Fox Corporation - Class A (FOXA) — Q1 2026 Earnings Call Transcript

Thank you, Charlie. Good morning, and welcome to our fiscal 2026 first quarter earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer; John Nallen, President and Chief Operating Officer; and Steven 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 EPS and 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. We also refer to free cash flow, which we define as net cash provided by operating activities less capital expenditures. And with that, I'm pleased to turn the call over to Lachlan.

Thank you, Gaby, and thank you all for joining us this morning to discuss our fiscal first quarter earnings. Fiscal 2026 started strong across our businesses with revenue growth of 5% and EBITDA growth of 2%. Advertising revenue grew 6% during the quarter despite not having last year's political revenue with robust trends at news, sports, entertainment and Tubi. This is supported by a gain in engagement across the portfolio, which distinguishes us from our peers and again underscores the strength of our brands and the leading positions they hold in our ecosystem. Distribution revenue grew by 3%, with subscriber declines remaining below 7% for the third consecutive quarter. The momentum in Q1 is continuing into Q2, led by a very healthy advertising market for us, stemming from both the upfront and from a strong scatter market. In fact, we are enjoying the most robust advertising market we have seen for some time. Also in this quarter, we launched FOX One. Though it's only been 2 months, we are encouraged by the enthusiastic response to the product. Subscriber trends have exceeded our expectations with those subscribers coming through direct acquisition and partnerships. We continue to believe that our content is best served as part of a bundle, whether it's in the pay-TV bundle or a direct-to-consumer bundle as it provides value and choice to the consumer. At FOX, we are distribution agnostic. We are committed to ensuring our networks and content reach as many households as possible. With that in mind, we launched 2 FOX One bundled partners earlier this month, ESPN and Verizon. These will build upon the strong momentum we have achieved with our groundbreaking Amazon Prime channels partnership. Kudos to everyone at Amazon from Andrew Jassy down for their tremendous and brilliant support of the service. You all have done just a tremendous job. Unsurprisingly, in terms of engagement, we have a balanced mix on FOX One with news driving audience and reach during the week and sports events doing the same over the weekend. Across all forms of distribution, interest and engagement in FOX's portfolio of live sports is increasing. FOX Sports kicked off the fall season with solid momentum. The NFL on FOX is off to a great start, averaging almost 22 million viewers in September, a 12% increase over last season and FOX's best start to an NFL season ever. And FOX's America's Game of the Week ranked as TV's #1 show through the end of September with an average of 30 million viewers. And our schedule only looks better from here right through to the NFC championship at the end of the season. Interest in college football continues to reach new heights as well. Through the end of September, FOX's Big Noon Saturday window averaged over 6 million viewers, up 22% over last season. The strong start was punctuated by nearly 17 million viewers tuning in to watch Ohio State versus Texas, the most watched week 1 college football game ever on any network. Like with the NFL, we head into the back half of the college season with a strong roster of Big Ten and Big 12 matchups, highlighted by the Michigan, Ohio State game and capped off by both the Big Ten and Mountain West Conference championship games. And while we thought last year's Dodgers-Yankees World Series would be a tough act to follow, Major League Baseball has once again performed well for us. Regular season ratings were up 3%. And as we go into game 6 of a spectacular World Series, our total post-season advertising revenues will likely surpass last year's. Speaking of revenue, Tubi achieved 27% revenue growth in the first quarter, driven by an 18% increase in total view time. This overall engagement trend has continued into Q2. Our expansive content library and our differentiated user base have solidified Tubi's position as the top premium AVOD platform in the U.S. And I'm happy to say Tubi reached profitability this past quarter. It's a great milestone, a credit to the Tubi brand to our viewer experience and to the revenue momentum we are seeing. This will likely lead to a partial moderation in the overall net investment we expected to deploy across our digital initiatives this year. FOX News sustained its strong ratings and audience momentum throughout the quarter. FOX News, once again, cemented its status as the most watched cable network in total day and in Primetime. Even more impressive, FOX News is the most viewed network in all television in weekday prime calendar year-to-date. This engagement and share led to the highest first quarter ad revenue in FOX News Media history with higher pricing across both direct response and national advertising during the quarter. Breaking news coverage throughout the quarter also drove strong engagement at FOX News Digital, fueling growth in page views and minutes versus last year. FOX News Digital closed the quarter with over 6.5 billion social media video views, its highest total ever. The strong Q1 results we have just reported, coupled with the ongoing trends we are seeing across the company, give me great confidence in the positive outlook for FOX. This is particularly underpinned by the strength of the advertising market, our leadership position across news and sports and by Tubi reaching quarterly profitability earlier than expected. Coming off a record fiscal 2025, fiscal 2026 will again highlight the uniqueness of our strategy, the quality of our assets, our ability to deliver on screen and financially and the overall strength of our financial position. This confidence is clearly demonstrated by this morning's announcement of a $1.5 billion accelerated share repurchase transaction. Consistent with our track record, we remain committed to delivering value for our shareholders in a thoughtful and disciplined manner. And now let me turn it over to Steve for more on the results.

Thanks, Lachlan, and good morning, everyone. FOX has made a strong start to fiscal 2026, highlighted by robust total company revenue growth of 5%. Advertising revenues were up 6% over the prior year, even with the tough comparison to the start of last year's record political cycle, driven by continued momentum at Tubi, strength in pricing at news and pricing and ratings growth at sports. Distribution revenues, which now include both affiliate fees for our linear channels as well as subscription fees for our direct-to-consumer streaming services grew 3% over the prior year. Content and other revenues grew 12%, primarily due to higher entertainment content deliveries in the quarter. Total company expenses were up 6% year-over-year, largely due to investments in our digital-led growth initiatives and higher entertainment programming costs. This was partially offset by lower sports programming costs. As a result, quarterly EBITDA grew 2% to $1.07 billion. Net income attributable to stockholders of $599 million or $1.32 per share compares to the $827 million or $1.78 per share reported in the prior year period. Excluding noncore items, adjusted net income was $686 million and adjusted EPS was $1.51, equating to a year-over-year increase of 4%. Now turning to our operating segments, where at our Cable Networks, revenue grew 4% over the prior year. Cable advertising revenues were up 7%, driven by robust pricing at FOX News, which more than offset the advertising impact from the absence of Copa America at our cable sports networks. Cable distribution revenues grew 3% in the quarter as pricing growth from our affiliate renewals outpaced the impact from industry subscriber declines, which continue to run at under 7%. Cable content and other revenues increased $13 million, led by higher sports sublicensing revenues. Cable expenses grew 2%, primarily due to higher sports programming rights and production costs led by international soccer rights. This was partially offset by lower news gathering costs relating to our coverage of last year's presidential election cycle. All in, EBITDA at our Cable segment was $800 million, an increase of 7% over the prior year quarter. Turning to our Television segment, where we delivered 5% growth in revenues. Television advertising revenues were up 6%, driven by continued growth at Tubi and strong sports pricing and engagement led by the NFL. This was partially offset by the absence of last year's political advertising revenues. Television distribution revenues grew 2% over the prior year quarter as healthy growth in fees across FOX owned and affiliated stations more than offset the impact from industry subscriber declines. Looking forward, with stable to improving subscriber erosion trends, we expect continued total company distribution revenue growth for the full year. Reflecting the flow of our commercial terms with distributors in fiscal 2026, we would expect this growth to be driven by our Cable segment. Television content and other revenues increased 17%, primarily a result of higher content revenues tied to our entertainment production studios. Expenses at the Television segment grew 4% year-over-year, driven by higher entertainment programming costs and higher content costs at Tubi. This growth was partially offset by lower sports programming costs, primarily from the absence of WWE and last year's broadcast of the UEFA Euros. All in, quarterly EBITDA at our Television segment grew 7% to $399 million. Now turning to cash flow. Free cash flow was negative $234 million in the quarter. This is consistent with the seasonality of our working capital cycle, where the first half of our fiscal year is characterized by a concentration of payments for sports rights and the buildup of advertising-related receivables, both of which reversed in the second half of our fiscal year. We remain active with our share buyback program, where we have repurchased a further $300 million so far this fiscal year. In addition, as you will have seen in this morning's release, underscoring our confidence in the outlook for the business and our commitment to create value for shareholders, we will enter into a $1.5 billion accelerated share repurchase transaction, consisting of $700 million of Class A common stock and $800 million of Class B common stock. This transaction will commence tomorrow, and we anticipate it being completed during the second half of fiscal 2026. This is all supported by the strength of our balance sheet, where we ended the quarter with approximately $4.4 billion in cash and $6.6 billion in debt. And with that, I'll turn the call back over to Gaby.

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

Maybe I could ask a couple of questions about the digital initiatives. First, could you provide any additional insights on FOX One regarding subscriber uptake and engagement? What content are users engaging with on the platform? Did you notice any growth acceleration after launching the ESPN bundle? Additionally, congratulations on achieving positive margins for Tubi. How should we view the long-term margin potential for that platform?

Thanks, John. Starting with FOX One, it's still very early, as we only launched a couple of months ago. However, the uptake has far surpassed our expectations. Perhaps it shouldn't be surprising given that it's a fantastic platform, and the team has done an excellent job in creating an outstanding service. The content and brands are truly top-notch. We are very pleased with the initial results regarding subscriber growth and engagement. There is a healthy mix of sports and news viewing, along with some entertainment, but engagement is primarily driven by sports over the weekend and news during the week. We anticipate no slowdown as we enter the busy autumn sports season. Subscriber acquisitions are progressing smoothly and efficiently, particularly with NFL and college football, as well as post-season baseball. It's gratifying to see subscribers and viewers also engaging with our additional content on the platform, especially news. Regarding Tubi, we've mentioned before that we're satisfied with reaching profitability this past quarter. There will be some seasonality to consider, but we expect continuous growth in profitability and for Tubi to become a significant contributor to EBITDA in the medium term, with margins ultimately in the 20% to 25% range.

I wanted to ask about the stronger pricing on FOX News and understand how you see this pricing in relation to your potential and what is driving this strength. At the end of last year, you mentioned a significant number of new advertisers expressing interest. I’m trying to gauge where we are in the pricing cycle and the potential you foresee. Additionally, you mentioned a moderation in investment levels due to the success at Tubi, which is great. Could you share some insights on where you think that may fall, perhaps in comparison to last year's investment levels or other metrics to help us understand your perspective?

Thank you very much, Michael. I'll address both questions. Regarding FOX News pricing, the strength is clearly reflected in the market share we are achieving, which is consistent with previous quarters. For the entire day in Q1, particularly in P2+, we have increased our share by 63% compared to our news competitors. In Primetime, our share has risen to 65% against our news rivals. Importantly, we are currently the number one channel across all of television year-to-date. As we approach the fall with new entertainment programming and football, we anticipate some challenging comparisons. Nevertheless, being the top channel year-to-date is a significant accomplishment. Additionally, it's worth noting that our CPMs are about half of those for broadcast, attracting interest from advertisers and clients.

Our advertising performance is about half of what the networks achieve in terms of cost per thousand impressions. This makes it a very effective option for our clients who are trying out the channel and returning to spend more. This year, we've gained around 350 new national clients for FOX News, and they are consistently increasing their budgets. The pricing is rising, both from direct partnerships and through very strong direct response pricing. We expect this positive momentum to continue. Regarding our investment in new businesses, we are reaching profitability sooner than anticipated, which will lead us to moderate the conservative estimates provided last quarter. We're pleased with this outcome and will keep investing in these businesses strategically as we see necessary. It's a modest investment in our future.

I just have one and a quick follow-up. Just on the comment around distribution growth for the company for this year. I was wondering if you could just expand a little bit on what you think the key drivers of the stable to improving subscriber erosion trends are? And how important is FOX One to your outlook on distribution growth? And then just as a follow-up, I was just wondering if you could explain a little bit more about the ASR, why now and also why the composition between Class As and Bs just given the more limited float on Bs?

Great. Thanks, Mike. Regarding distribution growth, we are starting to see the initial benefits from skinny bundles, which we are involved in across the board. This marks the third consecutive quarter of reduced subscriber decline, which is encouraging as we notice some improvement in subscriber retention. This change is a result of consumers having more flexibility to opt for skinny bundles instead of traditional full bundles. The skinny bundles that are most successful are those focused on entertainment, news, and sports. It’s encouraging to observe this trend. Additionally, digital distributors are performing well. FOX One is not expected to have a significant impact on this situation; rather, it complements our subscriber base as we are targeting individuals who have cut the cord or never subscribed. However, as mentioned previously, we aim for FOX One to achieve low to mid-single-digit millions of subscribers, so it won't have a notable immediate effect overall. Steve, would you like to add anything?

Yes, to elaborate on the distribution growth Mike mentioned, I want to reiterate that we're optimistic about our current situation given the growing subscriber trends and Lachlan's point about FOX One, which we expect to contribute positively. We anticipate total company distribution revenue to increase this year. For the TV segment, due to the timing of our rate increases, we expect our full year FY '26 TV affiliate revenue to be roughly in line with '25. However, because of these rate increase timings, we expect overall total company distribution revenue growth to occur in '27 across both segments. We're confident in our outlook. Regarding your question on ASR, the way the ASR will operate is tied to the entry into the transaction tomorrow. We will receive 80% of the shares back upon settlement immediately, and it will take most of the current fiscal year to finalize. The division between the As and Bs reflects that the Bs are trading at about a 10% or 11% discount to the As, offering a more efficient buying opportunity for the Bs. Additionally, we've conducted approximately $6.9 billion in buybacks, with $5.9 billion for the As and $1 billion for the Bs, which we believe is the right mix for the remainder of the fiscal year.

So my first question is, even with the accelerated share buyback, you have significant flexibility on your balance sheet. Can you discuss how you might utilize that? Do you anticipate any changes to your asset mix in the coming years? It seems quite evident that there will be mergers and acquisitions in the industry. How do you see yourself participating in that, particularly in relation to FOX? Additionally, Lachlan, you mentioned strength in both upfront and scatter advertising. Could you provide more insight, especially regarding FOX's news side and also the broader advertising landscape including sports, entertainment, and Tubi?

Sure. Jessica, Steve will address the balance sheet specifically, but you're absolutely right. It's an industry-leading balance sheet that we take pride in, and we work diligently to maintain its strength. However, it ultimately needs to be utilized, particularly for mergers and acquisitions. We are constantly evaluating all opportunities, both externally and internally identified. We anticipate being more active in M&A in the near future, though there are currently no specific deals on the table. We believe that M&A will play a crucial role in our growth moving forward, and we will remain disciplined in our approach. We are focusing on areas where we see positive growth trends rather than challenges. Therefore, we won't invest in sectors with significant exposure to the cable industry or similar entertainment assets. This is the framework guiding our assessment of potential opportunities. From an advertising perspective, as I mentioned, since the inception of new FOX in 2019, we are experiencing the strongest advertising market in our segments. This is particularly relevant for us because our areas, especially live news and live sports, benefit from extensive reach and an influx of revenue from linear cable entertainment into live sports and news. Additionally, Tubi is seeing exceptional revenue growth across the board. In terms of national advertising, we've seen particularly strong performance in pharmaceuticals, financial services, and technology driven by AI-related advertising. The NFL is performing well, and we expect this World Series, if it hasn't already, to exceed our postseason revenue from last year in Game 6. Sports and college football are also showing great results. FOX News has experienced significant price increases in both direct response and premium branded advertising. Local stations, which previously had a mixed outlook, have shown improvement, which is very encouraging. We've observed robust pharmaceutical advertising for these stations. The areas that are experiencing some weakness include restaurants, certain telecommunications, and the automotive sector, which has remained flat. Overall, we are optimistic about the outlook for our stations. Last year, Tubi benefited greatly from political advertising due to its targeted audience, which is difficult for advertisers to reach. Despite that, Tubi continues to show remarkable growth. We are satisfied with the advertising outlook, especially within our current market environment.

Operator, we have time for one more question.

Maybe taking another stab just at the investment levels this year. I think Steve's conservative estimate last quarter was $350 million, I believe, for '26. I don't know if maybe you'd give us an update based on how you guys are trending so far? And then Lachlan, kind of back to FOX One, just anything you called out and thanked Prime Video for their contribution. But just anything interesting or surprising to you in how, I guess, sort of you're acquiring FOX One customers when you look at all the different options and channels? I know it's early, but I would be interested.

Let me start with FOX One. Thanks, Ben. I don't think it's much of a surprise that partnerships are very important. The partnerships we launched with ESPN and Verizon are expected to play a significant role in FOX One's growth. I must emphasize that Amazon has been an outstanding partner; their efforts in distributing the product and acquiring subscribers have been remarkable. We give them a lot of credit and appreciate their collaboration. From a content viewpoint, it's not unexpected that sports—across the board—are a major draw for the product and contribute significantly to user engagement, especially on weekends. This engagement continues as users access news and entertainment content during the week. The sports season, particularly the busy autumn sports season, is a crucial time for us to drive subscriber acquisitions. It’s still early days, but we’re extremely pleased with FOX One's performance, which is a testament to the team's hard work. I’ll now hand it over to Steve.

Yes. So Ben, you're spot on. We did call it $350 million on the Q4 call for what we expected to see in fiscal '26. I think as we sit here today, we think that as we sort of qualified, we think we thought that was a conservative estimate. We still think it's a conservative estimate. But I think too early in the year to sort of put you on to a different number.

Great. At this point, we are out of time. But if you have any further questions, please give me or Charlie Costanzo a call. Thanks so much for joining us today.

Thanks, everyone.