News

FBN Launch Boosts Outlook for News

11/02/2007 8:00 PM Eastern

News Corp. may have only enjoyed the distinction of being the world’s largest media company (based on market capitalization) for about one week, but at least two analysts are bullish on the media giant’s prospects for its fiscal 2008 first-quarter results.

News Corp. was the largest media company in the world for about four days late last month — its $67.79 billion market cap passed Time Warner Inc.’s $67.32 billion on Oct. 22 for the first time. By Oct. 26, though, Time Warner had rallied to a $68.8 billion market cap, besting News Corp.’s $67.85 billion.

But now with the successful launch of the Fox Business Network, News Corp. appears positioned for another strong period of growth. In fact, FBN appeared to take away some viewers from main rival CNBC during its initial days.

Tale of the Tape
Two analysts — Jonathan Jacoby of Banc of America Securities and Anthony Noto of Goldman Sachs — each published reports on their predictions for News Corp.’s fiscal first quarter performance recently:
Jacoby Noto
SOURCE: Analysts reports
Revenue $6.7 billion $6.5 billion
Operating Income $963 million $958 million
EBITDA $1.2 billion $1.2 billion

Banc of America Securities media anlayst Jonathan Jacoby predicted revenue of $6.7 billion (a 14% increase over last year) and a 12% bump in cash flow to $1.2 billion in the quarter. Jacoby wrote in a research report that part of the reason for that strong performance is easy comparisons to the previous year — especially in the film and satellite-TV divisions — that will partially be offset by accelerated depreciation in its newspaper segment, a difficult broadcast environment and upfront costs associated with FBN.

“Growth should be more evident in the numbers toward the second half of fiscal 2008 (although 14% revenue growth in the first quarter isn’t bad),” Jacoby wrote.

News Corp. has said it expects FBN to lose about $70 million in fiscal 2008, which ends June 30. The media giant also said that it expects the channel to lose between $150 million and $200 million cumulatively over the next three years.

Much of News Corp.’s first-quarter growth will come from its film and cable segments, Jacoby wrote. He estimates that film revenue will rise 30% to $1.6 billion and cash flow will increase 27% to $303 million in the period.

At its cable networks, despite upfront costs for the FBN launch of about $38 million and weaker ratings for the Fox News Channel, advertising revenue is expected to rise about 8% in the period to $239 million.

Affiliate revenue, fueled by carriage renewals for FNC, should rise 17% to about $783 million in the period, according to Jacoby.

At the broadcast division, including the Fox broadcasting network, Fox television stations and MyNetwork TV, revenue will rise only about 1% in the period, Jacoby predicted.

Goldman Sachs media analyst Anthony Noto wasn’t quite as optimistic as Jacoby about News Corp.’s fiscal first quarter, but he remained bullish on the company.

Noto, in a research report, said revenue will come in at about $6.5 billion (a 9% increase) and operating income will be about $958 million (up 12%) for the period.

But Noto agreed with Jacoby on at least one point — that most of the growth will come from cable and filmed entertainment.

Noto predicted a strong quarter for the film division — revenue up 18% to $1.4 billion and operating income up 26% to $300 million — based on the strong domestic and international box office of The Simpsons Movie and Live Free or Die Hard.

Television networks — primarily Fox broadcasting — will enjoy a 5% bump in revenue to $1.2 billion, but operating income — down 5% to $182 million — will be affected by lighter ratings.

Noto added that while ratings were down for Fox (they declined 14% year-over-year among 18-49 year-olds) in the quarter, that was mainly due to comparisons to last year when Fox experimented with an early start (late August) to its fall programming schedule.

Prior to this comparison, ratings in the quarter were down about 7%.

Noto is more optimistic regarding the Fox cable networks — revenue should be up about 11% to $982 million and operating income should rise 15% to $261 million, mainly because of launch costs for FBN and the Big Ten Network, which News Corp. introduced earlier this year.

While Noto estimated that the FBN and BTN launches cost a bout $30 million, he expects big gains in affiliate fees for Fox News.

Noto expects a 55% increase in affiliate fees for FNC in the period, especially as its DirecTV Group and Cablevision Systems agreements continue to ramp up through the second quarter of fiscal 2008.

“Affiliate fees will continue to be the primary driver of cable network growth, as Fox News Channel remains under-monetized versus its peers and has programming agreements expiring with Time Warner (Fall 2007) and Comcast (2008),” Noto wrote.

Noto added that he expects prior affiliate fees of 25 cents to 30 cents per subscriber per month for FNC will increase to an average fee of 70 cents to 75 cents per subscriber per month for the network.

September