Fox Corporation (NASDAQ:FOX) Q3 2024 Earnings Call Transcript

Fox Corporation (NASDAQ:FOX) Q3 2024 Earnings Call Transcript May 8, 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 Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I’ll now 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 3rd 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 thanks, everyone, for joining us this morning. This quarter, FOX continued to distinguish itself from its peers delivering 7% EBITDA growth and demonstrating again the strength of our brands and the advantages of our strategy. This result is even more impressive when considering we are comping to last year’s third quarter, which enjoyed a significant tailwind from Super Bowl 57. In the fiscal third quarter, total affiliate revenue fees grew 4% with positive growth at both our Television and Cable segments, driven by pricing benefits from our recent renewals. Headline advertising revenues were down during the quarter as expected, due to the absence of the Super Bowl and fewer NFL broadcast than in the prior year.

If not for the difference in our NFL postseason schedule, our total advertising revenues would have increased a few percent. Overall, advertising trends at FOX are clearly moving in the right direction, both in the scatter market and in early upfront discussions. Demand for sports remains robust, while trends at FOX News are improving across the board, including the fact that we have now fully lapped the direct response market issue that had adversely impacted FOX News PR revenues. And while there wasn’t much of a primary season this year, we do expect strong political advertising for national and local races as well as local ballot issues in the first half of our fiscal ’25 which would largely benefit our station group. As we look to our annual upfront presentation next week, our focus on live content and must-watch events, such as the coming presidential election cycle and next year’s Super Bowl combined with Tobi’s position as the most watched free TV and movie streaming service will favor our enviable position with advertisers across the FOX portfolio.

Operationally, FOX News again ended the third quarter as the most watched cable network in total day and primetime. FOX News also strengthened its leadership position inside the category gaining share again, commands 50% of total debuting. These gains are underpinned by a dedicated team of journalists and staff who are focused on delivering coverage and insights on current events most relevant to our viewers. Building from our strength in primetime, we are expanding our leadership across day parts, whether that be mornings with FOX & Friends, afternoons with The Five or late nights with Gutfeld. And we expect this momentum to continue as we ramp action coverage heading into the fall. Tubi ended the third quarter with 22% revenue growth driven by a 36% increase in total view time and 20% growth in monthly active users to just under 80 million MAUs. Our expansive content library and our differentiated user base have solidified Tubi’s position as the most watched free TV and movie streaming service in the U.S. with 1.6% of total TV viewing, ahead of Peacock, MAX, The Roku Channel, Paramount+ and Pluto TV and only marginally behind Disney+.

Paramount’s debut on the Nielsen Gauge in February of ’23 to the most recent gauge in March of ’24 to be share of total U.S. TV view time grew 60%, which is faster than any other streaming service over that same period of time. Apart from just its growing scale to be also unique and uniquely valuable to advertisers through its reach and through its engagement. Over 60% of Tubi users are classified as cord cutters or cord nevers and 90% of those user time watching is proactively on demand as opposed to passively watching a fast channel. This positions to be very well as an important part of the growing digital streaming advertising marketplace. We look forward to showcasing Tubi’s strengths at next week’s upfront. FOX Sports had an impressive quarter with strength across all areas of our portfolio.

We finished the 30th anniversary of the NFL on FOX on a high note with 3 NFC playoff games on FOX averaging an incredible 45 million viewers. This was capped with the NFC Championship game growing over 56 million viewers, which is 19% higher than last year’s NFC Championship game and the most watched in over a decade. This season also reinforced FOX solid position in collar sports with strong viewers from both college football and college basketball. In fact, in the current academic year, FOX are the most watched college football, Men’s College Basketball and women’s college basketball games across the regular season. College Sports has grown to become the second biggest source of FOX viewership behind only the NFL. Total consumption of college sports on FOX has grown by over 40% through the last five years.

And in the March quarter, we launched the UFL, United Football League, the result of the merger of the USFL and XFL. With this merger, the outlook for spring football is promising, and we are pleased with the results through the midpoint of the season. While the sports calendar in our upcoming fiscal fourth quarter tends to be quieter, FOX Sports is excited to present its summer of soccer, featuring over 200 hours of live soccer coverage across our platform starting with the UEFA European Football Championship on June 14 and Copa America on June 20. This summer will also feature a new schedule from FOX Entertainment, with returning favorites like Gordon Ramsay’s Food Stars and exciting new shows like the 1%. This follows a successful spring slate that featured two of the top five new primetime series in Krapopolis and the floor.

With Krapopolis, ranking as the number one new Primetime Entertainment Show and the floor as the number one game show season to date. Last quarter, we announced the formation of a new sports-focused digital distribution platform with our partners Disney and Warner Bros Discovery. We are happy to have hired truly a world-class CEO in Pete Distad and he is off to a flying start. In just several weeks, the JV now has over 150 engineers and executives dedicated to building a unique innovative product which focuses on sports fans outside of the traditional TV bundle. We’ve already launched an internal data service, which I have been trialing this past week, and I have to say it’s an incredibly exciting product and we can’t wait to launch it this fall.

Today’s media market is certainly dynamic, but the strength and leadership of our brands and their capacity to convert those strengths financially underscores our considered strategy. Underpinned by our best-in-class balance sheet, we ended the quarter with $3.8 billion in cash and just 1 time net leverage. We remain committed to driving long-term shareholder value creation through the thoughtful balance of managing our existing businesses, pursuing new adjacencies and returning capital to our shareholders. And with that, I’ll hand it over to Steve.

Steve Tomsic : Thanks, Lachlan, and good morning, everyone. FOX’s strategy continues to deliver solid results. Even with the comparison to our blockbuster NFL schedule of the prior year, we posted total revenues of $3.45 billion and grew adjusted EBITDA by 7% to $891 million. Total company affiliate fee revenues grew 4% over the prior year with growth at both our Television and Cable segments, supported by a recent cycle of affiliate renewals. Reflecting the event-driven nature of our business, advertising revenues on a headline basis were down 34% as we compare against last year’s broadcast of the Super Bowl, along with 2 less NFL playoff broadcasts in the current year quarter. As Lachlan just mentioned, if not for the impact of these NFL schedule items, total company advertising revenues would have grown low single digits.

Total company other revenues were down 22% versus the prior year primarily the result of the timing of sports of licensing revenues, which were more weighted towards our fiscal second quarter this year. Total company expenses fell 21% year-over-year primarily a result of the NFL postseason schedule differences I just mentioned. Net income attributable to stockholders of $666 million or $1.40 per share compared to the net loss of $54 million or negative $0.10 per share reported in the prior year period. This year-over-year variance reflects the growth in EBITDA as well as the absence of last year’s FOX News Media litigation charge and a current quarter book gain on the merger transaction of the USFL which is now being deconsolidated in connection with the formation of the United Football League.

Excluding these and other non-core items, adjusted EPS was $1.09, up 16% against last year’s $0.94. Now let’s turn to our segment results. At Cable, revenues were $1.47 billion, down 6% from the prior year quarter, while EBITDA grew 3%. Cable affiliate fee revenues were up 1%, with growth in pricing from our distribution renewals outpacing the impact of — from industry subscriber declines running in the mid-8% range. Cable advertising revenues fell by 6% or $20 million at the national sports networks, advertising revenues were down due to the absence of last year’s Super Bowl-related programming, and the world baseball classic. At FOX News, ad revenues were impacted by moderating direct response pricing declines and lower digital traffic, partially offset by higher national pricing.

Cable other revenues decreased $89 million, primarily a result of the timing of sports sublicensing revenues, which were more weighted towards our fiscal second quarter. Cable expenses were 16% lower than the prior year, primarily due to the timing of the associated sports sublicensing expenses, lower costs at FOX News and the deconsolidation of the USFR. All in and despite segment revenues being down 6%, quarterly adjusted EBITDA at Cable grew 3% over the prior year quarter to reach $819 million. Turning to our Television segment, where revenues were $1.94 billion, down 22% from the prior year, while EBITDA increased 24%. TV affiliate fee revenues grew 9% over the prior year as price increases across our owned and operated as well as 30 FOX-affiliated stations more than offset the impact from subscriber declines.

As mentioned previously, TV advertising revenues were impacted this quarter by the composition of our post-season NFL schedule, namely the absence of last year’s Super Bowl and 2 less NFL playoff games. As a result, on a headline basis, TV advertising revenues were down 40%. TV Other revenues increased $30 million, primarily the result of the timing of deliveries from our entertainment production companies. While total TV revenues were down versus the prior year, this was more than offset by a 24% decrease in TV expenses. Expenses were lower in the quarter, primarily due to the impact of the NFL schedule along with fewer hours of original drifted prime time content, including the impact of the industry labor disputes. All in, we delivered quarterly adjusted EBITDA at the TV segment of $145 million up 24% over the prior year quarter.

Turning to cash flow, where we generated strong free cash flow of $1.39 billion in the quarter reflecting our normal seasonal cycle of collecting advertising revenues from our fall programming, coupled with our major sports rights payments being concentrated in the first half of our fiscal year. From a capital return perspective, from the commencement of the third quarter through today, we have repurchased $300 million under our share buyback program, along with returning nearly $125 million to our shareholders via our semiannual dividend payment. Our total cumulative buyback activity since the launch of the program in 2019 now amounts to $5.4 billion or 26% of our total shares outstanding and we remain committed to fully utilizing our current $7 billion authorization.

These capital return measures are supported by our robust balance sheet, where we ended the quarter with $3.8 billion in cash and $7.2 billion in gross debt. And with that, I’ll turn the call back over to Gabby to open the Q&A.

Gabrielle Brown : Great. Thanks, Steve. And now we will be happy to take questions from the investment community.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of John Hodulik from UBS. Please go ahead.

John Hodulik: Thank you, and good morning everyone. Strong growth again at Tubi. I guess a couple of questions on that. I mean, first, what’s driving the growth in TVT? Any color you guys can provide on CPMs? Disney yesterday gave you a little color on some weakness in connected TV CPMs and then three, any color you can provide on dilution at Tubi and maybe how you guys view future profitability of that business? Thanks.

Lachlan Murdoch: Thanks very much, John. So, let me — I’ll start. I’m not quite sure what I understand what you mean by dilution at Tubi, but let me start with the other two. The growth of Tubi continues to be incredibly strong. I think TVT growth comes from both new subscribers or new viewers finding the platform. As you’d be aware, we’ve very efficiently be marketing the platform to bring more people to it, and it’s becoming a wider and wider known and loved brand in the marketplace. And the reason for that is we have — we’ve talked about it on calls before, with 250,000 movies and television series, on the platform. And now over 250 in fact, I think, around 270 live fast channels on the platform, it really does offer a tremendous product for everyone who’s utilizing it.

But it’s very interesting because of all those fast channels and all those 2,000 movies and TV series, 90% of the viewing comes on demand. And this is very important because when the viewing comes on demand and it’s proactively on demand as opposed to passively sort of sitting back and watching our fast channel, that’s much more valuable to advertisers. And it certainly is something that we’re going to make a big deal about at our upfront presentations next week. So, because of that, we are very confident we can hold our CPMs at Tubi. We’re already very efficient with our CPMs. I think some of our competitors priced themselves when they entered the AVOD market over the past 12 months to 18 months are very high, and we’re seeing the marketplace then having to drop CPMs as new entrants add supply to the market.

So that’s affecting the market overall. It certainly has an impact on the market for advertising for Tubi. But from a CPM point of view, it’s not really going to be a big impact to us. I should just say, though, that next quarter, we are going to be facing difficult comps in the fourth quarter. I think if you remember, this time last year, Tubi was up 47%, in revenue, and that’s going to be a very difficult comp for us next quarter. So, there will be some headwinds for the whole marketplace, but from a comp point of view for Tubi as well in the next quarter. So that’s just a slight word of caution.

Operator: Your next question comes from the line of Robert Fishman from Moffett. Please go ahead.

Robert Fishman : Good morning, everyone. Given all the press about the NBA negotiations underway, just curious if you can think a little bit as far as your broader sports rights go? And how do you think about the value of FOX Broadcast Network as you negotiate those future sports, right? And then the flip side of that is you feel like you’re at a competitive disadvantage without your own SVOD service to compete for future rights? And then if I can, just separately, given all the M&A discussion in the industry, what are your latest thoughts on monetizing some of your strategic noncore assets like your FanDuel option and Studio Lot? Thank you.

Lachlan Murdoch: Thanks, Roger. So, with the MBI, obviously, I can’t sort of comment on other people’s sort of negotiations and where that may or may end up. And in terms of how we think about it affecting the value of the FOX Network and our sports portfolio. We’re very happy with our sports portfolio. We obviously look at — but packages as they come up but we see them as a portfolio or a bouquet of sports rights that we have, and we feel very strong with the current portfolio that we have, which is one of the reasons why we didn’t pursue the MBA in this round of negotiations. But I think it does go to the value of broadcast television because sports leagues still need reaches the — is still incredibly important for them, for them to drive their fan bases, for them to get the maximum amount of viewership to their games and matches.

And so, the value of the FOX Network and frankly, our strategically kind of our position station group to any sports league only increases over time is what we’re seeing. And therefore, I don’t think coming of second part of your question, I don’t think we are strategically disadvantaged with not having a subscription video-on-demand service because we found in the past, we can partner with others. Well, frankly, the leagues to tend to partner with others, we can take the rights where we can broadcast to the most amount of Americans possible and they can allocate rights to SVODs as needed. But they’re never going to be able to live entirely without a broadcast network and the broadcast distribution.

Steve Tomsic : Yes. So, Robert, just in terms of the M&A picture, our posture on sort of what near-term noncore assets, like we’re strong believers in the sports betting market in this country. We read with interest you all not to put $1 billion-dollar value on it. And so, it is now our intention is to see through and eventually exercise. And then the Studio Lot, we think, is a long-term asset for us. We have development plans for that. And so, we don’t any change in posture around early monetization of those assets. We think they are incredibly valuable for the long term.