Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Fox Corporation first quarter fiscal 2020 earnings Conference call.
At this time, all participants are and they listen only mode. Later, we will conduct a question and answer session instructions will be given at that time.
If you should require any assistance during the call. Please press Star then zero.
As a reminder, this conference is being recorded I would now turns <unk> like to turn the conference over to our Chief Investor Relations Officer, and Executive Vice President Corporate initiative Mr. Joe <unk>. Please go ahead Sir.
Thank you operator, Hello, everyone and welcome to our first quarter fiscal 2020 <unk> earnings Conference call.
Joining me on the call today, Robotically Murdoch executive Chairman and CEO John Neylan.
C O.
And Steve topic, our CFO .
First block when Steve will give some prepared remarks on the most recent quarter.
We'll take questions for me investment community.
Please note that this call may include forward looking statements regarding Fox corporations financial performance and operating results.
These statements are based on management's current expectations and actual results could differ what has stated as a result of certain factors identified on today's call under the company's FCC 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 or FCC filings, which are available on the Investor Relations section of our website.
With that I'm pleased to turn it over to lock.
Thanks, Joe a good afternoon, and thanks, everyone for joining us today on Fox corporations, 2021st quarter earnings call.
Our first full fiscal year as a standalone public company is off to a solid start with good positive momentum across all our businesses.
I'm just reported strong financial results, which Steve will comment further on shortly.
Perhaps more importantly, we're making significant progress on the operational goals and strategic initiatives that we outlined to you at our Investor day.
Our strategy to build Fox around live sports news and event programming is producing results and delivering audience growth and engagement faster than we expected.
For example, we're now six weeks into the fall season, and Fox has established itself as both the number one rated broadcast network.
And the only being for network to deliver year on year audience growth in the key 18 to 49 demographic and in total viewers.
We are up 5% in 18, 49 ratings and 10% in total viewers.
This leadership position stems from the investments, we're making across our network beginning with Fox Sports, which is accounted for 22 of the 50, most watched telecast in the country since the NFL kick off.
Our ratings are up 11% across our entire portfolio of college and pro football led by Thursday night with viewership up 22% and our Sunday broadcast which is up 8%.
Three year high.
Another New addition to the Fox network was the debt you Ive W. W. Eased Friday night Smack down on October four to an average audience of nearly 4 million viewers.
We are thrilled with R.W.W. partnership as it completes our strategy the program live content from Thursday through Sunday in the fall.
The momentum behind football and W. W. E continued into the second quarter with a solid to major League baseball post season, culminating where they historic seven game World series.
Fox wins in adults 18 to 49 on four nights Monday, Wednesday, Thursday and Friday.
More nightly wins than any other network.
The success of the network extends well beyond sport, where their entertainment slate offered her great start led by to the top three programs on television.
We're pleased to be seeing such positive signs of momentum as we execute the strategy, we laid out last night.
Our mix of live and your life tent pole content mixed with high quality entertainment, it's clearly paying dividends.
The mass singer has returned for its second season as the number one entertainments go on broadcast.
And 911 is the top program on Mondays and as the number two scripted program.
All the television.
And part of a son is the highest rated new broadcast program on any network. This season.
In fact in entertainment programming only Fox ranks number one over the first six weeks of the season for the first time since 2011.
Speaking of number one the Fox News network is on track to finish the calendar year as the number one cable channel for the fourth straight year end is the number one news channel.
18 years running.
Speaking of news our station group has continued to expand the already extraordinary amount of local news rebroadcast, which positions us well, they're robust political AD market, we expect next year.
The real strength and value of these distinctive brand is evidenced by the momentum we've had on the distribution and affiliate renewal front, where we remain on pace to achieve the targets we have previously outlined.
We have successfully when new distribution agreements with charter dish and Cox, along with affiliate agreements, but next car Gray and TEGNA.
In each of these renewals, we were able to extreme value at the reflects the strength of our core brands.
Having said that we haven't seen the rate of subscriber declines in the traditional NBP. The universe escalate in recent months with this quarter, yielding industry declines of over 4%.
But it is important to note that the subscriber losses reported by just one distributor, which accounts for approximately 25% of pay TV subscribers represents the majority of the net losses, we experienced over the past 12 months.
That distributor accounts for almost 80% of total losses over the last year and without them some losses would decreased to about 1.3%.
Helped by strong gains from the leading D N B P D.
This is important because it suggests that it is too early to draw from conclusions from a market that is still clearly fluid.
Especially in light of surging results from our leading digital partners.
It is though something we are clearly focused on.
Another area of focus is growing the company's digital revenues and businesses.
I should mention that we do not include Dnbi PD distribution revenue in our digital results.
The reach of our direct platforms has grown to over 250 million users per month with total engagement growing to over 11 billion minutes per month.
Interestingly, we now see well about 10% of our screaming audience consuming the four case stream.
With very positive feedback and we're excited to be the first broadcaster ever the stream the Super Bowl and for K.
It will be a groundbreaking experienced for fan.
Our digital strategy.
<unk> businesses like Fox Bad incredible.
Is crucial to a heightened engagement with the audiences, which is already driving meaningful growth.
Year over year digital revenue has grown over 30% in the quarter.
And we continue to work to optimize our digital platforms.
For the first time ever our Fox News Fox business and Fox television stations digital properties.
Oh now underpinned by the same tech platforms, and Fox sports is being transitioned this quarter, enabling us to drive improved monetization across these businesses.
Of course, driving that improvement also leads us to new business models and new revenue streams.
In conjunction with the kick off of the football season, we launched the free to play Fox Sports Super sticks out nationally, which has already achieved nearly 1 million registered users and almost 10 million plays.
The stars group is now while the digital sports Wagering service box bad in both New Jersey and Pennsylvania.
The proposed merger between flatter entertainment the owner of Fanduel and our partner the stars group will create many opportunities for us.
Excited to develop the box that brand in partnership with Fanduel and are confident in the dual brand strategy to capitalize on a rapidly growing sports wagering market.
Over a month ago Fox business debuted a brand refresh across its linear and digital platforms, including a new logo in tagline invested in you.
As part of this initiative Fox business Dot Com and the Fox business, App, where we launched a new content and editorial tools to drive engagement.
The initial performance of the relaunch digital properties has been encouraging.
As we have seen substantial increases in page views and in unique users.
A core part of our strategy for Fox business Dot Com is our acquisition of credible labs, which closed a few weeks ago.
We're now beginning the process of integrating it service with our core businesses, starting with Fox business.
Well, we remain focused on executing against our operational operational plans. We also continue to make progress towards other strategic initiatives.
While maintaining a balanced approach to capital allocation.
To further strengthen our portfolio of assets yesterday, we announced an agreement with nexstar to acquire their local television stations in the Seattle and Milwaukee markets.
In return, we have agreed to sell them our stations in the Charlotte market, which geographically aligns with nexstars existing operations in the Carolinas and in Virginia.
It's a great deal from both companies and their rare win win.
This acquisition expands the reached a wonderful boxes core assets our television stations portfolio.
And further strengthens what is already a highly profitable cash generative business.
This transaction will expand our market presence the 14 of the top 15, Dms and importantly adds two major markets with NFL Major League Baseball Pac 12, and Big 10 teams.
Finally, consistent with a timing we laid out at our Investor day to day, we have today announced that our board of directors has authorized a $2 billion stock repurchase program.
We're pleased to have the buyback authorization firmly in place as part of our capital tool kit.
The company also announced its intent to complete $500 million stock repurchases in the near term.
In light of all the positive momentum I have just touched upon in light of our success of the network at sports and news and in our growing station group in light of our market, leading investments in sports gaming and into credible marketplace and in light of the unique cash benefits of our cash.
Structure, we believe we are undervalued in respect to our peers and to other investment opportunities available to us at this time.
This buyback reflects both our confidence in the long term strength of our business.
And our commitment to finding the most efficient use of our capital.
We remain committed to deploying capital in a disciplined manner to maximize shareholder value through a balanced approach of organic investment accretive and may and return of capital to our stockholders.
We will not follow their prescribing formula to plan instead, we will be opportunistic and invest capital where we feel the company can achieve the greatest return on investment.
Now Steve will provide more detail on our financial results.
Thanks, a lot Glenn good afternoon.
We've made a solid start to fiscal 2020.
And notwithstanding the subscriber headwinds Loveland just mentioned overall, we are exceeding our internal plans that we commenced via with.
We delivered healthy topline and double digit EBITDA growth in the first quarter, which sets us up well for the remainder of fiscal 2020.
Let me now take you through our results and along the way I remind you of some key factors that shape the rest of that fiscal years.
In the first quarter. The company reported total revenues of $2.7 billion up 5% other the comparative period in fiscal 2019, reflecting revenue growth across all operating segments.
EBITDA was $856 million at 12% increase over the $761 million generated in the prior year led by higher contributions from the television in cable segment.
This growth was partially offset by higher corporate expenses reported in the other segment, which reflect the costs at Fox operating as a standalone public company in the current you caught up this is the presentation of carve out financial statements in the prior <unk>.
From a bottom line perspective, net income attributable to stockholders at $499 million.
80 cents per share was lower than the not then the $604 million or 97 cents per share in the cry your quota.
This decrease was primarily attributable to a 150 million dollar reduction in the unrealized gain recognized in other than that related to the change in fair value of the company's investment broker.
Excluding this impact and other onetime items adjusted EPS of 83 cents was up slightly over the last year's 82 cents per share as that strong operating performance was largely offset by below the line items, such as interest and tax expense, which as we have flagged in the past now reflect the full amounts associated would help.
Operating as a Standalone company.
So now turning to the performance of our operating segments, Florida like cable network EBITDA of $684 million was up 8% on revenue growth of 2%.
The revenue increase was led by other revenue growth of $30 million.
This increase was driven by pipe of the boxing revenues, including the pack, yes, I'm about that took place on July twentyth.
Along with increased sports IP licensing revenues and subscription revenues from Fox nation.
Cable affiliate revenues were in line with size in the prior year quarter as the impact of higher average rights across essentially all of that brands was offset by the net decrease in pay TV subscribers that Lachlan mentioned earlier.
Barring material changes in parents subscriber trends, we anticipate a return to growth in cable affiliate revenue in the second half with the fiscal year as rate resets from recent renegotiations begin to take effect.
Cable advertising revenues decreased 4%.
Afflicting lower contributions from the women's FIFA World Cup in the current year as compared to the men's tournament in the prior year, along with the absence of U.S.C. programming at the National Sports networks.
EBITDA cable segment increased 8% over the prior year, reflecting the higher revenues and a 5% reduction in costs.
The decrease in expenses was attributable to lower rights and production costs related to the men's FIFA World Cup in the prior year quota and the absence of you have stay programming in the current you quota, partially offset by contractual increases on existing sports rights agreements.
At the television segment EBITDA was $251 million, an increase of $18 million, 47% from the prior year quarter on the back of revenue growth of 6%.
The revenue growth was led by 14% increase in television affiliate revenues, reflecting double digit programming fee growth from non on station affiliates and double digit direct retransmission revenue growth at a owned and operated stations.
This growth is consistent with the overall TV affiliate revenue trajectory trajectory, we laid out that average invested I in my where we announced our expectation to deliver revenues of approximately $2.65 billion.
Calendar year 2022.
Other revenues in the television segment grew by $34 million driven by higher digital content licensing revenues and revenues from our recently acquired animation studio bedside books.
As expected advertising revenues in the quarter decreased by $12 million or 2%.
As higher entertainment advertising revenues, which include the impact of the broadcast of the Emmy Awards on Fox.
We more than offset by the several eggs by several expected cyclical factors versus the quarter a year ago.
These include the impacts of political advertising revenues at the local stations related to the 2018 midterm elections and more people World Cup matches in the prior year quarter.
Television segment expenses were in line with prior year amounts as the contractual increases on existing sports rights agreements and expenses associated with the broadcast of the Emmy Awards were offset by the absence of the rights expense associated with the broadcast of the men's FIFA World Cup in the prior year quarter.
Well most of you are already aware at this point it is worth remembering that seasonal and cyclical factors have the particularly pronounced impact on a quarterly results in our television segment.
So we most visibility that Q2 results with the impact of high sports rights and production expenses at the Fox network, reflecting the contractual annual escalators on the NFL Major League Baseball and college football contracts and the addition of W. W. E rights as well as lower political advertising revenue at at local television so.
Patients when compared to the prior year.
Finally from a TNL perspective, the net EBITDA loss other segment amounted to $79 million, which reflects a full quarter of standalone costs as opposed to the carve out basis, a presentation in the corresponding quarter last year.
The strong overall piano results generated free cash flow, which we calculate as net cash provided by our operating activities less cash invested in property plant and equipment of just over $160 million in this quarter.
The modest rate of conversion of EBITDA free cash flow approximately 20% reflects the typical seasonality you should expect to see in the business.
He asked first and second quarter cash flows are impacted by the working capital deficit from sports rights payments and the timing of cash cash collection on out and advertising revenue, which both for the us in the second half without fiscal year.
On a full year basis, we continue to expect to benefit from natural low working capital usage, along with a cash tax benefit.
From an overall balance sheet perspective, we ended the quarter with $3.3 billion in cash.
$6.8 billion in debt.
As Lachlan mentioned earlier in the very near term, we will be deploying $500 million of cash on hand to the buyback, but I am B class shares.
To do this we've entered into an accelerated stock repurchase transaction to buy back $350 million of the company's class a common stock and intend to comfortably repurchase approximately $150 million of class B common stock.
Additionally, as part of that balanced capital allocation approach and as we announced yesterday approximately $300 million of capital will be directed to the next television stations transaction, which we expect to close in the second half of this fiscal year.
Any upside that we closed the acquisition of 67% stake incredible labs for approximately $260 million.
And with that I'd now like to return it back to John Thanks, Steve.
Operator, we'd be happy to take questions from the investment community.
Thank you, Sir ladies and gentlemen, if you wish to ask a question. Please press Star then one on your Touchtone phone.
You will hear a tone, indicating you had been placed in Q you may remove yourself from Q at any time by pressing the pound key and if you are using a speakerphone. Please pick up the handset to do for pressing the numbers.
It has been requested you limit yourself to one question. Once again, if you have a question. Please press Star then one at this time one moment. Please for our first question.
And we'll go to the line of Doug Mitchelson with credit Suisse.
Thanks, So much good afternoon, one question I guess for Laughlin and John I'm, just curious support update on the progress on investment spending how much.
You know what was the September quarter proportional to the year in terms of the investment spending that you laid out the analyst day and power each of those investments doing lock line are you already touched on a WWD, but in terms of programming investment and a in terms of Fox nation would love to get an update thank you.
Hi, Doug I'll, let I'll, let Steve a tag alone.
Doug or listening in terms of the amount of in investment spending actually deployed in the quarter is actually relatively modest we called out the investor day.
I'm way between two and 250 million of net EBITDA, our investment over the course of that year, and I'd say less than 10% of that was deployed over the quarter you'll see.
A significant amount of that come through in the quarter wearing now because we've obviously got WWD that launched in October the fourth floors.
Now right in the middle of the full schedule in entertainment programming and Fox Nice from where we continue to build in terms of the programming in the marketing.
You can go to the next question please.
And we'll go to the line of Jessica Reif Ehrlich with Bank of America. Please go ahead. Thank you have one question. That's a tough one so maybe a multipart our can you give us color on.
So the advertising numbers for this quarter as you look out to the second quarter in the third quarter. The Super Bowl given your ratings and the upfront can you just give us some color on what's going on and you have a new advertising structure, which seems to be working well and then anything you can say on any movement and discussions on the NFL negotiate.
It would be great any color there.
Right just got those those aren't tough question, so I'm I'm happy to take them. So thank you Oh, let's come from an advertising point of view talk a little bit about stool, but tsubo and a second but you know or in the quarter. Despite some of the the comparisons.
Steve You know I mentioned in his in his earlier.
Earlier comments.
Your advertising has been quite strong I'm, particularly across the entertainment and sports category.
We we had a very successful upfront or with entertainment pricing up double digits and with sports pricing up.
Hi single digits.
Which we know which which we've been very pleased we're achieving a in addition to that one of the one of the a critical goals of our upfront was also to set the W. W. E pricing to broadcast pricing not cable pricing and we did a very successfully no categories in them.
Market are are you know number categories are incredibly strong the streaming services, you know with Disney Netflix and the Apple our recently have been spending spend a good money.
Tech sector, with Google and Microsoft Amazon as a very strong clients a pharmaceutical has been strong they've been moving some of the money between demographics. So from some money so out of news, but but onto a honest sports and entertainment.
And of course, the financial services sector clients like Geico Progressive State farm have also been a been spending good money and supporting us very well.
So we're happy with where we are haven't mentioned news news pricing in the upfront was up mid single digits.
The news market as a as a advertising market is softer than in entertainment and in sport. We think that's because of some of the ratings deficiencies at our competitors that are that some some volume has been given way are more cheaply. Then then we would agree too.
So we were finding the news market a softer than than sports and news a pacing in the sorry in a quarter.
Our scatter pricing was up about 25% know, there's very little scatter. So it's a but as a oh, good statistic and going forward, it's lower than that but still but it's still up well above the upfront, which leads us to the Super Bowl worst where it will.
Well ahead of last.
Last years or so.
We we don't know a last year as our competitor, but we're well ahead of our our last Super Bowl, where we were selling at this stage in the year. We're sold out of all of our eight positions and we really good momentum as we continue to.
To to sell the superbowl. So we're very confident the pricing will be I don't want to give the number but there the pricing will certainly be the highest cost per 32nd AD or in any Super Bowl today. So we're very pleased with that.
On the NFL, we don't have a an update for you in terms of where we are with the negotiations.
Obviously, we're engaged with the NFL everyday as a rebroadcast.
There are there fixtures.
And but negotiation with with the NFL in terms of a renewal of any of the packages has not started yet.
And next we'll go through the line of Michael Nathanson with Moffat Nathanson. Please go ahead.
Thanks, I'm going to ask a couple around Nexstar. So you talk a bit about the accretion math behind the station swap and GE moved a foxs Retrans Ray car right away and is that higher than Nexstars. Retarded. Then lastly, besides from rich retrench step ups, if they're already.
Benefits you derive from from getting in those markets you called out the geographic footprint, but I wondered or like what what does that derive was that benefit you from changing but you know the location these markets.
Hey, Michael It stayed here in terms of the the Retrans benefits it pretty much is a straight a move from taking what what they will pay us from those stations reprogramming fee perspective, and then.
Then assuming them into our Retrans right, that's pretty immediate impact and synergy benefit of.
Taking the stations onto our balance sheet. So.
Especially its happy enough from day, one remember, though this won't close until later in the fiscal years. So you probably won't see much of that.
In fiscal 20, and Michael John just adding those key markets, which were.
We will miss the only one is missing when you look at our footprint.
Particularly for the NFL and the other sports rent is just to.
Revenue upside for us.
Helps on both national and local level and we achieve cost synergies to given the size of the station group.
That we have we just would naturally achieved.
Cost synergies then.
Okay, Great and go next question, Yes, Sir next we'll go to the line of Ben Swinburn with Morgan Stanley .
Thank you.
Good afternoon, just on the on the buyback and sort of the balance sheet, you guys talked about a billion and a half minimum cash balance at the Investor Day. As you noted you guys are over story and I think even after the MSR the acquisitions, you've announced the dividend you are still not even spending your free cash flow this year.
On our numbers. So I'm just wondering if you have any timeline in mind or a sense of urgency about.
Optimizing the balance sheet from a cash debt perspective.
It's it's a not sort of way of me trying to figure out how fast you're going to buyback your stock obviously.
Yes.
And you've never been suddenly thanks [laughter].
Look the buyback is is just one element of our overall.
Discipline balanced allocation of our capital.
So today, we're pleased to announce announced that authorization out of the deployment of the 500 million.
I'd remind you that this announcements right in line with the timetable that we had established.
It's been well developed by our board.
Established in the best interest to Waller shareholders.
And with its adoption ongoing authorizations will be determined as an ordinary course matter with the board.
Added to deal with your question, specifically, while we fully expect to complete the authorization, we won't Hello, a formulaic approach.
To any current or future buyback deployment that just doesn't make any sense to us.
So we'll invest our capital where we feel we can generate the greatest long term return and our investment.
For our shareholders.
And amongst the various legs of disciplined and balanced capital allocation.
I think we can go to the next question.
And we'll go to the line of rich Greenfield with light Chad.
Hey, guys, it's Brandon Ross.
As far as Max.
Thank you.
First on a fs one.
So Disney took you have seen from you guys and recently took boon to sleep and I'm pretty sure. They renewed with Formula. One. So just can you help us with how you plan to fill the programming hole.
There and then.
Thinking about the Super six mobile game that you guys launched which looks like in the on ramped to legalize betting.
For you guys can you give us any takeaways that you've learned so far there.
Thanks.
So and let me start with Fox Sports one.
I would.
Yeah.
Oh I lay respectfully.
Disagree with you in terms of sort of any kind of programming hall. The the the the Fox sports one programming.
Lineup is pretty impressive you know who's going to college sports a huge my NASCAR, France is the primary home or <unk> of our NASCAR programming boxing and so and we're very pleased with a with the programming on Fox Sports one well, obviously look at can continuing to strengthen that as.
Our tuniu some that are fit with our program strategy emerge. So we are.
We are we're pleased with where Fox sports one I sit today and I think our distributors are if you look at the renewals across all of our affiliate renewals I mean are Fox sports. One now continues to drive increases in a in affiliate.
Fees and right. So our affiliates I agree with us and sorry, which was the question obviously on Supertex.
So super six has been you know you know probably successful if you look at the strategy.
If any of these OFAC spending to look at what the strategy Watson and Sky in Britain.
And in other countries, where were legalized sports digital sports Wagering has occurred having a free to play a game that's on top of the fall into it to attract users is critically important to having no with superset six and that the success.
They're very early and rapid success of Supertex, I think bodes very well to dropping those does users down into Andrew you know a fox bad for pay our game. So we're we're pleased with Supertex and when we're pleased with Fox about I should mention on it and I didn't.
I I I was remiss not to mention just in response to Jessica's question.
Already if you look just in the New York, New Jersey market.
In New Jersey sports betting, they're already yeah, I'm 13 active gaming advertisers and so one of the reasons we have worked.
Quite pleased about this liberalization of sports wagering.
Rules state by state is not not only do it do we think well game and tremendous long term value through Fox bad.
But also just from an advertising point of view and we're now seeing several million dollars.
Year to date already start to flow through and only the I'm very limited number of states, where I'm, we're sportswear Germans loss.
Operator, we have time for one more question.
Okay and that will be from the line of John Hodulik with UBI. Yes. Please go ahead.
Okay. Thanks, guys, maybe on Monday affiliate side, you guys did 4.3% growth this quarter I think during the last year you guys said.
7% is sort of in the mix, obviously, a lot of moving parts, maybe talk about a little bit about.
The renewals you guys as I've talked about when that you should see that hit.
In fact, the piano and yes at 7% still it's still a good guide for the year. Thanks.
Hey, John It's Dave I think that's that's around the Mac.
I should say the patent here and it's a similar patent the what we saw last year, which is.
September quota and December quarter, pretty a pretty flat for US then you should see it. So you should expect December this year to be simulate.
Kind of performance for us, but then with the renegotiations that we've just done which laughlin outlined in his opening remarks the rate resets that we get out of those renegotiations really begin to kick in at the start of the calendar in next year's so when you look at a first half second half growth right the growth rate will absolutely be skewed to that.
At that second half and in particular ask the quarterly you'll see.
We see the benefit of those rights resets really kicking again, it will be skew towards retransmission growth is against cable affiliate, but.
We feel pretty comfortable where we are for the full year renewals and also that $2.65 billion how difficult to 22.
At this point, we are out of time.
Thank you everybody for joining today's call. If you have any further questions. Please give dan Carey or me a call.
It's been talked you next quarter.
And ladies and gentlemen that does conclude our conference call for today again. Thank you very much for your participation in for using the ATM T. executive teleconference. You may now disconnect.