Fox Corporation - Class A (FOXA) — Q1 2020 Earnings Call Transcript

Thank you, operator. Hello, everyone and welcome to our first quarter fiscal 2020 earnings conference call. Joining me on the call today are Lachlan Murdoch, Executive Chairman and CEO; John Nallen, COO and Steve Tomsic, our CFO. 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 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 it over to Lachlan.

Thanks, Joe. Good afternoon, and thanks everyone for joining us today on Fox Corporation's 2020 first quarter earnings call. Our first full fiscal year as a standalone public company is off to a solid start with good positive momentum across all our businesses. We've just reported strong financial results, which Steve will comment further on shortly. But perhaps more importantly, we are making significant progress on the operational goals and strategic initiatives that we outlined to you at our Investor Day. Our strategy to build Fox around live sports, news and event programming is producing results and delivering audience growth and engagement faster than we expected. For example, we are now six weeks into the fall season and Fox has established itself as both the number one rated broadcast network and the only Big 4 network to deliver year-on-year audience growth in the key 18 to 49 demographic and in total viewers. We're up 5% in 18-49 ratings and 10% in total viewers. This leadership position stems from the investments we're making across our network beginning with Fox Sports, which has accounted for 22 of the 50 most-watched telecasts in the country since the NFL kickoff. Our ratings are up 11% across our entire portfolio of college and pro football led by Thursday Night with viewership up 22% and our Sunday broadcast which is up 8% to a three-year high. Another new addition to the Fox Network was the debut of WWE's Friday Night SmackDown on October 4 to an average audience of nearly 4 million viewers. We are thrilled with our WWE partnership as it completes our strategy, the program live content from Thursday through Sunday in the fall. The momentum behind football and WWE continued into the second quarter with a solid Major League Baseball postseason, culminating with a historic 7-Game World Series. Fox wins in adults 18 to 49 on four nights, Monday, Wednesday, Thursday and Friday, more nightly wins than any other network. The success of the network extends well beyond sports with our entertainment slate off to a great start, led by two of the top three programs on television. We are pleased to be seeing such positive signs of momentum as we execute the strategy we laid out last May. Our mix of live and near live tentpole content mixed with high-quality entertainment is clearly paying dividends. The Masked Singer has returned for its second season as the number one entertainment show on broadcast. And 911 is the top program on Mondays and is the number two scripted program on all of television. Prodigal Son is the highest-rated new broadcast program on any network this season. In fact, in entertainment programming only, Fox ranks number one over the first six weeks of the season for the first time since 2011. Speaking of number one, the Fox News Network is on track to finish the calendar year as the number one cable channel for the fourth straight year and as the number one news channel for 18 years running. And speaking of news, our station group has continued to expand the already extraordinary amount of local news we broadcast, which positions us well for the robust political ad market we expect next year. The real strength and value of these distinctive brands is evidenced by the momentum we've had on the distribution and affiliate renewal front where we remain on pace to achieve the targets we’ve previously outlined. We have successfully renewed distribution agreements with Charter, DISH and Cox, along with affiliate agreements with Nexstar, Gray and TEGNA. In each of these renewals, we were able to achieve value that reflects the strength of our core brands. Having said that, we have seen the rate of subscriber declines in the traditional MVPD universe escalate in recent months with this quarter yielding industry declines of over 4%. But it is important to note that the subscriber losses reported by just one distributor, which accounts for approximately 25% of pay television subscribers, represent the majority of the net losses we experienced over the past 12 months. That distributor accounts for almost 80% of total losses over the last year. And without them, subscriber losses would decrease to about 1.3%, helped by strong gains from the leading MVPDs. This is important because it suggests that it is too early to draw firm conclusions from a market that is still clearly fluid, especially in light of surging results from our leading digital partners. It is though something we are clearly focused on. Another area of focus is growing the company's digital revenues and businesses. I should mention that we do not include the MVPD distribution revenue in our digital results. The reach of our direct platforms has grown to over 250 million users per month with total engagement growing to over 11 billion minutes per month. Interestingly, we now see well over 10% of our streaming audience consuming the 4K stream. With very positive feedback, and we're excited to be the first broadcaster ever to stream the Super Bowl in 4K. It will be a groundbreaking experience for fans. Our digital strategy inclusive of businesses like Fox Bet is crucial to heightened engagement with our audiences, which is already driving meaningful growth. Year-over-year digital revenue has grown over 30% in the quarter, and we continue to work to optimize our digital platforms. For the first time ever, our Fox News, Fox Business and Fox Television Stations, Digital Properties are all now underpinned by the same tech platforms. And FOX Sports is being transitioned this quarter enabling us to drive improved monetization across these businesses. Of course, driving that improvement also leads us to new business models and new revenue streams. In conjunction with the kickoff of the football season, we launched a free-to-play Fox Sports Super 6 app nationally, which has already achieved nearly 1 million registered users and almost 10 million plays. The Stars Group is now live with the digital sports wagering service Fox Bet in both New Jersey and Pennsylvania. The proposed merger between Flutter Entertainment, the owner of FanDuel and our partner of the Stars Group will create many opportunities for us. We are excited to develop the Fox Bet brand in partnership with FanDuel and are confident in the dual brand strategy to capitalize on the rapidly growing sports wagering market. Over a month ago, Fox Business debuted a brand refresh across its linear and digital platforms, including a new logo and tagline vested in EU. As part of this initiative, FoxBusiness.com and the Fox Business app were launched with new content and editorial tools to drive engagement. The initial performance of the relaunch of digital properties has been encouraging as we have seen substantial increases in page views and in unique users. A core part of our strategy for FoxBusiness.com is our acquisition of Credible Labs, which closed a few weeks ago. We are now beginning the process of integrating its service with our core businesses starting with Fox Business. While we’ve remained focused on executing against our operational plans, we also continue to make progress towards other strategic initiatives while maintaining a balanced approach to capital allocation. To further strengthen our portfolio of assets, yesterday we announced an agreement with Nexstar to acquire their local television stations in their Seattle and Milwaukee markets. In return, we've agreed to sell them our stations in the Charlotte market, which geographically aligns with Nexstar's existing operations in the Carolinas and Virginia. It's a great deal for both companies and a rare win-win. This acquisition expands the reach of one of Fox's core assets, our television stations portfolio and further strengthens what is already a highly profitable and cash-generative business. This transaction will expand our market presence to 14 of the top 15 DMAs, and importantly, adds two major markets with NFL, Major League Baseball, Pac-12 and Big 10 teams. Finally, consistent with the timing we laid out at our Investor Day, we have today announced that our Board of Directors has authorized a $2 billion stock repurchase program. We are pleased to have the buyback authorization officially in place as part of our capital toolkit. The company also announced its intent to complete $500 million of stock repurchases in the near-term. In light of all the positive momentum I’ve just touched upon, in light of our success of the network in sports, in news and in our growing station group, in light of our market-leading investments in sports gaming and in the Credible marketplace, and in light of the unique cash benefits of our tax structure, we believe we are undervalued in respect to our peers and to other investment opportunities available to us at this time. This buyback reflects both our confidence in the long-term strength of our business and our commitment to finding the most efficient use of our capital. We remain committed to deploying capital in a disciplined manner to maximize shareholder value through a balanced approach of organic investment, accretive M&A, and return of capital to our stockholders. We will not follow a prescribed formula of deployment. Instead, we will be opportunistic and invest capital where we feel the company can achieve the greatest return on investment. Now, Steve will provide more detail on our financial results.

Thanks, Lachlan, good afternoon. We’ve made a solid start to fiscal 2020. And notwithstanding the subscriber headwinds Lachlan just mentioned, overall we are exceeding our internal plans that we commenced the year with. We delivered healthy top line and double-digit EBITDA growth in the first quarter, which sets us up well for the remainder of fiscal 2020. Let me now take you through our results and along the way remind you of some key factors that shaped the rest of that fiscal year. In the first quarter, the company reported total revenues of $2.7 billion, up 5% over the comparative period in fiscal 2019, reflecting revenue growth across all operating segments. EBITDA was $856 million, a 12% increase over the $761 million generated in the prior year, led by high contributions from the television and cable segment. This growth was partially offset by higher corporate expenses reported in the other segment, which reflect the cost of Fox operating as a standalone public company in the current year quarter. This is the presentation of carve-out financial statements in the prior year. From the bottom line perspective, net income attributable to stockholders of $499 million or $0.80 per share was lower than the $604 million or $0.97 per share in the prior year quarter. This decrease was primarily attributable to a $115 million reduction in the unrealized gain recognized in other net related to the changing fair value of the company's investment in Roku. Excluding this impact and other one-time items, adjusted EPS of $0.83 was up slightly over last year's $0.82 per share as a strong operating performance was largely offset by below the line items such as interest and tax expense which as we’ve flagged in the past, now reflect the full amount associated with operating as a standalone company. So now turning to the performance of our operating segments for the quarter. Our company network EBITDA of $684 million was up 8% on revenue growth of 2%. The revenue increase was led by other revenue growth of $30 million. This increase was driven by pay-per-view boxing revenues, including the Pacquiao-Thurman bout that took place in July, along with increased sports licensing revenues and subscription revenues from Fox Nation. Cable affiliate revenues were in line with those in the prior year quarter as the impact of higher average rates across essentially all of our brands was offset by the net decrease in pay television subscribers that Lachlan mentioned earlier. Sorry, material changes in current subscriber trends, we anticipate a return to growth in cable affiliate revenue in the second half of the fiscal year as rate resets from recent renegotiations begin to take effect. Cable advertising revenues decreased 4% reflecting lower contributions from the women's FIFA World Cup in the current year as compared to the men's tournament in the prior year along with the absence of UFC programming at the national sports networks. EBITDA at our cable segment increased 8% over the prior year, reflecting the higher revenues and a 5% reduction in costs. The decrease in expenses was attributable to lower production costs related to the men's FIFA World Cup in the prior year quarter and the absence of UFC programming in the current year quarter, partially offset by contractual increases on existing sports rights agreements. The television segment EBITDA was $251 million, an increase of $80 million or 47% from the prior year quarter on the back of revenue growth of 6%. The revenue growth was led by a 40% increase in television affiliate revenues, reflecting double-digit programming fee growth from non-owned station affiliates and double-digit direct retransmission revenue growth at our owned and operated stations. This growth is consistent with the overall TV affiliate revenue trajectory we laid out at our Investor Day in May where we announced our expectation to deliver revenues of approximately $2.65 billion by calendar year 2022. Other revenues in the television segment grew by $34 million driven by higher digital content licensing revenues and revenues from our recently acquired Animation Studio, Bento Box. As expected, advertising revenues in the quarter decreased by $12 million or 2%. This higher entertainment advertising revenues include the impact of the broadcast of the Emmy awards on Fox. We are more than offset by several expected cyclical factors compared to the prior year quarter. These include the impacts of political advertising revenues at the local stations related to the 2018 mid-term elections and more pay-per-view matches in the prior year quarter. Television segment expenses were in line with prior year amounts, with contractual increases on existing sports rights agreements and expenses associated with the broadcast of the Emmy awards. We are offset by the absence of rights expense associated with the broadcast of the men's FIFA World Cup in the prior year quarter. While most of you are already aware, at this point it is worth remembering that seasonal and cyclical factors have a particularly pronounced impact on our quarterly results in our television segment. This will be most visible in our Q2 results with the impact of higher sports rights and production expenses at the Fox network reflecting the contractual annual escalators on NFL, Major League Baseball, and college football contracts. And the addition of WWE rights along with lower political advertising revenue at our local television stations when compared to the prior year. Finally, from a P&L perspective, the net EBITDA loss in our other segment amounted to $79 million, which reflects the full quarter of standalone costs as opposed to the carve-out basis of presentation in the corresponding quarter last year. A strong overall P&L result generated free cash flow which we calculate as net cash provided by operating activities, less cash invested in property plant and equipment of just over $160 million in this quarter. The modest rate of conversion of EBITDA to free cash flow of approximately 20%, reflects the typical seasonality you should expect to see in the business. Here our first and second quarter cash flow are impacted by the working capital deficit from sports rights payments and the timing of cash collections and advertising revenue, which both reverse in the second half of that fiscal year. On a full-year basis, we continue to expect to benefit from natural low working capital usage, along with that cash tax benefit. From an overall balance sheet perspective, we ended the quarter with $3.3 billion in cash and $6.8 billion in debt. As Lachlan mentioned earlier, in the very near term, we will be deploying $500 million of cash on hand to the buyback of both A and B class shares. To do this, we’ve entered into an accelerated stock repurchase transaction to buy back $350 million of the company's Class A common stock and intend to promptly repurchase approximately $150 million of Class B common stock. Additionally, as part of that balanced capital allocation approach and as we announced yesterday, approximately $300 million of capital will be directed to the Nexstar television stations transaction, which we expect to close in the second half of this fiscal year. And in October, we closed the acquisition of a 67% stake in Credible Labs for approximately $260 million.

Thanks, Steve. Operator, we would be happy to take questions from the investment community.

Thank you very much. I have a question for Lachlan and John regarding the update on investment spending. Could you share what the September core proportion of the year was for the investment spending outlined during Analysts Day? Additionally, how are each of those investments performing? Lachlan, you've already mentioned WWE, but I would appreciate an update on the program investment and Fox Nation. Thank you.

Hey, Doug, I will let Steve tackle on.

Doug, listen in terms of the amount of investment spending actually deployed in the quarter is relatively modest. We called out at the Investor Day, somewhere between $200 million and $250 million of net EBITDA investment over the course of that year. And I would say, less than 10% of that was deployed over the quarter. You will see a significant amount of that come through in the quarter we are in now. Because we obviously got WWE that launched on October 4. We are now right in the middle of the full schedule and entertainment programming in Fox Nation, we continue to build in terms of the programming and the marketing.

We can go to the next question, please.

Thank you. I have a question that might be a bit challenging. Could you provide some insight on the advertising numbers for this quarter? As we look ahead to the second and third quarters, especially with the Super Bowl coming up, can you share your thoughts on the current situation? Additionally, with the new advertising structure appearing to be successful, could you also update us on any developments regarding the NFL negotiations? Any details you can provide would be appreciated.

Thank you, Jessica, for your questions. I’m happy to address them. From an advertising perspective, I will touch on the Super Bowl shortly. Overall, advertising has performed strongly this quarter, especially in the entertainment and sports sectors, despite some comparisons noted by Steve earlier. Our upfront was very successful, with entertainment pricing increasing by double digits and sports pricing rising in the high single digits, which we are pleased about. A key goal of our upfront was to align WWE pricing with broadcast rather than cable pricing, and we successfully achieved that. Several market categories are performing exceptionally well. Streaming services like Disney, Netflix, and Apple are investing significantly, and major tech companies such as Google, Microsoft, and Amazon have been strong clients. The pharmaceutical sector has also been robust, with shifts in spending towards sports and entertainment from news demographics. Notably, financial services clients like GEICO, Progressive, and State Farm are also investing well and supporting us effectively. Regarding news, pricing was up in the mid-single digits during the upfront, but the news advertising market is currently softer when compared to entertainment and sports. We believe this is linked to rating challenges faced by our competitors, leading to a dip in pricing. In terms of pacing this quarter, scatter pricing rose around 25%, although there is limited scatter available, making this figure significant. Although it's projected to decrease going forward, it remains above the upfront pricing. As for the Super Bowl, we are outperforming last year's sales at this time and have sold out all of our premium positions, maintaining strong momentum in sales. We are confident that the pricing for the Super Bowl will reach its highest cost per 30-second ad to date, which is very encouraging. Regarding the NFL, we do not have any new updates on negotiation progress. We are in daily discussions as we broadcast their games, but formal negotiations for the renewal of any packages have not yet begun.

Thanks. I’m going to ask a couple around Nexstar. So you talk a bit about the accretion math behind the station swap? And do you move to Fox's retrans rate card right away? And is that higher than Nexstar's rate card? And then lastly, besides from rate retrains step-ups, if there are any, are there any benefits you derive from getting in those markets? You called out the geographic footprint, but I want to know like what is that drive? What is that benefit you from changing the location of these markets?

Hey, Michael, it's Steve here. In terms of the retrans benefit, it’s pretty much a straight move from taking what they were paying us from those stations from a programming fee perspective and then assuming them into our retrans rates. That's a pretty immediate impact and synergy benefit of taking the stations onto their balance sheet. So it adversely hits our P&L from day one. Remember though, this won't close until later in the fiscal year. So you probably won't see much of that in fiscal '20.

And Michael, it’s John. Adding those key markets, which were pretty well missed, the only one we’re missing when you look at our footprint, particularly for the NFL and the other sports we are in, is just a big revenue upside for us. It helps on both a national and a local level. And we achieve cost synergies given the size of the station group that we have, we just would naturally achieve some cost synergies there.

We can go to the next question.

Thank you. Good afternoon. Just on the buyback and sort of the balance sheet, you guys talked about a $1.5 billion minimum cash balance at the Investor Day. As you noted, you guys are over 3. And I think even after the ASR, the acquisitions you've announced the dividend you’re still not even spending your free cash flow this year at least up on our numbers. So I’m just wondering if you have any timeline in mind or sense of urgency about optimizing the balance sheet from a cash debt perspective? It's not sort of way of me trying to figure out how fast you’re going to buy back your stock obviously. So …

But look, the buyback is just one element of our overall disciplined balanced allocation of our capital. So today we're pleased to announce that authorization and the deployment of the $500 million and I'd remind you that this announcement is right in line with the timetable that we had established. It's been well developed by our Board, established in the best interest of all our shareholders and with its adoption ongoing authorizations will be determined as an ordinary course matter with the Board. Now to deal with your question specifically, while we fully expect to complete the authorization, we won't follow a formulaic approach to any current or future buyback deployment. It just doesn't make any sense to us. So we will invest our capital where we feel we can generate the greatest long-term return for our shareholders and amongst the various legs of disciplined and balanced capital allocation.

I think we can go to the next question.

Hey, guys. It's Brandon Ross.

Welcome back.

Thank you. First on FS1. Disney has taken UFC and recently acquired Bundesliga, and I believe they renewed with Formula One. Can you explain how you plan to address the gap in programming? Additionally, regarding the Super 6 mobile game you launched, which seems to be a pathway to legalized betting for you, what insights have you gained from that so far? Thanks.

So let me start with Fox Sports One. I respectfully disagree with you regarding any programming gap. The programming lineup for Fox Sports One is quite impressive, featuring a substantial amount of college sports, as well as being the primary home for our NASCAR programming and boxing. We are very satisfied with the current programming on Fox Sports One, and we will continue to look for opportunities that align with our program strategy to strengthen it further. We are pleased with the position of Fox Sports One today. Additionally, if you examine the renewals of all our affiliates, you will see that Fox Sports One continues to drive increases in affiliate fees and rates, which indicates that our affiliates are in agreement with us. And could you please remind me of the question regarding...?

On Super 6.

Super 6 has been incredibly successful. The strategy behind Fox's spending, similar to Sky's approach in Britain and other countries where legalized digital sports wagering has been implemented, emphasizes the importance of having a free-to-play game like Super 6 to attract users. The early and rapid success of Super 6 suggests that we can effectively convert these users into paying customers for Fox Bet. We are satisfied with both Super 6 and Fox Bet. It's worth noting that in the New York and New Jersey market, particularly for New Jersey sports betting, there are already 13 active gaming advertisers. This liberalization of sports wagering rules on a state-by-state basis is promising; we anticipate substantial long-term value from Fox Bet and have already seen millions of dollars in advertising revenue in the limited states where sports wagering is legalized.

Operator, we have time for one more question.

Thank you, everyone. On the affiliate side, we experienced 4.3% growth this quarter. Previously, it was mentioned that it was around 7%. There are obviously many factors at play. Could you provide some insight into the renewals and when we might expect to see those reflected in the P&L? Also, is the 7% still a reliable estimate for the year? Thank you.

Hey, Jon, it's Steve. I think that's about right. You can see a consistent trend here, similar to what we experienced last year, where the September and December quarters were fairly stable for us. Therefore, you can anticipate December this year to reflect a similar performance. However, the renegotiations we've just completed, which Lachlan mentioned earlier, will lead to rate resets starting at the beginning of next calendar year. This means that when you compare first half and second half growth rates, the second half will show significantly higher growth, particularly in the third quarter, when the benefits of these rate resets will become evident. It will mainly favor retransmission growth compared to cable affiliate growth. Overall, we feel confident about our position for the full year and the $2.65 billion target for calendar '22.

At this point we are out of time. Thank you everyone for joining today's call. If you have any further questions, please reach out to Dan Carey or me. We look forward to speaking with you next quarter.