Good News, Despite Gemstar Write-Off

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News Corp. took a $4.23 billion fiscal third-quarter write-down for its investment in Gemstar-TV Guide International Inc., leading to a $4 billion loss in the period.

As a result, News chairman Rupert Murdoch said he and his executives will keep a close eye on the IPG company in the coming months.

News, which owns a 42.6 percent stake in Gemstar, had already installed its own executive — former Fox Cable Networks Group president Jeff Shell — as the guide vendor's co-president and chief operating officer last month.

Discussing News Corp.'s fiscal third-quarter results with analysts on a conference call, Murdoch said he was disappointed in Gemstar's stock performance, but still believes its technology has promise.

"In response, we are taking a much more active role in preserving value of this powerful asset," Murdoch added. "We've appointed one of our outstanding executives, Jeff Shell, to be co-president and chief operating officer of Gemstar.

"I and other senior members of News Corp.'s management team are spending a great deal more time with [Gemstar chairman] Henry [Yuen] and Jeff to oversee both operations and external financial reporting of their company. We believe very strongly in the strategic importance of Gemstar."

KINDER, GENTLER?

Later, on a conference call with reporters, Murdoch said that though he believes Gemstar's operations are performing well, its relationships with cable operators could be better.

"This is a company that had sued customers rather than make friends of them," he said. "We see a turnaround in that."

Gemstar has been pounded since questions about its accounting methods arose earlier this year. Its stock is down 67 percent since the beginning of the year.

Despite the write-down, News Corp. reported a strong quarter, with pro forma revenue up 14 percent and operating income up 49 percent.

Cable networks — including Fox News Channel, FX, the Speed Channel and Fox Sports Networks — tripled their operating income in the period, to $73 million. Cash flow at the cable networks more than doubled, to $83 million.

Murdoch was especially pleased with the performance of Fox News Channel and FX, which improved market share during the period.

Revenue at Fox News rose 40 percent in the period, while cash flow was up $16 million, mainly due to growth in affiliate and advertising revenue.

During the conference call, News Corp. chief financial officer David Devoe said Fox News also grew its subscriber base by 23 percent, to 79 million homes from 64 million homes in the third quarter last year.

Fox Sports Networks increased revenue by double digits, and subscribers for its Speed Channel (formerly Speedvision) rose 31 percent in the period to 50 million, Devoe added.

The better-than-expected results also caused Devoe to increase News Corp.'s guidance for the rest of the year.

Devoe said operating income was expected to grow between 8 percent and 10 percent for the year, rather than in the mid-single-digit increase it had earlier predicted.

Cash flow at Fox Entertainment Group would rise 13 percent to 15 percent in fiscal 2002, Devoe estimated, above previous predictions of growth in the upper single digits.

FOX NEWS FEE HIKE?

With Fox News's improved ratings, better penetration and greater advertising revenue, Murdoch said, cable operators might see a rise in the carriage fees News Corp. charges them for the network.

"We're just seeing the recognition of the much-greater penetration of FX and Fox News," Murdoch said. "We will see very strong growth in earnings in both of those channels. Certainly in News, we'll probably see a 100 percent increase.

"And you should remember that we're still selling it to the cable industry at 28 cents per month [per subscriber], up against our competitor [Cable News Network] at 38 cents, who we're beating solidly on ratings. When the time comes in two or three years for renegotiating those contracts, if we can keep the dominance of Fox News, we can look forward to it being a really major earner for the company."

Murdoch also was cautiously optimistic about a rebound in the advertising market.

"I'm not yet prepared to declare a permanent end to the advertising recession, but it's certainly a much stronger market than we were experiencing a year, or even six months ago," Murdoch said.

Scatter pricing for the cable networks is up 15 percent, Murdoch added, and next year News Corp. expects total aggregate cable spending to rise between 9 percent and 10 percent.

Goldman Sachs & Co. cable and media analyst Richard Greenfield was encouraged by the strong growth, increasing his fiscal 2002 operating income estimate for the company by 10 percent to $1.83 billion.

Investors also seemed heartened by the increases, driving News Corp. stock up 7.8 percent, or $2.07, to close at $28.45 on May 14. The stock climbed another $1.98, to close at $30.43 on May 15.

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