Fox Corporation - Class A (FOXA) — Q1 2024 Earnings Call Transcript

Thank you, operator. Good morning, and welcome to our fiscal 2024 first 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. I just want to start with a comment and a note of thanks. We are living through tumultuous times. And at the outset, I want to acknowledge the work our journalists are doing covering the horrific October 7 terrorist attack and the subsequent ongoing war in the Middle East. From the reporting of Trey Yingst, Greg Palkot, Mike Tobin, and Lucas Tomlinson in Israel; and Steve Harrigan in Gaza, to the deep analysis and insightful commentary by our reporters and hosts, including John Roberts and Trace Gallagher, to the essential and brave work of our on-the-ground producers and camera crews, Fox is fulfilling its mission defined, report and analyze the news of the day without fear or favor. News reporting is hard, and work reporting is perhaps the hardest. And while the horror central to this news cycle weighs heavily on those we ask to expose it, their exposure is necessary. And so our team deserves our admiration and gratitude as they continue to work tirelessly under demanding conditions to keep us up to date on events far away and on their impact closer to home. My sincere thanks to them all. Now turning to today's first quarter earnings release. Against a backdrop of an active news cycle and a robust sports schedule, fiscal 2024 has started off on solid operational and financial footing. Fox's focused portfolio of assets continues to distinguish itself and deliver exceptional results. Financially, we are now comparing against the fiscal '23 cycle of events that delivered record revenues and EBITDA. Despite this comparison, we posted total revenues this year slightly ahead of last year's record. On the affiliate side, we reported 2% total affiliate growth, led by 8% growth of the TV segment in the quarter. Importantly, we have continued to secure constructive renewals, which deliver for our partners and reinforce the value of our brands and programming. Advertising revenues in the quarter decreased by around 2%, principally due to a comparative quarter last year that was significantly heavier in political ad revenues at our local TV stations. We understand there is inconsistency around the broader advertising market, particularly in entertainment, but our focus on live sports and news continues to deliver with healthy national pricing and demand in addition to continued momentum at Tubi. Underpinning revenue are our core brands, which consistently resonate with viewers, and the consumption data clearly shows this. With total viewing of FOX brands up 2% in the quarter. FOX Sports was a big driver of that consumption, especially with its broadcast of the Women's World Cup, where the U.S. versus the Netherlands on FOX was the most-watched Women's World Cup match ever on U.S. English language television. From summer to fall, our lineup is bolstered by our football packages led by the NFL on FOX, averaging over 17 million viewers. Based on the strength of our remaining schedule, especially from Thanksgiving to Christmas, we expect that engagement to improve significantly. In College Football, interest is reaching new highs. Fox's Big Noon Saturday is progressing to a third straight year as the #1 game window in all of college football, averaging almost 6 million viewers. At Tubi, we had another enviable quarter, delivering 30% revenue growth driven by an impressive 65% lift in total view time. Tubi surpassed 70 million monthly active users in September, logged nearly 4 billion streaming hours in the first half of the calendar year, and remains the #1 AVOD player and most-watched free ad-supported TV streaming service in the United States. Additionally, Tubi has beaten Pluto, Max, Paramount Plus, and Peacock for 5 consecutive months. One reason for the high engagement level at Tubi is its extensive content library that now exceeds 60,000 titles, which translates into more than 225,000 movies and TV episodes in addition to approximately 300 fast channels. During the quarter, Tubi introduced Rabbit AI, a ChatGPT-4 powered recommendation engine to help users navigate this incredible range of titles. Tubi also offers a unique and compelling proposition to advertisers. Our recent MRI study of streaming peers concluded that Tubi saw the fastest growth among young and diverse populations and that Tubi is able to deliver high-value net new audiences, with 33% of Tubi streamers unreachable on other top AVOD services. Now turning back to Fox News, the strength of our overall news coverage and the reach of our linear audio and digital content is unmatched. Whether it is the conflict in the Middle East, the upcoming 2024 election cycle, or volatility in the financial markets, FOX News is increasingly their viewers' first choice. The launch of our new expanded primetime lineup in mid-July further solidified Fox News' leadership position, not only in cable news but in all of cable, finishing the quarter as the most watched cable network in both total day and primetime. FOX News maintained its lead as the most watched cable news network, beating CNN and MSNBC in total viewers and in the demo for both prime and total day. We have seen that continue and expand in the current quarter, with October viewership increasing over 20% from the first quarter with over 30% growth in the key demo. Ratings leadership during the quarter was achieved across the platform. The Fox News channel had the top 6 cable news programs with P2+ and the top 7 programs within the demo. In P2+, the 5 led the way in terms of viewers, followed by Jesse Watters Primetime and Hannity, of the 5 Gutfeld, Hannity, and Jesse Watters Primetime were among the top 4 programs in the demo. And Fox Business News ended the quarter as the most-watched business cable network, beating CNBC in total viewers during the business day for the sixth consecutive quarter. The election cycle started off with the successful Republican presidential primary debate, which is Fox News channel's highest-rated telecast since election day 2020 and the highest-rated non-sports telecast of the year across cable. While the debate kicked off the election cycle, once we get deeper into it, our local station group will benefit greatly from increased political spending in the coming quarters. Over at FOX Entertainment, we started the 2023 to 2024 broadcast season as the #1 network in the key adult 18 to 49 demographic, and Fox ranks as the top network in entertainment programs, first in at least 10 years. FOX has 3 of the top 4 highest-rated premieres of the 2023/'24 season to date in Krapopolis, The Simpsons, and The Masked Singer, and the season's #1 new game show with Snake Oil. Across the company, fiscal '24 is shaping up nicely. We look forward to great enthusiasm across the fall sports season, underpinned by the NFL, college football, and now the completed World Series, continued viewing growth at Tubi, and renewed momentum at Fox News and our local stations as the election cycle heats up. Our balance sheet remains a core asset for FOX, and we will continue to deploy it in a disciplined and thoughtful manner that delivers value for our shareholders. Finally, I would like to congratulate my father on a 70-year career at News Corp and Fox. His enduring legacy can be felt in both of these companies, and I can assure you that he is still very much involved and will continue to be for years to come. With that, I'll turn it over to Steve to take you through the operating details of the quarter.

Thanks, Lachlan, and good morning, everyone. FOX reported total first quarter company revenues of $3.21 billion, which is slightly above the prior year quarter. This was led by a 2% increase in affiliate fee revenues as the pricing gains from recent distribution renewals more than offset the impact from industry subscriber declines. From an advertising perspective, we faced a tough comparison to last year's record midterm political revenues at our local stations. This, coupled with continued softness in the direct response marketplace at FOX News, more than offset the benefits we saw from the broadcast of the FIFA Women's World Cup, the 30% revenue growth generated at Tubi, and continued support of national pricing for live content. Taking as a whole, our advertising revenues declined 2%. Meanwhile, total company other revenues increased 2% or $6 million. Quarterly adjusted EBITDA was $869 million compared to the $1.09 billion reported in the prior year quarter. Expenses increased this quarter driven by higher rights amortization and production costs associated with the Women's World Cup, the first year step-up from our NFL rights renewal, and increased expenses at our digital businesses. Net income attributable to stockholders was $407 million or $0.82 per share compared to $605 million or $1.10 per share reported in the prior year period. This move largely reflects the EBITDA impact I just mentioned, along with the change in fair value of the company's investment in Flat recognized in other net. Excluding this impact and other non-core items, adjusted EPS was $1.09 versus last year's $1.21. Turning to our operating segment results, starting with television, where we delivered total quarterly revenues of $1.78 billion or a 4% increase year-over-year. This was driven by an 8% increase in TV affiliate revenues with healthy growth in fees across all FOX-affiliated stations that more than offset the impact from industry subscriber declines. Advertising revenues in our TV segment grew 1%, led by the benefits from the broadcast of the Women's World Cup, continued growth at Tubi, and the timing of college football broadcasts, partially offset by the absence of last year's midterm political revenues and lower ratings of the FOX network. Television Other revenues increased 6% in the quarter, primarily a result of the timing of participations tied to our entertainment production initiatives. The growth in revenue at our television segment was more than offset by a 10% increase in expenses, including costs associated with the Women's World Cup, the first-year step-up associated with the renewal of our NFL rights, and continued investment at Tubi. Together, these revenue and expense impacts led to quarterly adjusted EBITDA of $351 million in our Television segment compared to the $409 million reported in the prior year quarter. Our Cable segment reported total quarterly revenues of $1.39 billion, a 3% decrease year-over-year. Cable affiliate revenues were down 2% in the quarter, largely a result of industry subscriber declines, which continue to run in the 8% range. Cable advertising revenues were down 8% as the broadcast of the Women's World Cup and the Men's CONCACAF Gold Cup were more than offset by the continued impact of a softer direct response marketplace and lower ratings at FOX News Media. Notably though, we continue to see healthy national linear and digital demand from advertisers of Fox News Media. Cable other revenues increased by $6 million in the quarter due to the timing of sports sublicensing revenues. Meanwhile, expenses at our Cable segment increased 13%, led by higher programming rights amortization and production costs for the Women's World Cup and Gold Cup, the timing of college football broadcasts at FOX Sports One, and contractual rights increases across our sports portfolio. All in all, this resulted in adjusted EBITDA at our Cable segment of $607 million compared to the $742 million reported in the prior year period. Turning to cash flow, where free cash flow, which we define as net cash provided by operating activities less CapEx, was negative $70 million in the quarter. This is consistent with the seasonality of our working capital cycle with the first half of our fiscal year characterized by a concentration of payments for sports rights and the buildup of advertising-related receivables, both of which reverse in the second half of our fiscal year. From a capital deployment perspective, fiscal year-to-date, we have repurchased a further $300 million through our share buyback program. We have now cumulatively repurchased $4.9 billion, representing approximately 24% of our total shares outstanding since the launch of the buyback program in 2019, and we remain committed to utilizing our full buyback authorization of $7 billion. This is supported by the strength of our balance sheet, where we ended the quarter with approximately $3.8 billion in cash and $7.2 billion in debt. This excludes the $1.25 billion of senior notes that we issued in early October, the proceeds from which we intend to use to pay down the corresponding maturity coming due in January 2024. And with that, I'll turn the call back over to Gabby.

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

After deciding on passing on the WWE renewal, can you share anything specific on how you evaluated the ROI of the deal in the context of driving higher advertising and affiliate fee revenue? And then maybe just more broadly, can you discuss, whether you expect to see any impact on future sports rights negotiation if the Disney, Charter renewal impacts the industry rate of cord cutting or affiliate fee growth going forward?

Rob, there’s a lot to discuss. Let me break it down. In our analysis of the WWE renewal, we assess it similarly to our entire sports portfolio and any new rights opportunities. From an advertising perspective, we found that the audience of WWE was not generating advertising revenue that met our return on investment standards. Additionally, we did not attribute enough retransmission revenue to WWE, prompting us to move on from the partnership. They have been a great partner for many years, but our return on investment did not align with our strict criteria. We wish them well as we proceed forward. Currently, we are in what I believe is the final stage of productive negotiations for our NASCAR renewal, and we are eager to continue that partnership, which has also been very successful for us in terms of ROI. Regarding the Disney and Charter situation, I see it as a net positive for us. We want our distributors to thrive and continue investing in high-quality programming and brands. With FOX News, Fox Sports, our station group, and our network, we have a valuable set of core brands that distributors like Charter appreciate. Overall, the Disney and Charter deal has positively influenced our strategy.

My question is about unlocking value, which may involve two interconnected aspects. First, I wanted to ask about sports and Tubi. The popularity of sports, especially football, particularly college football, is likely at an all-time high. Your college sports rights are probably more valuable now than ever. I'm curious if you have any strategies for capitalizing on and maximizing the return on those rights beyond the usual avenues, like advertising on live events and retransmission fees. Additionally, related to that, is leveraging Tubi, both for sports and more broadly. It seems that your stock does not fully reflect the value of Tubi, which continues to grow. Are you considering ways to better showcase that value or perhaps enhance it through some strategic efforts? I would like your thoughts on how to unlock value from an asset that's performing well and likely has much more worth in the public market than its current valuation within Fox. I know that's a lot to unpack, but I'd appreciate your insights.

No, that's fine. I think I can address both questions with one response. You're absolutely correct, college football has never been more popular and is receiving high ratings. One aspect we haven't discussed is that advertisers have taken notice. They are investing heavily in college football with great rates and a strong desire for volume, recognizing the value of this audience. It might have been undervalued in previous years, but advertisers are certainly seeing the opportunity, and we're at the forefront of that. Our goal is to create value through our brands, including the Fox Sports brand and its distribution. We'll continue to derive value through college football and monetize it accordingly. Regarding Tubi, we do not anticipate any significant live sports programming in the near, medium, or even long-term future. Tubi is primarily focused on entertainment, particularly video-on-demand, which enhances the value of that content and user engagement. It will likely be a long time before we see substantial live sports on Tubi. In terms of unlocking Tubi’s value, it will be the primary way our audiences engage with entertainment moving forward. It's a central element of our business and strategy, and we’re creating value organically by driving its growth. I'm very pleased with the performance of our new CEO, Anjali Sud. She's doing an excellent job and has a clear strategic vision for advancing Tubi's success.

First of all, I want to express my gratitude for your introductory comments about news reporting and your father, who is truly unique. My question has two parts, as usual for all of us. First, regarding advertising, can you share your outlook for political advertising and the current state of sports advertising? We understand that general marketing seems relatively weak. Secondly, similar to what Ben just asked, what is the long-term vision for Tubi? It’s evident that there is significant growth in the short term, but is this the path you envision as you consider a possible shift to streaming, especially given the decline in traditional platforms? How are you approaching this?

So let me start with advertising. We hear and understand that the advertising market appears to be, I would use the word mixed or sort of unsettled. However, we are not seeing that to the same extent due to our focus on sports and news. Starting with sports, where we're seeing high demand around our NFL and our college football schedule, particularly in the national sort of market, pharmaceuticals, auto, quick-service restaurants, and CPG categories have all been quite active, and I think importantly, our pricing has been at a modest premium, but we are pricing above our upfront, which certainly in the sports category, the market remains healthy. This will be somewhat tempered by post-season baseball, including the conclusion of their World Series last night. I think sometimes you get lucky and you get 7-game series with matchups that capture the imagination of a national audience and sometimes you're less lucky. So that's how that could play out. And so I think we would have liked to have seen more games, and we'd like to have seen a bit more excitement around these games, but it is what it is. Having said that, we should congratulate the Texas Rangers for a great season and winning the World Series. At FOX News Media, national advertising is solid with growing pricing. It's important to note that we have over 80 new national advertisers in primetime specifically in our 8 p.m. hour in the first quarter. So the refreshing of our schedule and lineup has worked from both a ratings perspective and from an advertising perspective. Direct Response continues to face some headwinds really from last year, from the previous upfront, which created an oversupply in the market for direct response and put downward pressure on pricing. We would expect, as we go forward, for that pressure to be relieved. There will be some challenges, and we've got increased audiences due to the news cycle, which is a positive from a ratings point of view, but that's partially offset by an increased level of preemptions due to our in-depth reporting. Overall, I should just say that we are very happy with the overall performance of both the sports and news verticals in our business. We're also very happy with Tubi. We announced we had 30% revenue gains, which is driven by the 65% growth in total view time. I think going forward, we'll see continued growth in view time. Anjali is very focused on that. What there is softness in the entertainment advertising market, Tubi is not immune from that softness. But Anjali is focused on how we better monetize. We've had incredible growth in audience and viewership, and now it's time to really focus on how we more effectively and efficiently monetize that huge audience. We've earned the right, because of the audience growth, to start to take a greater share of wallet from our advertising partners. Finally, regarding local stations, we are pacing slightly ahead of last year in the base market, if you exclude political. Remember, this quarter last year, particularly October, had over $125 million worth of political revenue in the month of October alone. So it's a huge year-on-year comparison. But excluding political, we're very pleased with the base market's strength. And that's really led by the auto and retail categories, which are very strong, as well as financial services. That's offset by betting/wagering and also entertainment, given that there are not a lot of movie launches in Hollywood. So that offsets some of the growth in auto, retail, and financial services.

First, can we just get an update on the affiliate renewal process? I think you guys had said that it would be more weighted on the TV side, but I think a lot of the new agreements kick in in January. So just any color on the trends we should see there. And then getting back to the Charter, Disney renewal, you guys seem to be somewhat unique in that you don't really have any long-tail networks or, I would say, a major SVOD platform. Lachlan, you talked about Fox Nation, but it's obviously very different than what we're seeing in the rest of the industry. Just any thoughts on the implications for Fox as this model we've seen out of this renewal would be broadly adopted over time for the industry.

Thanks, John. Regarding affiliate renewal, let me provide some context before Steve discusses the numbers. The key point about affiliate renewal is our strategic focus on our core brands and building strong partnerships with our distributors to help their businesses succeed. From FOX's perspective, our primary revenue stream continues to be the cable bundle and pay TV distribution, which we expect to remain significant for the foreseeable future. The success of our distribution partners translates into our success as well. We aim for them to thrive, which is why we have maintained our premium content within the cable bundle. At this point, we are not looking to move premium content away from our cable distribution partners, as that would not be beneficial for either side. Since our last earnings call a quarter ago, we have renewed several distribution contracts, and our focus on partnership has led to rate increases and agreements that align perfectly with our plans. Our brands, including Fox News, Fox Sports, and our local stations, are valued by our distributors. We are pleased with our renewal pace and have not encountered issues in our collaborative efforts with partners. Regarding your question about Charter and Disney, I prefer not to comment on other companies as many will be addressing their earnings next week. We are still early in the media cycle, and they can provide insights into how their renewal impacts them, especially regarding entertainment channels, which we do not operate in. Overall, we see this as a positive trend, and we appreciate our partners focusing on core brands where viewership and retransmission leverage exist, rather than less popular channels.

Yes. So John, just to reinforce Lachlan's point, we had just over 1/3 of our distribution renewals due this fiscal year, and we're virtually through all of that. As Lachlan mentioned, we've achieved our pricing objectives against those renewals, which speaks to the constructive relationship we have with those distributors. We negotiate our full portfolio as a bundle, and I think you should expect to see that coming into the new calendar year. You'll see the impact of those renewals, and I suspect the benefit of those will be skewed towards the television segment, but you should also expect to see some progress on the cable side in the new calendar year.

A lot has been asked, but Lachlan, thinking about your comments on direct response and recognizing that some of those upfront issues hopefully fade. But it makes me curious about your view on the future of the linear video ad landscape. You have Tubi, which allows you to benefit from the shift to digital. But do you think we've reached a tipping point where linear video advertising is in secular, not just cyclical decline?

The short answer is, you have to break it up by category. If we look at sports and news, there's no sign of a slowdown in demand for the incredible and unique reach that those platforms deliver to our advertising clients. I think the direct response issue really relates to the upfront before last, there was a negotiating strategy of some of our competitors, which led to an oversupply of direct response in the market, and that's driven pricing down. We didn't see the same activity in this past upfront. We expect pricing pressure on direct response to ameliorate in the coming quarters. We see this as a shorter-term problem and not a structural issue at all. So particularly in news and sports, there is no other content or platform that offers the reach those categories do. We are very confident in the future of linear advertising, when we can deliver the audiences we deliver with the brands and brand safety that we also can offer our clients.

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.

Thank you, everyone. Thank you.