Fox (A) [FOXA] Conference call transcript for 2022 q3
2022-11-01 12:00:05
Fiscal: 2023 q1
Company Representatives: Lachlan Murdoch - Executive Chair, Chief Executive Officer John Nallen - Chief Operating Officer Steve Tomsic - Chief Financial Officer Gabrielle Brown - Chief Investor Relations Officer
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the FOX Corporation First 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 Instructions] 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.
Gabrielle Brown: Thank you, operator. Good morning and welcome to our fiscal 2023 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.
Lachlan Murdoch: Thanks Gabby and thank you all for joining us this morning to discuss our first quarter results, and Happy Halloween everyone. I was trying to think of a Halloween reference or a joke, but in fact there's nothing scary in these results. Actually fiscal ‘23 has started off – by the way, that's called a dad joke in my household. Fiscal ‘23 has started off on a solid footing for us, supported by healthy viewership at sports and news, revenue growth across our platforms, and impressive momentum at TUBI. Financially we delivered 5% growth in our top line revenues, led by an 8% increase in advertising and 3% growth in affiliate revenues. Our advertising growth in the quarter was driven by strong pricing at FOX News and FOX Sports. Record first quarter political revenues at the local stations, and in a quarter where industry-wide digital advertising revenues appear to have been under pressure, to be posted standout revenue growth of almost 30%. These are great results for FOX. However, we recognize that there is a lot of commentary around advertising headwinds as the macro environment evolves. Yes, the broader national advertising market is looking more fluid compared to the time of our last earnings call. However, the macro impact is not uniform across our verticals. We have observed some softness in the linear entertainment scatter marketplace. Remember that FOX does not over-index to network entertainment. So any impact there is nominal to us and has been more than offset by the digital entertainment strength delivered by TUBI. Additionally, despite the economic headwinds, we are seeing continued strength across our linear news and sports portfolios, led by the pharmaceutical, restaurant and streaming categories. These dynamics underscore a flight to quality, and the importance of our focus on live content with over two-thirds of our advertising revenue generated by live sports and news. At our local stations we've generated record political revenues for the September quarter. Second quarter to-date political revenues have also been very strong, given the combination of races and ballot issues across our markets. And I can confirm with a week still to go before Election Day, we have already beat our fiscal year 2021 record at the local stations excluding the Georgia runoffs. Meanwhile, base market sales at the local stations were stable in the first quarter. It's still too early to gauge how much of an impact the macro uncertainty will have on local base market advertising in the December quarter, but we are encouraged by the continued positive growth we are seeing in the automotive category, recognized industry-specific dynamics that are impacting sectors such as wagering and government public health advertising. On the distribution side of our business, we have completed the first rounds of our multi-year affiliate renewal cycle. So far the results are consistent with our expectations and we are pleased that the market recognizes the value of our brands as they deliver for their customers. Turning to our business units, FOX News turned in another Stella performance, finishing the fiscal first quarter as the number one channel on cable and the third most viewed network in Weekday Prime in all of television, behind only NBC and CBS. FOX Nation had a standout quarter for subscribers and engagement with total subscription growth north of 45% and total hours watched up almost 70% over last year, making our fiscal first quarter, FOX Nation’s highest quarter ever for hours watched. FOX Sports has had a very exciting calendar or has a very exciting calendar head of it this fall. The NFL on FOX is off to a great start and we're pleased to report that America's game of the week is averaging nearly 23 million viewers, up 9% over last year. The 2022 College Football season also got off to an outstanding start with 10.6 million viewers for Alabama, Texas in the season's first big Noon Saturday game. It's no surprise that FOX’s big news Saturday remains the number one window in college football with viewership up 15% over last year, and FOX continues to be the primary home for baseball's post season, where our coverage across FOX started in October and culminates with the world series throughout this week. As always, we're barracking for a tight seven game series. You know quite well that we have assembled an array of marquee sports rights and many of them will be on full display later this month during the Thanksgiving weekend, when FOX will play host to four of this year's biggest match-ups. The Giants versus Cowboys on Thanksgiving; the U.S. Men's Soccer Team versus England in the World Cup on Friday; Michigan and Ohio State on Saturday afternoon; and of course we’ll present America's game of the week on Sunday afternoon, which is between the Rams and the Chief’s; it'll be a terrific game. This extraordinary holiday weekend slate sets us up nicely as we prepare to broadcast Super Bowl 57 in February. Elsewhere, the story at TUBI is breathtaking, with first quarter revenue growth reaccelerating to almost 30% over last year. This marks the first time that TUBI revenue has surpassed the advertising revenue generated by FOX Entertainment in a meaningful way. And in the December quarter for TUBI, it looks to be a continuation of that momentum with revenue growth, the revenue growth rate currently pacing ahead of the September quarter at nearly 40%. Driving revenue at TUBI is strength across all major KPIs, particularly total viewing time, which was up over 50%. In fact, this was TUBIs highest quarterly viewership ever, with TVT reaching 1.3 billion hours. TUBIs impressive progress in growing the audience, engagement and monetization is indicating that our investment strategy and operational focus is working nicely. At FOX Entertainment we saw some changes last month with Charlie Collier moving on to new challenges. We are happy that Rob Wade has stepped into the role of CEO of FOX Entertainment and those who know Rob will share my view that he will be a tremendous steward to our entertainment businesses. Our fiscal year is off to quite a start. The September quarter results once again highlight the strength of our leadership brands, and we are just getting started on what promises to be a banner year for FOX. We are encouraged by the operating trends across the portfolio and the early returns on our digital investments. When paired with our strong balance sheet and low leverage, the FOX story remains a differentiated one amongst its media peers. And while we continue to be mindful of how the macroeconomic environment evolves during the months ahead, FOX remains well positioned to navigate and outperform through any potential uncertainty. Finally, let me comment on the announcement we made earlier this month regarding a potential combination of FOX and News Corporation. As has been made public, both FOX and News Corporation have formed separate special committees to explore a potential combination following letters received from my father, Rupert Murdoch and the Murdoch Family Trust. For a combination transaction to proceed, it will need the approval of both special committees and a supportive vote by the majority of the minority non-affiliated shareholders of each company. The special committee has not made any determination at this time and there can be no certainty that the company will engage in such a transaction. Given the importance of the work of the special committees, I'm not in a position to take any questions on the proposed transaction at this time. And now Steve will take you through the financial highlights of the quarter.
Steve Tomsic: Thanks Lachlan and good morning everyone. As Lachlan mentioned, we have made a solid start to fiscal 2023, delivering total company revenue growth of 5%. This top line momentum was led by 8% growth in our advertising revenues, where in the quarter we continued to see healthy scatter demand for our leading news and sports properties, and generated meaningful revenue reacceleration at TUBI. We also benefited from a record fiscal first quarter for political advertising revenues at our owned and operated television stations. Notably, we are able to drive 3% affiliate fee revenue growth without the benefit of any significant renewals impacting the quarter, and trailing 12 months subscriber losses running at approximately 7%. Quarterly adjusted EBITDA was $1.09 billion, up 3% as our revenue growth was partially offset by higher expenses led by continued investment in our digital initiatives and increased rights amortization at FOX Sports. Net income attributable to stockholders of $605 million or $1.10 per share, compares to the $701 million or $1.21 per share reported in the prior period. Once again, this was impacted by the change in fair value of the company's investment this quarter, which we recognize in other net. Additionally, our effective tax rate was slightly higher in the quarter, primarily due to a re-measurement with our net deferred tax assets associated with the reduction in state taxes. This had no impact on our cash taxes in the quarter. Excluding this impact and other known core items, adjusted EPS was $1.21, up 9% over last year's $1.11. Turning now to our segments starting with cable network programming. Cable advertising revenues were up 2% as our market leadership in news continue to drive linear pricing gains at the FOX News channel. This was partially offset by lower programmatic revenues at our digital news properties in the current period, as well as the impact of scheduling effects at our National Sports cable networks, where last year's revenues benefited from the Concacaf Gold Cup and Copa América Tournaments. Cable affiliate fee revenues were consistent with the prior quarter. As we have signaled previously, we're in the early days of our next distribution renewal cycle and we are pleased with the outcomes of our earliest renewals, and we continue to expect to see these benefits take effect in the back half of our fiscal year and initially concentrated towards the television segment. Cable and other revenues increased 9% in the quarter, primarily due to higher FOX Nation subscription revenues. EBITDA at our cable segment is $742 million compared to the $774 million reported in the prior year periods, and included the impact of elevated breaking news cost and the timing of digital investments at FOX News Media. At Television, we delivered 8% revenue growth, led by an 11% increase in advertising revenues. Our television stations saw a record September quarter for political advertising revenues, while the FOX Network benefited from continued strength in pricing and additional MLB Broadcast of FOX Sports, partially offset by softer ratings. Notably, we saw a sequential reacceleration of growth at TUBI, with revenues up 29% to approximately $165 million. This was on the back of a 53% increase in total view time and stable CTM’s. Television affiliate fee revenues were up 6% as healthy growth in fees across all FOX affiliated stations more than offset any impact from subscribe declines. Other revenues increased 5% in the quarter, primarily reflecting the impact of the TMZ and MarVista acquisitions, partially offset by the timing of deliveries of Bento Box. EBITDA at our Television segment was up 14% in the quarter, where we saw the typical seasonal increase in our marquee rights at costs at FOX Sports, including the impact of our MLB renewal, partially offset by lower marketing and programming expenses of FOX Entertainment. We are clearly making strong progress in both audience growth and monetization at TUBI, which underscores our confidence in the long term value of this asset. So it is worth noting that the EBITDA we delivered in the quarter at the Television segment and FOX more broadly incorporates an approximately $50 million EBITDA investment in TUBI. Now turning to cash flow where we generated $196 million of free cash flow in the quarter, 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 build-up of advertising related receivables, both of which reversed in the second half of our fiscal year. From a capital deployment perspective, fiscal year-to-date we have repurchased a further $300 million via our share buyback program. We remain committed to utilizing our full buyback authorization of $4 billion. Having now cumulatively repurchased $2.9 billion, representing approximately 14% of our total shares outstanding since the launch of the buyback program in 2019. Finally, we continue to maintain a very robust balance sheet where we ended the quarter with approximately $5 billion in cash and $7.2 billion in debt. Fiscal 2023 is now well underway and with a strong program of showcase events still to come, coupled with the strongest balance sheet in the industry, FOX is uniquely placed to navigate any macro uncertainty and deliver value to our shareholders. And with that, I'm happy to turn the call back over to Gabby.
Gabrielle brown : Thank you, Steve. And now we would be happy to take questions from the investment community.
Operator: Thank you. [Operator Instructions] One moment please for the first question. That will come from the line of Jessica Reif Ehrlich of Bank of America Securities.
Operator: We'll go to the line of Robert Fishman with MoffettNathanson.
Operator: And that will come from the line of Ben Swinburne of Morgan Stanley.
A - Lachlan Murdoch: Good morning, Ben. I'll start obviously with the TUBI and Steve, you can talk about the buyback and capital allocation. So to start with TUBI, you know if you look at TUBI as a business and what the team there have built is really a best-in-class AVOD service and they've had several years head start in this business. They are entirely focused on AVOD, but that's both from a – you know having established really a superior ad-tech stack and ad-tech team and also now combined with FOX, you know an advertising sales team with a proven track record. You know you couple that with the largest library available in the United States with 48,000 titles, which you know by the way is 5x the Netflix library. The cross platform opportunities that we are executing on across Sports and News and entertainment, you know it really sort of provides you know a tremendous platform that's absolutely taking off. You know TBT was up 53%. That really drives you know a tremendous amount of the sort of monetization as it flows through. We hold our CPM rates are pretty steady at TUBI. So it's really – it's not pricing that is – pricing has increased, but it's not pricing that’s accelerating. It's really the TBT time that's offering our clients and advertisers you know more opportunities on the platform. So we are tremendously excited about the future of TUBI as we sit here today.
Operator: We'll go to the line of Phil Cusick of JPMorgan.
Operator: That will come from the line of Steven Cahall of Wells Fargo.
Operator: And that will come from the line of John Hodulik of UBS.
Gabrielle Brown : 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 everyone.
Lachlan Murdoch: Thanks everyone.
Operator: And ladies and gentlemen, that does conclude your conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.
