Filed by The News Corporation Limited
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Companies: Hughes Electronics Corporation
Commission File No. 000-26035
General Motors Corporation
Commission File No. 001-00143
NEWS CORPORATION
Moderator: Tsalem Mueller
May 13, 2003/8:00 a.m. CDT
NEWS CORPORATION
May 13, 2003
8:00 a.m. CDT
Coordinator Good morning, and welcome to the News Corporation
and Fox Entertainment Group's third-quarter
earnings release conference call. I would like to
notify that your lines will be on a listen-only
mode until the question-and-answer segment of
today's call. This call is being recorded. If you
have any objections, please disconnect at this
time. I would now like to turn the call over to one
of today's speakers, Mr. Gary Ginsberg, Executive
Vice President of Investor Relations and Corporate
Communications. Thank you, sir, you may begin.
G. Ginsberg Thank you, Hope. Good morning, everyone, and
welcome to today's conference call to discuss the
third-quarter operating results for both News
Corporation and the Fox Entertainment Group. With
me today are Rupert Murdoch, Chairman and Chief
Executive of News Corp.; Peter Chernin, President
and Chief Operating Officer; Lachlan Murdoch,
Deputy Chief Operating Officer; and Dave DeVoe,
Chief Financial Officer. Before we begin our
discussion today, let me first make some
preliminary statements. This call does not
constitute an offer to sell or solicitation to buy
in connection with the proposed acquisition by News
Corporation of an interest in Hughes Electronics.
News, GM and Hughes intend to file a proxy or a
consent solicitation statement, and other materials
with the SEC, with respect to the transaction.
Because they will contain important information,
investors are urged to read these materials which,
when filed, will become available free of charge at
the SEC's Web site. Investors will also receive
information at an appropriate time on how to obtain
transaction-related documents for free from News.
Today's call is, of course, governed by the Safe
Harbor Provisions. On this call, we will make
statements that constitute forward-looking
statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and
unknown risks, uncertainties and other factors,
including those described in News's public filings
with the SEC that could cause actual results to be
materially different from those in the
forward-looking statements. In addition, to the
extent that any non-GAAP financial measures are
discussed on this call for which a GAAP
reconciliation is not otherwise contained in the
News Corporation or Fox earnings releases, News and
Fox will post any required additional information
on their respective Web sites.
With all of that, I would now like to turn the call
over to Rupert Murdoch.
R. Murdoch Thank you, Gary. Good morning, ladies and
gentlemen. If you've read our release, then you
certainly know the kind of income growth and
operational momentum we continue to enjoy at both
News Corporation and Fox: the 25% improvement in
News Corp.'s operating income for the quarter; the
39% increase in EBIT DA at Fox; and particularly
impressive, the fact that such gains were
accomplished, despite the financial impact of a
war. All these achievements point to a company
that's operating more smoothly, more successfully
than at any time in its history.
Our growth has come according to a consistent
strategy. There were no surprises in our results,
and we can be very confident that the solid
improvements we are making will continue from here.
We are leveraging our strengths; we are creating
assets of enormous value; and we are consistently
meeting - even exceeding - our predictions of
market gains and operational growth.
The result has been a considerable strengthening of
both the content and distribution sides of our
business. In terms of content, our film, television
and publishing assets are growing well. The film
content that we put in theaters and on televisions
around the globe continues to grow profits. Our
network television content is fresh and compelling,
as reflected in our network profits. Our veteran
experience in news production, general
entertainment and sports programming has created
some of the fastest-growing cable channels in the
industry, and our publishing assets also continue
to grow.
On the distribution side, we've made some great
strides, particularly since the close of the
quarter. I see it in two valuable pay-television
opportunities, in Italy and the United States. In
April, we officially created Sky Italia, with the
completion of our purchase of Telepiu in Italy.
Based on the very low purchase price; on the very
manageable investment costs; on our proven ability
to control piracy; and in a potential reward for
such a rich and under-served market, we look
forward to generating robust profits on this
platform after the full implementation of the
merger and the full launch of Sky Italia.
We also recently announced our agreement to acquire
a 34% interest in Hughes Electronics and their
American satellite television platform, Direct
Television, in North and South America. Certainly,
this is a business with tremendous potential, both
for consumers and our company. With the addition of
DirecTV, we'll have built the world's first truly
global television platform, a platform that
immediately will serve more than 25 million
subscribers across the globe.
Of course, DirecTV will face very stiff competition
in the United States from the larger and dominant
cable companies. We look forward to this
competition, and to energizing the American
multi-channel market by offering an unprecedented
quality of service, a unique diversity of
programming, and new and interactive services, to
the benefit of American consumers.
These initiatives will take some time, but it is a
process that we will pursue with great focus and
energy.
At the same time, and along with these exciting new
undertakings, we remain intensely focused on our
core assets, and on sustaining the impressive
growth that continues to characterize our results.
So today, we are increasing our guidance for both
News Corporation and Fox Entertainment Group, as
Dave DeVoe will explain to you now as part of our
financial review of the quarter. Thank you, David.
D. DeVoe Rupert, thank you very much, and good morning,
everybody. As Rupert mentioned, we are pleased with
the company's performance in achieving continued
strong revenue and operating income growth, both at
Fox and at News Corporation. This growth reflects
the outstanding performance at the Fox Network; the
further development of our cable channels; and
continued successful theatrical and home video
releases at the film division. It also reflects the
stability and strength of our print businesses,
which continue to improve their market share in
highly competitive markets.
We are equally pleased with the results from Fox
television stations, which registered increases
despite the non-recurrence of advertising revenues
from last year's Super Bowl on Fox, and the impact
of significant preemption's for war coverage. The
impact of the war on the stations was approximately
$20 million in the quarter, and the effect on the
entire company was between 35 and $40 million.
For today's call, I'll first discuss Fox's
performance, and then I'll follow that with an
overview of News Corporation. Let's take a look at
Fox first.
For the quarter, the Fox Entertainment Group
reported revenue growth of 9%, and consolidated
EBIT DA of $542 million, up 39% from last year.
Operating income increased by over $200 million, to
$464 million; and Fox's earnings per share for the
quarter were $0.31 this year versus $0.13 in last
year's quarter.
Now let's look at the Fox consolidated businesses
in a bit more detail, starting with film. Film
entertainment reported another exceptionally strong
contribution, with third-quarter EBIT DA of $220
million, surpassing last year's strong quarterly
results. Driving this year's earnings were
significant home entertainment sales, especially
from our blockbuster, Ice Age. Additionally, the
pay TV availability of Shallow Hal and Planet of
the Apes contributed to the quarter's performance.
These strong results were somewhat offset by the
theatrical releasing costs of films released in the
quarter, including Daredevil, Phone Booth, and Just
Married.
Our television production business,
Twentieth-Century Fox Television, also increased
its earnings from a year ago. This result reflects
higher syndication profits from The X-Files and
Dharma and Greg, and continued strong DVD
contributions from television product, including
The Simpsons and 24.
At our television stations, we had another strong
result, with third-quarter EBIT DA of $179 million
on revenue growth of 6%. Revenue increases were
achieved, despite the absence of the Super Bowl on
Fox this year, and substantial preemption's, due to
war coverage, which I mentioned just a couple of
minutes ago. In addition, we increased our
promotion cost to support the February sweeps, and
a news-related cost increase for war coverage.
At the Fox Broadcasting Network, EBIT DA for the
quarter was $37 million, compared to a loss of $45
million a year ago. This significant improvement
reflects increased prime-time revenues from a 32%
increase in ratings, and improved pricing as a
result of that; also - as a result of success,
rather, of the network's schedule, and particularly
from the shows, Joe Millionaire and American Idol,
and these improvements were partially offset by
increased marketing costs on our new midseason
shows.
The improvement at the Fox Network also reflects
the non-recurrence of the Super Bowl on Fox, which
resulted in a loss at the network level a year ago;
and Peter will give you more detail on the network
in just a couple of minutes.
Moving on to the cable network programming segment,
this segment reported EBIT DA of $106 million, a
$23 million increase over last year's results, on
18% revenue growth. This segment continues to
experience increases in subscribers and ad
revenues, while controlling costs across all
networks. Given that these networks are still
developing, we expect our operating margins in this
segment to continue to grow for some time to come.
The Fox News Channel continued its growth in the
third quarter. This growth was achieved, despite
preemption's and increased costs for war coverage.
Ad sales, which increased nearly 50%, led the
quarter's growth.
The regional sports networks also continued their
growth this quarter, and achieved double-digit
revenue growth from increases in DTA subscribers.
Reduced broadcast operations costs also contributed
to the improved result. The quarter was, however,
affected by the blackout of Fox Sports North and
Sunshine Network, for which carriage terms were
agreed after the quarter ended, and the impact was
about $6 million.
Speed Channel also continued its growth in the
quarter, with a 13% increase in subscribers and a
59% increase in advertising revenues from year-ago
levels.
At FX , revenues were up 17%, driven by higher
advertising revenues from ratings and pricing, and
the addition of approximately four million subs
from a year-ago level.
With that on Fox, let's turn our attention to News
Corporation and the additional operations that are
not included as part of the Fox Group. News
Corporation overall reported operating income in
the third quarter of $685 million, a 25% increase
over last year's reported results. The majority of
this improvement was generated by our filmed
entertainment, television and cable network
businesses, the results of which we just discussed.
Additionally, both our book publishing and our
magazines and inserts segments performed well this
quarter.
Losses at our associated entities before other
items of $26 million were primarily the result of
the inclusion of our share of losses at Stream.
These losses at Stream reflect the seasonality, the
amortization of soccer rights in this quarter. This
performance was offset in part or these losses were
offset in part by our share of the BSkyB results,
and BSkyB has just reported this morning, so I
refer you to that release.
News Corporation's net profit for the third quarter
before other items is $298 million, versus $236
million a year ago. Earnings per ADR were $0.23,
versus $0.18 a year ago. The results on a per-share
basis reflect the substantially higher operating
income from our consolidated businesses, partially
offset by the lower results from our associates.
Looking at News Corp.'s divisional results, our
film and our cable segment results at News Corp.
are in line with the comments I just made at Fox.
At News Corporation's television segment, operating
income was $207 million, up 82% over the
third-quarter results from a year ago. This
performance primarily reflects the growth at the
network and the stations discussed earlier.
In addition, Star continued to enjoy operating
profit growth this quarter, despite costs
associated with the launch of our channel in China.
Star's revenues grew by more than 20% from an
increase in subscribers. This is mainly at Star
Plus in India.
Our magazines and inserts segment reported
operating income of $76 million, a 6% improvement
over last year's quarterly result; and this
improvement is driven by higher revenues,
particularly in the FSI division and reduced paper
cost offset, offset in part by increased operating
costs at the in-store division. These costs are
principally related to higher payments to retailers.
In the newspaper segment, operating income reported
in U.S. dollars is $115 million, $11 million lower
than the third quarter a year ago. Advertising
revenue gains both in the United Kingdom and
Australia were offset by circulation revenue
declines in the U.K. as a result of the Sun's cover
price reduction to match its competitor.
In Australia, stronger advertising trends from the
particularly health real estate, telecommunications
and automobile sector, coupled with reduced
newsprint costs, increased our operating income in
local currency terms by 6%.
Harper Collins, our book business, had another
solid quarter, delivering earnings in line with
last year of $23 million.
Moving on to our balance sheet for a couple of
minutes, the company continues to strengthen our
financial condition. During the quarter, in a
series of transactions, the company took advantage
of the opportunities in the debt markets, and
essentially refinanced high-coupon near-term debt
maturities with new issues that were lower-coupon
and longer-dated.
We also issued a new security over our BSkyB
shares, and redeemed the majority of the old
security, which had been outstanding since 1996.
This transaction will save us about $40 million in
cash a year. At March 31st, our debt balances
decreased from year-end levels by nearly $860
million to $7.8 billion, and our cash balances
stood at $4.9 billion.
After the quarter, which Rupert just mentioned a
minute ago, we closed on the acquire of Telepiu. It
now will form Sky Italia. This will be a new
reporting segment, by the way, for the company.
Cash paid at the closing totaled approximately 425
million euros, and we have assumed approximately
$350 million of Telepiu's public debt.
Finally, before I talk about guidance, as indicated
in our last call, the company generates over 80% of
our operating cash flow in the last six months of
the fiscal year. So far in the first nine months of
this year, cash flow from operations less capital
expenditures was approximately $1.3 billion. This
is an improvement of approximately $400 million
over last year's level.
Finally, moving on to our expectations for the year
and before I do that, I need to provide some
Regulatory-G comments.
As more completely described in Fox's 10-K and
10-Q's filing, and in the earnings release
distributed today, we believe EBIT DA is the key
financial performance matrix for Fox. It is
determined by taking operating income and adding
back depreciation and amortization. If you are
looking to reconcile our estimates of Fox's 2003
EBIT DA to operating income, we estimate that
depreciation and amortization for the year will
approximate $300 million.
Now with that, let me address our expectations. As
we look at the remainder of fiscal 2003,
essentially all of our operating divisions are
projecting continued growth. Operating indicators
through April have been encouraging, with few
exceptions; but we do remain cautious on the
economy.
In our previous-quarter conference call, we
indicated expectations for 2003 EBIT DA growth at
Fox to be in the range of 40% to 45% above 2002
levels; and based on the assumptions inherent in
our projections, we are increasing our growth
expectations for fiscal 2003 to approximately 55%.
At News Corporation, our previous guidance, which
included the operating losses of Sky Italia,
indicated a low to mid-20% growth rate above fiscal
2002 operating income levels. We are now increasing
our operating income growth estimates at News
Corporation to the low 30% range.
With that, I would now like to turn the call over
to Peter, who will provide more color on our
operations.
P. Chernin Thank you, Dave. I think Rupert and Dave
have given a pretty clear picture of the reasons
for the operational strength that's reflected in
our third-quarter results. I'd just like to take a
minute to give you a sense of what we plan to do
with that strength going forward, particularly at
the Fox assets.
When it comes to our film operations, obviously our
video and DVD businesses will continue to drive the
kinds of strong and steady results that were seeing
now. But I'd say that even more important is the
strong string of successful motion pictures that
our studio continues to produce. During the past
quarter, this streak included three number-one box
office releases in a row, with the openings of Just
Married, Phone Booth and Daredevil, an achievement
that was quickly followed by X2, which opened ten
days ago to a record $155 million worldwide on its
opening weekend; and in its first ten days has now
brought in more than $270 million in worldwide box
office. I might add that the total worldwide box
office of the first film was about $280 million, so
in the first ten days, we've essentially matched
the first film. This kind of movie and the previous
three are the streak that feeds our pipeline of
video and DVD releases, and we will work to extend
it over the coming quarters. This weekend, we
released Down With Love, with Ewan McGregor and
Renee Zellweger. In July, we have Sean Connery in
League of Extraordinary Gentlemen. In November, we
have Peter Weir's Master and Commander, with
Russell Crowe; and at Christmas, we'll release both
Cheaper by the Dozen, which is a very wholesome and
appealing family movie; and a new Farrelly Brothers
comedy, Stuck on You, which is not.
In television, we're obviously very happy with our
positive momentum and increased revenues both of
which we intend to maximize and drive forward. At
the heart of these improvements is the strong
turnaround at the Fox Broadcasting Company, which
has lifted ratings and ad revenues not only at the
network, but across our 35 U.S. television
stations.
On Thursday, we'll announce our fall lineup of
shows, so I don't have too much to say about our
programming plans, but I can tell you that we will
continue to leverage the strength that, in the past
quarter, delivered Fox its first-ever sweeps
victory among adults 18 to 49; and put is, I think,
at a very competitive place to potentially win this
month's sweeps as well.
I can also tell you that we're in a much stronger
position going into the up-fronts than we were a
year ago. We have far higher ratings across our
entire schedule; more powerful legions with which
to launch new shows; more stability across more
nights; and a lot fewer holes to fill than last
year.
American Idol 2 is clearly a national phenomenon, a
franchise hit that is doing for us what Survivor
did for CBS several years ago. With two weeks to
go, the show is posting very strong numbers across
all age groups, and we're expecting its finale over
the next two weeks to generate very big numbers.
The strength of American Idol has lifted our entire
schedule, most importantly, scripted series, which
will be the foundation of our schedule going
forward.
24 has grown this season. Bernie Mac, That 70's
Show, and Simpsons have all upped their ratings
substantially this season. Oliver Bean, the premier
of which we did about 60 days ago, has been an
early success; and another new comedy we launched
in midseason, Wanda at Large, is the
second-highest-rated new comedy of the season.
This summer, we plan to build on this momentum with
early launches of numerous shows, as we go into a
12-month-a-year scheduling thing, in order to
better cushion the effects of post-season baseball,
to get a head start on the fall and to maximize our
marketing dollars, to help us release new
successes.
In cable, the big story is obviously Fox News
Channel. But I'd say the bigger story is how well
Fox News is doing with the end of the war.
Obviously driven by the war, Fox News ended the
past quarter as the highest-rated basic cable
channel in prime time, the first news channel to
rate number one in more than 12 years.
Since the war, Fox News has managed better than any
of its competitors to hold on to its new viewers,
and with the cost of preemption's and other
war-related expenses behind us, we can look forward
to greater ad sales and margin expansion from here.
We can also look forward to the continued growth of
revenues and operating profits at our regional
sports networks, and at FX. With more DTH
subscribers and higher affiliate rates at the
RSN's, with steadily increasing subs and ad
revenues at FX, and with two of cable's
fastest-growing channels in National Geographic and
Speed, we have a lot of confidence that cable
network programming will continue to be a major
growth driver for the company.
Given the number and the effectiveness of our
growth engines, the outlook for both News Corp. and
Fox in the coming quarters is very positive, as
reflected in our upgraded forecasts which Dave just
gave you, and particularly throughout these five
consecutive quarters of double-digit growth.
With that, Dave, Rupert, Lachlan and I would be
happy to answer any questions you may have.
Coordinator Jessica Reif-Cohen, you may ask your
question, and please state your company name.
J. Reif-Cohen It's Merrill Lynch. I have two completely separate
questions. One, Peter, could you comment on your
outlook for the up-front market for both the TV
network and your cable networks?
Separately, completely separate, is a sports
question: Dave mentioned that there was an impact
from being taken off the advanced Newhouse Systems
for the RSN's, and Peter mentioned affiliate fee
increases for the RSN's. Could you just talk
generally about the RSN's, where you see affiliate
fees going? Is there any change in your rights fees
from the new deal with Cablevision? I understand
you're on a tier now. What with the advanced
Newhouse resolution, just speak about that. Thank
you.
P. Chernin First, as for the up-front, I'm obviously not going
to make any predictions about the up-front. I think
that there's a bunch of very positive things, which
we have going for us. Clearly, we have great
ratings momentum going into it at Fox. I think,
excluding the Super Bowl, we're up 30% in calendar
'03. I think we've got the best demos of any
network, which will continue; and I think that
there seems to be strong demand in key categories:
movies, cars, retail, fast food, etc., financial
services, the wireless. So right now, all the signs
are pretty good, and I think we're in a good
position, I believe as good a position as any
network, to play this marketplace. I personally
believe that the cable CPM's will be slightly
stronger than network CPM's. Again, I think with
the growth of FX and particularly the News Channel
and Speed, etc., we're in a good position to play
those. The RSN's, we had a settlement with
Time-Warner and with the Newhouse Systems which we
feel very good about. It's obviously confidential,
but it represented the kind of increase that we
expected in our budget, and I think we are planning
these businesses for the long-term, which is, we
think that they can continue to grow.
On the other hand, we're not interested in gouging
the cable operators and driving sports fees to the
points, where we get deliberately migrated to other
tiers. So I think we're looking to build long-term
profitable businesses with our cable operators. We
believe that they are valuable basic services, and
we think we've got a pretty good equation,
certainly in the short to midterm going forward, of
keeping our rights fees under control and hopefully
growing our affiliate fees at a slightly larger
level.
J. Reif-Cohen May I just follow up with one question on the
advertising side, Peter? Could you at least discuss
the outlook for calendar Q2 or your fiscal Q4 for
TV stations.
P. Chernin I think maybe I'd be better served having Lachlan
do that.
L. Murdoch Sure, Jessica. For the rest of the year, the
station pacings show moderate increases above last
year. The June month, the end of this current
quarter, appears to soften and flatten out, to
being slightly negative; although automotive and
entertainment revenue really remain the main
drivers. So for this fourth quarter that we're in
now, we'll see sort of a mid-single-digit growth
for the quarter for the pace.
Coordinator Richard Bilotti, you may ask your question, and
please state your company name.
R. Bilotti Rich Bilotti from Morgan Stanley.
Gentlemen, in looking at both your network level
and your station level, it appears that you spent
considerable sums, and you sort of reference this
in your comments, on promoting your schedule.
Looking at the year-over-year change in revenue
growth, excluding the Super Bowl, at the network it
was obviously up a lot, and the stations were up.
So could you walk us through how you made that
decision, and does that come back to - in other
words, can you monetize that in fiscal '04?
I guess if you want to look at it from a very
concise point of view, does spending that money
this year allow you to create operating leverage
such that, especially at the station groups,
year-on-year margins continue to improve next year
as they did this year?
P. Chernin Rich, let me answer that question first
from the network, although I think it probably
extends a little bit to the station group, since
the bulk of our marketing spend was at the network.
I believe we probably increased our marketing spend
by about $25 million in this fiscal quarter that
we're reporting. I think it was exactly the right
thing to do for ongoing leverage, and will be
reflected in ongoing leverage.
If you recall, we came out of December with pretty
disastrous November and December ratings, and it
was critical for us to build up the network. So if
you look at what we launched in this quarter, we
launched Joe Millionaire, which we'll bring back in
the fall and we don't have to relaunch out. We
clearly launched American Idol 2, which has proven
to be as close to an invaluable property as there
is in the television business. We launched Wanda at
Large, which looks like a success. We launched
Oliver Bean, which looks like a success; and we
launched The Pits, which doesn't look like a
success.
But I think we were very committed to turning
around the network, which we felt was something
critical to do. We were in the ratings doldrums in
the fourth calendar quarter, and we felt it was
critical to turn around the network, both for its
own performance and for the station performance.
I think those results were certainly reflected
almost immediately in the February sweeps. We
expect them to be reflected again in the May
sweeps; and I think that, as I alluded to with
Jessica's question, I think that the unparalleled
strength which Fox has going into the up-fronts,
which - I would rather be the Fox Network going
into these up-fronts, than the other networks,
given our ratings momentum and our demos - I think
a lot of that strength is a reflection of that
marketing. Clearly it's the strength - it's a
reflection of the shows more than anything, but we
felt that we had the goods in the shows, and we
wanted to market them aggressively. I think it will
be leveraged over next year, both on the network
and also on the stations.
L. Murdoch Just to echo that on the station group side, with
some additional war costs in this quarter, but also
some station group spending on the sweeps
promotions, which we didn't spend in '02, caused
our costs to get pushed up higher than they would
have otherwise been. I think, to Peter's point,
there was money very well spent. Every single
Fox-affiliated O&O was number one in the 18 to 49
demographic in the last sweep, which is a fantastic
result; and we'll see in the fourth quarter sort of
the expense line will come back into line with the
historical growth of well below 2%.
R. Bilotti Would that mean that in terms of looking at
this - this is the first time in about four or five
quarters that we didn't see margin expansion in the
station business, Lachlan. Does that mean that with
the fourth fiscal quarter and perhaps the first and
second fiscal quarter of next year, if expense
growth goes back to 2%, we can expect to see
further margin expansion on a year-over-year basis?
L. Murdoch The answer is yes. There's lower program
amortization coming in next year, which helps a
lot; and that's offset somewhat by expansion of
news; I think about 60 hours of news next year that
we're planning on expanding, particularly in the
mornings on some of the stations. But net, the
margin will increase, yes.
R. Murdoch I'd just add, this last quarter was affected by,
certainly, 10 or $15 million, by preemption's of
advertising for the war coverage.
R. Bilotti Thank you very much. R. Murdoch Twenty. I'm
corrected, $20 million.
Coordinator Anthony Noto, you may ask your question, and please
state your company name.
A. Noto Goldman Sachs. Peter, your cable networks continue
to outperform with strong top-line growth, and as
we analyze your affiliate fees relative to the
competitive networks in each genre, you seem to
continue to be under-leveraged in terms of your
audience size relative to your affiliate fees. I
know your contracts are a couple of years out from
ending. Is there an opportunity in the near term to
be able to go back to the cable MSO's and
renegotiate the affiliate fees for the Fox News
Channel and FX that are clearly continuing to gain
market share, but continue to be under-indexed on
the affiliate fee side? If not, through the cable
networks, is there an opportunity to try to capture
affiliate fees through the broadcast network?
Then, one other question: If I interpret your
guidance correctly, it appears that you're actually
taking your fiscal fourth-quarter EBIT DA up by
about $50 million to $60 million. Is it fair to
assume that that upside for the next quarter is
actually a continuation of the strength at the
broadcast network, and do you see this as the
inflection point for the broadcast network? Thanks.
P. Chernin I guess I have a sort of non-answer for the cable
questions, which is, I don't want to sort of
pre-negotiate on a conference call with cable
operators' affiliate fees. We believe that our job
is to improve the ratings performance, improve the
desirability, to improve the profile of these
networks, and to make them must-haves for
consumers, and that the affiliate fees will follow
suit. We're constantly having internal discussions
and discussions with cable operators about what the
best way is for us to maximize the results. But
doing our job on a day-to-day basis is growing the
ratings, growing the profile and growing the
consumer demand for these services.
I think no one has done that better than Fox News,
but I also feel that we're accomplishing the same
things at the RSN's, at FX, at Speed, at Nat Geo.
We're very cognizant of where our rates are,
relative to others'. Clearly, our rates are
currently below CNN's, which is a joke. We'll
maximize that, but we're not going to pre-negotiate
on this call.
The same thing is true, frankly, at the broadcast
networks. I think that certainly if you look at the
fact that 45% of all viewing on cable systems is
the broadcast networks, we would expect to get our
just desserts for that; but we'll figure out the
exact way to do it, and we'll announce it when the
time comes.
As for the guidance -
D. DeVoe Yes, I think, of course, on the guidance,
it's a calculation; and you can make that
calculation easily. But I think the more important
part is, yes, I think it does speak to our
confidence as to where we think the business is
probably going to carry over as we start fiscal
'04, yes.
A. Noto Just one other follow-up question on News
Corporation: In the U.K., your competitor has
raised prices. From a pricing standpoint
strategically, how do you think about pricing in
the U.K. versus gaining circulation?
R. Murdoch As of today, we're back to our old prices.
A. Noto Great. Thank you.
R. Murdoch The war is over, and we've increased our
lead over the competition by 8%. Coordinator
Brendon Lyons, you may ask your question, and
please state your company name.
B. Lyons Brendon Lyons, J.B. Weir. I was just
interested in the forward-pacing comments in
regards to the fourth quarter for your station
group. On Sinclair's conference call recently, they
said that the Fox stations were actually down
fourth quarter on last year. How do you reconcile
the different outlooks there?
R. Murdoch That's Sinclair's problem.
D. DeVoe We do a better job.
L. Murdoch I can't reconcile the comment, because
fourth quarter, as I mentioned in response to
Jessica's question, we're up both in revenue terms
and - you can probably read into Sinclair's answer
in market share terms as well.
B. Lyons Then, if I can just ask a follow-up question:
Are you able to give some sort of split of the Iraq
war impact in terms of splitting it out between the
cable group and the network?
D.DeVoe I think we'd rather not get into that level
of specificity, particularly - I'm sorry, we're
checking on these new SEC regulations, so I guess I
can now give this. These are roughly, broadly, the
numbers I gave you.
About $20 million at the stations; about $5 million
at the network; about $10 million at the News
Channel; and the balance is at our print
businesses.
R. Murdoch That's revenue. There were costs -
(Parties speaking simultaneously.)
D. DeVoe It's operating income - well, mainly, it's both.
It's both revenue and costs.
Coordinator Raymond Katz, you may ask your question, and please
state your company name.
K. Mangliss Thank you, it's Katie Mangliss for Raymond
Katz of Bear Sterns. We have two questions. One is,
if Lachlan can give us a little bit more color on
how the local piece of advertising is going at the
TV stations. Also, if you would be kind enough to
give us an idea of the mix of DVD sales at the TV
and film studio business, please.
L. Murdoch I'll start with the local piece. Local sales are
obviously sort of in line with national, being up
in the fourth quarter now, and this is reflected in
the third quarter as well that we've just passed,
in the mid-single digits. I'm going to say the Fox
stations, so of our O&O's, obviously the Fox
affiliates are stronger than our UPN affiliates. If
anything, our UPN affiliates are dragging down the
overall Fox station group pacings for both
quarters. We'd be up much stronger if we were just
focused on the Fox affiliates, and that obviously
dampens to some degree the revenue in those duopoly
markets.
P. Chernin I'll answer the DVD question. We don't
break these out specifically, so I don't have a
number off the top of my head. What I can tell you
is that certainly, TV product represents far less
than 25% of our DVD revenues, and the bulk of it
continues to be and will be driven by film product,
both new releases and library product.
Coordinator George Colman, you may ask your question, and please
state your company name.
G. Colman It's Citigroup-Smith Barney. Peter, I hate to push
the point, but these film numbers are simply
outstanding. Can you give any more color at all on
the incremental impact of syndication on DVD in the
quarter? I guess the issue is how long you can
continue to beat the odds in such a spectacular
fashion in first release.
P. Chernin I think that "spectacular" may be a little strong.
We're pleased with the results. We'd like to see
more, quite honestly. I'm not sure it's a function
of beating the odds. I think what we are trying to
do is two things: To continue to have a steady,
predictable result from our library and our
past-yea releases on the movie side, flowing into
DVD and home video; and then I guess the simple way
of saying it is, make sure we don't screw it up in
the new-release business. To make sure that we are
releasing new movies that have economics that make
sense, that are solidly profitable on their own,
and that will continue to drive the following
year's results in DVD and video.
I would never predict long long-term in the movie
business, but I think if you look at the
foreseeable future, the new movies we've released
in the past four or five months are what are going
to drive our DVD and video revenues during fiscal
'04, and we feel very good about that. In the
television business, it's the same thing, which is
that we obviously have a great library and a great
backlog of syndication, and the key is, can we
produce at a cost-effective basis new shows, and
hopefully continue to add to that syndication
business, which we feel pretty good about.
We've got Bernie Mac getting ready for syndication.
We have Yes, Dear, which has grown - it's probably
I think the fastest-growing show on CBS this
season. We've launched Still Standing, which was
the number-one new comedy on television this year
on CBS; so we think we are continuing to add to
that syndication pipeline, and that's really the
name of the game, is to maximize the current shows,
keep them on the air for four or five seasons, and
then make sure we can add one, two new shows a year
to that pipeline. We think that that program is in
place and working quite well.
D. DeVoe Yes, and too, that business has roughly
doubled its earnings contribution, the television
production business, year over year in the quarter.
G. Colman I'm sorry, Dave; what was that? Did you give a
number on that?
D. DeVoe I didn't give a number, because we don't
break out that separately, and we really don't want
to start doing it. But it doubled its contribution
from a year ago, the television production
business.
G. Colman That's great. Just one, if I could just change tack
slightly for a moment. If, as now seems likely, the
FCC increases the television station ownership
capital to 45%, and retains the UHF discount, and
if deals do follow that in the short term, to what
extent are you materially constrained from either a
balance sheet or an FCC perspective, given the
impact of the Hughes deal?
R. Murdoch Legally, nowhere at all. But I would think that as
a matter of company strategy, we would only be
interested in one or two very selective markets. We
are not out to increase the reach dramatically.
We'd like more duopolies, of course, in any of the
top 20 markets.
L. Murdoch I think very importantly is that with the 35
stations that we currently operate, we have ample
opportunity to facilitate in swaps for the markets
that we would like to acquire, as opposed to paying
any cash or shares.
Coordinator Spencer Wang, you may ask your question, and please
state your company name.
S. Wang Two quick questions. Can you quantify the impact of
the sports write-down, if there was any in the
quarter. Then, secondly, on the RSN's, do you have
any affiliation agreements that come up in the next
12 to 24 months? Thanks.
D. DeVoe With respect to the write-down, due to Regulation G,
we cannot quantify what the effect might have been in
the quarter.
P. Chernin That's for affiliation deals. We may have
some little bits and pieces. The only significant
one which comes up in the next 12 to 24 months I
believe is a number of Cox systems.
Coordinator Alex Pollak, you may ask your question, and please
state your company name.
A. Pollak It's Alex Pollak from the Quarry Bank in Sydney.
Just a quick question on the DVD business. I think
in the last conference call, there was some talk
about somewhere down the track maybe, in the film
business, you could be hitting a billion dollars'
worth of EBIT. I think you declined to kind of give
a year date on that; but you're at $500
million-plus for the three quarters and you've got
a pretty strong pipeline. So it doesn't look all
that impossible, given the strength of the DVD
sales, and also the fact that you got some TV
product coming through, which is, after all, found
revenue if you like, that you could put a time
frame on that billion dollars at all? That's one
question.
I have another one that is just a more technical
question on the cash flows, and that is, you did -
two questions, actually. There was a $300 million
release of provisions in the quarter, point one;
and on the investment side of it, you bought the
Chicago station I think in the first quarter for
about $450 million U.S.; there's another $500
million U.S. of investment spending. Could you just
outline what that's on, please?
P. Chernin I'll answer the billion-dollar question
first, which I think was, if I recall, Mr. Murdoch
setting a standard which he expects us to achieve;
and I guess we'd better figure out a way to do it.
But we don't have a date, and I'm sure he'll hold
our feet to the fire to get there.
The one thing I would take exception with is the
characterization of DVD TV revenues as "found
money." I think what we are in the business of is
creating the highest-quality product that we can in
both the TV and the film business, and then
figuring out the way to maximize its exploitation
across as many media as possible. I think what that
money reflects is the strength and desirability of
certain of our key assets: X-Files, Simpsons, etc.
A. Pollak Yes; I only meant that it was bad insofar as
you cost it all out on the basis of first-run,
syndication, etc.; and then to have this DVD kicker
at the end of it, before coming in, when you hadn't
envisaged it when you commissioned the shows is in
that sense found.
P. Chernin But look, to be fair, the marketplace is
constantly shifting. I think that you'll see - our
three main sources of revenue are on TV products,
which is syndication, international sales and DVD's
- are constantly shifting. You'll see pressure in
one area and growth in another. We're always
looking to maximize across all three of them, but
they don't all grow at the same time.
A. Pollak Yes. Just on the cash flows?
D. DeVoe Alex, there really weren't any significant
investments in the quarter; and I'm not following
where you are with the release of the provisions,
other than we had significant collections on
receivables and we paid down creditors. So maybe
what you might want to do specifically is, why
don't you call Reed -
A. Pollak Yes.
D. DeVoe -- go through on the details, because I just don't
know what it is you're referring to.
A. Pollak I mean, it's not a criticism at all. The general
cash flows, I think $1.3 billion is what you
released in the quarter, after interest, tax and
working capital, and before cap ex is a pretty
spectacular result, so just a couple of technical
questions there. But I'll deal with those later.
D. DeVoe By the way, that $1.3 billion was after cap ex.
A. Pollak Thank you.
Coordinator Kathy Styponias, you may ask your question, and
please state your company name.
K. Styponias Thank you, Prudential Securities. Two
questions. You mentioned that - I believe it was
Peter - mentioned that for the Fox Network, we're
going to see a lot more scripted shows in the
coming television season. I was wondering if you
can give us a little bit of color of what you
expect your programming costs to look like on the
entertainment side, as well as the sports side.
Then, also a question for Peter: At a Senate
hearing earlier this week, some of the cable CEO's
that testified suggested that they might need
Congressional support to get rid of re-transmission
consent/must carry. How does that impact how you
think about your network business and your cable
nets on a go-forward basis, if that is to come to
fruition? Thanks.
P. Chernin As for the first question, I think we're a couple
of days away from having a lock on what the expense
side of our business looks like. We're setting a
schedule right now. I do think, to be fair, in my
opinion, one of the misconceptions in the broadcast
business is that these reality shows are so cheap.
These reality shows have gotten pretty expensive.
They are high-quality productions shot on
locations, etc.; and secondly, they have no repeat
values. So there's not a huge cost differential
between the higher-quality reality shows and
scripted shows. But we will put together the
schedule that we think will maximize ratings and
maximize our profitability, and we're a couple of
days away from knowing that.
As for the Washington comments about retrans, first
of all, I think cable operators who have some
extraordinarily enviable positions, local
monopolies, are trying to negotiate in front of
Congress and cry "Poor;" and I think that, in my
opinion, any right-thinking member of Congress will
look at the importance of free broadcasting for
this country and will look to, if anything, I would
think improve the position of broadcasters in
retrans, given that the bulk of the viewing on
cable systems is occurring for broadcasters.
So I don't take those comments that seriously, and
I think that we would expect to be appropriately
compensated for product which we think is the
highest-quality product that's available on any -
broadcasting, cable, anyplace else, which is great
series, great sports, great local services and news
and local products. I don't particularly take it
seriously.
Coordinator Yolanta Mosojada, you may ask your question, and
please state your company name.
Y. Mosojada It's Credit Suisse First Boston. Can I ask
whether you're expecting to receive any cash out of
independent newspapers, and whether there are any
other asset sales that are on the agenda?
R. Murdoch Could you repeat that? I didn't quite hear
that, I'm sorry.
Y. Mosojada Do you expect to get any cash out of the
independent newspaper's sale of its newspaper
business? And are there other asset sales that are
on your agenda, or is it a priority at all for the
company.
L. Murdoch Let me deal with the independent newspapers
first, Yolanta. First of all, it's really an issue
for I&L's board, what they do with their proceeds
of the sale of their newspapers. But we are not
currently at this stage expecting to gain any cash
out of New Zealand at this stage.
In terms of other acquisitions, Dad, I don't know
if you want to answer that.
R. Murdoch I don't think we really want to get into any
discussions of acquisitions of newspapers at this
stage.
L. Murdoch I think Yolanta was referring to any - Yolanta,
you're talking about any--
Y. Mosojada Any other asset sales, so are there any
other peripheral assets that - or any assets that
you would deem peripheral, that you would look to
be selling?
R. Murdoch No. I think it's well known that we're selling the
Dodgers, or hoping to; we have them for sale and we
have some promising negotiations. But we can't say
any more than that.
G. Ginsberg Operator, we have time for one last question.
Coordinator Our last question comes from Doug Mitchelson. You
may ask your question, and please state your company
name.
D. Mitchelson Doug Mitchelson from Deutsche Bank. Thank you. Two
quick questions. I know that on the programming
cost side, you don't want to be pinned down; but I
think just looking at your schedule and the
changes, I think it would be fair to imply
programming costs should be up a normal amount this
year; is that at least in the right ballpark? I
know you should be pretty close in your schedule.
Then, secondly, where are we on television cost
cuts? Have they fully cycled in, Lachlan, or do we
still have more to go on the duopoly savings? Thank
you?
P. Chernin Again, I would say that going in, I would expect
television programming costs to have normal
escalations, but in some ways, the big indication
of where you end up is how quickly you cancel
expensive series. If we cancel another Girls' Club
and Firefly within the first month, our costs will
probably go up more substantially. On the other
hand, if our new series are more successful and we
have less expensive cancellations, our costs could
go down; so I think it's too early to really know
where those are going to come out. But it feels
overall like a pretty normal year.
D. Mitchelson Is American Idol under several renewals?
P. Chernin Yes.
D. Mitchelson And then on the television cost side?
L. Murdoch In terms of the television stations - and they're
sort of cost-savings-driven from the duopolies - by
the end of this quarter, so by the end of this
fiscal year, we will be done with everything,
except New York. I think in the next few months, we
complete some of the master control sort of
facilities for a number of the stations. Then, next
year, all that's left is the progress of New York
consolidation of the duopoly; and that will be done
through the course of next year. It's hard to
quantify that at the moment, just because we're in
negotiations with the unions and other people about
it.
G. Ginsberg Thank you, everyone, for joining us on the call. If
you have any additional questions, as always, feel
free to call Reed, myself or Craig Fallenstein in
New York, and have a good day.
* * *
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