Fox Corporation (NASDAQ:FOX) Q2 2024 Earnings Call Transcript

Fox Corporation (NASDAQ:FOX) Q2 2024 Earnings Call Transcript February 7, 2024

Fox Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Fox Corporation’s Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Chief Investor Relations Officer, Ms. Gabrielle Brown. Please go ahead, Ms. Brown.

Gabrielle Brown: Thank you, Operator. Good morning, and welcome to our fiscal 2024 second quarter earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer; John Nallen, Chief Operating Officer; and Steve Tomsic, our Chief Financial Officer. First, Lachlan and Steve will give some prepared remarks on the most recent quarter, and then we’ll take questions from the investment community. Please note that this call may include forward-looking statements regarding Fox Corporation’s financial performance and operating results. These statements are based on management’s current expectations, and actual results could differ from what is stated as a result of certain factors identified on today’s call and in the company’s SEC filings.

Additionally, this call will include certain non-GAAP financial measures, including adjusted EBITDA or EBITDA, as we refer to it on this call. Reconciliations of non-GAAP financial measures are included in our earnings release and our SEC filings, which are available in the Investor Relations section of our website. And with that, I’m pleased to turn the call over to Lachlan.

Lachlan Murdoch: Thank you, Gabby, and thank you, all for joining us this morning. Against the backdrop of an active news cycle and another robust fall sports schedule, our fiscal second quarter again illustrated the strength of Fox. The growth we delivered in affiliate fee revenues was the standout this quarter, with the Television segment growing by 10% and the Cable segment returning to growth, once again demonstrating the power of our brands and our programming. We now largely completed our fiscal 2024 affiliate renewal cycle, having achieved our commercial goals without disruption and setting a solid foundation for renewals in fiscal 2025 and beyond. As expected, advertising revenues in the quarter were down, primarily due to comparisons to last year’s major cyclical events, including the mid-term elections at the TV stations and the broadcast of the Men’s World Cup in the Cable and Television segments.

Parsing through the cyclical comparisons, our concentration in News and Sports coupled with the outstanding performance at Tubi is clearly an advantage in a mixed advertising environment. More specifically, sports advertising was very healthy during the quarter and we saw particularly strong demand for the NFL and College Football, which continued into the NFL playoffs. At News, the second quarter was more nuanced, while preemptions and the direct response market adversely impacted quarterly growth, we sequentially narrowed the gap between the current and prior year in ratings and in pricing. We were also able to increase our viewing share over the previous quarter, and the positive trends in share ratings and pricing have carried over into the current quarter.

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Q&A Session

Last week, I visited our bureau in Jerusalem, met with our talented and dedicated staff there, and saw firsthand the devastation wrought by Hamas on October 7. Our hearts, our thoughts and our prayers go out to the victims of that day, the innocents killed in Israel, and in Gaza, and the hostages still denied the embrace of their families and loved ones. The work our correspondents, our camera people and our producers do reporting on these events is important, outstanding, and deeply appreciated. Now, on to Sports, in calendar 2023, 96 of the year’s 100 most watched telecasts were live sports. Fox was responsible for 29 of the year’s 100 most watched shows, more than any other network. This marks the fifth straight year that Fox has topped the industry in live sports viewing and demonstrates the unparalleled reach and engagement our content achieves.

The 30th NFL regular season on Fox concluded with an average of 19 million viewers across all games, with America’s game of the week averaging 25 million viewers, an eight-year high. And Fox NFL Sunday logged its 30th straight year as the number one NFL pre-game show. That strength continued into the post-season, with Fox’s three post-season windows delivering a best ever playoff average of almost 45 million viewers across the wildcard, divisional, and championship games. In digital, we saw strong engagement at Tubi, which finished with a very impressive 62% growth in total view time and 17% growth in revenue. Tubi’s library of over 240,000 movies and TV episodes coupled with ubiquitous distribution drove engagement, helping Tubi reach 78 million monthly active users, log almost 2.5 billion streaming hours in the quarter and set a new monthly record of 855 million total viewing hours in December alone.

Tubi has consolidated its position in the streaming landscape, ranking as the most watched free TV and movie streaming service in the United States, according to Nielsen, and surpassing Peacock, Max, Paramount Plus, and Pluto TV in view time for seven consecutive months. At FOX Entertainment, the second quarter saw programming strength, with Fox having the season’s number one new broadcast entertainment series in Krapopolis, hats off to Dan Harmon, the number one new game show debut in Snake Oil and the number one cooking series in Hell’s Kitchen. We’re also pleased with the very strong start of our mid-season lineup and the early success of We Are Family and The Floor. Before I hand over to Steve, I’ll comment on the sports platform we announced last night between Fox, Disney and Warner Bros.

Discovery. This new and unique digital distribution platform is focused on sports fans outside of existing paid TV offerings. Upon launch in the fall of 2024, the platform will offer a broad suite of sports, including those from a combined 14 linear networks that broadcast sports today. The inclusion of our networks in the platform is consistent with our strategy, being proudly consumer first and distribution agnostic. Across the distribution ecosystem, our traditional Pay TV market will remain our dominant customer base for some time to come. As such, we remain committed to our existing distribution partners, where our strong portfolio of leadership Sports, News and Entertainment brands thrive in their bundled offerings. This unique new platform opens up a new market for us, one that we at Fox have not accessed before and that we’re excited to participate in.

As always, we are focused on delivering value for our shareholders in a thoughtful and disciplined manner, and we will continue to explore every opportunity to maximize that value over the long-term. Let me now turn it over to Steve for his comments on the quarter’s financial results.

Steve Tomsic: Thanks, Lachlan, and good morning, everyone. With the vast majority of our fiscal 2024 affiliate renewals now successfully completed, Fox delivered 4% growth in total company affiliate fee revenues, led by 10% growth at Television and a return to growth at Cable. This growth reflects the must have nature of our content and the value that our distribution partners place on it. Consistent with our expectations regarding event cycles, advertising revenues this quarter were impacted by the absence of the FIFA Men’s World Cup at FOX Sports and mid-term political revenues at the local television stations, along with lower advertising revenue at FOX News Media. Collectively, these factors contributed to a 20% decline in total company advertising revenues.

Total company other revenues grew by 14%, driven by higher sports sublicensing revenues. All in Fox reported total company revenues of $4.23 billion, down 8% from the prior year. Total company expenses decreased 5% over the prior year, primarily due to the absence of the Men’s World Cup at FOX Sports and fewer hours of original scripted programming at FOX Entertainment due to the strikes. However, this was partially offset by the first year step up under our new NFL rights agreement. Quarterly adjusted EBITDA was $350 million as compared to the $531 million reported in the prior year quarter. Net income attributable to stockholders of $109 million or $0.23 per share, compared to the $313 million or $0.58 per share reported in the prior year period, largely due to the EBITDA impact I just mentioned, along with the net changes in the fair value of the company’s investments recognized in other net.

Our effective tax rate for the quarter came in at 12%, reflecting a one-off remeasurement of our deferred tax assets as a result of changes in state tax laws. Excluding this impact on other non-core items, adjusted EPS was $0.34 per share versus last year’s $0.48. Turning to our segments, starting with Cable, which reported 2% growth in total quarterly revenues. Cable affiliate fee revenues increased by $5 million with growth in pricing from our distribution renewals, outpacing the impact from industry subscriber declines running at approximately 8%. Cable other revenues increased $124 million, largely driven by higher sports sublicensing revenues associated with our college sports and international soccer agreements. This growth in affiliate and other revenues was partially offset by a 23% decline in Cable advertising revenues.

At FOX News Media, advertising revenues were impacted by a softer direct response marketplace, low comparative ratings, and higher levels of preemptions due to our breaking news coverage of global events. Meanwhile, at the national sports networks, we measured against last year’s broadcast of the Men’s World Cup. Expenses at the Cable segment were 14% lower than the prior year, with savings mainly gained from the absence of the Men’s World Cup, as well as lower legal programming and production costs of FOX News Media. Taking all these factors into account, quarterly adjusted EBITDA at the Cable segment grew 60% over the prior year quarter. Moving to our Television segment, which reported total quarterly revenues of $2.54 billion, down 13% from the prior year.

The TV segment reported strong 10% growth in affiliate fee revenues as price increases across all Fox affiliated stations more than offset the impact from industry subscriber declines. TV advertising revenues were down 19%. The solid growth of Tubi was more than offset by comparisons with last year’s cycle of major events, including the FIFA Men’s World Cup and mid-term political revenues, as well as the relative mix of World Series matchups and game counts. Also at TV, revenue from our entertainment production companies was impacted by the SAG and WGA related disputes. This contributed to a $64 million decline in TV other revenues, most of which was offset by a commensurate reduction in expenses. Overall expenses at the TV segment remained flat as higher costs under the NFL agreement and a modest increase in investment at Tubi were offset by lower costs from the absence of the Men’s World Cup, lower college sports rights costs, and fewer hours of original scripted content due to the strikes.

Together, these revenue and expense impacts led to a quarterly adjusted EBITDA loss of $138 million to our TV segment, compared to an EBITDA contribution of $256 million reported in the prior year quarter. Turning to free cash flow, where we recorded a deficit of $615 million this quarter. This is consistent with the normal seasonality of our working capital cycle, where the first half of our fiscal year reflects the concentration of payments for sports rights and the buildup of advertising related receivables. In terms of capital allocation, fiscal year-to-date, we have repurchased an additional $550 million through our share buyback program, bringing the total cumulative amount repurchased to $5.15 billion, or 25% of our total shares outstanding since the launch of the program in 2019.

In addition, today we announced a $0.26 per share semiannual dividend. These capital return measures are supported by our robust balance sheet, where we ended the quarter with $4.1 billion in cash and $8.4 billion in debt. These balances are before taking into account the repayment of our $1.25 billion note in late January. With that, I’ll turn the call back over to Gabby to open up the Q&A.

Gabrielle Brown: Thank you, Steve. And now, we would be happy to take questions from the investment community.

Operator: [Operator Instructions]. We have a question from Ben Swinburne with Morgan Stanley. Please go ahead.