As we expected, News Corp’s (NASDAQ:NWS) Q2 fiscal 2013 financial results showcased a strong performance from its cable networks business. Growth in subscription prices, retransmission fees, the U.S. presidential elections and higher ad pricing drove News Corp’s domestic results. Meanwhile, the international business was impacted by the consolidation of Fox Pan Americana Sports (FPAS) and Fox Star Sports Asia. Even though Sky Italia showed significant weakness, investors needn’t worry as this business constitutes less than 2% to News Corp’s value as per our estimates. Furthermore, the filmed entertainment business was more or less flat with profits slightly down.
Let’s turn our focus to News Corp’s media networks business, which consists of cable networks as well as broadcasting and constitutes roughly 70% to News Corp’s value according to our estimates.
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- How Much Upside Can Digital Real Estate Growth Drive For News Corp?
Look Forward To Good Growth Across News Corp’s Media Networks
The Q2 fiscal 2013 results demonstrate one thing very clearly – News Corp is successfully reducing its dependance on advertising revenues. With affiliate fee growing at a much higher pace than that of advertising revenues and retransmission fee almost doubling compared to Q2 of fiscal 2012, News Corp can look forward to a more stable growth outlook.  In addition, the digital licensing of content is playing its part in helping profit growth.
Domestic affiliate fee grew by 13% in Q2 fiscal 2013 compared to the same period a year ago.  In comparison, domestic advertising revenues increased by 8%.  The growth rates are impressive when compared to the results of its peers including Disney (NYSE:DIS), Viacom (NASDAQ:VIAB) and Time Warner (NYSE:TWX).
What is News Corp doing better?
There is obviously a sharp focus on expanding sports programming, and the company has been investing to enhance its regional sports network. Sports programming is in high demand and therefore it’s relatively easier to raise subscription prices. That’s what ESPN has done every year and News Corp’s Fox Sports appears to be doing the same. In addition, the company also launched Fox Sports San Diego that helped its results.
The subscription growth rate is not just limited to News Corp’s sports network but is also very much visible for Fox News. The news network has performed extremely well recently and has maintained its top spot in terms of viewership, well ahead of competitors such as MSNBC and CNN.  The U.S. presidential elections held in the fourth quarter of 2012 drew a large audience, thus helping the news networks boost their ratings. This worked for Fox News as well.
As far as broadcasting is concerned, there is definitely some ratings pressure. However, News Corp still managed to grow its broadcasting revenues by 1% on improved ad pricing and growing retransmission revenue. This is likely to continue, and we expect affiliate fee’s (subscription fee, retransmission fee and licensing revenues) revenue share to increase consistently over the coming years.
Its investment in sports programming is going to be key for News Corp in the coming quarters. Although this may lead to over dependence on sports, investors can take comfort from the knowledge that there are only a few good players in the sports arena. While ESPN dominates big sporting events, Fox Sports is a big player in regional sports programming. While maintaining its dominance in regional sports, Fox is going to launch a nationwide channel to directly compete with ESPN.
Our price estimate for News Corp stands at $28, roughly in-line with the market price.Notes: