FOX Q3 2023 Earnings Call Transcript

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May 9, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fox Corporation Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would like to emphasize that functionality for the question and answer queue will be given at that time.

Operator

As a reminder, this conference is being recorded. I'll now turn the conference over to Chief Investor Relations Officer, Ms. Gabrielle Brown. Please go ahead, Ms. Brown.

Speaker 1

Thank you, Keely. Good morning, and welcome to our fiscal 2023 Q3 earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer John Nowlin, Chief Operating Officer and Steve Tomczyk, 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.

Speaker 1

These statements are based on management's current 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.

Speaker 2

Thank you, Gabby, and thanks to 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 57 on the Fox broadcast network, which generated approximately 650,000,000 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 115,000,000 viewers across FOX Platforms making Super Bowl 57 the most watched program in U.

Speaker 2

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 Q4, which includes the return of NASCAR, the 2nd 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 2nd season of Next Level Chef, which promises to be the next big lifestyle franchise from our Studio Ramsey partnership. Our entertainment business also found success with the number one new series and new drama of 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 5 consecutive seasons.

Speaker 2

In fact, the combined power of our sports and entertainment programming places Fox at number 1 amongst broadcast network season to date in the key 2018 to 49 demo. Our strong sports calendar also had a halo effect At the Fox Television stations, we 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 3rd quarter was nothing short of stellar, with revenue growth of 31% supported by sustained gains in engagement where total view time increased 38% year on year. And while still early in the Q4, the April results for Tubi show the momentum across the platform accelerating.

Speaker 2

Having recently marked the 3 year anniversary of our acquisition of Tubi, our progress over this longer term timeframe 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 7,000,000,000 impressions. And our strong growth in engagement has now led to Tubi's inclusion in Nielsen's The Gage, 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 We thank Farhad for his entrepreneurial leadership at Tubi over the last 3 years and of course before.

Speaker 2

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 3rd quarter as the most watched cable network in total day in 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 beating CNBC and total viewers during the business day and market hours for the 4th consecutive quarter. Let me briefly address the settlement of our dispute with Dominion Voting Systems.

Speaker 2

We made the business decision to resolve this dispute and avoid the acrimony of a divisive trial and a multiyear appeal process, a decision 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 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 provider.

Speaker 2

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.

Speaker 3

Thanks, Lachlan, and good morning, everyone. FOX again delivered strong underlying financials in our fiscal Q3 with 18% revenue growth 3% EBITDA growth, bolstered by a record breaking Super Bowl 57. 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 $833,000,000 up $22,000,000 over the prior year quarter as these revenue increases were partially set by higher expenses.

Speaker 3

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 $54,000,000 or negative $0.10 per share compared to net income of $283,000,000 or $0 per share reported in the prior year period. The variance was primarily due to other net where we recognized 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 non core items, Earnings growth was strong with adjusted net income growing 8% to $494,000,000 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 61% increase fueled by Super Bowl 57, which as Lachlan mentioned generated over $650,000,000 in gross revenue.

Speaker 3

We also benefited from 2 additional NFL playoff games, 1 divisional And one wild card, partially offset by the timing of 1 less regular season game. Momentum Vituby remains strong with advertising revenues up 31 percent to $170,000,000 on the back of increased engagement and stable pricing. The strong advertising tailwinds in the television segment were partially offset by lower prime time ratings at the Fox Network and mixed Stations when excluding the Super Bowl. Television affiliate fee revenues were up 9% 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.

Speaker 3

EBITDA at our television segment was up 82 $17,000,000 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 $60,000,000 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 the softer direct response market Fox News Media, while being partially offset by the benefit of the World Baseball Classic at the National Sports Networks.

Speaker 3

Cable affiliate fee revenues were broadly flat coming in at $1,100,000,000 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 $792,000,000 compared to the $864,000,000 reported last year, largely due to these revenue impacts along with elevated legal costs at Fox News Media and higher expenses associated with the 2nd season at the USFL and the World Baseball Classic at FOX Sports. Now turning to cash flow, where we generated strong free cash flow of $1,480,000,000 in the quarter, reflecting our normal seasonal cycle of collecting advertising revenues from our fall programming coupled with our major sports rights payments being We continued with our normal course buyback activity of $250,000,000 in the quarter and deployed $1,000,000,000 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.

Speaker 3

We remain committed to fully utilizing our current $7,000,000,000 authorization where we now cumulatively repurchased approximately $4,400,000,000 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 $4,100,000,000 in cash and $7,200,000,000 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 This 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 and A.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, I'd like to emphasize the functionality for the question and answer One moment please for the first question. We'll go to the line of Robert Fishman with MoffettNathanson.

Speaker 4

Good morning, everyone. I have a couple of related questions, if I can. Laughlin, after the Dominion settlement, is there anything that you can share to better And the future settlement risks? And then related, can you discuss whether the departure of Tucker Carlson will lead to changes And 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 retrans growth 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?

Speaker 4

Thanks very much.

Speaker 2

Thanks, Robert. I don't know where to start. I love the 7th question. But, no, thank you very much and good to hear from you. On a so let me start and I'll hand over, I suppose, to Steve for the final questions.

Speaker 2

So, I'm obviously limited about what I can say about any ongoing litigation, But I can make the following comments in regards to Dominion and I referred to some of this in my prepared remarks. Look, as we've stated many times, we always acted as a news organization reporting on the newsworthy events of the day, We certainly included allegations being made by the sitting President of the United States and his lawyers in the aftermath of a hotly contested presidential election. We have been and remain confident in the merits of our position that the First Amendment protects the news organizations reporting Allegations being made by a sitting President of the United States. However, the Delaware Court severely limited our defenses at trial through pretrial rulings. One example of being not being able to point to the newsworthy nature of the allegations.

Speaker 2

So we determined that the best course of action for the company As you know, we have a pending case with Smartmatic, which is a fundamentally different case than Dominion in that all Of our full complement of First Amendment defenses remain and we'll be ready to defend this case surrounding extremely newsworthy events When it goes to trial, likely not until the calendar year 2025. As regards To our programming strategy in prime time, there's no change to our programming strategy at Fox News. It's obviously a successful strategy. And as always, we are adjusting Our programming and our lineup and that's what we continue to do. We are pleased with The strength of the advertising demand throughout our schedule, but particularly prime time.

Speaker 2

Steve, do you want to talk to the Amphipedes? Yes, sure on the affiliate.

Speaker 3

So Robert, yes, listen we're pleased with the way our affiliate negotiations 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 retrans in FOX Sports in those negotiations. And so with another sort of third of our book due for renewal in fiscal 'twenty four and a touch under 30% due in fiscal 'twenty We feel pretty confident that we can continue to deliver pricing gains as subscribers. If the subscriber rate of attrition stays at the same level, we expect to post Ongoing affiliate revenue growth for the company.

Speaker 1

Operator, we can take the next question.

Operator

And that will come from the line of Ben Swinburne with Morgan Stanley?

Speaker 5

Thanks. Good morning. 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 in to 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 to be 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.

Speaker 5

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 very much.

Speaker 2

Hey, thanks Ben. I'm glad Robert left you a question. But on advertising, look, we I think you alluded to a softness in the market. We're really not seeing that across our major platforms. I'll give you a bit of the detail.

Speaker 2

The national market, Sports market for us is very strong, very robust. Obviously, as we enter the summer, it's a slower, Quieter always is a quieter period for us until the fall when our key marquee sports programming It is on air, but we're seeing pretty robust demand for time and availability in the sports market. So We're very confident with sports. In news, the direct response Issues, which is a market issue, it's not a Fox News issue, has stabilized. So we're not seeing Any more deterioration in direct response pricing.

Speaker 2

So we feel pretty confident in The stabilization of that piece of revenue, again, that's really a product or a result Of oversupply with our competitors with direct response is not so much a Fox News issue, but it's something that certainly has affected our ability To achieve the premium pricing that we've been used to. But again, that issue has stabilized and we think it's a offers us a pretty good platform going forward. The other thing that I mentioned on news, which is just a small data point, we're seeing political revenue earlier Than we've ever seen before. It's still small, but it's sort of unheard of to have it this early in the political cycle. So again, We think that bodes well for the fall and as we enter the more significant part of the political cycle.

Speaker 2

And then coming on to Tubi, the revenue is accelerating there. It's revenue is while it's accelerating pretty strongly, Gabby doesn't want me to give the number. It would break most of Your models, but it's not keeping pace with TBT. TBT continues to grow even faster, which is a great metric. So we have the avails.

Speaker 2

We're looking forward to 2B being a central part of our upfront negotiations. It's clearly Not only a strategic driver for us, but have been an important driver going forward. Then when you get down to local base markets, That's where we're seeing more mixed results in the different kind of verticals of revenue. We're very pleased to see auto again continuing its rebound with strong growth in the auto category. The entertainment category, we're also seeing growth in and restaurant category, we're seeing growth in.

Speaker 2

But this is offset by weakness across Other categories such as retail, telecom and obviously sports wagering and betting. So the local market It does feel soft overall. But again, we're looking forward for our businesses, particularly in sports and news. We're looking forward to a strong decent summer and a strong fall season. I think that's all the questions.

Speaker 2

Thanks, Ben.

Speaker 1

Next question, please.

Operator

We'll go to the line of Phil Cusick with JPMorgan.

Speaker 6

Hi, thanks. A couple of questions and then a quick one. On Tubi, it sounds like your TVT 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?

Speaker 6

We appreciate the $1,000,000,000 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.

Speaker 2

Thanks very much, Phil. On let me start with Tubi and I'll follow-up to Steve for the some of the capital management element So on Tubi, we're going to continue to invest in Tubi. It's at the same levels we've been investing over the last Year or so, we just think it's a tremendous opportunity for us. As I mentioned in my comments, The fact that we're now Nielsen's Gauge now has some over 1% of the U. S.

Speaker 2

Television viewing is a tremendous sort of benchmark to have hit and I see continued growth there. So From a consumer aspect and from a marketers' aspect, 2B is becoming more and more a central part of Usage and sort of an opportunity. And this is really because the focus Tubi's had over, not only think about over the last 3 years with our involvement, but obviously the team there has done a tremendous job not only over the last 3 years, but before that really sort of driving sort of best in class personalized AVOD experience, building an incredible Library, nearly 55,000 titles in the U. S. Alone.

Speaker 2

And again, to put that in context, that's 5 times the The Netflix library and now really being able to monetize They're viewing in a more efficient, better way. So we're incredibly optimistic and I would say The results are in. We're incredibly pleased with the performance of 2B going forward and we think it's an appropriate area for us To continue to invest in. On the I'll turn it over to Steve on the on sort of capital management. But just On it, I'll just start by saying, look, we have a $7,000,000,000 buyback authorization.

Speaker 2

I think we've spent about $4,400,000,000 of that. So we have if my math is not incorrect this Tom, good morning. Dollars 2,600,000,000 remaining of the authorization. We fully expect to deploy all of that capital Back to shareholders through our buyback, and any litigation has no impact on that at all. Thanks, Ocwen.

Speaker 2

So Phil, just to go back on legal costs. Legal costs over the last 2 or 3 quarters have been elevated. Obviously, we've been Deep in

Speaker 3

the depositions and pretrial preparations for Dominion. So I'd expect that to subside over the next couple of quarters. And then to just pick up on Lachlan's point, listen, we the leverage is the debt we have $7,200,000,000 We got a maturity in January, which we'll make Call on as to whether to repay or refinance, but the leverage feels about right where we are at the moment. And our cash position is strong. And so we would anticipate Whatever happens with future litigation, we can continue to go with our buyback pacing as it has been over the last But we'll be balanced about it as we've been saying since the formation of the company.

Speaker 1

Operator, next question please.

Operator

And that will come from the line of John Hodulik with UBS.

Speaker 7

Great. Thanks guys. Maybe getting back to the sports team, where viewership remains Across the board, I mean, first of all, how would you gauge the success of the USFL? 2nd, 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 rider strike?

Speaker 7

Thanks.

Speaker 2

Thanks, John. Look, USFL, it's still it's just the start of the second Season, we're very pleased with it. We're pleased with both its ratings, the quality of the games, It's performance on television and ratings and also frankly it's performance on the ground with ticket sales and And engagement with football fans. So early days, but we couldn't be more happy with how it's tracking today. In terms of additional sports rights, we look across our portfolio of sports rights.

Speaker 2

We're constantly managing them. We look at sports rights as they come up And we also look at them as they get renewed just to make sure that they are efficient for us and that We're paying a responsible and appropriate amount for those rights. So we're constantly adjusting, but we do it with, I think a real commitment to discipline in terms of what rights we would acquire or dispose of. So it's a moving It was always a moving feast, but I wouldn't expect anything dramatic at all in that area. What was the last question?

Speaker 2

The rider strike. The rider strike. So, no, thank you. On the rider strike, look, I think for us, we are Well positioned for the Riders' Strike. We think that with our strategic priorities and sort of Strengths in sports, but also in news.

Speaker 2

These are two areas that are not affected by the Riders' Strike And the audience will pivot on a when they're watching television to those categories. In entertainment, you have to remember as well, we only program 2 hours of entertainment a night. That's a mixture of both Scripted and unscripted content, so we feel very well positioned there with that not to be affected by the rider strike Really at all. There'll be some scheduling changes with some of these descriptive content, but it's not something that will have a significant financial impact on us.

Speaker 1

Operator, we have time for one more question.

Operator

And that last question will come from the line of Jessica Reif Ehrlich with Bank of America.

Speaker 8

Thanks. I just wanted to maybe follow-up on Lachlan's first point that you're not overly dependent on Live and unscripted, I mean, given you're live and unscripted, you're not only dependent on the writers for entertainment. So given that, like can you talk about your outlook for the upfront also given macro? I You seem to be in a very different position than most people, but the market is, as most people say, choppy. And then also given the decline in the pay TV universe, Can you just talk about how you see Fox News and Sports transitioning over time?

Speaker 2

Great. Hi, Jessica. Thank you very much. So look, I Agree with you on the rider strike. I think for us, our focus on sort of live news, live sports, And frankly, the network, a healthy balance of scripted and unscripted Content on the network puts us in a tremendous position.

Speaker 2

I think what the timing of the strike obviously with the upfronts next week Creates some, what's the word, hesitancy. It's hard to present an exact Schedule, right? If you're only in entertainment, it's not if you're in news and sport. So I think it positions us very well in the upfront. And that's of course as I mentioned before, not including the strength of 2B going to Upfront as well.

Speaker 2

And Tubi will certainly be front and center in all of our upfront presentations, but also in our negotiations Going forward, so we feel very well positioned. It's early with the upfront. These negotiations We'll take time, but I think we're in a best position as we could possibly hope for. In terms of So the cable universe and what we plan to do with news and sport Going forward in terms of any sort of a direct to consumer or alternative kind of distribution strategy, as I think we've said before, we're ready to go. We have the technology in place.

Speaker 2

I think we have the teams and the people in place to go D2C when we deem that necessary or prudent. But for the moment, we continue to drive industry leading pricing out of the MVPD and the MVPD universes. Steve mentioned this before. Our pricing has been it's not theoretical. Our pricing has now been set in contracts Going forward, so for the we have a third of our distribution Deals by sort of volume this year, this fiscal year and another third, the next fiscal year and we're very pleased with where we sit and where we've established a market price for our brands.

Speaker 2

The and when you just speaking of the brands, when you have the best sports Business and brand and your best news business and brand, these are products that ultimately, right, will be part of any scaled Regardless of what technology is used to deliver that content and that platform. And so We see D2C in the future and it will come eventually, as just one component of a broader distribution strategy. But it's certainly across any of those platforms or technologies, it's hard to see not having our sports and our news On those platforms. So we feel pretty well positioned Jessica.

Speaker 1

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.

Speaker 3

Thank you.

Operator

And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation in using AT and T Executive Teleconference. You may now disconnect.

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