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News Corp’s Gangbuster Quarter

Posted on Friday, Mar 12th 2010

The New York Times announced recently that it will adopt a metered model of charging viewers for online content from next year. News Corp ((NASDAQ:NWSA) is already successfully monetizing content with its WSJ.com site. The company’s recent results reflect its ability to charge for superior online content.

News Corp’s Q2 revenues grew 10% over the year to $8.7 billion, exceeding the market’s target of $8.2 billion. EPS of $0.25 was also higher than the Street’s target of $0.20 and the previous year’s earnings per share of $0.15.

The strong results were driven by the success of News Corp’s filmed entertainment division, which posted revenue growth of 28% to $1.9 billion for the quarter driven by the home entertainment successes of “Ice Age: Dawn of the Dinosaurs,” “X-Men Origins: Wolverine,” and “Night at the Museum: Battle of the Smithsonian,” and the pay-TV performance of “Taken.” News Corp is also seeing improvement in the local and national advertising markets. After six consecutive quarters of year-on-year declining revenues, TV station revenues finally posted 6% growth driven by improved local advertising and sports advertising. Cable network revenues also posted impressive 18% revenue growth driven by 21% growth in affiliate revenue and undisclosed single-digit percentage growth in ad revenues. Earnings at the newspaper unit grew nearly 30%, driven by higher advertising revenue at the Wall Street Journal. Overall newspaper revenues grew to $1.7 billion compared with $1.5 billion earned a year ago. Book publishing also saw revenues grow.

News Corp believes that “content is not just king, it is the emperor of all things electronic.” The company is driving its efforts towards improving content in all divisions. They are already seeing results of their content focus in 20th Century Fox’s recently released 3D science fiction movie, “Avatar.” The James Cameron-directed movie is touted to be the most expensive ever made, at a cost of nearly $500 million. But it has been paying its return. The film has already grossed more than $2 billion at the box office, and after being nominated for nine Oscars, it won for art direction, visual effects, and cinematography at this past Sunday’s Academy Awards.

But it’s not just the entertainment division; the superiority of News Corp’s content can be gauged at the newspapers division as well. According to the Audit Bureau of Circulation’s report, The Wall Street Journal was the leader in the daily circulation of U.S. newspapers. The Wall Street Journal has had year-on-year advertising and circulation gains as well. The newspaper’s website, WSJ.com, has been successfully charging for content since 2002 and has a growing subscription base and advertising revenue. WSJ.com had nearly 642,000 online subscribers in April 2002, a number that had grown to over 1.1 million by April 2009. Subscribers, who are mostly businesspeople, treat the newspaper as business expense and don’t seem to mind paying.

News Corp’s international presence is also growing. The company is pursuing other geographies and recently purchased a $70 million 9.09% stake in the Saudi media group, Rotana. Rotana operates a major TV and radio network, a record label, and advertising and sales operations in the Middle East, and it boasts of the largest library of Arabic-language films along with contracts for managing prominent artists of the region. NewsCorp is also expanding in India with new programming offerings on the Star TV network.

Meanwhile, News Corp is exiting free-to-air broadcasting services in the Eastern European market. The company recently sold its Bulgarian terrestrial TV business to Central European Media Enterprises (CME) for $400 million.

MySpace, however, was the big disappointment during the quarter. News Corp has already put in a new management team in place to address the site’s weakening traffic. News Corp has a $900 million guaranteed revenue deal with Google in which Google handles exclusive search and contextual advertising in return for Fox Interactive Media’s traffic guarantees. News Corp is expecting to pay out nearly $100 million due to MySpace’s failure to meet traffic guarantees.

News Corp’s stock is currently trading at a 52-week high of $16.83 with a market capitalization of $37.6 billion.

Meanwhile, Viacom (NASDAQ:VIA) saw cost control measures drive earnings.  Q4 EPS of $1.09 was significantly higher than the Street’s expected $0.88, but revenues slipped 3% over the year to $4.1 billion and missed the Street’s expected $4.2 billion target.

By segment, Media Networks revenues of $2.33 billion fell 6% over the previous year. Ancillary revenues fell 37% to $0.29 billion, driven by lower sales of Rock Band bundles. Worldwide Advertising revenues fell 3% to $1.30 billion with domestic advertising revenues falling 4% over the year. Worldwide Affiliate revenues registered growth of 11% to $0.74 billion while Filmed Entertainment revenues fell 1% to $1.79 billion. Worldwide Home Entertainment revenues of $1.15 billion grew 12% over the year driven by the strong performance of DVD and Blu-ray releases during the quarter. Worldwide Television License fees also managed to grow 27% to $445 million.

Viacom ended the year with revenues of $13.62 billion and EPS of $2.62 a share compared with the previous year’s revenues of $14.63 billion and EPS of $1.97.

Viacom is expanding in emerging markets as well. One area of focus is India, which has 83 million subscriber households and is the world’s second-largest cable television market, next only to China. Viacom is generating additional content and programs for Colors, its regional language general entertainment channel in India. To attract the attention of this cricket-loving nation, Viacom has have secured the license from the six-week Indian Premiere League tournament to use the league’s brand for television shows. The company is looking to launch reality shows such as a talent hunt called “IPL Rock Star,” a version of “Fear Factor” featuring cricket stars, an IPL celebrity party show, and an IPL awards night. The company is also evaluating the opportunity of bringing international networks to the United States.

Earlier in the year, Viacom was working on improving the content of MTV to help improve the channel’s ratings.  During the quarter, the company launched several shows and has gotten results: in January, MTV had four the top ten cable series in its target demographics, and the audience grew 20% over the year.

Viacom also launched its digital service network Epix during the quarter and is offering full access to all of its online content to their consumers. Epix boasts of more than 150 HD films, which is more than any other pay TV service. The network has a library of 300 movies available online, half of which are in HD. The company is looking to expand this library to 3,000 titles over the next year.  Viacom recently signed distribution deals with Cox Communications, Mediacom, Charter Communications, and the National Cable Television Cooperative and is targeting to reach 20 million U.S. homes by May of this year with Epix.

Meanwhile, the company is also restructuring its 49% stake in Rhapsody, the digital music subscription service. RealNetworks owns the remaining 51% stake in Rhapsody. Viacom, along with RealNetworks, will give Rhapsody the required IP rights for the content. Real Networks will additionally pump in $18 million in operating capital in the new entity. The two are expecting the move to help streamline and make Rhapsody profitable.

Viacom’s stock has also been trading at 52-week high levels of $33.26 with a market capitalization of $18.9 billion.

In summary, we just presented two media stocks that are trading near their 52-week highs, and showing reasonably good results on fundamentals. Other than News Corp’s MySpace, which needs some serious strategic maneuvering, the rest of the company’s business looks solid.

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