News Corp. Web Unit Sees Revenue Drop, Admits It Won't Hit FY 08 Goals

It took a while, but Rupert Murdoch has finally acknowledged that News Corp.'s Web business won't hit the goals he laid out for it last August. Actually, he made Peter Chernin say it: "Let me begining by saying yes, we will fall short of what were very aggressive projections."

Chernin said Fox Interactive (MySpace, IGN, Photobucket, et al) will come in around $900 million at the end of next quarter - missing its $1 billion goal by 10%. This jibes with what we heard last month when FIM revenue boss Mike Barrett was ejected.

More worrisome: FIM revenue actually decreased from Q2, dropping from $233 million to $210 million. News Corp.'s overall quarter was fine, and in line: While both investors and the press spend a lot of time thinking about MySpace, it's still a tiny part of the company.

Revenue: $8.75 billion, up 16% y/y, beating $8.65 billion consensus. Broadcast and cable up, film and TV down.

Operating Income: $1.4 billion, up 16% y/y, which is in line with guidance.

Earnings: $2.7 billion, up from $1.8 billion. A big chunk of that ($1.7 billion) is from the DirectTV sale.

EPS: We are confused, as are our peers. We'll update shortly. News Corp. is reporting 91 cents, but that includes one-time gains from the sale of DirectTv. Adjusted EPS was 30 cents, vs. consensus of 31 cents.

Guidance: Unchanged.

"Other", which includes Fox Interactive Media: Loss of $7 million, up from a $104 million loss last year. "At Fox Interactive Media strong revenue growth from increased search and advertising revenues was partially offset by increased costs associated with domestic and international expansion, new features and costs associated with the startup of new ventures."

The big question for SAI readers: How did MySpace/Fox Interactive Media do? Last we heard, executives had finally reconciled with the fact that they weren't going to hit the $1 billion revenue, $200 million profit goals that Rupert had laid out for them last summer, a realization which led to the ouster of FIM revenue chief Mike Barrett.

Last quarter News Corp. reported FIM revenue of $233 million, $62 million of that came from their three-year Google deal. We should get more detail on that during the 4:30 call, which we'll cover live

Earnings Call begins: Standard cast of characters: Murdoch, COO Peter Chernin, CFO Dave DeVoe. Comments will be pubbed in their entirety at NWS site, says PR guru Gary Ginsberg.

DeVoe: Results include $53M in incremental losses due to startup of Fox Biz, Big 10 Network, TV operations in Serbia, Poland, etc,. Adjusted EPS was 30 cents, a penny less than consensus.

Film ok vs tough comps. Network TV business great because of Super Bowl, good w/out Super Bowl. MyNetwork TV lost less money. Cable TV did quite well: OI up 17% to $300M, including losses from Fox Business. "Double digit profit growth" for Fox Biz.

FIM: $210 million, up 55% y/y -- but down consecutively from Q2. $66M of that is from Google. Ad revenue up 18%. Operating income $27M, up from $3M last year.

Guidance: unchanged for FY 2008.

Murdoch: Going to spend time talking about Dow Jones. Defending move against accusations that. "We have not changed our playbook". Dow Jones is not just a fantastic newspaper - emphasizing exciting non-print business. Enterprise media is biggest growth engine (DJ Index, Newswires, Factiva) are sold B2B.

WSJ.com 1M paying subs: One of only 3 papers, period, in US with that many paid subs. One of those is the WSJ. Rest of DJ sites doing well.

Also anticipate sig. growth at WSJ. Can raise rates, reduce churns around the world. Paid subs increased y/y, overall circ up too. Journal not moving away from core areas of coverage: Corp finance, international finance coverage will increase. Also, let's all keep this in perspective. "Extra-innings game, to use an overused metaphor, and we're only in the first innings." Translation: Leave me alone and let me run Dow Jones. I know what I'm doing.

Chernin to talk about digital: Referencing "press reports" that we would fall short of revenue targets. "This is a very healthy business.

"But let me begining by saying yes,we will fall short of what were very aggressive projections." Will be about 10% short -- ie $900 million.

Incredibly optimistic about social media. Specific challenges 1) Tons of inventory. Lack of scarcity creates a liquidity challenge. Working on bringing big brands aboard. 2) People who are visiting social networks there for different reasons, different uses. Figuring out how to target. 3) What's the value of a "friend"? Trying to figure out new metrics to communicate with marketers.

But "we think the future looks very exciting." Branded revenue up 31% y/y, branded revenue up 19% from q1 to q3. MySpace user base growing, but revenue growing faster: Fy 08 revenue per unique up 49% over last year. 54% of all social network ad dollars going to MySpace.

Touting new big wins from branded advertisers. Luxury brands coming in: Nordstrom, Cartier. Major jumps in several big categoires: Automotive up, consumer electronics, beverage, education all up triple digits.

Reorged sales group, launched "audience network". 7,000 outside developers working with MySpace API, creating 1,000 new apps. "Explosive growth" in mobile. MySpace mobile fastest growing WAP product in US, 1 B page views overall.

Comparing well to Facebook, citing comScore, Nielsen numbers for engagement. Same for IGN, Photobucket also doing well. Fox Sports.com up 20% in uniques.

Music JV: Will expand on MySpace music strength. Also established Fox TV station online operations. MySpace TV "a strong number two to YouTube". Hulu off to "much stronger start than expected."

"We are very pleased with the performance of the FIM division and MySpace specifically." Acknowledge challenges, and in some cases slower growth than expected.

Q&A: WSJ newstand price increase? Murdoch: Yup. WSJ price going up 50 cents next week.

Is MySpace a stand-alone entity? Or do you fold into bigger property (ie Yahoo or MSN)? How bullish are you on broadcast TV:

Chernin. "We fell great about MySpace as a stand-alone entity" at same time, "willing to have strategic conversations if they made sense". [This is much less coy than they've been in past]. TV? Sure we feel bullish about TV. Networks always feel bullish about TV in advance of upfronts.

Chernin on movies: Bullish on Blu-ray. Not enough Blu-ray players out there, but that will change in june and rest of year with more players, at cheaper prices. We want to see more orders of discs, but also important to keep high price margin, which our competitors have also been able to do. Would like Blu-ray to be about $1B at home video of retail this year (presumably means global). Will experiment with day and date with some titles. Monitoring cannibalization. Too soon to declare that we'll move overall to day-and-date. VOD: Rapidly growing, expect it to continue to grow. But not overwhelmingly additive anytime soon.

How does Rupert see big-picture economy in US and worldwide? No doubt that US consumer economy is "stressed" and you're seeing that reflected in advertising. Shorter-term bookings. We're increasing our share even though there are some declines in overall business. Australia booming, UK and Europe are "steady". Will they follow American pattern soon? I don't know. Certainly I'm told that business is slowing down on the continent. Our business, certainly in UK, is in very healthy condition.

What's going on with FIM revenue deceleration? Chernin: We look at this as a work in progress. Single biggest challenge is the huge amount of inventory. Our own growth booming, so is Facebook, puts pressure on our ability to raise CPMs because of scarcity value. But overall trends quite positive, maybe a little bit slower than beginning of the year, but no reason to change our optimism.

What is sustainable operating margins for FIM over next couple years? Chernin: We're not taking foot off accelerator for growth. Continuing to invest in international. Investing in technology, MySpace Music JV, investing in apps, etc etc. We could have clearly escalated margin this year, but made decision to invest. But it's too soon to start milking this thing for margin right now.

Fox News OI only 11%. Is there something going on there. Lumpyness? Also on FIM: Is Ebit range also dropping 10%. Fox News not slowing. Not breaking out EBIT numbers, but they probably will slow down, but that's not because of growth - it's because we're spending. Expect to be well over $1 billion revenue next year [We would hope!]

Time for press Q&A:

What's going on with Yahoo talks? Have those discussions "cooled" as reported (by Reuters' Ken Li, who's the very person asking about this)?

Rupert mutters something. Chernin: Saying that "talks have cooled probably overstates it" we have conversations with everyone in the space. Not sure I would characterize them as talks.

What about MSFT? "We're not in discussions with Microsoft. We have conversations with everybody in the space but we're not in talks with Microsoft."

What's your level of interest in deals with MSFT, YHOO, AOL, or whatever? Chernin: "We're prepared to have any strategic conversation that makes sense" but not sitting around pining for deals. "I have not had a conversation with Microsoft or AOL in a couple of weeks". Murdoch "Nor have I".

More q's on same topic: Chernin declines to give MSFT, YHOO, AOL advice. Re strike: Boileplate talk - wants to get a reasonable deal for all sides etc.

Please talk about the future of Internet consolidation: Chernin " I don't know. We'll see what happens." Murdoch: "Yeah"

What about Cablevision bid for Newsday: Murdoch "No, I don't think Cablevision will prevail. Just give it a few days, will ya?"

Some fist-shaking by Chernin towards actors thinking about striking.

Searching for new WSJ managing editor to replace Marcus Brauchli: We'll keep the powerless committee that's supposed to oversee our paper's editorial product well-informed about how that's going.

Why not break out MySpace from FIM? Chernin: Don't understand the nature of your question. But FIM is a corporate construct but MySpace is basically run independently already. MySpace is dominant revenue generator but Photobucket, IGN, Fox Sports important too. No negatives to having MySpace as part of FIM.

Call ends.

See Also: News Corp. Blows MySpace Targets, Dumps Sales Chief
News Corp: We Don't Want To Buy Yahoo, AOL, Or Anything Else
News Corp. Internet Unit FIM Missed July, August Revs