This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: 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. If you should require assistance during the call, please press star, then zero. 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.
spk08: 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 Tomsik, 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 filing. 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.
spk03: 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's 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. While 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 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-based market advertising in the December quarter, but we are encouraged by the continued positive growth we are seeing in the automotive category, but recognize 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 stellar 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 of Fox Nation's highest quarter ever for hours watched. Fox Sports has had a very exciting calendar, or has a very exciting calendar ahead 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 Noon 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 postseason. 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 matchups, 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 Chiefs. It'll be a terrific game. This extraordinary holiday weekend slate sets us up nicely as we prepare to broadcast Super Bowl LIV in February. Elsewhere, the story at Tubi is breathtaking. with first quarter revenue growth re-accelerating 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, looks to be a continuation of that momentum, with 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 Tubi's highest quarterly viewership ever, with TVT reaching 1.3 billion hours. Tubi's impressive progress in growing 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 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.
spk04: 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 scattered 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 were able to drive 3% affiliate fee revenue growth without the benefit of any significant renewals impacting the quarter and trailing 12-month 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 in clutter, which we recognise in other net. Additionally, our effective tax rate was slightly higher in the quarter, primarily due to a re-measurement of our net deferred tax assets associated with a reduction in state taxes. This had no impact on our cash taxes in the quarter. Excluding this impact and other non-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 continued 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 Copper America tournaments. Cable affiliate fee revenues were consistent with the prior quarter. As we have signalled previously, we are in the early days of our next distribution renewal cycle. 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 other revenues increased 9% in the quarter, primarily due to higher Fox Nation subscription revenues. Ibadara at our cable segment was $742 million compared to the $774 million reported in the prior year period and included the impact of elevated breaking news costs 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 station saw a record September quarter for political advertising revenues, while the Fox network benefited from continued strength in pricing and additional MLB broadcasts of Fox Sports, partially offset by softer ratings. Notably, we saw a sequential re-acceleration 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 CPMs. Television affiliate fee revenues were up 6% as healthy growth in fees across all Fox affiliated stations more than offset any impact from subscriber declines. Other revenues increased 5% in the quarter primarily reflecting the impact of the TMZ and Mar Vista acquisitions, partially offset by the timing of deliveries of Bento Box. Ibidara 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 at 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 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 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.
spk08: Thank you, Steve. And now we'd be happy to take questions from the investment community.
spk09: Thank you. Ladies and gentlemen, I'd like to emphasize the functionality for the question and answer queue. If you wish to ask a question, please press one then zero on your touch tone phone. You will hear a tone indicating that you've been placed in queue and you can remove yourself from queue at any time by once again pressing one then zero. If you're using a speaker phone, please pick up the handset before pressing the numbers. It has been requested that you limit yourself to one question. Once again, if you have a question, please press one then zero at this time. One moment please for the first question. That will come from the line of Jessica Rees-Ehrlich of Bank of America Securities.
spk00: Thank you. Good morning. One question. Okay, let me think about this. Well, first on the decline in the pay TV universe, can you talk about how that impacts your affiliate discussions, both cable and retrans on the broadcast side, and how you're thinking about maybe hedging your reliance on the pay TV bundle? And then, Lachlan, I heard you say, you know, you don't want to talk about News Corp, but Obviously, it's out there, and maybe you can just talk a little bit about why now, what do you think the benefits are from the combination? And the balance sheet, your balance sheet is so incredibly strong, but so is theirs. How do you think about using those balance sheets?
spk03: Male Speaker Good morning, Jessica. Thank you very much. And I appreciate keeping your questions short, a number of questions, so thank you. I know it's tough. because there's a lot to talk about. But on the decline in the pay TV universe, as Steve called out, you know, we've seen a decline of just about 7%. We're not seeing in sort of the most recent remits that that decline getting any worse. So it's obviously last year was 5% this time last year. This year we've seen this tick down to 7%, but it looks to have stabilized at 7%. And our focus is really in, you know, continuing to invest in our brands, particularly news and sport, which are, you know, really essential to the paid television bundle. So, you know, we're not in a position, as I think a lot of the cable general entertainment channels, which are, you know, are more... at risk to people going to SVOD services and streaming to get that type of content, whereas there's only one place you can get Fox News and there's only one place you can get Fox Sports. So our strategy is to continue to invest and be essential for all of our distributors for their paid television bundles. And we've seen that play out through our renewals. We're at the beginning of our renewal cycle. It's a massive three-year cycle. I think in fiscal 23, 34% of our aggregate cable and television segment distribution revenue is up for renegotiation. Next fiscal year, it's also 34% up for renegotiation. And in fact, in fiscal 25, it's still 28%. So we almost, over the next three years, completely renew and refresh and extend our cable distribution agreements. We're well underway with having completed the first round of those renewals, and I have to say we are extremely pleased with the outcome of those renewals because our distribution partners do value what we bring to the bundle and our commitment to the bundle. those renewals have gone very well and have met every expectation we've had for them. The split between cable affiliate revenue and television segment affiliate revenue will shift slightly. I think you'll see the television affiliate segment grow at a faster pace than the cable affiliate revenue. And that's just in terms of how we negotiate those agreements with the distributors. In terms of a potential recombination with News Corporation, I really can't talk about it. It's actually an independent process going through with the independent committees, and it's not for me to... you know, discuss the conversation. Well, I don't know the conversation they're having or nor can I discuss them. So I'm sorry about that, Jessica.
spk09: Operator, next question, please. We'll go to the line of Robert Fishman with Moffitt Nathanson.
spk01: Hi, good morning, everyone. Maybe just more broadly, can you discuss the importance of scale in the media industry or are there advantages to having a smaller portfolio of where you can focus on the core sports and news assets that you just started to talk about, especially one thing about the cable network negotiations, as you already alluded to.
spk03: Good morning, Robert. How are you? Look, I think, you know, scale has to be focused, right? And scale is important. What we've seen amongst our media peers over the last, you know, few years is our peers getting bigger through mergers and acquisitions. I think scale lends flexibility in many ways. We continue to grow our business. We continue to look at M&A and be very disciplined in how we look at it, but we also do look the importance of scale, particularly over the next couple of years when opportunities, I think, in the marketplace will emerge, that having the scale be flexible in how we deal with them will be important.
spk09: Operator, next question, please. And that will come from the line of Ben Swinburne of Morgan Stanley.
spk02: Thank you. Good morning. You guys may be the only ones to talk about advertising revenue growth accelerating into the December quarter during earnings, particularly with your comments around Tubi. We've seen a lot of weakness in digital advertising broadly. Can you talk a little bit about the drivers there? I know you mentioned TVT, but are there other aspects to what Tubi is offering advertisers that explains the strong growth this quarter and what you're seeing into Q4. And just to come back to capital allocation, if I can sneak one more in, I guess I'm a little surprised the buyback isn't accelerating. Your stock's got like a 15% plus free cash yield and you're sitting on cash, $5 billion earning, I don't know, 2% or 3%. It seems given the position of the company's cash flow profile, like a pretty attractive opportunity to sort of increase the pace. So I don't know, Steve, if you have anything you want to add in terms of just what you guys are waiting for, looking at to resolve itself to maybe get more aggressive, or maybe the environment just means you want to be more conservative. I'd love to hear your thoughts there. Thank you, guys.
spk03: All right. Good morning, Ben. I'll start, obviously, with Tubi, and Steve, you can talk about the buyback and capital allocation. So... Just to start with Tubi, if you look at Tubi as a business and what the team there have built, it's really a best-in-class AVOD service, and they've had several years head start in this business. They're entirely focused on AVOD, but that's both from having established a really superior ad tech stack and ad tech team, and also now combined with Fox, an advertising sales team with a proven track record. You couple that with the largest library available in the United States with 48,000 titles, which, by the way, is five times the Netflix library. The cross-platform opportunities that we are executing on across sports and news, and entertainment. It really provides a tremendous platform that's absolutely taking off. TBT was up 53%. That really drives a tremendous amount of the monetization as it flows through. We hold our CPM, you know, rates 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 more opportunities on the platform. So, you know, we are, you know, tremendously excited about the future of Tubi as we sit here today.
spk04: Hey, Ben, it's Steve. Just on the capital allocation, I think the environment obviously lends itself to being more conservative on balance sheet management, but it's our nature to be measured in the way we manage the balance sheet. If you look at what we've done since the establishment of Fox and where capital has been directed, we've sent $4 billion back to shareholders, whether it be in the form of the $2.9 billion in buybacks plus over $1 billion in dividends. versus M&A, which net M&A sits at below $1.5 billion. So I think the bias so far has been to return capital to shareholders where we haven't had other alternate uses for it. But right at the moment, we feel like being measured in a touch more conservative is the right place to be.
spk09: Next question, please. We'll go to the line of Phil Cusick of J.P. Morgan.
spk06: Hi. Thank you. First, a follow-up on the Tubi data points. Those are helpful. Thank you. Can you discuss the potential of that business to evolve maybe from what it looks like today? And I know you're in specifically an investment mode, but what does it take to get that EBITDA number to a positive over time? And then second, any sort of update on the Flutter negotiation or timing there? Thank you.
spk03: So, you know, on Tubi, Tubi's been profitable in past quarters, and we've made the proactive and I think prudent decision to use this opportunity to invest in Tubi. It's modest investment compared to, very modest investment compared to what our peers are investing in their SVOD platforms, but we think it's a It's a sage investment because the opportunity to really lead in the ABAP market is absolutely there for the taking. We are leading the ABAP market, but to sort of cement that lead and to win in the ABAP market is absolutely our goal. So we'll continue to invest into the short to medium term in Tubi. I think particularly in an environment where their potential sort of economic stress in households, having a free service is a great position to be in. I think Tubi will benefit from any, frankly, from any economic chills that people might feel. So it's the right time to invest. It's the right time to extend our lead. Flutter? You know, we expect a decision in the Flutter arbitration imminently. And, you know, once we have that handed down, you know, we'll assess our position. But we expect an imminent decision, and we expect to be pleased by it.
spk09: Next question, please, Operator. That will come from the line of Stephen Cahill of Wells Fargo.
spk05: Thank you. I know you're not commenting on the merger itself, but I think you mentioned that a majority of independent shareholders need to approve it. So I was wondering if you could at least comment as to whether shareholders are going to be provided with some incremental information between now and I guess what will be a required shareholder vote. And the reason I ask is I think that Fox, in my opinion, is a great business. So I think shareholders are wondering why they want to mix a great business with just a different business. So if you could at least comment, not specifically on the deal, but what that investor education is going to look like, I think that would help everybody envision what's going on. Thank you.
spk03: Thank you very much. As I mentioned, I can't really comment on it because we don't know if there is a deal or if there will be a deal, what that deal would look like. So It's hard to comment on anything or impossible to comment on anything that doesn't exist today. So we, like you, have to be patient and wait to see what the special committees, what the outcome of their discussions and processes.
spk09: Operator, we have time for one more question. And that will come from the line of John Hudlick of UBS. Yes.
spk07: Great. Thanks guys. Maybe first a couple of follow-ups on the, on the 2B data. I mean, first, and Locke, you may have covered this, but like what content is driving that, that, you know, 50% increase in, in, in TBT there. And then is the 50 million investment that we saw in the quarter, is that a good run rate going forward? And is that, I mean, I would imagine that's not, that doesn't constitute a change in that, in the guidance for sort of flattish digital dilution in the quarter. And then lastly, just back to the ad market. I mean, Anything you could say about sort of ad trends, especially in the local TV market, ex-political, as we head into the December quarter? Because, again, there's been a number of sources of weakness there. I'm just wondering what you're seeing in that part of the market. Thanks.
spk03: So let me start on Tubi. Steve can talk about the run rate, and then I'll come back to the local ad market, ex-political and with political as well. Okay. Look, the TBT growth across Tubi has really been across all genres. It's been pretty widespread. Tubi, as we've discussed on previous calls, Tubi's core proposition is video on demand, so it's their movies and their television series on demand. They have worked hard over the last... a year or so, you know, launching, I think it's now over 200 fast channels, which are, you know, a combination of both news, but also general entertainment and sports fast channels. Those fast channels are doing very well, but are, you know, growing rapidly, but are overall a smaller percentage of their TVT. But it's pleasing that this is, you know, the growth has been really across the entire platform. Do you want to talk about run rate?
spk04: Run rate for Tubi, so 50 million absolute EBITDA deficit in the quarter. Last year, Tubi across the whole year was in the low 200s in terms of EBITDA deficit for the company. I would anticipate that the 50... We saw last year, I expect this to be the same case this year, where the second half of the year, had relatively more investment than first half and so you should expect to see a relatively consistent pattern with that. And listen, it doesn't change sort of our guidance in terms of the dilution around digital investments across the company, whether that includes to the nation, whether blockchain, the rest of the portfolio, that remains intact as is. But Tubi, listen, as we see that business develop, we'll continue to invest in it as we see that top line continue to grow, which is exceeding our expectations.
spk03: And then on the advertising market, it's interesting as you sort of look at the, what's the word, the ins and outs of the market, like in some categories where local might have some softness or more fluidity in the market, you're seeing it being picked up in national advertising in the same category. So sectors that were strong in local now are strong in national. So there's some sort of swings and roundabouts there. But overall, the trend is really a flight to quality, particularly around our news and sports brands and platforms. So nationally, I think, are called out. Pharmaceutical is very strong. Restaurants, particularly quick service restaurants, and even more particularly pizza category, is doing very well. I know my household, the advertising is working. And media, really streaming, particularly as SVOD services are more and more competitive. They're spending a lot of money marketing themselves on our platforms. On the soft side, we're seeing softness in wagering. Again, that's more of a local softness in wagering, but we're picking up a lot of that in national wagering, sort of betting spend. And government health services, right? So this time last year, there was still a lot of COVID-19 health services advertising, messaging from governments, and obviously that's very significantly less this year round. Locally, automotive remains very strong. Again, this is the first time in a couple of years that we've seen a local automotive advertising as strong as it is now. The other category locally that's very strong is general services, which is good to see. And any softness elsewhere is more than made up by this record political year. I think you have to remember that in our markets, and we have a tremendous local station footprint, and there are Senate races in 13 out of our 18 markets. You know, and particularly the hard-fought ones are Arizona, Georgia, Pennsylvania, and we're certainly seeing a tremendous amount of political spending flow through those markets. But also, you know, this year, gubernatorial races. We have, I think, 17 gubernatorial races in our 18 markets. So it's an incredibly busy time, and, you know, we're certainly seeing it flow through in our political revenues.
spk08: 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.
spk03: Thanks, everyone.
spk09: And ladies and gentlemen, that does conclude your conference for today. Thank you for using AT&T Executive
Disclaimer