News Corp. Lowers Profit Growth Outlook

Fox Ratings Problems Offset Cable Gains

After reporting higher second-quarter earnings, News Corp. said the rest of the year won’t live up to previous expectations in part because of a ratings shortfall at the Fox broadcast network.

News Corp. CFO  David DeVoe said during the company’s conference call with securities analysts that taking into account the company’s second quarter performance, management now expected to finish the fiscal year with operating income growth in the mid to high single digit range. Last quarter, the company said it expected growth in the high single to low double digit range.

Chase Carey, News Corp.’s COO said that three business were responsible for the earnings shortfall, Sky Italia, a victim of the Italian economy, the Australian newspaper business, and Fox Broadcasting.

“It’s no secret we had a tough fall,” Carey said of Fox’s performance in the new TV season. He said there had been hopes that ratings for X Factor would grow when it hit the competition phase,but that those hopes didn’t pan out.

Carey also said the fall was disrupted by baseball, the elections and Super Storm Sandy and that efforts to re-start some of the shows on the schedule didn’t work out. “It went the other way,” he said.

Finally, he said some of the network’s sports properties added to the bad  news, with a World Series sweep, college football championship games  that were less than compelling and NFL playoffs that registered double-digit ratings drops. “That’s a lot of money,” Carey said, referring to the NFL numbers.

Carey said the network’s problems reflected “the built-in uncertainty of the content business” and that “we feel like we have a really good team” programming the network.

Carey also spent a fair amount of time answering analysts questions about Fox Sports One, the new sports cable network News Corp. is supposed to launch but hasn’t yet announced.

He called the channel the “world’s worst kept secret” and said that the company sees opportunities in the field. “Sports is a force second to none” in the TV business, he said, adding that it has been “a cornerstone of our ability to build the businesses we’ve built.”

Analysts appeared concerned about the high costs that come with sports, but Carey said “we believe we have a unique combination of rights and assets to create a very attractive business,” though he added that the company’s would be opportunistic if there was a chance to enhance the channels’ offerings.

In the second quarter, News Corp.’s cable networks reported big gains, helping the company increase revenue and operating income.

Net income rose to $2.38 billion, or $1.01 a share, from $1.06 billion, or 42 cents per share. The results included $1.4 billion in non-operating gains, partly offset by restructuring and impairment charges. The company said that adjusted earnings per share came in at 44 cents, compared with an adjusted 39 cents a year ago.

Revenues rose 5% to $9.43 billion.

Adjusted net earnings per share and revenue surpassed Wall Street forecasts.

"News Corporation's fiscal second quarter performance reflects our strong momentum. Double-digit gains in our Cable and Television businesses, along with improvements in our Publishing segment, drove revenue and earnings growth even as we seized opportunities to invest in our core businesses for long-term and sustainable growth," CEO Rupert Murdoch said in a statement.

Cable network operating income was $945 million, up 7% from $882 million a year ago. Revenues were up 18%, driven by double-digit growth at the regional sports networks, Fox News, FX and National Geographic channels. Programming costs were up because of expanded college football and Ultimate Fighting Championship coverage, plus added NBA games following last year's lockout.

Domestic ad revenue was up 8%. International ad revenue was up 29%.

Affiliate revenue rose 13% domestically and 42% internationally.

Television operating income rose 19% to $224 million. The company attributed the jump to retransmission consent revenues that more than doubled and increased local advertising revenue at the Fox Television Stations, which were driven by political ad revenues.

Ad revenues were lower at the Fox broadcast network because of lower ratings and a World Series that was three games shorter than a year ago.

News Corp.'s earnings included $56 million in costs from the cellphone hacking scandal that led to the closure of its British newspaper News of the World. A year ago, the company reported a charge of $87 million due to the scandal.

The earnings also included $23 million in costs from the proposed split into two companies.