News Corporation (NWS) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the News Corp. Third Quarter 2011 Earnings Release. [Operator Instructions] I'd now like to turn the conference over to Reed Nolte, Senior Vice President, Investor Relations, News Corporation. Please go ahead.

Thank you very much, operator. Hello, everyone, and welcome to our Third Quarter Fiscal 2011 Earnings Conference Call. On the call today are Chase Carey, President and Chief Operating Officer; and Dave DeVoe, our Chief Financial Officer. First, we will give some prepared remarks on the most recent quarter, and we'll be happy to take your questions first from the financial community and then from the press. This call may include certain forward-looking information with respect to News Corporation's business and strategy. Actual results could differ materially from what is said. News Corporation's Form 10-Q for the three months ended March 31, 2011, identifies risks and uncertainties that could cause actual results to differ. And these statements are qualified by the cautionary statements contained in such filings. Additionally, this call will include certain non-GAAP financial measurements. The definition of such measures can be found in our earnings release and our 10-Q filing. Finally, please note that certain financial measures used in this call, such as adjusted segment operating income, adjusted earnings per share and adjusted net income, are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of segment operating income and the EPS and net income reconciliation is included in our earnings release. With that, I'll turn it over to Dave.

Reed, thank you, and good afternoon, everybody. As you all have seen in today's earnings release, our results in the third fiscal quarter were led by exceptionally strong performance at our Cable Programming and Television segments. These 2 segments combined were up 48% compared to the third quarter a year ago. Part of these results were offset by a very difficult comparisons in Filmed Entertainment related to Avatar's record box office performance a year ago and reduced publishing contributions. Our reported results this quarter reflect a onetime $425 million pretax charge related to the previously announced litigation settlement involving the company's Integrated Marketing Services business, which is reflected in this quarter's publishing segment operating income. After adjusting for this item, we reported total segment operating income of $1.19 billion for the third quarter, 5% below the year ago quarter's results of $1.25 billion. Our share of reported results from our associated companies were down $70 million in the quarter, and after adjusting for gains on business dispositions in each year, results were down approximately $80 million. This decline is primarily due to our share of losses from our ESPN Star Sports joint venture in Asia, resulting from their World Cricket broadcast, as well as from our increased ownership in Sky Deutschland. Excluding the net income effects in both years of onetime items, along with this year's litigation settlement charge as well as News Corporation's share of gains by our associates on their business dispositions, third quarter adjusted earnings per share this year is $0.26 compared with the year ago adjusted result of $0.29. Our press release includes a reconciliation to our GAAP amount. Now I'd like to provide some additional information on a few of our businesses. Let's start with our Cable Networks. This segment continues to drive overall company results, generating over 60% of News Corporation's total segment operating income. Third quarter Cable segment operating income contributions increased 25% over year ago levels to $735 million with double-digit earnings growth at all our major channels. This growth continues to be top line driven with segment revenues up 13%. Advertising revenues at the Cable Networks increased 16% over year ago levels and affiliate fees grew 12%. To illustrate the momentum of this business, I'd like to give you a few highlights. Fox News generated its highest ever operating profit in profit margin in the quarter. We also look forward to continue the affiliate revenue growth from affiliate deals to be renewed before the 2012 election. FX now ranks as the #7 most popular cable channel in prime time among 89 basic cable competitors for this March quarter 18 to 49 ratings, up 20% on average over year ago levels. At our Fox International Channels, we now operate the #1 and #2 ranked pan-regional channels at Latin America under the Fox and National Geographic brand, and they are performing well ahead of our plan. In India, where STAR is the leading television network, we've already generated 55% more in earnings through the third quarter than we did it all the 12 months of fiscal 2010. At our Film segment, third quarter operating income was $248 million as compared to the record $497 million we reported a year ago, and this is as expected. This decline reflects last year's theatrical box office success of Avatar. As we look forward, the most significant comparison issues related to Avatar's financial success are now behind us. And given Rio's current success at the worldwide box office, we anticipate good growth at our Film segment in the fourth quarter. At our Television segment, operating income in the quarter of $192 million increased $152 million, nearly a fourfold increase, driven by a 23% revenue growth at the segment, increased re-trans fees and reduced programming costs at the network. Station revenues increased 8% from a year ago, driven by the Super Bowl, offset in part by the absence of the DCS broadcast and by reduced political spending. Auto telecom and financial advertising were also very strong. At the FOX Broadcasting Network, we had very successful quarter led by the NFL postseason, including Super Bowl 45 full day of record viewership. We continue to experience at point national ad markets salary ratings from shows like American Idol, including House. At SKY Italia, segment operating income declined to $17 million from last year's reported $35 million, resulting from higher marketing and installation cost. This investment in the business resulted in an almost 50% increase in gross subscriber additions in the most recent quarter, and it's also reduced the year-on-year churn for the past 5 quarters. Revenues declined slightly in local currencies as compared to the prior year's quarter, primarily due to lower advertising revenues and an expected decrease in monthly ARPU resulting from our new offerings. Monthly ARPU in the quarter averaged 42 euros, the same as that achieved in the December quarter but down from 44 euros in the year ago quarter. And this decrease reflects new subscribers and the net lower price points as well as some migration of existing subscribers among the new package choices. We are very pleased with the overall results to date of the reorganized programming packages. This quarter's gross additions totaled approximately $173,000 versus $118,000 a year ago. This improvement, combined with a reduction in churn, netted SKY Italia 45,000 additional subscribers versus a loss of 39,000 subscribers in the year ago quarter, and SKY ended the quarter with 4.9 million subscribers, which is its highest level that is achieved to date. In our Publishing segment, segment operating income of $161 million decreased $82 million from last year's third quarter when excluding this year's litigation settlement. This reduction largely reflects advertising revenue declines at our Australian and United Kingdom newspapers, start-up cost for The Daily, increased newsprint cost and reduced contributions from the integrated Marketing Service business. The quarter was also affected by the absence of Dow Jones Index business, which was sold last March. And finally, before I turn the call over to Chase, I'd like to address our guidance for fiscal 2011. And as a reminder, we measure this guidance excluding for fiscal 2010, the $500 million litigation charge resulting in a base of $4.46 billion in segment operating income for comparative purposes. Similarly, we are excluding from fiscal 2011 the $125 million litigation charge. In early February, we reiterated guidance and expected our segment operating income growth rate for fiscal 2011 to be in the low double-digit range above the $4.46 billion fiscal 2000 (sic)adjusted result. And based on all the assumptions inherent in our projections, we are maintaining our operating segment income guidance for fiscal 2011 to be at a growth rate range in the low double digits above the fiscal 2010 adjusted result. Given our earnings performance through March, you'll infer that we are anticipating strong earnings growth in our fourth fiscal quarter, and we are. But now with only 2 months ago, we feel very confident in achieving this growth rate. And with, I'd like to now turn the call over to Chase for some additional comments.

Thanks, Dave. In many ways, our third quarter was similar to our second quarter. Our results were driven by strong performance in our Television businesses, including U.S. and international cable networks, our broadcast network and our TV stations. Our international satellite platforms continue to focus on growth and strengthening their competitive position. As Dave said, this is the last quarter of the Film business where we will face the difficult Avatar comps in a material way, and we're excited about the upcoming releases. We're on course to address MySpace through a strategic transaction and are moving forward with an array of digital initiatives from The Daily to digital versions of our newspapers to authentication to the premium VOD. Overall, it's a quarter of solid progress. Looking forward, we're now truly poised to take our business to much higher levels of profitability over the next 1 to 2 years. Our U.S. channels, both cable and broadcast, will clearly be one driving force in that growth. At FOX News, we will have completed our newest rounded carriage agreement with slightly over half our sub-universe by the summer of 2012 with new rates that reflect this increased importance in the market. FX had just completed its highest rated quarter ever and is poised to build in that growth to increased advertising and affiliate revenues. The Fox Broadcast Network, American Idol has really found a second life with the renewed level of energy and excitement, which when paired to the X Factor in fiscal 2012 gives us an unrivaled 1, 2 punch and frankly allows us to plan the business with much greater confidence. We're making good progress with our stations and affiliates in retransmission, although we still have some issues to work through. On the ONO side, we plan to have re-trans agreements with well over half the households by the end of this calendar year. In fact, we look to have agreements in place with over 80% of that universe by the end of calendar 2012. Additionally, by the end of fiscal 2012, we expect to have new affiliation agreements in place with over 2/3 of our affiliate universe measured by household numbers, generating appropriate compensation for us for the value Fox delivers in the marketplace. The upfront ad markets for both cable and broadcast seem well positioned for truly strong results with scatter continuing to sell at big premiums to last year's upfront. The U.S. local ad market is facing tougher comps from a year ago, and the Japan tragedy is having an impact on short-term local ad spending. Q3 spending was up a bit in this quarter. At quarter ending June, it looks to be low to mid- up -- low to mid- single digits. Our international channels are expected to register growth rates that will likely equal or exceed those in the U.S. This growth will be across-the-board but particularly strong in markets like South America, India and the Southeast Asia. We have some competitor strengths we can build on to drive this growth for years to come. In our Content businesses at Fox, I noted earlier that we're ending a series of quarters with difficult comps in our Film business and look forward to some exciting upcoming releases. Rio will soon cross over $400 million in the worldwide box office, and we feel very good about our upcoming summer films: X-Men: First Class, Mr. Popper's Penguins, and our Planet of the Apes prequel. Our TV studio continues to be an industry leader, and we're taking advantage of new competition from Netflix and other emerging platforms, which are creating a new and incremental source of revenue for library rights to our shows. At the same time, we're focused in ensuring we protect the currency and the value of our series on a maintaining flexibility to address this evolving market. Our satellite platforms all have a renewed sense of growth. I don't want say much ahead of Sky Deutschland's own quarterly release. However, we feel great about the real momentum and sub-growth and overall platform development in the last few quarters. Italy has also continued to show renewed strength in sub-growth, and it's in the strongest competitive position that it's been in for 2 years. Our technology content in service have all added new dimensions. For example, last month, we concluded an exclusive agreement for right to the European Champions League. Subscriber growth has been our clear priority, and this has required us to invest in marketing, consumer offers and technology, which has impacted current profits. However, we believe it is critical to position ourselves for long-term financial growth and leadership. In support of these objectives, we expect SKY Italia to cross the $5 million sub-threshold this summer. We know that we have some headwinds to navigate, like advertising slowdowns, in the Publishing segment and start-up costs is in places, like The Daily, but we feel very good overall about our business and geographic mix and are really excited about our growth prospects over the next couple of quarters. Thanks.

Operator, we'd like to now go to the Q&A session with the analysts and investors.

[Operator Instructions] Our first question will come from the line of Alan Gould, Evercore Partners.

Chase, could you just update us on any news on the BSkyB deal, when we should hear from Mr. Hunt?

Again, we're focused -- I mean, our focus right -- I'll address it briefly. I mean, I'm not going to handicap the regulatory timing. I mean, I think it will be soon, but that really does -- I mean, like our focus continues to be on completing the regulatory profit process, and that is where our focus, however, and I guess I will say, which I've said recently, the movement in the Sky stock price is clearly troubling. The Sky stock is trading between GBP 5 and GBP 6 before we've made our offer. And that already represented a significant premium to its peer cable and satellite distributors and of course Sky was expected to continue to generate very good results. And to their credit, Sky management is generating good results since then. However, those results are really essentially in line with, not only our expectations, but analyst expectations. So in these -- the results validate the premiums Sky was trading at last summer but not a whole new premium on top of the pre-existing premium. Because I also want to note, there seems to be an unrealistically rosy view. Now the challenge is Sky must navigate going forward. Sky management is second to none. However, the business is certain to face pressures and demands from emerging technologies, competition and the overall economy and many other places that Sky will have to navigate. Therefore, I want to reiterate one more time that we'll be very disciplined about this process, and we will pursue other options for our capital if we can't reach a reasonable deal.

Our next question comes from the line of Adam Alexander, Goldman Sachs.

Chase, could you maybe just elaborate what would be Plan B if the Sky share price continues to run ahead of where it is? And just on SKY Italia, the business seems to have gotten a lot of momentum in terms of sub-additions, but we're not really seeing the financial results come through. Can you just update us on where you think that ARPU might settle and maybe a little bit more color on the current operating environment in Italy?

Yes, I mean, in the U.K., I'm not going to get into hypotheticals. Again, our focus is getting this through the regulatory process and trying to conclude a deal. We'd like to conclude a deal, if we can reach a reasonable deal. So I'm not going to get into hypotheticals about options at this point. In terms of Italy, growth, you got to invest in growth. I mean, I -- I sort of live this firsthand in other places. And when you're adding subscribers that you're investing in marketing, you're investing in offers. I mean, clearly, we're going through a process. Dave touched on it, where we modified our offers last year to have more competitive offers that give us really long-term strength in the marketplace, and there's a settling through process, both with existing and new customers in terms of that. I think as you get into -- as we get later into this year, we sort of get through that settling process, but I think it does require investment at all those fronts, including technology, look for putting more technology in the homes. We feel very good about the ability to create a set of program packages and services DVRs, HD and the like. There was a good, solid, real, long-term growth, and that really is our focus at this point. We'll have to keep strengthening the programming offers I mentioned, the Saga Champions League, which we're taking exclusive rights to. Our focus is really about creating a competitive strength, unique strength in the marketplace that lets us drive all these metrics forward from a position of real leadership. I mean, we obviously have that leadership today, and we think this is a time to invest and solidify and build on that leadership position to enable us to give us the platform for long-term growth.

And our next question comes from the line of Jessica Reif-Cohen, Bank of America.

I have 2 questions for Chase. Chase, you mentioned that FOX News half the universe will be video complete by the summer of 2012. Is that between now and 2012? And what kind of increase should we be thinking about? I mean, the last go-around was triple. Can pay-TV operators even stomach that?

Again, I'm not going to advertise what we're looking to achieve. Yes, I mean, first, time frame wise, yes, I was talking about -- I think it is slightly over half for universe by next summer. So it's coming up in that time frame. It's not all of next summer but that's when they're sort of half that I refer to comes up. And look, I think we feel we're warranted, that increase reflects the strength of FOX News. I said before that FOX News is a channel that probably stays second to ESPN in terms of importance and clout in the marketplace. In 2012, we're also happening to be heading into a thing called an election and that probably adds a bit of energy to it. So I think we're going to try and be. I think when we dealt with these issues, whether it's -- or any of channels. I think we try to look for something that we think is fair and reflects the value of that market place. I think with FOX News, we've created a channel that is due for an appropriate increase, given its strength in the marketplace. And here we're cognizant certainly about pressures in terms of the market and the programming costs and the consumer and the like. But equally, we think it is important that we get a fair compensation for our content. I mean, you look at this, this is still a very healthy segment on all levels. Some of that existing again in the last couple of days, but I'm not going to put out sort of publicly what -- and I think negotiation should be held on a private, so I'm not going to put out what we're...

Okay, but something that has been a little more public has been like the re-trans. So you kind of laid out how much of the footprint of the U.S. is coming up over the next year or so. So can you just maybe give us a range of how meaningful a contribution from re-trans and reverse comp we should be looking for in fiscal '12 and again in fiscal '13, like what's the incremental increase that we should be...

Again, I think we've been pretty clear, I mean, but again, these sort of things, I think, are private negotiations. It's important to us. We view it as we want to create it a real dual revenue stream and have compensation that -- on the subscription side that begins to reflect the value of the FOX Network. I mean, in reality, it's -- I guess if you look at competitive rates, it's higher than anything we'd be asking. But it's an important and significant major source of revenue. But I don't think we're going to get down to what the specific rates are again. I'll reiterate what I've said before, we've said the Broadcast business, and I really do think in many ways that it's an integrated business in the station and -- between the stations and network. That will be $1 billion plus business in the next couple of years, but with a stable ad market without relying on any unusual growth in the ad market, simply a stable ad market.

And that comes from the line of Jolanta Masojada, Credit Suisse. Jolanta Masojada - Crédit Suisse AG: Chase, I wondered if you could provide some operating metrics at The Daily and more broadly what the experience The Daily is telling you about the potential of the tablet market?

I think we -- I mean, The Daily, I'm not going to give a whole lot of specifics. I think in the quarter -- on the financials, I mean, and I think in the quarter, we lost about $10 million on The Daily. It's really early days with The Daily. I mean, I...

[indiscernible] on 1,000 downloads, yes.

Yes, I mean, yes, it's very early days, work in progress. I mean, it's only a month plus that it's been pay based. It actually is one of the most downloaded news apps out there, but it's a work in progress. And I think we know that we're improving the technology, we're refining the content. And the tablet market is still in its infancy. If you look at the any of the numbers in the tablet universe today versus the numbers people have out there for the end of this calendar year or the end of the following calendar year, it's a small fraction of what that will be. So I think on all fronts, it's -- whether it's on The Daily itself or the tablet market and how it evolves, I think it's pretty early days on all those fronts.

Our next question comes from the line of Michael Nathanson, Nomura Security.

So I have two: one for Dave and one for Chase. Dave, I just wonder, if you look at your operating profit of the Studio, you're down $500 million or so year-to-date. Can you give us a sense of what percent or what part of that decline is in Avatar? Or is there any other things dragging you down year-over-year that may be more than Avatar?

In the quarter, the -- almost the entire decrease is related to Avatar.

And year-to-date, the bulk of that?

The bulk of that is related to Avatar, yes.

Okay. So there's -- some people look at it again. Okay. Then Chase, a question for you would be, year-to-date, you're up double digits in affiliate fees domestically, and while you all don't want to talk about what FOX News is worth, the question would be is, can you grow double digits in affiliate fees the next couple of years based on the deals you're doing and the deals that are to come? So is the double digits a fair level of growth for affiliate fees domestically?

Yes. I mean, again, I'd probably say we -- when you look at what we have coming up in terms of affiliate negotiations, we expect it to be an area of real solid growth for us going forward.

And our next question comes from the line of Richard Greenfield, BTIG.

A couple of questions. One just on sports. You signed a Pac-12 deal, just broadly not just including News Corp., but it just seems like sports costs and what people are willing to pay for league RSNs, team RSNs is really spiraling to all new levels. I mean, even hockey, which I think ratings are pretty horrible and got over $200 million a year from Comcast NBC. I guess the broader question is kind of how do you think about sports? How does the Pac-12 fit in with losing the Lakers for you? And do you worry about what the ending impact of all of this is going to be on the actual consumer who's going to pay for all of these sports channels that are being created by teams, leagues and other? And then just a broader question for Dave on the balance sheet. You've got, I think, almost $12 billion of cash now. If for any reason BSkyB doesn't happen, is a tender something you would seriously consider? I mean, it just seems like you've got tremendous capacity with the cash sitting there and cash flow building. Just would love to know how like long do you plan to sit on $12 billion of cash if you decide to move on from BSkyB for whatever reason?

In terms of sports -- sports, I think, I've said it before, it's the -- clearly, it's a double-edged sword. It's -- certainly, the costs are challenged and we're very cognizant if it. I think the flip side is the value of sports is unique and probably becomes more unique in an era of fragmentation and DVRs and other technologies and the passion and the interest in sports seem like that continually distinguishes it from other things. I think we now believe and have proven around the world with sports rights that we've been able to navigate these costs and generate real value. Sports has certainly been a big part of our growth story, and we have in really all our territories and regions and have been a major part of building our businesses. So we're obviously not ignorant of the costs and -- but I think as we look at it, we look at -- and I think what is important for us, I mean, you touched on the regionals, the nationals, the network. And so we have the appropriate vehicles, internationally becomes the platforms as well that in all these sports rights that we have the appropriate vehicles to use these sports to, to build value and build our businesses. But I think these, I think, truly -- event sports, as I said, really are becoming more and more unique and probably more important than ever. And I think what you do need to make sure is we've got enough vehicles to figure how we build value around these sorts of franchises. And I think we -- I guess we can tell we've got a pretty good track record proving we can do that.

With respect to the balance sheet, obviously, we're not going to sit on $12 billion actually to the extent that we're not going to be doing BSkyB transaction. We have a lot of, I think, options as to what we would do with it. And I think we'll face it when we get there, if we get there. We're certainly not going to sit on $12 billion and have the inefficient use of our capital structure that would affect. Just one -- I think this is Michael's question with respect to the film company. The one other major thing during the -- this is in the year to be -- for the year that would affect the film numbers is, we had Ice Age last year, which is a significant profit contributor, which we don't have in the current year.

And that comes from the line of Tuna Amobi with Standard & Poor's. Tuna Amobi - S&P Equity Research: So in the context of the affiliate renewal deals that you just alluded to, Chase, when you talk to your distribution partners, are you calling out separate authentication rights, also iPad streaming rights? I'm just kind of wondering how confident that you are that you will be paid for these rights. And I think you guys also have a unique position with The Daily. So I'm just kind of wondering, do you feel that the iPad rights are embedded in the entertainment side? Is there any distinction you make between the news and the entertainment when you think about those rights and the value that they may have to you?

Yes, I'd say, I think in general, authentication is just a good thing. And I think part of [indiscernible] a couple of the questions address the issue of increased cost of content or increased cost of programming. But it's -- one of the ways you deal with that vis-à-vis a consumer is to give the consumer increased value and give him a new experience. And I think the ability to access this product again in the proverbial, where you want, when you want, how you want, multiple screens, I think is a good thing. So I think we are looking to work with distributors to provide this richer experience. I think this is sort 2 fronts, as I've said, the richer experience in the home and then the richer experience out of the home. I think they're all going to be part of these discussions. And I think we -- and we are looking. And certainly, I think in the home is probably the primary focus. We're looking to work with distributors to provide that richer in-home experience. And I think there was recently an announcement about us extending with Comcast, as an example, and the VOD experience. And we think that's an important part of us, again, while we have tough negotiations. I think together, we need to continue to figure out. We continue to make some good experience for consumers and do our part to provide a richer and better experience in ways consumers can have new features and new functionality and things that excite them. And I think directionally, that is where we'd like to go. Tuna Amobi - S&P Equity Research: If I can as a quick follow-up on the NFL situation, just kind of wanted to get your view on that and how this might play into the upfront dynamics? And I think you recently alluded to some kind of mitigation plan that you guys have in place. Should there not be a season? I was wondering if you can also perhaps share some of that with us.

Look, I mean, I think our real hope is level heads prevail and this issue gets resolved. So I think that's our hope, and I think that's what initially people will move forward with an expectation. Things will get resolved. Obviously, as we go along, we'll have to deal with it. I think we tried -- I mean, for us, it's the afternoon, so it's not like we're preempting prime time, so it doesn't -- the afternoon is fairly discrete. I think we try to mitigate it. In reality, there aren't a lot of NFLs around, so you could do some other things. There's nothing -- I mean, one of the reasons why is it, what it is, just because there isn't anything to -- if there was something to put in its place, you have a pretty different world. But there isn't, so I think as you'd move forward, we try to think to whether its mitigate in terms of content or mitigate in terms of whether those advertisers who want to reach an audience and how do they reach that audience. I think it will be, but I think it will be limited to how far you can go. We'll certainly work constructively with everybody to deal with. I think it will be equally complicated because you're going to always have a fairly short-term time of horizon to not know how long this just go on and when could it get resolved. So I think we've obviously talked about ways we can mitigate on an array of fronts, but I think we'll have to play this out as it goes. And again, our real hope would be logic prevails, and everybody recognizes the best thing for everybody is to get this done, get deal done.

And that comes from the line of David Bank, RBC Capital Markets.

Fox is in a pretty unique position relative to mostly the media conglomerates in the world right now, and there's actually a tremendous amount of television content that arguably you can exploit in the same sort of tonnage deals that I think CBS has done and, to some extent, Disney. Can you talk about what your strategy is with respect to the content that's arguably been pretty exploited and you couldn't kind of do these tonnage deals and pick -- just pick up a bunch of sort of free money. What is your view of those deals that have gone on and...

What do you mean -- I'm not sure. When you say tonnage, what do you mean by tonnage?

The big parts of libraries that have been relatively well exploited, but there's still a market in the online video distribution sector.

You mean like the Netflix deals?

Right.

Okay. I think in many ways, libraries have been under exploited. I mean, it's probably one of the positives about Netflix, realistically what I would like to see more of these, and I think the digital world will create more of these. I mean, I think our library product has been up an underexploited asset. I think Netflix has actually provided some truly incremental value for libraries, where you actually have product that probably -- if there hadn't really been a viable market for that all of a sudden there is a market for and I think as more of these digital platforms arise different shapes and forms. I think it provides an opportunity to capture real value off of the unique product that just didn't have appropriate outlets for it. I think it's one of the reasons why, I think, we're participating in that. We have a pretty clearly defined view of what we think is the type -- what is the type of product, what point should we sell it and I think what is the type of product and rights that we need to protect that should be sold, and what should be sold in one place and what should be sold in a different place. And I think equally, when we do these deals, we want to make sure we maintain flexibility and control of our long-term destiny, and we're not doing deals that lock us into something we then regret. And so I think our priorities has been to try to take advantage if we can get fair value. If we can't fair value, we're not going to do it but be disciplined about our rights, take advantage of these emerging distribution platforms that are largely digital and make sure we maintain flexibility and control as these markets evolve. Because I think they will evolve, and I think you will have new and different opportunities. And so I think it pays to be -- to not grab a quick buck that may look like a quick buck today and not be quite as attractive a buck, literally, 12 to 18 months later.

Do you think we could expect you guys to be able to do a deal like we've seen from CBS or like we've seen from Disney with the expectation that it would be fairly not disruptive to all the other economics you enjoy for your content? I'm sorry, just for the quick follow-up, what has stopped you so far from doing those kinds of deals?

Well, we've actually done some deals, so it's not -- we have, and again, that's what I was saying. I think we feel it's very important to have a clearly defined line between current -- the current product and library product, and we have a clear view on where that line exists. I think equally, we recognized that there is product that may end up being -- and I think increasingly, this will be the case with hit product that only goes one place or the other, not both, and you’ll end up finding important product that is bought -- and in some ways, some of these digital platforms are competing with sort of the more established linear platforms for rights. And as opposed to existing of both, they may exist in one place or the other. And so I think it’s why I talked about flexibility and discipline, but we have, we certainly have done deals. I wouldn’t call them tonnage deals. I think, they're deals which we think take advantage of the opportunity. It's certainly real revenue to us. But again, I think by adhering in a set of views that, as you said, protect and certainly recognize that we have networks and unique content that we need to manage and have ways that it distinguishes itself in the marketplace, distinguishes itself with unique content, distinguishes themselves with unique rights, whether that’s on a network side or a content side or a digital platform side.

And that will come from the line of James Mitchell, Goldman Sachs.

Could I ask a couple of questions on Europe? First of all, could you talk about advertising trends in Europe? You mentioned that U.K. and newspaper advertising in SKY Italia advertising revenue was down year-on-year. And then second, a broader question, when you look at your pay-TV platforms in Europe, do you feel they have the sets of rights to prevent online video interlopers eroding your contents advantage in terms of U.S. movies and U.S. TV series being distributed in Europe?

Yes. I mean, I think, Jim, I'm not sure, I have a whole lot on the ad front so I mean, the firms are...

No, I mean, the U.K.

Advertising is down around mid- single digits in the quarter and the markets are a little bit soft.

And in Italy, we clearly have some -- the economy is tough there but there are some headwinds on the ad side in the Italian marketplace as well. I think in terms of the digital rights and the like, I mean, in some ways, one of the benefits of these being emerging platforms is you really plan your business knowing those things are there. And I think in many ways, we look at them as a part of the mix, a part of the way, being a player in those things, not sort of viewing ourselves with any sort of limited four walls but being smart, intelligent. And it is, in some ways, the benefits in places like whether it's Italy, Germany, what have you. We're still in the early stages of growth in those marketplaces. And so it gives us the opportunity to plan and look at our business in a way that it doesn't look at it in too limiting a way. And I think in some ways, to their credit, sky in the U.K. has done a good job, and I think proven that they're going to take advantage of emerging technologies to continue to develop and build the business. And I think to their credit, Sky U.K. has done a really good job of building upon these emerging technologies and these newer platforms. In Germany and Italy, certainly our plans would be to continue to do that and take advantage of these things. So I think we've already announced some things in those markets that will take advantage of it.

And that comes from the line of Ben Swinburne, Morgan Stanley.

I have some for Dave on the quarter. I don't know if you wanted to give us the organic international growth at cable. I think you said it was 21%, affiliate; 18% ad. But I'd assume if you had the FX impact there.

I don't think I gave it.

No.

I gave you total. I gave you growth with respect to the affiliate and advertising growth for the entire segment, including the U.S. businesses as well.

Okay. And I don't know if you do want to break out the losses associated with The Daily in the quarter and how we should think about that drag sort of over the next couple of quarters.

Well, I think as Chase said, it's approximately $10 million in the quarter.

Okay. And then may be lastly, Chase, just there was the recent Hawaii Five-O deal that TNT syndicated. It was reported to have rights, basically a block of Netflix-like services for that show while it was in the syndication, which I think just could last for many years. Just wondering, as a buyer of syndicated content, for example, like an FX, if you think that sort of a transaction makes sense, if it's -- worth paying up for that kind of exclusivity.

Yes. I mean, if I -- as a buyer on the FX side, I would increasingly certainly look at FX as a [indiscernible]. I think about it as a competing network, whether it's competing with HBO, competing with an FX or -- and I think if you're buying, if you're looking at premium property, I mean, I think exclusivity matters. And I think it’s critical. So I think it will become very much a part of the mix as channels go forward. And if you have something that -- if you're going out to unique properties that are going to be a part of defining your network or distinguishing your network, I think controlling all those rights and getting exclusivity I think will be critically important. And certainly, for us at FX, it is our -- it's been a part of our strategy already in place, and we have been -- as we've been acquiring rights, if we’re acquiring key rights, we’re acquiring rights to control the Netflix type rights, so we’re not competing against them. So not quite as -- like as I've said, not only is it important, we've in fact been doing it on rights we acquire that are key properties.

Our next question comes from the line of Barton Crockett, Lazard Capital Markets.

I wanted to ask if you could address a report about potential interest at News in joining a consortium to bid for Formula 1. And even if you can't address that particular thing, just talk more generally about the question of ownership of sports given the escalating cost of sports rights and the importance of that on TV. Does it make sense to think about going back to a day where you own more leagues, own more teams as a way to protect your television properties?

On the Formula 1 specifically, there's not really a lot -- you're going to add to what we said. I think as we did say, it’s really at an exploratory stage. It’s not clear where it goes. We're talking at about forming a consortium. So clearly, it is very early days. I won’t repeat too much because I think a few minutes I ago talked about essentially the importance and value of sports rights and recognize certainly the complexities that come with cost. I think it’s difficult to make a leap and say that because it’s dealing with a cost that you want to try and be in an ownership role, I think you sort of got to deal with each one of those on -- deal with each situation on its own merits. I mean, obviously places certainly in the U.S. where you've got 32 NFL teams or colleges. You're not going to acquire -- that it obviously is just not realistic from the get go, but I think you want to be -- this world is certainly continuing to change and evolve. I think you want to be innovative and open minded about ways to try to deal with key unique rights. And I don't think that rules anything out, but I don’t think you can sort of have a one size, fits all strategy, get up and say you're going to pursue things, everything this way or that way. I think you sort of have to -- you have to deal with each opportunity in its own merits, and what -- make a judgment about what's the best way forward.

The next question comes from the line of Matt Finnigan, Wedbush Securities.

It's actually James Dix for Max. Just 2 questions. You basically reaffirmed now your guidance you gave at the beginning of the year for operating income growth. I just want to know whether there are any variations in terms of how the segments are tracking for the year, any ones which are -- which seem to be standing out and your expectations, particularly interested in your view on cable. And then secondly, just following up on the sports topic, do you think strategically you have an advantage in going after sports or being flexible in how you go after them by having both broadcast and cable networks in the U.S.? Or do you think that's -- it would be just as easy for competitors to build a consortium and split up games, for example, like how Turner did with CBS?

On the guidance, we're expecting -- I mean, cable is just continuing to grow as it has all year, it's doing great. We're expecting a strong fourth quarter out of both FBC and in our television stations. As I said before, both Film and the Television Production business is going to have a good fourth quarter, and you'll see SKY Italia rebound in the fourth quarter as well. So there's not -- there's any significant changes from how the business has been operating. And for that, maybe you'll see Publishing, which has down quarter for a variety of reasons because of -- partly because, as I mentioned, because of the marketing, partly because of the weakness in Australia, in our business in Australia. But you will we'll see that rebound in the fourth quarter. So the business is looking very strong.

And I think in terms of sports and having, I guess, a network of multiple outlets, yes, I mean, I think having multiple outlets is critically important. I mean, I think the fact that we have in this country broadcast networks, cable networks, regional networks, I think it's tremendously important. As you look at a franchise therefore and components of it, digital obviously is going to become a part of that and increasingly a part of that, too. And internationally, as we said, we got unique dimensions to our businesses there. But I think having those platforms gives you an ability to take rights that may have different ways to be exploited in each one of those and make sure you can maximize both the value for us to achieve the things these sports and leagues, teams, conferences want to achieve. So yes, I think without question, having a breadth of outlets and expertise is tremendously important to being able to maximize the value of these key sports rights.

And that will come from the line of Mike Morris, Davenport. Michael Morris - Davenport & Company, LLC: Two quick questions. One, as you head into the upfront this year, can you talk about how you approach a new program, like the X Factor, that has the potential, I think, to be a big hit? And how do you sell that? Do you hold some of that back? How can you leverage what -- I would think you would hope to be on American Idol type of product given that you don't have much insight into the ratings on it yet? And then second, just over at Publishing, can you talk about how much of the weakness in Australia may have been weather related? Do you have any indication what that is if any of its kind of maybe more onetime in nature, that will be helpful?

I mean, it's really difficult. I mean, listen, there's no question we're affected particularly in the Brisbane and Queensland area, but it's very hard for us to quantify. I think it's more affected by the slowdown in the economy, particularly in the retail trades in sort of the business.

And I think in terms of X Factor, we're very excited about X Factor and you could be assured we will have very unique strategies on how to sell and maximize that. But typically, we don't share those publicly. I think those are the types of things we plan to keep to ourselves and use to our advantage. But we're excited about having it, and we believe we can do some very exciting things with it.

Operator, now we'd like to go to the press part of the call, please?

[Operator Instructions] Our first question comes from the line of Peter Ryan, Australian Broadcast.

Chase, I just wanted to ask a question about events of the recent days. I mean, what's the News Corporation outlook both financially and also I guess editorially given the killing of Osama Bin Laden. Does that change News Corp.'s view of the world as opposed especially given the resilience of the FOX News Channel over the past 10 years?

I don’t think it’s – I mean, it sold a lot more papers and certainly looked pretty an event to people. We're tremendously important to people and I think give everybody appropriately a lift. But yes, I think that if you're talking sort of really the challenges and issues, the economy and sovereign debt, maybe the macroeconomic issues that are out there in the world, I don't think that -- I think it's tough to sort of say that event leads to have a differing view about what are the risk challenges or what step – what's the future look like in these economies.

And that comes from the line of Georg Szalai, Hollywood reporter.

Chase, I wanted to ask if there's any reaction to the National Association of Theatre Owners asking that you guys release premium VOD sales data, and I was wondering how you guys think about how you really evaluate the success of premium VOD, what time frame do you envision to figure out whether that's something that works and how will you evaluate the success?

It is a, let's see, it is a test. We're in the very early stages. We had one small film. I don't know that I've got a specific set of here's [ph] the point in time that we make a judgment about it. I think in some ways, it's obviously -- I understand there's -- there are concerns about it. Look, the theatrical market is a very important market to us. It is essentially the market that sets the pace for our film industry. And we don't -- we think it's an opportunity for some films and certainly, it has set all the films for us to create a window that is appropriate for our segment. We don't think it's a big segment. I think in some ways -- I think part of what we're trying to do is set a value for our product as it moves down the chain. I mean, I do think one of the fundamental problems we've got out there is sort of the fact that we ended up in $1 rentals five or six months after theatrical release and that just our product that doesn't work. I mean, that undervalues our product to an extent that it makes no sense. So we've got to build appropriate values and windows into our business. But certainly, the theatrical business is second to none in importance to us, and I think we're going to go forward, we're going forward with this carefully and we'll judge it as we get some data and get some experiences. But I don't have a sort of point in time, date in time or a formula by which we're plugging it in to judge it.

Will you guys share some data with NATO?

Look, I think it's probably good for all of you to understand this. I mean, I don't -- I actually didn't know what request has been made, so I hadn't actually heard the specific request, but I think we feel it's important perfectly to understand what's happening out there.

Next question will come from the line of the Staci Kramer, paidContent.

Chase, I wonder if you could talk a little bit about your digital publishing strategy right now and whether you're looking at do more along the lines of The Daily, taking it outside of the U.S. and what other areas you're looking at in terms of converting some of your properties to pay online properties?

I think -- I mean, I hope and I expect and unless we go through making sure your armor goes through a budget process now like every one of our -- realistically, every one of our franchises should have a digital extension to their business. I mean, that's the world we're in. So whether it's news, sports or entertainment or sort of what's traditionally video or print. And obviously, some of those things blend together and become a multimedia, I mean, a large play in many ways become a multimedia product. We've got to be developing extensions for all those, in all those places. And so I think in every one -- and obviously, to some degree, every one of them is doing some version of it today. Some of it's more straightforward like The Times or The Post that are putting a -- creating an iPad version of the printed product, and in some places, it will be product that is more expanded and tailored to the digital world and takes advantage of interactivity and again the ability to more put together multiple experiences and sort of The Daily is pushing towards integrating, new technologies and 360 video and moving video inside a printed product. But each and every one of our businesses has to be figuring how do they create those, how do they participate. And sometimes it's working with others in terms of their digital sites, in many ways, just develop our extensions digitally of our brands, content and franchises.

Can you say what kind of conversion rate you're seeing from Daily free downloads and trials to subscriptions?

I'm sorry I didn't hear the front end of the question.

Can you say what kind of conversion rate The Daily is having some free trial downloads to actual paying subscriptions and whether...

No. I mean, we're like, we're about a month into this. In many ways, we're not going to build this in a fishbowl. I mean, I think we recognized there -- it's a work in progress. It's an experiment in many ways in terms of developing and finding what consumers like and what things really work and how do we improve it. But we're not going to give -- I think that sort of detailed information is not something that we're going to share in public or probably putting out publicly at this point.

Along those lines, maybe this isn't that detailed, could you say whether you see the people are preferring to pay weekly or are they preparing an annual subscription?

Like in many ways, and part of this is sort of working through in a lot of these platforms where they're still trying to figure out the subscription process. So there's a lot of moving parts here that ends up being part of that -- part of what you've got is so many digital platforms and what -- the tablets are obviously, as we said, in many ways they're in their infancy. So it's more complicated than that. And you sort of got a good deal with not only what you want to do, but what can the market handle and what are the various players in the market say they're capable of doing. So there are a lot of moving parts to this, and then I think it will be a very different business a year from now. And two years from now, it will be a very different business than it was a year earlier. So it's going to continue to evolve.

At this point, we're out of time. Thank you, everybody, for joining the call. And if you have any further questions, please call us in New York.

Ladies and gentlemen, that does conclude today's conference. Today's conference was recorded for replay. If you wish to access that replay system, you can dial into the 1 (800) 475-6701. International participants may dial (320) 365-3844, and the conference access code for today's call is 198808. The conference will be available until May 18, 2011.