Media Industry Worth Watching in 2008

2007 was a not a pleasant year for the Media Industry. Most of the Media stocks including IAC, Walt Disney, News Corp. and Time Warner have undergone correction between 10% to 40%. Except Walt Disney, all other stocks are trading close to at their 52-week lows. Most of the companies have reported below the Street’s expected results. Considering all the news and activity in the online media business, the segment’s performance is a sobering reminder to the fact that change is a difficult phenomenon to manage. Let’s have a look at the results.

In 4Q07, InterActiveCorp(IAC) reported y-o-y revenue growth of 8% to $1.86 billion. This was just above the Street’s expectation of $1.83 billion. It reported a net loss of $370 million against a profit of $15.3 million a year ago. Excluding certain abnormal items, it would have earned $0.46 a share versus $0.05 a share in the corresponding period of the previous year.

Segment wise, new IAC was the strongest 21% y-o-y growth and operating losses came down to $59.2 million from a loss of $184.1 million a year ago. HSN experienced y-o-y revenue growth of 3% but profit slipped by 7% due to low gross margin and higher expenses. Ticketmaster experienced 27% y-o-y revenue growth and profit increased by 8% to $63.8 million. Revenue at online mortgage referral unit LendingTree fell by 55% to $52.1 million, predictably due to the worsening mortgage market. [You can read our detailed analysis of IAC’s various businesses in Web 3.0 and IAC.]

For the full year, the company reported a net loss of $144.1 million, or $0.50 per share, versus a profit in 2006 of $187.1 million, or $0.59 per share. Revenue in 2007 was up 8% to $6.37 billion from $5.91 billion a year ago. Analysts had expected full-year earnings per share of $1.55 on revenue of $6.41 billion.

The overall profit of IAC largely suffered on a big write-down in its mortgage referral business, tax expenses and costs in anticipation of the proposed spin-off of four businesses. However, new IAC has done quite well in generating media & advertising revenue due to its alignment with online advertising’s growing influence. But Ask.com has continued to struggle to grow.

The plan to split IAC into five parts is on hold because of the messy battle between Mr. Diller and John Malone, the CEO of Liberty Media, which is IAC’s largest shareholder.

We also looked at Walt Disney in detail earlier. Disney reported revenue of $10.45 billion for the quarter ended 29th December 2007, up 9% y-o-y. The company reported net income of $1.25 billion or $0.63 per share, down from $1.7 billion or $0.79 per share in the year-ago quarter. Operating profit jumped to $2.25 billion, a 15% growth compared to the corresponding quarter of the previous year. EPS (excluding abnormal profit) increased by 29% to $0.63 from $0.49 a year ago. This was well above the Street’s expectation of $0.52. Free cash flow stood at $249 million.

Revenue at Media Networks recorded a 10% jump to $4.17 billion and the operating profit experienced strong 28% y-o-y growth. The Parks and Resorts segment reported revenue and profit growth of 11% and 25% y-o-y respectively. Revenue at the Studio Entertainment stood flat at $2.64 billion but profit slipped 15% largely due to 9% fall in DVD sales. Unexpectedly revenue growth in the consumer segment was 29% y-o-y and the operating profit was up by $88 million or 38% y-o-y.

The Company’s strong profit was largely fueled by higher advertising revenue and affiliate revenue at ESPN. Moreover, DVD sales of High School Musical 2 provided the Disney domestic channels better growth.

Besides Disney’s continuous focus on its core business, the Company is finding more margin expansion and attractive growth in the online and video games businesses. The Company is expected to increase investment in these two areas.

Even though Disney also hit its lowpoint in January, the stock has started climbing back.

We covered News Corp. in detail in the Fall as well. News Corp is in the news right now as Yahoo!’s desired white knight, its savior from Microsoft. I don’t think any such “deal” will actually gain shareholder approval, but the media likes this fodder to ruminate on. In this “deal”, News Corp. will get 19.9% stake in Yahoo! in exchange for its online social network MySpace valued at $10 to $11 billion.

News Corp’s quarterly revenue stood at $8.6 billion, a growth of 9.5% y-o-y; and net profit in its second fiscal quarter rose to $832 million or $0.27 cents per share, from $822 million or $0.26 cents per share a year earlier. It achieved double-digit growth in nearly every operating segment. News Corp. was expected to have earned 28 cents a share on $8.25 billion in revenue.

Its cable-network programming division reported operating income of $337 million, up 23%. Television profits more than doubled to $245 million, boosted by the Fox network and Star. Filmed entertainment division reported operating income of $403 million; down from $470 million a year ago. Its Movie studio profit fell 1 % due to high box office release spending. SKY Italia generated operating income of $62 million, an improvement of $74 million versus a year ago.

The results were driven by higher advertising sales at the Fox News channel and the Fox television network, and higher search revenue from its Google/MySpace agreement supported the Company’s strong profit. The company has finally started generating attractive returns from the online platforms. [There are issues with the Google / MySpace deal, though.]

News Corp, forecasts its fiscal 2008 operating income to grow in the mid-teens percentage range, above its previous estimate in the low teens. Moreover it does not expect any decline in its television ad market.

In Q407, Time Warner’s sales (See detailed analysis here) climbed 2.4% to $12.6 billion while the net income declined to $1.03 billion or $0.28 a share, from $1.75 billion or $0.44 a year earlier, however last year profit was high due to sale of its AOL’s European online access business. I have suggested a restructuring, they are considering a restructuring, although perhaps our thoughts are not entirely in alignment. There have also been talks of AOL and Yahoo! merging, to what end I do not know!

Sales revenues from the Company’s film unit rose 13% to $3.51 billion from the previous year and sales at the networks unit rose 1.3% to $2.7 billion; its operating profit slipped 1.7% to $770 million. Earnings from Cable division rose 19% as the company continued to digest cable systems from Adelphia Communications Corp.

The Networks division’s sales rose by 1% while the profit declined by 1%. AOL’s revenue decreased by 32% to $1.3 billion while the operating income increased by 29% to $381 million.

For the full year, revenue rose 6% over 2006 to $46.5 billion; and adjusted operating income climbed to $12.9 billion, up 17%. Earning per share was $1.08, compared to $1.2 in 2006.

Gain at Time Warner’s cable and film divisions was largely driven by increased customers and DVD sales.

The Company predicted earnings growth of up to 9% in 2008. The Company will focus on reducing its expenses by $50 million a year, and it also predicted earnings growth of up to 9% in 2008.

The company is working on restructuring its business to separate AOL’s growing online advertising-based business from the dial-up access business, which is declining rapidly as people are shifting to high-speed Internet services from cable TV and phone companies.

After the unsolicited bid by Microsoft for Yahoo, there have been rumors in the market that Yahoo may look to merge with Time Warner’s AOL or Walt Disney or News Corp. Anyone other than the big bad wolf, and presumably a Media company.

The market has already highly discounted the Media stocks due to strong anticipation of lower advertising spending, softening US broader market and recession fears. The market has probably overreacted, given how much excitement the Media industry is generating right now. An industry facing tremendous discontinuity is also an industry that can produce maximum upside, given the
levers.

In 2008, watch this segment carefully!