Fox Corporation - Class A (FOXA) — Q1 2021 Earnings Call Transcript

Thank you, Greg. Hello, and welcome to our fiscal 2021 first quarter earnings 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 available in the Investor Relations section of the website. And with that, I'm pleased to turn the call over to Lachlan.

Thanks, Joe. Good morning and thank you all for joining us to discuss our first quarter results. Today is a big day for Fox, and not just because we get to brag about our strong financial performance, continued operating momentum, and burgeoning digital assets, such as FOX Bet and Tubi, but because every four years we have the privilege and the responsibility of reporting on a U.S. presidential election. This very moment, as we speak, our viewers are starting their election day turning on their TV sets to where they left them last night, the FOX News channel, or opening their web browsers to FOXNews.com, or checking the FOXNews app for the latest report. Throughout the day, tens of millions of Americans around the country will turn to FOX to follow our coverage of the presidential election as well as senate, state, and local races. They do this because they trust us and our legion of hardworking and diligent news professionals. Hours ago, our studios across the country were lit for today's coverage, and anchors, producers, camera operators, engineers, news editors, reporters, and more all got ready for a long day and night ahead, but our real preparation for today began years ago. In fact, it is over 12 months since we launched our Democracy 2020 campaign. This intentional, careful planning has served us well. The energy and excitement are palpable in the newsrooms of our local Fox television stations and at FOX News, where Bret Baier and Martha MacCallum will be live from Studio F in just a few hours. The news teams at the Fox television stations and FOX News have done a superb job throughout this election season, and viewers from across the political spectrum have been turning to us in record numbers as a result. FOX News finished September as the first cable network to lead all broadcast networks in weekday content with total viewers for the full quarter. In fact, FOX News has been the most watched network in all of television from Memorial Day through Election Day. We achieved ratings growth in total day and primetime throughout the first quarter. FOX News total day ratings were up 28% in total viewers and 31% among adults 25 to 54 years old. Primetime ratings increased even more substantially, up 43% in total viewers, and up 54% among adults 25 to 54 years old. This demographic is sought out by advertisers, making these gains particularly impactful. Already in the second quarter, the rate of growth in both total viewers and in the 25 to 54 demographic has accelerated from last quarter. Just one recent example, last Tuesday, October 27, Tucker Carlson Tonight on the FOX News channel had more total viewers than the season premiere of NBC's This Is Us that same night. And while our linear platform is remarkably strong, our audience is also increasingly accessing our digital products to connect with us. FOX News Digital ended their first quarter with record engagement, more than 11.5 billion total video views. Total minutes watched clocked in at 14.2 billion, and unique visitors jumped to 115 million per month. FOX News not only draws large audiences nationally, but it also draws a more politically diverse audience in more strategically important states than any other cable news network. According to Nielsen, FOX News dominates share of viewing in swing states and key blue states. FOX News accounts for 50% of total primetime viewership in swing states, compared to MSNBC with 28%, and CNN with 23%. This is only possible because we speak to the broadest audience of anyone in our competitive set. Our audience includes the greatest number of registered independent and likely voters of any cable news network. FOX News is relied on by 38% of registered independents. This speaks directly to the quality of our journalism and the balance of our reporting. People have noticed this year both presidential candidates and the pack supporting them have turned to FOX News to reach our large, engaged, and diverse audience. In fact, 28 different political candidates or groups have advertised on FOX News during the month of October. Additionally, we have shattered the record for political advertising at our local stations, surpassing the previous high set during the 2018 midterms. The geographical mix of our stations includes both the largest DMAs and locations that are longstanding and newly emerging swing states. This allows us to capture a significant share of local political ad spend. Since I spoke to you in August, we've gained increased visibility into local advertising pacing. Last quarter, our local stations were experiencing a year-over-year decrease in our base ad market of approximately 40%. Compare that to this first quarter, where our core stations were down approximately 20%. Including the benefit of political and station acquisitions, we are now pacing ahead of the same time last year. Looking at it slightly differently, at the beginning of COVID, our stations were pacing down nearly 50% compared to the prior year. Today, they are pacing ahead. This is a tremendous return to strength in a remarkably short period of time. All of our stations also play an important role in connecting audiences in key sports markets with football, baseball, and other FOX Sports programming. We have stations in nearly all NFC markets, including our recent additions in Seattle and Milwaukee. While overall NFL viewership has seen year-to-year declines across all of its partners, Fox's America's Game of the Week is well on its way to a 12th consecutive season as TV's most watched show. America's Game of the Week is averaging over 24 million viewers, up slightly over last year. We used this, our 27th season of NFL on Fox to accelerate awareness and use of the free-to-play FOX Bet Super 6 app. By week five of the NFL, we signed up more than 1.3 million new users, meaningfully surpassing our estimates and increasing total installed users to over 2.9 million. More than 1.2 million people played in our November 1st NFL Super 6 game. By promoting the FOX Bet Super 6 app across our entire portfolio, we have greatly expanded its user base. Expect more sports and non-sports games and promotions across our platforms given the results we are seeing. One week ago Sunday, the Super 6 app was number six in the entire iOS App Store, only behind apps like Facebook and Snapchat, and Super 6 is consistently at or above the top of the sports category in iOS and/or downloads. Drafting after the success of Super 6, FOX Bet, our sports betting app is also energizing users. The app, which is currently available in Colorado, New Jersey, and Pennsylvania, has been the third most downloaded sportsbook app for the past two consecutive weeks. That will only increase as we launch in new states. We anticipate our next launch will be in Michigan early next year. All of our Fox businesses are committed to our partnership with Flutter and propelling this growth of the Super 6 and FOX Bet platforms. Each week, we are driving over 100 million media impressions across our portfolio of owned-and-operated Fox assets. Another important digital expansion for the company, our ad-supported streaming platform Tubi is thriving. Let me start with the astronomical growth we've seen this quarter. In August, Tubi reported 33 million monthly active users, representing a 65% year-over-year jump. More importantly, since acquisition, Tubi has averaged approximately 100% increase year-over-year in Total View Time, the most meaningful method when measuring the performance of any AVOD service. This is due in part to more than 41 Fox titles currently available on Tubi including The Masked Singer, Gordon Ramsay's 24 Hours to Hell and Back, and LEGO Masters. When Tubi began streaming The Masked Singer, the show quickly became Tubi's number one television series overall. We use the show to increase viewers to Tubi, and we are also driving them to the platform through marketing across our networks, including the FOX Network and FOX News. Most recently, Tubi sponsored the post-game show during the Major League playoffs and the World Series on Fox. Using these internal Fox marketing opportunities will increase consumer awareness of Tubi which will drive exploration and viewing. We are also using our television stations to promote and differentiate Tubi. As part of Tubi's News on Tubi launch on Roku and Amazon Fire in October, viewers now have access to live feeds from 18 Fox owned-and-operated stations in top markets including New York, Los Angeles, Chicago, and Dallas. The News on Tubi offering also includes content from third parties including Bloomberg TV and NBC News NOW. News on Tubi serves several important objectives. It provides viewers with the best local news, and further leverages the access of Fox, also expanding consumers' understanding of what Tubi offers. With News on Tubi, the platform is for the first time providing live viewing opportunities, and we are now monetizing this new content and our impressive viewership gains. We are including Tubi in all of our ad sales discussions. The power of the Fox and Tubi partnership is evident. Since September 1, Tubi has achieved 45 of the top 50 revenue days in its history. With a median age of 34, Tubi's audience is young, diverse and in demand for many brands. The leading Fox entertainment programs that feed Tubi are in important synergy that we will continue to capitalize on with new and returning shows. All FOX Entertainment's returning shows including the 9-1-1 franchise, Prodigal Son, The Resident, and Last Man Standing are back in production with scheduled return dates in early January. As in previous years, Fox will launch a robust and strong slate of shows midseason utilizing the end of the NFL season and NFC championship as a springboard. Despite pandemic-related production halts in the summer that impacted its fall lineup, FOX Entertainment had a successful premiere week this television season. For premiere week, which is the week of September 21, Fox was the number one network for entertainment programming. Fox also kicked off the 2020–2021 fall television season with a number one new series, the number one comedy, and the number one drama, and Fox has continued that leadership position, ranking as the number one network for the week of October 19. Each of our core brands is a powerhouse distinctly positioned to differentiate itself from competitors and appeal to viewers. The power of our total portfolio though is even greater than the sum of its parts. Look at the share of voice recently achieved by the FOX Network and the FOX News channel on Thursday, October 29. Together, these networks made up 65% of TV total viewer share compared to the rest of broadcast. The reliable content strength of FOX News in combination with NFL on Fox captured nearly two-thirds of all viewers watching broadcast television that evening. On several October evenings, our leadership brands accounted for at least half of all viewers watching broadcast television, and that occurs with sports on the network and also when we air one of our entertainment hits. The power of our brand is not only recognized by our audiences and advertisers; it is also valued by our distribution partners. In the first quarter, we saw affiliate revenues grow by 10%, driven by healthy rate increases. While we continue to see a decline in subscriber volume, that trend is improving. This past quarter, we saw industry subscribers decline around 6%, which is an approximately 50 basis point improvement from what we experienced last quarter, and our recent agreements coupled with updates we heard during the recent earnings calls in October from AT&T, Comcast, and Charter give us an encouraging look into the December quarter. Our networks and content continue to be essential to the services offered by traditional and virtual MVPDs. We are sustaining our momentum and building on our strengths. With increased visibility to the market and resumption of sports and entertainment production, we are optimistic and excited for the remainder of the fiscal year.

Thanks, Lachlan, and good morning. It's a busy day, so let's get straight to our results. The company delivered total revenues of $2.72 billion, up 2% over the comparative period in fiscal 2020 led by affiliate revenues that grew 10%, once again demonstrating the strength of our brand and our focused portfolio of channels. From an advertising revenue perspective, we continued to face strong growth of FOX News media and record political revenue source returned to growth at our FOX television station. The underlying and sustained strength resulted from COVID-19 related supply side factors that saw the postponement of live sports events and key scripted entertainment content at the FOX Network. Quarterly adjusted EBITDA was $1.17 billion, up $310 million over the comparative period in fiscal '20 due to the top line increases in revenue and the timing of programming expenses as a result of COVID-19. This improvement in EBITDA flowed through to the bottom line when net income attributable to stockholders of $1.11 billion or $1.83 per share was higher than the $499 million or $0.80 per share in the prior year quarter. This increase included a one-time gain recognized in other net associated with the reimbursement of the cash tax prepayment from Disney following the disposition of certain 21st Century Fox assets. Excluding the impact of the Disney reimbursement and other non-core items, adjusted EPS of $1.18 was up 42% compared to last year's $0.83 per share primarily reflecting revenue and EBITDA growth. Turning to the performance of our operating segments for the quarter with cable networks' EBITDA of $781 million was up 14% on revenue growth of 3%. Cable affiliate revenue increased 4% supported by higher average rates partially offset by net decrease in pay television subscribers of 6%. Cable advertising revenues increased 18% led by another quarter of impressive linear and digital growth of FOX News media partially offset by the postponement of live sporting events namely Big Ten and Pac-12 football at our cable Sports Net. Cable other revenues decreased by $39 million due to the absence of sports sub-licensing revenues which in turn are broadly offset by commensurate reduction in rights cost. EBITDA at our cable segment increased $97 million over the prior year period. This reflects a revenue growth that I just noted as well as low sports programming rights amortization and production costs, principally due to the postponement of live events as a result of COVID-19. Partially offsetting these lower costs of FOX Sports were increased expenses of FOX News media due to the coverage of breaking news including the presidential election and continued investment in our digital news initiatives. The Television segment reported EBITDA of $457 million, an increase of $206 million while revenues were essentially in line with the prior year quarter. Television affiliate revenues increased 23% in the period reflecting double digit increases for both our programming fees from non-owned station affiliates and direct re-transmission revenues at our owned and operated stations. From a television advertising perspective, our local TV stations generated record political advertising revenues in the quarter reversing the COVID driven trend of the June quarter to be up versus prior year. This coupled with the addition of revenues from the fast growing TV was more than offset in the segment by COVID related postponements of college football and key scripted entertainment program along with comparability items, most notably two full NFL regular season broadcast windows and our broadcast of the Emmy Awards in the prior year period. EBITDA at our television segment increased $206 million over the prior year period on the back of lower operating expenses. The decrease in expenses was driven by lower programming rights amortization and production costs of FOX Sports including fewer NFL broadcast windows. Additionally, there were five fewer college football games in the quarter. FOX Entertainment also saw lower programming rights amortization due to delayed productions of key scripted titles as a result of COVID in the current year quarter and the broadcast of the Emmy Awards in the prior year quarter. Turning now to free cash flow, which we calculate as net cash provided by operating activities plus cash investment in property, plant, and equipment, in the quarter, we generated $150 million of free cash flow which is entirely consistent with the seasonality of working capital in our business. Reflecting both our confidence in the business and our balanced approach to capital allocation, so far this fiscal year we have deployed $305 million of capital to repurchase approximately $8 million class A shares and $3 million class B shares. Against our buyback authorization of $2 billion, we have now cumulatively repurchased just over $900 million representing approximately 4.5% of our total shares outstanding since the launch of the buyback program in November. From balance sheet perspective, we ended the quarter with $5.1 billion in cash and $7.9 billion in debt. Looking through the second quarter, the strong advertising momentum at news and local television stations and Tubi have all carried forward into the first month of this current quarter. We anticipate that these practices coupled with a heavy schedule of sports events will translate into a return to growth in overall net advertising revenue in the fiscal second quarter, notwithstanding what remains a midseason-focused entertainment slate with the return of our key scripted shows in the new calendar year. Meanwhile, from a cost perspective, we anticipate that the timing benefits seen in our first quarter content costs from sport events and entertainment slate postponements will begin to unwind in the second quarter through the remainder of the fiscal year. In terms of cash flow, we continue to anticipate relatively low working capital usage over the course of the full fiscal year, with our normal working capital patterns, with a first-half deficit, that largely reverses in the second half. As we have foreshadowed in the past, we continue to expect a high level of capital expenditure in fiscal '21 to support the final phases of the build-outs of our technical broadcast facility in Arizona, and the upgraded sum of our station facilities. All of this, of course, assumes that the COVID-driven disruptions to major sports and the production delays to our key entertainment properties are behind us. As our first quarter results demonstrate, we have seen a meaningful recovery in our underlying business. This operating momentum combined with the benefits of strong free cash flow and liquidity, moderate leverage, and the absence of any debt maturity until early 2022 positions us particularly well for the future.

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

Thanks so much. Lachlan, I think maybe the obvious question is, I know you like to have some walking-around money. With $5 billion of cash on the balance sheet, are you seeing a lot of interesting activity in the M&A market when you think about the increased visibility that you just talked about on this call, relative to what we had three months ago or six months? Does that change your focus in terms of your appetite for buying back stock? How are you thinking about deploying that capital over time? And if you don't mind, one quick follow-up: are you willing to give us what the total viewing time is for Tubi? I know you noted that it was up 100%. Thanks so much.

Thank you, Doug. It's great to hear from you. I hope you're doing well. First, I appreciate you mentioning our $5.1 billion in cash and the strong position of our balance sheet. We've put in a lot of effort to achieve this position, and as I hinted at in my prepared remarks, we are moving past a period of uncertainty that has affected all businesses. We're seeing much better visibility ahead. This gives us confidence in our future capital needs and reinforces our belief in our core business and cash generation. As we consider our cash reserves, we think about how to allocate it towards acquisitions, organic investments in our business, and returning capital to our shareholders. We don’t have a strict formula for how we would distribute funds among these areas, but so far, we have repurchased $900 million in stock, leaving us with $1.1 billion available under our buyback authorization, which we fully plan to utilize. Regarding your second question, Tubi's total viewing time in September reached 220 million hours. Thank you, Doug.

We can go to the next question.

Thank you very much. You've reached some impressive milestones at Tubi, and I believe there's a lot more new content to come. I'm interested in when we might receive further information or a more comprehensive update on your long-term DTC strategy. Additionally, could you provide any insights on the NFL negotiations and the significance of Thursday Night compared to Sunday Afternoon for you?

Thank you, Alexia. I'll start by addressing your second question. While I can't provide specific details about our NFL negotiations, I want to emphasize that the NFL, along with Major League Baseball, remains a top priority for us and is our primary programming partner. Our partnership spans 27 years, and we are committed to continuing it, as reflected in our ratings. Although NFL ratings have been lower this year due to several factors unique to this particular season, such as the clustering of premium sports in the fall and a significant rise in news viewing, we believe this softness in ratings is season-specific. Notably, the news audience overlaps significantly with the NFL audience, and cable news viewing has increased by 46% this NFL season. This gives us confidence in our ongoing partnership with the NFL. Regarding Tubi, as linear television becomes more fragmented, particularly in entertainment, Tubi is benefiting from this trend by attracting audiences and users from the linear television market. Tubi has strong support and growth potential, and we are eager to share its achievements and future developments.

We can go to the next question.

Hi, thank you. Good morning. One question on expenses, can you share what expense growth would have looked like excluding the programming disruptions that we've experienced? I think your operating expense looks like it's down about 14% in the quarter, and Steve, you referenced sort of an unwind of that going forward. So I'm curious how much of that does unwind, and whether this disruption has impacted how you think strategically about that mix of investment in scripted programming versus sports and news? And then one other, just real quick, if I could, I'm curious if you can share any thoughts on how the outcome of today's presidential election may impact FOX News going forward? Do you think ratings can vary based on an outcome? And also, the president has in the past referenced perhaps starting a news network, and how you would think about that competitively.

So, Steve, I should answer the first question, you can answer the…

Let me, Michael, address the expenses. The impact of COVID is becoming increasingly difficult to separate because we can't precisely determine how it affects advertising. However, if I examine expenses and focus on items that were postponed from Q1 to Q2, Q3, and Q4, I'd estimate that we will benefit from about $270 million to $280 million in expenses in Q1 that will be pushed to the latter half of the year. A significant portion of those expenses will hit in Q2 due to the concentration of both NFL and college football. Then, we'll see the entertainment expenses primarily align with Q3 and into Q4.

To address your second question, Michael, regarding the impact of the presidential election on FOX News, it has indeed been a remarkable news cycle not just for the election but also for significant events throughout the year, particularly COVID. This has driven both ratings and revenue, with FOX News advertising revenue increasing by 36%. When considering our audience and ratings, it’s important to view it from two perspectives: the total news audience and news appetite, and the share. The first aspect, the demand for news and various stories, is largely beyond our control. As we transition into a more typical news cycle, we anticipate that interest will return to traditional American pastimes like football, baseball, The Masked Singer, and I Can See Your Voice, which we eagerly welcome. On the other hand, what we can manage within the news landscape is our share. Over the past 18 years across various administrations and political cycles, we have consistently held our top position. So, to summarize that part of your question, we expect the news cycle to stabilize, and we fully intend to remain number one and maintain our share during this transition. Regarding your second question about new entrants and competition in the news sector, we embrace competition. We have always performed well in competitive environments, and we currently face strong competition. However, compared to previous years, our audience and reach have significantly expanded. We now see our competition as extending beyond just cable news to include traditional broadcast networks. As noted, FOX News has been the leading network, including broadcast networks, from Labor Day to Election Day.

We can go to the next question.

Yes, thanks. I have one for Lachlan and one for Steve. Lachlan, on sports gambling, I believe you have an option to buy 18.5% of FanDuel next year, in '21. I wonder how do you think about that, and just given how the market is valuing sports gambling, how are you thinking about putting excess capital into that business? And then for Steve, we always ask you about affiliate fees when people are disappointed. This quarter, you're surprisingly upside; you've given us the update on subscriber trends. Is anything else coming on, a little bit of new pricing? Perhaps some new deals came through? So any more color on the acceleration in affiliate fees would be helpful. Thanks.

Thank you. Thanks very much. So our FanDuel option, this is an easy answer and a quick one. We have a 10-year option to acquire 18.5% of FanDuel. We think it's a huge opportunity. We think that option today has tremendous value, and we work on literally a daily basis with Flutter to both increase the value of FanDuel and also increase the value of FOX Bet and Super 6, our 50-50 joint venture with them. So our excitement about the space in sports wagering is unabated, but with the nature of a long-term option, we would wait until an appropriate time to exercise that option, and you wouldn't expect us to do that in the near term.

Hi Michael, it's Steve. When looking at the affiliate performance sequentially, the main factor was that subscriptions improved slightly compared to Q4. As Lachlan pointed out, there was a positive difference of 50 basis points between Q4 last year and Q1 this year. There are a few minor elements to consider; last quarter we had specific promotional activities, while this quarter we did not include any accruals related to the Keep Americans Connected initiative. The changes are more a matter of underlying trends rather than any specific one-time events.

We can go to the next question.

Thank you. I also have a question on sports gambling and one quick follow-up. So, Lachlan, you launched FOX Bet I guess over a year ago. Has stay-at-home changed consumer behavior or your expectations for the long-term opportunity? And maybe you can frame the long-term opportunity of your various pieces, and what led to the partnership that you recently signed with the Philadelphia Eagles where you're incorporating bricks-and-mortar strategy into your approach with the FOX Bet studio and lounge that's being built at Lincoln Field? And then, just a quick follow-up on Tubi, what was the advertising contribution this quarter? Can you frame what advertising change would have been without Tubi? Thank you.

Sure. First, regarding Fox Bet, wagering has significantly increased during COVID, especially with people staying at home. While sports were on hold, gaming was thriving, and as sports returned, sports wagering surged. The industry is on a promising path, particularly as more states allow wagering, creating a growing opportunity for us. However, as you may recall, our partnership with Flutter means they currently control and fund the FOX Bet business since Fox Corporation is not a licensed entity. Nonetheless, we are closely collaborating with them to promote FOX Bet to enhance the value of our joint venture. As for Tubi, we have been actively selling it for several months and incorporating it into all our discussions with advertising partners. Tubi expands Fox's reach by over 20% and attracts a young, diverse audience that adds to our overall audience. In my regular conversations with Farhad, he often shares new daily revenue records, which is fantastic to see, and we're just at the beginning. When considering key metrics like time spent viewing, total users, and revenue, Tubi is consistently surpassing all expectations in our growth strategy.

Operator, we have time for one more question.

Thanks. Good morning. Steve, you mentioned record political contributions. Could you provide some details on that, either for this quarter or the overall cycle, so we can understand the impact of political contributions in the television segment over the past six months? Additionally, I wanted to ask about Sunday Ticket and the NFL. There have been reports suggesting that AT&T may not retain that package. As you evaluate the NFL landscape, do you think that package could be appealing to FOX, possibly on a platform like Tubi? Or are you concerned that it might expand beyond the satellite distribution model we've seen before, potentially affecting local broadcast ratings? I would appreciate your thoughts on this situation.

Hey Ben, I'll take the political advertisement. It's been a month to quarter and a month to half quarter. The good thing about this cycle is it's not just been a local story; we've been looking at a significant amount of national political revenue. So, for the quarter, we did a shade under $100 million across the group of which 70% of that was local, and then, when we look at it across the first-half, so July 1 through to today, we have plenty of skills under the next earnings call, we'll push close to $300 million of ad revenue, political ad revenue for the full six months, of which about just north of $200 will be local. So, it's been an enormous quarter-and-a-half for us.

Before discussing Sunday Ticket, I want to highlight the notable increase in national political advertising during this election cycle, as Steve pointed out. In the past, political advertising has largely been local, but the rise in national political advertising, especially on FOX News and in sports, is a positive change that reflects the quality of our audience. This trend has also influenced the advertising market. The strength of the political market has significantly increased our scatter pricing. Advertisers have been eager to secure time, leading to strong growth in scatter advertising across local stations, sports, news, and entertainment. We made a strategic decision to withhold a slightly larger portion of time than we typically would in our upfront negotiations, retaining about 5% more for scatter, and that decision has proven to be very beneficial. Moving on to Sunday Ticket, it's an exceptional consumer offering, but it only functions effectively under a subscription model, so we don't have a viable business model for monetization outside of that structure. Thank you for your question, Ben.

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 all once again for joining today's call.

Thanks, everyone.