Fox Corporation - Class A (FOXA) — Q3 2020 Earnings Call Transcript

Thank you, operator. Hello, and welcome to our Third Quarter Fiscal 2020 Earnings Conference Call. Joining me on the call today are Lachlan Murdoch, Executive Chairman 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 both available in the Investor Relations section of our website. And with that, I'm pleased to turn the call over to Lachlan.

Thanks, Joe. Good afternoon, and thanks, everyone, for joining us today. We are living through extraordinary times. Since we last all spoke together, who would have imagined our lives could have all been turned so upside down. The impact of COVID-19 has affected our economy, our businesses, our colleagues and ourselves. We owe deep gratitude to the nurses, doctors, police, teachers, aged care workers, volunteers and countless other front-line workers for their incredible and brave sacrifices. At Fox, we thank every one of them. Their work humbles ours. We have spent these last few months protecting the health of our employees; providing essential news, information and entertainment to our communities; all while bolstering the strength of our company in order to best tackle the challenges ahead. At the outset, let me say that, if there is anything you take away from my remarks today, it should be that Fox is in a strong position to deal with the impact of this pandemic. Our strength was clearly demonstrated in the quarter, which was only partially impacted by the pandemic and is illustrative of the outstanding results Fox delivers in unaffected cycles. The strength of Fox has also been on display in the weeks since the end of the quarter as we navigate these unprecedented times to continue to provide our services to communities across the country. Starting with a review of our third quarter, you will have seen that we delivered exceptional financial results, achieving revenue and EBITDA growth of 25% and 20%, respectively, adjusted earnings per share growth of 22%, and generating over $1.5 billion of free cash flow. Our revenue growth was multipronged. It feels like a lifetime ago, but as a reminder, the quarter began with our record-breaking broadcast of Super Bowl 54, where we generated around $600 million of gross revenue across the company. But the strength in the quarter extended well beyond the Super Bowl. Local advertising at the FOX Television stations grew by over 20% as Super Bowl revenues were supplemented with over $35 million of gross political ad revenues in the quarter. At FOX News, advertising revenues grew by 15%, led by a 45% increase in digital ad revenues. And we had another strong affiliate quarter with total company affiliate revenues growing by 10%, despite a touch over 5% reduction in pay-TV subscribers. Steve will cover the details of our financial results shortly. Operationally, the quarter saw FOX News and FOX Business deliver their largest audiences in each network's history with FOX News ratings up approximately 40% year-on-year. The success of FOX News Media's brands extended beyond their linear properties, FOX News Digital achieved its highest quarter ever across all KPIs, including over 11 billion digital page views. Company-wide digital reach grew 42%, while digital engagement nearly doubled year-on-year. Elsewhere on screens, the quarter brought us another successful season of The Masked Singer and the number one new broadcast reality series, the family-friendly hit, Lego Masters, two shows that we hope will shape the Fox Network lineup for years to come. While still early days, our strategy to leverage the cross-promotional power of our platform to support shows we have an ownership interest in is showing encouraging results. Bless The Harts was the number one new comedy and adds another leg to our Sunday Animation Block, while Prodigal Son was the second highest-rated new scripted drama on television. Locally, the FOX television stations continued the expansion of their news coverage, adding an additional five hours per week across Atlanta and Los Angeles. The stations' unified programming strategy drove ratings growth in essentially every day part, including daytime and late news. Corporately, during the past quarter, we completed important transactions to support the ongoing growth and momentum of FOX. Among them were the closing of our agreement with Nexstar, in which we expanded our local market footprint through the acquisition of key stations in Seattle and Milwaukee, and the transfer of our Charlotte stations to them; the early renewal of our distribution agreement with one of our largest partners, Comcast, and our full portfolio of channels; and the announcement and subsequent closing of our acquisition of Tubi, which immediately expands our direct to consumer capabilities and provides our advertisers with even more opportunities to reach audiences at great scale. Coupled with combined power of Fox's existing networks, Tubi provides a substantial base from which we will drive long-term growth in the direct-to-consumer market. As an example of the scale, in April, Tubi generated total viewing time of over 200 million hours, which is up more than 150% versus prior year. This was also the first full quarter reflecting the results of Credible, our digital loan marketplace business. And while we are only just at the beginning of exploring the marketing synergies between Fox and Credible, the business has had a great quarter, doubling its closed loan volume and revenue year-on-year. Overall, the financial and operating results through the first nine months of the year confirm just how sturdy our business is and demonstrate the power and importance of our live sports, news and event programming to our partners and our audiences. Of course, our achievements have been rightly overshadowed by the outbreak of the COVID-19 pandemic, and by the challenges it has presented to all of the company's stakeholders, including our colleagues, the communities we serve, our business partners and our shareholders. We understand our responsibility to each stakeholder and are mindful of them in the balanced actions we are taking to address the crisis. As I mentioned earlier, our main priority remains the health, safety and well-being of our more than 8,000 colleagues. We continue to follow federal, state and local guidelines when it comes to our workforce in our locations across the U.S. Those whose job functions allow it have been working remotely since mid-March. And we have over 70% of our employees offsite at the moment. We are grateful to those essential employees, whose jobs require them to work onsite for their commitment and for their resolve. We have taken actions to protect and ensure the well-being of these employees, particularly for those that are out in the community informing the country of every aspect of the pandemic at a national and local level. While taking steps to keep our colleagues safe, we also continue to provide our viewers with the information they seek to better understand this pandemic on a national and local basis. In this spirit, we swiftly launched coronavirusnow.com, a free to use website featuring the latest news about the pandemic. Drawing on our news gathering and digital capabilities across the country, bolstered by third party content from government and health organizations, such as the Centers for Disease Control, we've created the site to provide our employees, viewers and communities with reliable up to date information about this public health issue. Over 1.3 million Americans have accessed these specific resources. It's a wonderful example of the breadth of Fox coming together to provide a public service to our audiences at a critical time and in a new and distinctive way. Further, working with our distribution partners to ensure that all Americans could receive the latest national and local news regarding coronavirus, we offered free access to the FOX News channel and FOX Television stations, starting in mid-March and continuing for over a month. We are doing impactful work across our platforms to inform our viewers and to give back to our audiences. Fox raised over $13 million for Feeding America and the First Responders Children's Foundation, through our broadcast of Fox Presents the iHeart Living Room Concert for America, which paid tribute to the brave medical professionals and local heroes who are working on so many aspects of the pandemic. In early April, Fox News and Facebook co-hosted a coronavirus town hall, featuring medical and business experts, including members of the White House Coronavirus Task Force. Fox News and Facebook jointly donated $1 million to Feeding America's COVID-19 Response fund. In partnership with NASCAR and with the NFL, FOX Sports donated to Feed The Children, the American Red Cross and Feeding America. FOX Sports and FOX News talent have taped special public service announcements, encouraging viewers to stay home and to seek the latest guidance from the CDC. To date, we have broadcast nearly 30,000 COVID-19 PSAs. Our FOX Television stations have spearheaded charitable initiatives to assist their local communities from benefiting food banks and presenting on-air school lessons for students with limited access to technology. And an initiative I am particularly proud of is the preparation and delivery of 2,000 meals a day for the disabled community in Los Angeles by our Fox Studios foodservice staff. This gives us the dual benefit of keeping our amazing staff in work, while providing much needed support to the people of LA. We'll continue with many of these and other initiatives where we can be helpful. And I've asked each of our 8,000-plus employees to look for ways they can contribute to their community while working from home. At the same time, we're keeping a close eye on the evolving impact of the crisis on our business, adjusting the way we operate in the near term, communicating with our partners and evaluating our longer-term models to ensure that we maintain the strength of Fox for the future. Clearly, we are not immune to the impact of COVID-19, and we acknowledge the continuing pandemic will influence our future financial results. The uncertain nature of the situation, however, makes it challenging for us to estimate the future performance of our business, particularly over the near to medium term. So what has been the impact on our business to-date? At a macro level, sports events have been deferred and the production of certain entertainment content slated for the fall has been suspended. However, our activities around news have grown and intensified. Our local and national news ratings have been strong with FOX News ending the third quarter with its largest audience in history. We have seen this momentum accelerate into the current quarter with audience levels rising further, most notably in the younger demographics. This quarter so far has seen the network's adults 25 to 54 audience nearly double from prior year levels. This growth has not gone unnoticed by advertisers with new business coming to FOX News from clients looking to reach these younger demographics or to transition dormant sports dollars to news or to present different marketing messages in light of the virus, thereby mitigating most of the pullback in the categories that you would expect, such as auto, entertainment and retail. Categories that have moved spending into FOX News to reach our expanded and engaged audiences include insurance, fast service restaurants, telecom, streaming and tech. Where the impact of the pandemic is most apparent in our business is at our local stations across the country, where despite viewership gains for our local news programming, fiscal fourth quarter advertising revenues are pacing down around 50% from year ago levels. The local auto, local retail, local travel, and local entertainment categories are leading this decline for us and the rest of the TV market. We'll only see the pattern of how these categories will return after states and municipalities open back up for business. On our last earnings call, I indicated that all signs pointed to a robust political ad cycle for our local markets. As a result of the contraction of the field of presidential candidates and the postponement of many state primaries due to the pandemic, we have seen a slowdown in the active political advertising spend that we saw in the third quarter. However, traditionally, the political campaign significantly ramped up spending in our first fiscal quarter, and we expect, with election day still six months away, that this category will intensify again as we approach November. Turning to sports, which accounts for over 40% of our total annual advertising revenue. Very little of this revenue has been affected so far by the shutdowns. Our sports revenue is concentrated in the fall when baseball's postseason and the college and NFL football seasons are most active. We're in close contact with all of our sports partners and know that they are being thoughtful around their scheduling decisions by prioritizing the health and safety of all of the personnel associated with their sport, their fans and their production partners like us. We'll look to them for their conclusions around when they will commence play. Whenever they are ready to start, we'll be ready to produce and to broadcast. Like the rest of America, we can't wait for the first pitch thrown, the first ball hiked and the roar of engines starting again. On the entertainment side, COVID-19 has caused the temporary cessation of nearly all program production in the industry. Regardless, Fox will enter the next broadcast year with a great deal of stability. This is partially because animation production has been less affected than live action, and we expect to return in the fall with all new seasons of The Simpsons, Bless The Harts, Bob's Burgers and Family Guy. Also slated for the fall, we have already completed new seasons of our Gordon Ramsay franchises, Hell's Kitchen, and MasterChef Junior, and have all new series finished and ready to go to air, including the psychological thriller, NeXt and the Southern gothic soap opera, Filthy Rich. At this time, should the conditions allow for it, we are planning for production in early August of Season 4 of The Masked Singer, which will target a fall debut. We have also begun preparing new seasons of 9-1-1, 9-1-1: Lone Star, Prodigal Son and Lego Masters for mid-season launch dates. Given the uncertainty that our advertisers are facing in their own businesses, along with the potential variability in our programming schedule, you'll have noted the cancellation of our advertising Upfront, which would otherwise have taken place next Monday. Although, we will not be hosting this traditional event this year, we remain in constant dialogue with our advertising partners to ensure that we provide them with the flexibility needed to navigate these unprecedented times. Fox executives have been front and center with our clients, hosting video conferences to speak about the marketplace and the impact on their businesses. While the flexibility that we provide our partners will certainly be reflected in reduced advertising revenues in the current quarter, it is our priority to preserve these long-term relationships and do what we can to ensure the health and sustainability of their businesses and brands. Finally, as for distribution, we are pleased with increased viewing that we're delivering for our partners' video offerings and for our FOX-affiliated stations across the country. As it relates to pay TV subscribers, it's unclear so far of the impact of COVID-19 will materially alter recent trends. We know that a few major distributors have publicly expressed a bearish outlook for their video subs. And there will no doubt be recessionary economic pressures across a significant number of pay-TV households in the near term. These factors alone would likely exacerbate the recent trends in subscriber declines. But we also know from Nielsen Ratings that more people are consuming TV right now, particularly in the news category. And we know there is strong pent-up demand for live and event programming that is the cornerstone of our portfolio brands, beginning, for example, with the return of NASCAR in just 10 days. While the bias would have to lean toward near-term pressure on subscriber levels, how all of these factors interact and get reflected in subscriber numbers will become more clear as the year progresses. I'll wrap up my comments where I started. Fox is in a strong position to weather this turmoil. Our outsized exposure to news, a genre that should be less impacted than others and the timing of the sports that we broadcast has curbed the immediate impact on us so far. We entered this crisis in a position of financial strength and we remain well capitalized and highly liquid. Our steadfastly conservative financial management and our strong free cash flow profile underpin the company's balance sheet even with the uncertainty around the shape and pace of the economic recovery in the United States. As we emerge, Fox's focused collection of brands skewed heavily towards live and event programming will be even more in demand by advertisers and audiences alike. I am confident that we'll come out of this crisis as a stronger, more efficient and more agile company positioned for the future toward our continued goal of maximizing long-term shareholder value. And now, I'll turn the call over to Steve.

Thanks, Lachlan, and good afternoon. Let me start with a brief summary of our third quarter results, before going on to discuss current trading conditions. As Lachlan mentioned earlier, Q3 was a clear demonstration of Fox's financial strength. The company reported total revenues of $3.44 billion, up 25% over the comparative period in fiscal 2019, reflecting revenue growth across all operating segments. Total company advertising revenues increased 44%, led by the broadcast of Super Bowl 54, while total company affiliate revenues increased 10%, demonstrating the strength of our brands and our focused portfolio of channels. We achieved double-digit affiliate revenue growth despite the rate of net subscriber declines of just over 5%. Quarterly EBITDA was $920 million, and notwithstanding the comparison to carve out financials in the prior year period still represented growth of 20% led by increases of the television and cable network programming segment, partially offset by the impact of corporate expenses at the other segment. The increase in these expenses reflects the full costs of Fox operating as a standalone public company in the current year versus the presentation of carve-out financial statements in the prior year quarter. From a bottom-line perspective, net income attributable to stockholders of $78 million or $0.13 a share was lower than the $529 million or $0.85 per share in the prior year quarter. This decline was primarily due to the change in fair value of the company's investments recognized in other net. Most notably, the book loss incurred following the sale of our stake in Roku in March. From an economic perspective, the Roku sale, which equated to nine times our initial investment, delivered a post-tax gain relative to initial cash investment of approximately $300 million and strategically allowed us to convert a minority shareholding into the full ownership of leading AVOD player Tubi. Excluding this impact and other non-core items, adjusted EPS of $0.93 was up significantly compared to last year's $0.76 per share, reflecting the growth in EBITDA, partially offset by higher net interest expense, which as we have flagged in the past, primarily reflects interest on the standalone debt structure of Fox versus the carve-out presentation in the prior year quarter. So now turning to the performance of our operating segments for the quarter, where cable EBITDA of $792 million was up 7% on revenue growth of 6%. As expected, we saw growth in cable affiliate revenues accelerate to 4%, as the impact of new distribution agreements and higher average rates across essentially all of our brands, was partially offset by the net decrease in pay television subscribers. This growth also reflects the launch of FOX News and Fox Business on Sling late last year. Cable advertising revenues increased 10%, led by results at FOX News Media, including the impact of higher ratings and continued strength in our digital sales, partially offset by high preemptions associated with breaking news coverage. Segment advertising growth was also impacted by fewer live NASCAR events at Fox Sports 1, due to the postponement of early season races as a result of COVID-19. Other cable revenues grew by $18 million, driven by contractual sports sublicensing revenues, primarily associated with college basketball content in the quarter. EBITDA at our cable segment increased 7% over the prior year, reflecting these higher revenues, partially offset by higher expenses. FOX News Media costs were up in the quarter due to coverage of the presidential primaries and continued digital investment in FOX Nation, which were partially offset in the segment by lower programming rights amortization of Fox Sports 1 from fewer live NASCAR events. The quarter also included one-time costs at FOX Sports and FOX News Media related to the production of shoulder programming leading up to the broadcast of Super Bowl 54. The Television segment reported EBITDA of $224 million, an increase of $125 million over the prior year quarter on revenue growth of 41%. The revenue growth was led by a 56% increase in television advertising revenues, including the impact across our network and stations from Super Bowl Sunday. Excluding the impact of the Super Bowl and the impact of one less NFL divisional playoff game compared to the prior year, advertising revenues would have been up 1%, primarily due to strong CPM growth for FOX Network and higher political advertising revenues at the Fox Television Stations. These were partially offset by the impact of COVID-19 on our local stations during the closing weeks of the quarter. Television affiliate revenues increased 22% in the period, reflecting double-digit increases for both our programming fees from non-owned station affiliates and direct retransmission revenues at our owned and operated stations. EBITDA at our Television segment increased $125 million over the prior year, reflecting these higher revenues, partially offset by higher expenses. The increase in expenses was driven by programming rights amortization and production and costs associated with the broadcast of Super Bowl 54, partially offset by the impact of the rotating NFL divisional playoff game and prior year programming write-downs. Similar to our second quarter, we continued to make investments in programming, which included our first year of WWE content, the expansion of original entertainment programming and our participation in co-production arrangements with third-party studios. Finally, from a P&L perspective, the net EBITDA loss in our other segment amounted to $96 million, which reflects the full quarter of stand-alone cost, as opposed to the carve-out basis of presentation in the corresponding quarter of the prior year. We still expect the net EBITDA loss in our other segment to be in the mid to high $300 million range for the full fiscal year. Turning now to cash flow. As expected, our free cash flow generation in the quarter of more than $1.5 billion was strong, supported by the collection of advertising revenues from our fall programming and the fact that our sports rights payments were concentrated in prior quarters. As a reminder, we calculate free cash flow as net cash used in operating activity, plus cash invested in property, plant and equipment. As part of our balanced approach to capital allocation, in March, we closed on the previously announced Nexstar Television stations transaction at a net purchase price of approximately $300 million. We also generated net proceeds of approximately $340 million from the sale of our stake in Roku, which was earmarked from the acquisition of Tubi for approximately $445 million in net cash consideration at closing last month. During the quarter, we purchased 3.9 million Class A and 2.9 million Class B shares for $173 million. Against our buyback authorization of $2 billion, we have now cumulatively repurchased $600 million, representing nearly 3% of our total shares outstanding since the launch of the buyback program in November. Given the current uncertain economic conditions, we have not bought back shares since the onset of the crisis. From a balance sheet perspective, we ended the quarter with $3.2 billion in cash and $6.8 billion in debt. Since then, out of an abundance of caution, we took the opportunity to add to our already strong liquidity position by raising $1.2 billion of five-year and 10-year notes in April, which was significantly oversubscribed. The weighted average cost of this new issuance was approximately 3.3%, thereby making it attractive from a cost perspective to essentially prefund our $750 million maturity due in January 2022. So with the combined benefits of strong free cash flow and liquidity, moderate leverage and the absence of any debt maturity for almost two years, we face the challenges of COVID-19 from a position of financial strength. As Lachlan mentioned, while we are very proud of the operational and the financial results that we have achieved, we're acutely aware of the impact of COVID-19 and the challenges it presents to all of our businesses and all of our stakeholders. We note that there are a number of moving variables, among them the outlook for the gradual reopening of the economy, the timing in the return of sporting events and the evolution of the upfront advertising cycle that make it difficult to forecast our business beyond the very short term. As such, our commentary today will focus only on our fiscal fourth quarter and only on advertising revenues, which is where we are seeing the most significant impact to our business. The most immediate impact has been on advertising revenue at our local television stations, where inventory is sold essentially on a spot basis and many of our advertising partners operate in sectors most displaced by COVID-19. If pacing continues at current levels, we would expect our local advertising to be down by approximately 50% as against prior year. Meanwhile, our News and Entertainment businesses are expected to be more insulated in the immediate term. News is being supported by strong ratings, the growth of its digital properties, the category mix of its core advertisers, along with the new advertising clients it is attracting that help partially offset decline from the legacy advertising base. At Entertainment, we are already substantially through the broadcast season with our advertising revenues well supported by inventory that was sold during last year's upfront and until recently, a strong scatter market. So before we get to our Sports business, the collective Q4 impact of weaker advertising demand at our local TV stations, national news, and Entertainment businesses is anticipated to be around $200 million to $240 million or 25% to 30% compared to prior year. Across these businesses, we do not anticipate COVID-19 having a meaningful impact on Q4 costs. Now turning to our Sports business, where uncertainty around schedule makes it impossible to forecast top line impact. However, it is worth pointing out that we typically amortize the associated rights fees and production expenses on our P&L when the games or events actually air on our networks. So from a bottom line perspective, advertising revenues from events being postponed is often offset by the P&L expense benefit of not having the rights cost. Although these uncertainties make it challenging for us to estimate the future performance of our businesses, as Lachlan mentioned in his our financial results to illustrate, the company entered this crisis in a position of operating and financial strength. We will continue to manage our business and balance sheet in a disciplined and conservative manner so that we emerge as well positioned as possible to take advantage of opportunities during the recovery. And with that, I'd now like to turn the call back to Joe.

Thank you, Steve. And now we'd be happy to take questions from the investment community.

Great. Thank you. So my multipart, one question. I've always said you're a super nimble company, very entrepreneurial. And out of all of this, maybe there's some opportunity. I'm just wondering if you're thinking about longer-term changes in your business where you can find more efficiencies? And then more immediately, what can you say in terms of sports? Well, I mean, WWE is still on. Can you talk about what the ratings have been and what the advertising has been? I'm just wondering sports without fans, does it change the demand in advertising? NFL is supposed to announce their schedule tomorrow. Do you think that will impact the advertising demand? Thank you.

Thank you, Jessica. Let me address both of your questions. There are two questions, which are similar, but I appreciate them both. Regarding efficiencies, since we are in a strong position, we haven't specifically looked at efficiency improvements related to the COVID-19 impact. Our employees are fully engaged and all our businesses are operational. When we separated from Disney, we created what we believe is a very efficient platform for moving forward. That said, we've reviewed how we produce sports and news, and how we operate our corporate functions. We have learned valuable lessons from telecommuting and have found more flexible and innovative ways to work. We believe there are significant opportunities for us to become even more efficient and agile as a company. This is a process we were already exploring before COVID-19, and we see potential there. From the sports perspective, we are very pleased with the return of NASCAR on May 17, as there has been strong client demand to associate with and market during that race and future races. We have collaborated closely with our clients over the past six weeks through numerous digital meetings, helping them understand the impact of COVID-19 on their businesses and how we can support them as we emerge from this health crisis. This process is evolving, and we can now have more specific discussions with them, especially about the fall. We are also looking forward to the NFL releasing their schedule tomorrow night, which will allow us to have more detailed conversations with our clients. There is significant pent-up demand for sports and live event programming. Additionally, I want to commend the WWE for doing an excellent job of providing us with live content weekly, even under challenging conditions. We greatly appreciate their efforts. Thank you, Jessica.

Operator, we can go to the next question.

Thank you. Good afternoon. It feels like a long time since your Investor Day last year. I wanted to ask about a couple of key points you focused on then. One was the outlook for retransmission revenues, which is a crucial growth driver for your business. Given how much the landscape has changed since then, are you still confident in meeting those expectations? Additionally, I recall that you mentioned a cautious approach to buybacks and a conservative strategy with your balance sheet for potential future opportunities. We've certainly reached that moment, and I'm interested in how you plan to utilize your balance sheet, which can be a strategic advantage during times like these, to continue to innovate as you look ahead.

So Ben, I'll address the first part of your question, and then John and Steve can handle the second part. Regarding retransmission, we are completely confident that we will meet our goal, which we announced at Investor Day, even though it seems like a long time ago. I'm sure we all have noticed some changes. To remind everyone, that goal was to generate an additional $1 billion in affiliate revenue by the end of 2022. We believe we are on track to reach that target. John, I will turn it over to you for the second question.

Thank you, Lachlan, and thank you, Ben. You’re correct. We have always recognized the importance of our balance sheet as a key strategic asset for the company since the formation of Fox Corporation. The balance sheet's strength is indicative of our operational performance. It's essential to assess how robust our businesses are first. This strength provides us with options for the long term. However, as Lachlan and Steve noted, with current uncertainties, our immediate focus remains on the operational strength of the business. As Steve mentioned, we halted the buyback when the pandemic began, and we plan to proceed with caution for a bit longer, knowing that we have this strategic asset to further develop the company.

Operator, next question please.

Thank you. I have two questions. First, I'd like to understand your rationale for engaging with Tubi and where you believe you can add the most value. It appears there is a significant amount of library content available, while your company primarily focuses on live production. I'd be interested to hear how you envision creating value for Tubi. Secondly, Lachlan, during the last call you mentioned discussions regarding a new renewal with the NFL for the upcoming contract. Are those discussions still ongoing, and do any data points emerging in the next quarter cause you to reconsider moving forward with the deal until you observe clearer trends post-COVID? Thank you.

Thank you, Michael. You raised two great questions, and we could discuss them extensively. Regarding Tubi, it provides us with significant reach, and we've previously addressed our direct-to-consumer strategy. We are pleased with our authenticated approach through FOX NOW, which serves as an authenticated platform for our product, as well as the performance and growth of FOX Nation. Notably, April marked the second-strongest month for FOX Nation, and it continues to show impressive results, achieving an over-80% conversion rate from free trial users to paying subscribers. This indicates that our FOX Nation consumers are enjoying and investing in the product as it expands. We've also discussed Fox Bet and Credible as part of our direct-to-consumer strategy. However, concerning Tubi, we do not plan to re-enter the original production space through it. We believe our existing brands are crucial for Tubi's growth. You can see this today, as the top television show on Tubi, The Marked Singer, is driving significant viewership and advertising impressions. The potential for leveraging sports, news, and our local stations in the future is also very promising. Tubi has grown 150% year-over-year in terms of video hours viewed, and we see further opportunities to enhance its business. We are getting to know the Tubi team well and have confidence in their ability to achieve great things. It’s essential that Tubi aligns with our brands, and we find its distribution prospects exciting. As for the NFL, due to COVID-19, we haven't had the opportunity to sit down and discuss future plans and the renewal of our contracts. Nevertheless, we remain in daily contact with the NFL regarding various matters, and we maintain a close relationship with them. We don't see anything in the current market that alters our perspective on the value of our partnership with the NFL. They have been an invaluable partner for more than 25 years, and as they have grown, so have we. We look forward to continuing this partnership for many years ahead.

Thank you, very much. I just want to follow up on your comments about the upfront market. I understand the process is very different this year, and there's a tremendous amount of flexibility. But do you believe there will be some upfront markets that will occur, meaning that advertisers will be willing to make commitments for the fall and for next year? And I guess when you look at Fox's portfolio, sports being such a big component of it, do you feel that they will remain on the sidelines until you do get better visibility on that front? I know you mentioned having the line of games coming out soon will be helpful, but is it enough to sort of get them to kind of make these commitments?

Thank you, Alexia. As I mentioned earlier in response to Jessica's question, we have been actively engaging with our clients and advertising agencies over the past six weeks, and we do not anticipate that changing. We do not believe that a virtual upfront is appropriate at this time, as our clients are all experiencing the effects of COVID-19 in various ways and will recover differently. For instance, our retail and automotive clients will rebound from COVID-19 much differently than our financial services or insurance clients. The entertainment sector will also recover differently compared to telecommunications or professional services. Therefore, it is essential for us to understand our clients' unique needs through our engagement and to customize our partnerships accordingly, and that commitment will persist. There are triggers that influence these discussions, such as the release of the NFL schedule and the return of NASCAR to the track, which are exciting developments. However, we will continue to collaborate closely with each client and align our efforts to meet their specific needs. It’s also important to note that while the sports schedule is beginning to form, our fall entertainment lineup is extremely robust, largely due to much of our programming already being filmed and edited. The only uncertainty in our fall entertainment timetable is whether we can resume production on Masked Singer in time for the fall or mid-season. Additionally, the fact that our animation production schedule has remained largely unaffected by COVID-19 has been very beneficial for us. Therefore, we are optimistic about having a strong entertainment lineup this fall. Moreover, the notable increase in news ratings is a significant factor—our news ratings are at their highest ever, with a younger and more appealing demographic than before, which makes us very optimistic. So, our confidence lies not only in the return of sports but also in our news and entertainment offerings, and we expect to have a solid quarter.

Operator, we can go to the next question.

Thanks very much. I guess the first question is jump ball. Has this environment impacted making any new investments in entertainment programming? And how does the accounting work for the programs that you're bringing back? I believe you booked them on a cash basis last year when you made the investments. Now that they're returning for second seasons and they've been successful, does that have any implications for downstream revenues that you start to book or cash you start to receive? And the second question, Lachlan, I was going to ask, it seems like you have an idiosyncratic mix of acquisitions to-date, and what should we expect next in terms of M&A? And it's interesting because you strung three together as part of a direct-to-consumer strategy. So either way, whether it's an idiosyncratic mix or whether it's actually targeted to a specific strategy, any thoughts on what's next for M&A would be helpful.

Doug, I'll begin by addressing the first part of your initial question before moving on to the second. Steve will provide details on the accounting aspect, but regarding the effect of new investments in entertainment, as I mentioned, global production is essentially on hold right now. We are still planning for new seasons and shows that we are eagerly anticipating, whether they're for mid-season or next year, and there have been no disruptions in our development cycle for new shows and new intellectual properties. One ongoing aspect behind the scenes is the use of virtual writers' rooms and development, allowing teams to work without being physically present in costly movie studios. This work is continuing behind the scenes, which is reassuring to see.

Yes. Doug, regarding the accounting, we mentioned at the Investor Day that we anticipated spending between $200 million to $250 million on programming investments, and we are on track to meet that range for the full year. So far, we've spent close to $170 million in the first three quarters. We are still on pace, and as Lachlan mentioned, we will continue to evaluate our investments moving forward. The accounting for the amortization of entertainment programming will remain unchanged, as we typically process this during the first run. Therefore, there will be no alterations to the amortization.

I believe we can categorize our investment and M&A strategies into two main groups. The first focuses on enhancing our current strengths within our existing framework. Take Tubi as an example; we can improve both the content and advertising sales aspects of the platform. Their partnership with us is highly beneficial, and we view it as a strategic acquisition that aligns well with our capabilities. This approach is about leveraging new technologies and advertising on a video-on-demand basis to extend our content's reach and open more opportunities for advertisers. While it may seem straightforward, we find it quite promising. Therefore, one category consists of businesses that improve what we're already doing in exciting new ways. The second category includes companies like Credible and Fox Bet, where we aim to monetize our existing audiences through different channels. Currently, our revenue is roughly evenly divided between advertising and affiliate income, and diversifying our revenue streams to become less dependent on these two sources is crucial. We're particularly enthusiastic about Credible, which has doubled its size, loan volumes, and revenue over the past year. Fox Bet also had a remarkable Super Bowl, though the pandemic has reduced the volume of sports events. It's worth noting that part of our acquisition involved an equity stake in TSG, which has performed well following its merger with Flutter, and I want to commend Peter Jackson for that achievement. Overall, our strategy focuses on entering new markets while continuing to serve our existing audiences in innovative ways.

Operator, we have time for one more question.

I think we go to the next question.

Thank you. So maybe just first, you talked about the TV station pacing of around down 50%. As we've come through the current quarter, have you seen any sequential improvement that makes you think that, that down 50% isn't going to repeat again in the next quarter? And I know that's a bit of a call on how reopening looks but just wondering if you're seeing that down 50% start to improve as parts of the economy start to reopen at this point and then, just a quick follow-up on political.

So let me discuss the local and national advertising landscape broadly. Our projections indicate a 50% reduction in local advertising, which encompasses a variety of categories. The sectors you would expect to be hit hard by COVID-19, such as travel, entertainment, and restaurants, are performing markedly worse than 50% below normal. However, there are many categories experiencing smaller declines, like professional services and insurance, along with some, like pharmaceuticals, that are actually seeing growth. It's a complex situation. We can't precisely predict how local markets will recover, as it will vary from state to state as different areas lift shelter-at-home orders. Nonetheless, we are starting to notice some positive trends in the pacing going forward. Over the last couple of weeks, excluding national advertising, we have observed a significant decrease in requests for flexibility with advertising. It seems advertisers and marketers are beginning to look ahead to the first quarter of the next fiscal year, considering how to effectively market their products and brands again. It’s still early, but there’s a noticeable positive shift. Regarding political advertising, despite the impact of COVID-19 towards the end of the third quarter, it was still a record quarter for us in terms of political spending. The fourth quarter typically sees a decline, but political advertising usually ramps up again in the first quarter of the next fiscal year. We expect this trend to continue and anticipate a record political season. Our markets are well-positioned for this, with nine of our 18 markets classified as battleground states. Additionally, ten of our markets have U.S. Senate races, and two feature gubernatorial races, along with House contests in every market. We believe we are in a strong position to capture a significant share of political revenue in the first quarter of the next fiscal year. Thank you.

At this point, we're out of time. But if you have any further questions, please give me or Dan Carey a call. Thank you once again for joining today's call.