24.70.

Quarterly revenue from MySpace tripled to $75 million compared with a year ago, and revenue at all of Fox Interactive Media rose about 70% to about $125 million, executives said. The online unit is on track to be "marginally profitable" this fiscal year and reach $500 million-plus in revenue, Chernin noted, adding that profit will jump "dramatically" in the coming fiscal year.

He also said that management is targeting margins in the low 20% range, with Murdoch then jumping in to say he believes margins can even be "a lot better than 20%."

MySpace is "the big star at the moment" and will be "a very big profit driver for the overall company in the coming years, if we get it right," Murdoch said.

Goldman Sachs analyst Anthony Noto said in a research note Wednesday that "the MySpace outlook was particularly positive."

At News Corp.'s film unit, operating profit rose 57% to a record $470 million in the fiscal second quarter, with revenue up 41% to $2.3 billion.

Unit results benefited from the theatrical runs of "Borat" and the international success of "The Devil Wears Prada" as well as the home video performance of such titles as "Ice Age: The Meltdown," "X-Men: The Last Stand" and "Little Miss Sunshine." In the TV-DVD business, "24" and "Prison Break" were among key drivers.

Asked whether News Corp. could continue its film momentum of recent years, Chernin said he has "confidence in our team's ability to pick great movies" and manage costs. In addition, the recently launched Fox Atomic label could be "a significant growth driver in the years ahead," he said.

News Corp.'s TV unit saw its quarterly operating profit fall 39% to $112 million even though revenue edged up minimally to $1.6 billion. The Fox TV stations brought in an 8% gain because of strong political advertising, but that was more than offset by a 36% decline at Fox, primarily because of weak ratings for Major League Baseball's postseason and higher NFL program costs and by the launch losses for MyNet, which management declined to detail. Murdoch said its ratings have been "far below" expectations.

Chernin said he believes "the worst is behind us" on MyNet and expects "significant improvement" in the second half. With a dedicated management team led by Greg Meidel now in place, the network will look to cut costs and boost ratings with less emphasis on telenovelas and new movie nights on Thursday and Friday along with a martial arts fight show, among other changes, he said. These moves will reduce costs by 50%-plus on two-thirds of the nights, Chernin said.

The Fox network has been making up for its fall disappointments with the return this year of "American Idol" and "24," said Chernin, who also lauded "Prison Break" and "Bones." The president praised "Idol" for continuing to "defy logic" by still growing its audience.

For the current season, Chernin said Fox is in a horse race for the No. 1 spot in the 18-49 demographic, with CBS benefiting from having the Super Bowl.

Nonetheless, he said the Fox team is focused on developing more successful new shows. "We must do a better job at launching new shows in the fall," he said. "If we're not the No. 1 network next year (when Fox has the Super Bowl), we'll be somewhere between angry and disappointed."

News Corp.'s cable networks division grew its operating profit 4.7% to $275 million even though revenue rose 13.6% to $920 million. The Fox News Channel recorded a 25% profit increase, but higher programming costs for the unit's regional sports networks and marketing spending for "Dirt" on FX weighed on the bottom line. CFO David DeVoe said full-year cable network profit growth will be much higher again after a quarter with various special circumstances.

Asked about TV scatter advertising trends, Chernin said it is "surprisingly strong right now," with broadcast scatter "strong" and cable momentum "pretty strong."

Italian satellite TV arm Sky Italia, meanwhile, reduced its quarterly loss from $53 million to $12 million as its subscriber base grew beyond 4 million at the end of 2006.

Murdoch reiterated that the decision to swap his stake in DirecTV for Liberty's big stake in News Corp. was a purely pragmatic decision and will boost earnings per share. "Do not interpret it as a change to our positive view on the satellite market," he told investors, saying his team is "more bullish than ever," especially on the outlook for British Sky Broadcasting in the U.K. and Sky Italia.

For the full fiscal year, News Corp. continues to expect operating profit growth of 14%-16% excluding the year-ago asset sale gain.

Executives said the resurgence of the Fox network and stronger cable network unit gains along with more film and DVD strength will buoy the second half of the firm's fiscal year.

Asked about a big MySpace-Google ad search deal that still hasn't been finalized, Chernin said the partners have a binding letter of intent in place but are continuing to discuss ways to create upside for both as MySpace has been overdelivering on its promises.

Asked about a planned China launch of MySpace, Murdoch said that it is a tricky market. "None of the American media companies has made an impact there yet," he said, before signaling that MySpace could enter China in form of a licensing deal with a local partner.

Murdoch also said that it would be "too expensive" and not necessary for News Corp. to buy full control of BSkyB. He also said he has no interest in buying even a single additional share in interactive program guide firm Gemstar, of which News Corp. controls 41%.
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