October 21, 2005 –
I would now like to give an overview of News Corp.’s performance in fiscal 2005.
I’m very pleased to report that fiscal 2005 was another record year for the Company on virtually every key financial indicator. The past three years of double-digit revenue and operating income growth have placed your company in the strongest financial position in its history.
I don’t want to burden you with a long list of numbers that you may have heard before, but some of our fiscal 2005 results deserve repeating:
• Net income up 39 percent to $2.1 billion. A record.
• Cash flow from operations up 41 percent to $3.4 billion. A record.
• Revenues up 15 percent to $23.9 billion. Another record.
Earnings per share rose 28 percent to 69 cents a share and we finished the year with $6.5 billion in cash, while net debt fell to just $4.5 billion.
As a result of our record performance, we were able to significantly raise dividend payments to all stockholders, and we instituted a buyback of up to $3 billion of our stock over the next two years. Already, only four months into the buyback, we have purchased nearly $1 billion of our stock, and I expect we will complete the buyback well within the two-year period.
Our fiscal 2005 success was built on operating excellence across the company with nearly every segment delivering record earnings.
While our operations have excelled, your board and senior management have also been vigilant in streamlining and simplifying our corporate structure.
First and foremost, last year you voted overwhelmingly to support our reincorporation in the United States, moving our primary listing to the New York Stock Exchange. Since the reincorporation was completed last December, we have been included in the benchmark U.S. equity index, the S&P 500, while we have gradually been removed from the Australian S&P index. With the complication of many Australian index funds having to sell the stock over the past year, we haven’t yet seen a rise in the stock price that would mirror the exceptional earnings performance, but I remain confident that over the longer term investors will realize the great benefits of this move.
We also bought in that part of the Fox Entertainment Group that we didn’t already own, simplifying our corporate structure and giving us full access to the growing earnings of the Fox operations.
In another move that simplified our structure and gave us 100 percent of the earnings of two fast-growing media assets, we acquired the 58 percent of Queensland Press and the 20 percent of Sky Italia that News Corporation did not already own.
While each of these strategic initiatives will, I believe, significantly improve the return on your investment in the Company, it is our day-to-day operational performance that is easiest to quantify and assess. And, quite simply, our performance in fiscal 2005 was outstanding.
We have eight operational segments at News Corporation. In fiscal 2005, SIX of them achieved record earnings, while a seventh segment had a $100 million turnaround, and the final segment’s operational performance was virtually flat. Clearly, company-wide and worldwide, our businesses performed.
No area of the Company performed better than one of our newer businesses: Cable Network Programming. A business in which we had no presence 10 years ago contributed $700 million in operating income this year. That is fully 20 percent of our total operating income, and our single biggest driver of earnings growth, that would not exist had we not made the decision in the mid-90s to build for the future.
Much of the profit growth from the segment comes from our firmly established channels - FOX News, FX and our Regional Sports Networks. Ratings at FOX News, for example, were up 30 percent in primetime last year. And so far in fiscal 2006, FOX News has – for the fifth consecutive quarter – out-rated all of its cable competition COMBINED in primetime. Those increased ratings mean increased ad revenues. And less than a year from now, FOX News’ affiliate contracts will begin to expire and we anticipate significant increases in affiliate fees. Ratings and ad revenues at FX also climbed and FX has already started to renew affiliate contracts – at significantly higher prices.
But we haven’t sat back and relied on the continuing growth of our biggest cable channels. Instead, we have been busy developing more channels to build our momentum. SPEED Channel and National Geographic continue to add subscribers and are already profitable. And we have FUEL TV, Fox Reality and several others as a third level, if you like, of up-and-coming cable channels.
As millions of viewers tuned into our cable channels, millions more watched our movies – whether on the big screen or at home on DVD – to give our Filmed Entertainment segment another record year. It was a remarkable result in a year where the overall US box office was down and other studios reported sluggish growth in DVD sales. Far from a home entertainment slowdown, we saw 30 percent growth in sales in the first half of calendar 2005, and growth continues today.
The Filmed Entertainment segment also benefited from the growing television DVD market – a market we helped pioneer. Sales of FOX series such as The Simpsons, Family Guy, 24 and others continue to be popular among the millions of loyal FOX network fans.
And those fans have never been more loyal than in the past year. In 2005, for the first time in its history, the FOX network – the youngest of the four big networks – was the number one destination on television for the advertiser-coveted 18 to 49 demographic. American Idol can clearly take much of the credit for our win, but shows such as 24, The OC, House and Stacked gave Idol enormous support.
The great ratings at the network were a boon to the Fox Television Stations. A soft local ad market and the impact of a new local people meter system made for a difficult year at the station group, but operating income was still up slightly on 2004 results.
The other major asset in the Television segment – our pan-Asian channels group STAR – was a testament to how a bold, long-term vision can pay off. After a long infancy, STAR has blossomed into one of News Corp’s most exciting growth drivers. Earnings more than doubled last year and I fully expect them to be significantly higher again this year. STAR India, which has the most popular shows on cable and a vast library of local programming, is becoming a major profit contributor. And in China we have a great presence with Xing Kong and I’m confident of our future there.
Just as our long-term faith in STAR has been vindicated, so too has our long-held belief in the potential of satellite television to provide the best viewing experience for customers around the world.
While it only reached profitability in the last quarter of fiscal 2005, SKY Italia showed what happens when our Company has an idea, pursues it with all its energy, and creates a truly world-class business. SKY Italia had a profit turnaround of more than $100 million in fiscal 2005. In fiscal 2006, the turnaround could be even greater, and we expect it to be profitable for the full year. Average revenue per user is rising, and the churn rate remains low. And with last week’s launch in Italy of the MySky decoder, which includes among other things a new DVR, I believe SKY Italia subscribers will be more loyal than ever.
We also own major stakes in two other satellite platforms, DIRECTV in the United States and BSkyB in the UK.
Since we acquired 34 percent of DIRECTV nearly two years ago, it has been the fastest growing pay-TV company in America. It added 1.6 million subscribers in fiscal 2005, all the while adding more local and high-definition channels and more consumer-friendly offerings, such as an interactive service for all NFL games. DIRECTV has just started to roll out a new DVR, developed in conjunction with our own NDS, that we expect to be very popular.
Our 37 percent-owned BSkyB, meanwhile, has increased its direct-to-home subscribers to 7.8 million and recently offered a new pricing and programming structure aimed at attracting even more customers. BSkyB is solidly profitable and growing fast. BSkyB has changed the face of television in the UK, bringing consumers choices never before imagined in a country which had such limited choices in television viewing.
The film and television assets that I have already outlined tend to receive most of the attention of investors. They are generally touted as the Company’s fast-moving, high-growth businesses. But last year, somebody forgot to tell that to our Newspapers – the segment from which the rest of the Company has grown.
Earnings at our Newspapers segment jumped 31 percent to $740 million in fiscal 2005. Part of the rise was due to the inclusion of 100 percent of Queensland Press’ earnings for part of the year. But the rise couldn’t have occurred without us producing compelling papers for loyal readers. Our commitment to continue improving our papers, and offer new color capacity to eager advertisers, is reflected in several new capital investments in Australia and a 600 million Pound investment over the next five years in new plants and presses in the UK.
Our other print assets also recorded growth last year. HarperCollins had its 8th consecutive year of record profits and our Magazines and Inserts segment grew earnings 10 percent, led by continued growth in our InStore division.
So, the operating performance of virtually all of our businesses last year was outstanding. We have built from scratch, or acquired and then grown, one of the greatest groups of media assets in the world. But we can’t stop here. We have to go on growing and building for the future. If I had listened to some of my critics, News Corporation would still be a small regional newspaper company in Australia. Instead, all of us – you, the stockholders, the senior management and our tens of thousands of employees – have created something great and lasting and, not coincidentally, very profitable.
The media industry is one that, in my more than 50 years working in it, has evolved in ways people could never have imagined. With that in mind, and at a time when our financial position is stronger than ever, we have turned our attention in recent months back to the Internet. It is an area of the media industry we simply can’t ignore, and indeed has become our greatest single area of focus over the past year.
Why the urgency? Because the Internet is the fastest growing advertising market. It has the fastest growing audience. More importantly, broadband proliferation is at last real, meaning the opportunity is now to grow exponentially the distribution of our vast video content in news, sports and general entertainment.
If we are to deliver on our mission to return value to you our shareholders – and see the fruits of the thrilling days that lie ahead -- we must intelligently and prudently transform our company – beginning now -- to take advantage of the massive digital transition that is occurring.
And, frankly, forging this strategy is consistent with the strategy we’ve followed all along -- a strategy that has enabled us to grow from a single newspaper into the global company we’ve become. At its core, this company from the very beginning has been about offering choice – greater choice – to under-served consumers. It’s what led us to create a fourth broadcast network and a third cable news network; a regional sports network and a UK and Italian satellite platform. Empowering the consumer through greater choice is exactly what this Company strives to accomplish. And there’s no greater medium of choice than the Internet.
That’s why we are so drawn to the opportunities and challenges it represents. This is a time of fundamental change.
So with relatively modest and extremely well targeted investments, we have this year formed a special Internet unit and acquired properties that have instantly delivered us tens of millions of new customers, and, in the process, begun a transformation of the Company.
Fox Interactive Media was formed in July and has acquired several Internet assets that immediately place us in the top five of the most heavily trafficked collection of websites in the world. MySpace.com, the fastest growing website in the country, registering nearly 130,000 new users A DAY; IGN, with its array of young male oriented online games and content sites; and Scout.com, the number one independent online sports network, mesh perfectly into our existing off-line content and audiences, and all play to our strengths. Their youthful audiences are our audiences. Their interests are our interests.
With the addition of these companies, we have now the most potent combination of relevant content and critical audience mass to forge a real and profitable presence on the Web.
Our challenge in the coming months then will be to integrate these new businesses with our existing websites, and to develop a common navigation that will allow users to move back and forth between our various properties while we derive new revenues and profits from their on-line experience. Our aim is nothing less that to provide the best and stickiest Internet experience available anywhere.
This is a task that will not be easy – nor will it be accomplished overnight -- but I’m convinced that if we’re successful in attracting and keeping people on our websites, in monetizing our content on the Internet … if we’re successful, in short, of transforming our Company into a global … digital … powerhouse, great things lie ahead.
I'd like to end on a personal note and thank Stan Shuman for his 23 years of dedicated service to this Company as a Director. Stan has been involved in board decisions about every major transaction we have made since we purchased The Boston Herald-American in 1982 and renamed it The Boston Herald. We've come a long way since 1982, and Stan has been a powerful representative of stockholder interests and a true friend and advisor to me and to the Company at every stage of our development. I’m pleased Stan will remain a Director-Emeritus – and thus a valuable advisor to this Company -- for the remaining two years of his term.
With that, I will be happy to take stockholder questions.