Fox Corporation - Class A (FOXA) — Q3 2023 Earnings Call Transcript

Thank you, Kiley. Good morning, and welcome to our fiscal 2023 third quarter earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer; John Nallen, Chief Operating Officer; and Steve Tomsic, our Chief Financial Officer. First, Lachlan and Steve will give some prepared remarks on the most recent quarter, and then we'll take questions from the investment community. Please note that this call may include forward-looking statements regarding FOX Corporation's financial performance and operating results. These statements are based on management's current expectations, and actual results could differ from what is stated as a result of certain factors identified on today's call and in the company's SEC filings. Additionally, this call will include certain non-GAAP financial measures, including adjusted EBITDA, or EBITDA, as we refer to it on this call. Reconciliations of non-GAAP financial measures are included in our earnings release and our SEC filings, which are available in the Investor Relations section of our website. And with that, I'm pleased to turn the call over to Lachlan.

Thank you, Gabby, and thanks, everyone, for joining us this morning. FOX's strong fiscal third quarter operating results once again demonstrate the power of our content and the brands it underpins and the repeated capability of our focused strategy to deliver solid financial results. In the quarter, we grew top line revenue by 18%, led by the remarkable 43% growth in advertising and a solid 3% growth in affiliate revenue. Underpinning this performance was a record Super Bowl LVII on the FOX Broadcast Network which generated approximately $650 million of gross advertising revenue across our businesses and was the key driver of our 61% advertising revenue growth at our Television segment. This year's Super Bowl matchup between Kansas City and Philadelphia delivered 115 million viewers across FOX platforms, making Super Bowl LVII the most watched program in U.S. television history and the pinnacle of an extraordinary year for FOX Sports. The strong lineup of programming and advertising demand for FOX Sports continues into our fourth quarter, which includes the return of NASCAR, the second season of the USFL, the start of Major League Baseball's 2023 season, the finals of the UEFA Nations League, and a first for FOX, the Belmont Stakes. Leveraging the reach of a Super Bowl lead-in, we launched the second season of Next Level Chef, which promises to be the next big lifestyle franchise from our Studio Ramsay partnership. Our entertainment business also found success with the number one new series and new drama over the year in Accused and the number one new unscripted series in Special Forces: World's Toughest Test. FOX has now debuted the top new unscripted series for five consecutive seasons. In fact, the combined power of our sports and entertainment programming places FOX at number one amongst broadcast networks season to date in the key 18 to 49 demo. Our strong sports calendar also had a halo effect at the FOX Television stations, which saw many local advertising verticals higher in the quarter. In what continues to be mixed local advertising market conditions, we are encouraged by growth in categories, including auto, restaurants, and entertainment, but are watchful across other categories, including bedding, retail, and telecom. Meanwhile, Tubi's performance in the third quarter was nothing short of stellar with revenue growth of 31% supported by sustained gains and engagement, where total view time increased 38% year-on-year. And while still early in the fourth quarter, the April results for Tubi show the momentum across the platform accelerating. Having recently marked the three-year anniversary of our acquisition of Tubi, our progress over this longer-term time frame is just as impressive, having grown quarterly TBT by over 200% and revenue by 400%. Just as importantly, the Tubi brand has asserted itself on the broader media landscape. Our viral Tubi spot in the Super Bowl, which received massive press coverage, had almost 7 billion impressions. And our strong growth and engagement has now led to Tubi's inclusion in Nielsen's The Gauge, marking the first time Tubi has reached 1% of total TV viewing minutes and making Tubi the most watched fast service in the United States. And just last month, we announced the formation of Tubi Media Group, under Paul Cheesbrough, which brings together our digital capabilities in a more formalized and coordinated way to help us better monetize our digital touchpoints across all our FOX properties. We thank Farhad for his entrepreneurial leadership at Tubi over the last three years and, of course, before he leaves the business in terrific shape with an outstanding team to drive continued strong growth. At FOX News Media, we retained our leadership position amongst our peers. The FOX News Channel ended the third quarter as the most watched cable network in total day and prime time while maintaining its lead as the most watched cable news network, beating CNN and MSNBC combined. Also notably, the FOX Business Network ended the quarter as the most watched business cable network, leading CNBC in total viewers during business day and market hours for the fourth consecutive quarter. Let me briefly address the settlement of our dispute with Dominion Voting Systems. We made the business decision to resolve this dispute and avoid the acrimony of a divisive trial and a multiyear appeal process. Our decision is clearly in the best interest of the company and its shareholders. The settlement in no way alters FOX's commitment to the highest journalistic standards across our company or our passion for unabashedly reporting the news of the day. We're proud of our FOX News team, the exceptional quality of their journalism, and their stewardship of the FOX News brand. Whether it be our coverage of politics and elections, world events such as the war in Ukraine, or domestic issues, such as the crisis at the border, our journalists bring compelling news home to our viewers every day. The standards behind this reporting are not only what makes us the number one cable news network but the number one network in all of cable. In fact, in a recent poll, 41% of respondents chose FOX News as their most trusted network news. So as we look ahead, we are confident in the strength of the FOX brands and the strength of our balance sheet. And while we are not completely immune to the headwinds facing the broader industry and the general economy, we are well positioned given our areas of differentiation. Nonetheless, you can expect us to be even more focused on our cost base as we look to reinforce our strategy for future growth. We remain committed to driving long-term shareholder value creation through the thoughtful management of our existing business, the pursuit of new and exciting adjacencies, and returning capital to our shareholders. With that, I'll turn it over to Steve to take you through the details of the quarter.

Thanks, Lachlan, and good morning, everyone. FOX again delivered strong underlying financials in our fiscal third quarter with 18% revenue growth and 3% EBITDA growth, bolstered by a record-breaking Super Bowl LVII. Our advertising revenues increased 43%, led by the Super Bowl, along with the higher volume of NFL playoff windows and accelerating growth at Tubi. Meanwhile, our affiliate revenues grew 3% on the back of pricing benefits from recent renewals, partially offset by trailing 12-month subscriber losses continuing to run in the 7% range. Quarterly adjusted EBITDA was $833 million, up $22 million over the prior year quarter as these revenue increases were partially offset by higher expenses. This was primarily due to higher sports rights amortization and production costs associated with our NFL, Super Bowl, and playoff schedule. The net loss attributable to stockholders was $54 million or negative $0.10 per share compared to net income of $283 million or $0.50 per share reported in the prior year period. The variance was primarily due to other net where we recognize charges associated with the FOX News Media litigation, partially offset by the gain associated with the change in fair value of the company's investments. Excluding these and other noncore items, earnings growth was strong with adjusted net income growing 8% to $494 million and adjusted EPS of $0.94 per share, up $0.13 against last year's $0.81 per share. Now turning to our segments, starting with Television, where revenue grew an impressive 36% in the quarter. Television advertising revenues led this growth with a 61% increase fueled by Super Bowl LVII, which, as Lachlan mentioned, generated over $650 million in gross revenue. We also benefited from 2 additional NFL playoff games, one divisional and one wildcard, partially offset by the timing of one less regular season game. Momentum at Tubi remained strong with advertising revenues up 31% to $170 million on the back of increased engagement and stable pricing. These strong advertising tailwinds in the Television segment were partially offset by lower prime time ratings at the FOX Network and mixed base market conditions at our local stations when excluding the Super Bowl. Television affiliate fee revenues were up 9%, and as healthy growth in pricing across FOX owned and operated and affiliated stations continued to outpace the impact from subscriber declines. Other revenues remained essentially unchanged from the prior year quarter. EBITDA at our Television segment was up $82 million to $117 million. Expenses increased in the quarter driven by higher costs related to the Super Bowl and a higher volume of NFL games. The increase in expenses was partially offset by lower costs at FOX Entertainment, including the absence of a write-down of certain scripted programming in the prior year quarter. Our net EBITDA investment in Tubi of approximately $60 million was broadly in line with the prior year quarter. At Cable, we saw revenues generally in line with the prior year. Cable advertising revenues were down 7% due to the impact of a softer direct response marketplace at FOX News Media, while being partially offset by the benefit of the World Baseball Classic on the national sports networks. Cable affiliate fee revenues were broadly flat, coming in at $1.1 billion, with rate growth broadly offset by subscriber declines. Cable other revenues were up 10% in the quarter, led by higher FOX Nation subscription revenues. EBITDA at our Cable segment was $792 million compared to the $864 million reported last year, largely due to these revenue impacts along with elevated legal costs at FOX News Media and higher expenses associated with the second season of the USFL and the World Baseball Classic at FOX Sports. Now turning to cash flow, where we generated strong free cash flow of $1.48 billion in the quarter, reflecting our normal seasonal cycle of collecting advertising revenues from our fall programming coupled with our major sports rights payments being concentrated in the first half of our fiscal year. From a share repurchase perspective, as we foreshadowed on our last call, we continued with our normal stock buyback activity of $250 million in the quarter and deployed $1 billion of additional capital to an accelerated share repurchase transaction. We retired approximately 80% of the shares associated with the ASR in the March quarter and expect the remainder to settle in the coming months. We remain committed to fully utilizing our current $7 billion authorization, where we now cumulatively repurchased approximately $4.4 billion, representing 20% of our total shares outstanding since the launch of the buyback program in November 2019. These meaningful capital return measures are enabled by the strength of our financial position, where we closed the quarter with $4.1 billion in cash and $7.2 billion in debt. While this reported cash balance does not include the impact of the Dominion settlement, we continue to maintain a very robust balance sheet that supports our ongoing commitment to capital returns as well as flexibility to pursue value-accretive investment. And with that, let me turn it back to Gabby to open Q&A.

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

I have a couple of related questions, if I can. Lachlan, after the Dominion settlement, is there anything that you can share to better understand the future settlement risk? And then related, can you discuss whether the departure of Tucker Carlson will lead to changes in the prime time programming strategy and then potential opportunities for more national advertising? And then for John and Steve, just if you can expand on the early confidence you have from recent MVPD renewals? And after seeing the acceleration in retrains growth this quarter, any more insight on whether you can get better pricing to outpace the elevated levels of cord-cutting or just more economics from your affiliate partners?

Thanks, Robert. I'm not sure where to begin, so I'll address the seven questions. Thank you for your time, it's great to hear from you. I'll now pass it over to Steve for the final questions. I'm limited in what I can disclose regarding ongoing litigation, but I can share some thoughts on Dominion. I covered some of this in my prepared remarks. As we've mentioned repeatedly, we've always operated as a news organization covering significant events. This includes the allegations made by the sitting President and his attorneys following a contentious presidential election. We believe strongly in the merits of our position that the First Amendment safeguards a news organization’s reporting, including allegations from a sitting President. Unfortunately, the Delaware court has significantly restricted our defenses and trial options through pre-trial rulings, such as not allowing us to reference the newsworthy nature of those allegations. Thus, we decided that settling was the best approach for the company and its shareholders, rather than engaging in a lengthy trial with the possibility of two or three years of appeals. We also have an ongoing case with Smartmatic, which is fundamentally different from Dominion, and we will retain our full set of First Amendment defenses. We are prepared to defend this case related to very newsworthy events when it goes to trial, which is expected to take place in 2025. Regarding our prime-time programming strategy, there are no changes to our strategy at FOX News, as it has proven successful. We continue to adjust our programming and lineup. We are satisfied with the strong advertising demand across our schedule, particularly during prime time. Steve, would you like to discuss the MVPD?

Yes, sure, on the affiliate. So Robert, yes, listen, we're pleased with the way our affiliate negotiations are going. You know that this year, we had roughly 34% of the total affiliate book up for renewal. We've been successful in generating and establishing new pricing benchmarks for the network in FOX Sports or retrains and Fox Sports in those negotiations. And so with another sort of one-third of our book due for renewal in fiscal '24 and a touch under 30% during fiscal '25, we feel pretty confident that we can continue to deliver pricing gains in subscribers. If the subscriber rate of attrition stays at the same level, we expect to post ongoing affiliate revenue growth for the company.

I just want to ask about advertising. As you guys look into the rest of the year and head into the upfront, does Tubi give you guys an advantage as you go into what is, at least, I would describe as a soft demand environment for advertising and trying to drive pricing kind of across your properties, particularly with the new Tubi Media Group, just wondering if you think that's going to matter enough this year for us to maybe notice as we head into the fall. And then just on the direct response weakness at FOX News, do you guys have any visibility on sort of whether that's improving here in Q4 or what the drivers of that are? Any relationship to sort of some of the broader volatility around FOX News? Just wanted to get your updated thoughts on that.

Thanks, Ben. I'm pleased Robert addressed your question. Regarding advertising, while you mentioned some softness in the market, we're not experiencing that across our primary platforms. To elaborate, the national and sports markets remain very strong for us. As we approach summer, we typically see a slowdown until fall when our main sports programming airs, but there’s still considerable demand for sports advertising. We feel confident in our position in this area. In terms of news, the direct response challenges we face are more of a market-wide issue than a FOX News problem, and that segment has stabilized; we’re not seeing further declines in pricing, which gives us confidence about this revenue stream. This stabilization stems from a competitor oversupply rather than being unique to FOX News, and while it has impacted our ability to command premium pricing, the situation is improving and should provide a solid foundation moving forward. Additionally, we’re seeing early political revenue, which is unusual at this stage of the cycle, and we believe it bodes well for the upcoming fall season as we move into a more active political period. Regarding Tubi, its revenue is accelerating significantly, although it's not yet on par with TBT, which is growing even faster—a positive indicator for us. We have sufficient inventory available and anticipate Tubi will play a vital role in our upfront negotiations, serving as both a strategic and important driver for our future growth. However, in local markets, we're experiencing varied results across different revenue sectors. We are pleased to report that the automotive sector continues to rebound with robust growth. We’re also seeing positive trends in the entertainment and restaurant sectors. However, this growth is being countered by weakness in areas like retail, telecom, and sports betting. Overall, the local market presents a mixed picture. Nonetheless, we remain optimistic about our businesses, especially in sports and news, as we look forward to a solid summer and a strong fall season. That concludes my remarks. Thanks, Ben.

A couple of questions and then a quick one. On Tubi, it sounds like your TBT is still outgrowing revenue, but are you starting to unleash the revenue and profit there a little bit? And then on the legal side, any direction on legal expenses from here? And then one standalone, any thoughts on appropriate leverage and capital return from here? We appreciate the $1 billion, but how should we think about this? Are you still going to sit on the cash until we get to the next sort of legal view? Or should something happen between now and then?

Thank you, Phil. Let me begin with Tubi, and I apologize, Steve, for the capital management aspect of the question. We will continue to invest in Tubi at the same levels we've been maintaining over the past year. We believe it presents a tremendous opportunity for us. As I noted earlier, with Nielsen's Gauge reporting that we now account for over 1% of U.S. television viewing, this is a significant milestone, and I envision ongoing growth there. From both a consumer and marketer perspective, Tubi is increasingly integral to usage and offers substantial opportunities. This progress is attributable to Tubi's focused efforts over the last three years, combined with the team's exceptional work even before that in creating a best-in-class personalized AVOD experience, featuring an impressive library of nearly 55,000 titles in the U.S. alone. To put this into perspective, that is five times larger than the Netflix library, and we are now able to monetize that viewership more effectively. We are very optimistic about Tubi's future performance and will continue to see it as a key area for investment. Now, I will hand it over to Steve to discuss capital management. Before that, I want to mention that we have a $7 billion buyback authorization remaining, of which we have utilized about $4.4 billion. So, based on my calculations this morning, we have about $2.6 billion left in authorization and fully expect to return that capital to shareholders through our buyback program. Any litigation will not affect this plan. Yes, Steve.

Thank you, Lachlan. Phil, regarding legal costs, we've seen them elevated over the past two to three quarters due to ongoing depositions and pretrial preparations for Dominion. I anticipate that these costs will decrease in the coming quarters. To follow up on Lachlan's point, our current debt stands at $7.2 billion, with a maturity in January that will require us to decide whether to repay or refinance. Overall, our leverage feels appropriate at this time, and we maintain a strong cash position. Therefore, regardless of future litigation outcomes, we expect to handle our buyback pacing as we have in recent years while keeping the flexibility to invest in the business or seize any inorganic opportunities, in a balanced manner as we have consistently stated since the company's formation.

Great. Maybe getting back to the sports theme, where viewership remains strong, I'd say, across the board. I mean, first of all, how would you gauge the success of the USFL? Second, anything you could tell us about your appetite for additional sports rights, especially to fill in the summer months? And then how does the sort of relative weighting on sports versus entertainment programming position you guys given what could be a protracted writer strike?

Thank you, John. The USFL is still just at the beginning of its second season, and we are very happy with it. We're satisfied with its ratings, the quality of the games, and its performance on television, as well as with ticket sales and fan engagement. It's still early days, but we are pleased with how it is progressing. Regarding additional sports rights, we continuously review our portfolio. We assess sports rights as they become available and when they are renewed, ensuring that they are cost-effective and that we are paying a fair price. We make adjustments with a strong commitment to maintaining discipline in our acquisitions and disposals. It's an ongoing process, but I don’t anticipate any major changes in that area. As for the writer strike, we feel well equipped. Our strategic focus and strengths in sports and news are two areas that remain unaffected by the strike, and we expect the audience to shift their viewing to those categories. In entertainment, we only program two hours of content each night, which includes both scripted and unscripted programming. We believe we are well-positioned and that the writer strike won't have a significant financial effect on us. There may be some scheduling adjustments for our scripted content, but overall, it will not significantly impact us.

I wanted to follow up on Lachlan's previous point regarding your limited reliance on live and unscripted content. Given this, could you discuss your outlook for the upfront market? Considering the current macroeconomic conditions, it seems you are in a unique position compared to others, but many are describing the market as choppy. Additionally, with the decline in the paid TV sector, how do you see FOX News and sports evolving over time?

I agree with you regarding the writer strike. Our focus on live news and sports, along with a balanced mix of scripted and unscripted content, positions us exceptionally well. The timing of the strike, especially with upfronts next week, does create some uncertainty, making it challenging to present a precise schedule, particularly if you’re only focusing on entertainment rather than news and sports. This situation actually puts us in a favorable position for the upfront, and that doesn’t even account for the strength of Tubi as we enter this upfront season. Tubi will definitely be highlighted in our upfront presentations and negotiations moving forward. We feel very well positioned; while it's early in the upfront process and negotiations will take time, we are in the best situation we could possibly hope for. Regarding the cable landscape and our strategies for news and sports, we are prepared to move forward with direct-to-consumer or alternative distribution if we find it necessary. We have the technology and teams ready to go D2C, but for now, we continue to drive industry-leading pricing from the MVPD and DMVPD markets. Our pricing is not just theoretical; it's established in contracts moving forward. This fiscal year, a third of our distribution deals are already set, with another third for the next fiscal year, and we are satisfied with the market price we’ve established for our brands. Having strong sports and news brands is vital, as these products will be integral to any scalable platform, regardless of the technology used to deliver that content. We foresee D2C as a future component of a broader distribution strategy, but it’s hard to imagine not having our sports and news on those platforms. Overall, we feel well positioned.

At this point, we are 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.