Fox Corp
NASDAQ:FOXA
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Fox Corp
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Ladies and gentlemen, thank you for your patience and standing by, and welcome to the Twenty-First Century Fox fourth quarter of 2018 earnings call. [Operator Instructions] Just a brief reminder, today’s conference is being recorded.
And I would now like to turn the conference over to Executive Vice President of Investor Relations, Reed Nolte.
Thank you very much, operator. Hello, everyone, and welcome to our fourth quarter fiscal 2018 earnings conference call. On the call today are Lachlan Murdoch, Executive Chairman; James Murdoch, Chief Executive Officer; and John Nallen, our Chief Financial Officer.
First, we’ll give some prepared remarks on the most recent quarter. Then, we’ll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to Twenty-First Century Fox’ business (0:57) [Technical Difficulty] the expected timing, completion and effects of the proposed Disney transaction and spinoff of certain of the company’s businesses to create New Fox [indiscernible](1:09) constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
This information is based on management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Details regarding these risks and uncertainties are and will be contained in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended June 30, 2018, and the registration statement on Form S-4, which was declared effective by the SEC on June 28, 2018, and includes a proxy – joint proxy statement of Disney and the company and also constitutes a prospectus of New Disney as defined therein.
These statements are qualified by the cautionary statements contained in such filings. Also, please note that certain financial measures used in this call such as segment operating income and depreciation and amortization, often referred to as EBITDA and adjusted earnings per share, are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release and our 10-K filing.
With that, I’m pleased to turn it over to Lachlan.
Thanks very much, Reed. Good afternoon, everyone, and thank you all for joining us today. Shortly, I’ll provide some context on the financial results we just announced, but first, I want to update you on our pending transaction. [We’re](2:42) making steady progress. Ten days ago, shareholders of both Twenty-First Century Fox and Disney approved all proposals related to the combination of our film, television production and international businesses with Disney’s exceptional assets.
In addition, Twenty-First Century Fox shareholders approved proposals necessary to effect the spinoff of our portfolio of news, sports and broadcast businesses to create the New Fox. It is pleasing to report that our shareholders overwhelmingly endorsed our recommendation of this transaction with over 99% voting in favor. Shareholder approval is a key milestone towards the deal completing. In late June, the U.S. Department of Justice entered into a consent decree with Disney and Twenty-First Century Fox. We are now focused on obtaining regulatory approvals outside of the United States and on track to close our transaction in the first half of calendar 2019. We are confident that our businesses and brands will continue to flourish as part of Disney. As our shareholders will have meaningful ownership of the combined new company, we are focused on delivering these unique assets to Disney in great health.
Additionally, progress in forging the New Fox as a stand-alone entity has been substantial. Anchored by the number one news channel across of all of basic cable and a sports network that captures 40% of all NFL viewership, the New Fox will boast the schedule of America’s most engaging sports news and entertainment programming. In particular, I want to focus on the news and live sports brands that will underpin the strategic strength and robust financial profile of the New Fox.
Our cable network portfolio continues to be led by the strength of Fox News, which, this quarter, maintained its position as the number one cable network. Also, the Fox Business Network achieved its highest rated year ever this past fiscal year. In fact, the Fox Business Network beats CNBC in the business day for the past 14 consecutive months, and Fox News has been number one in total day and total viewers for 25 months straight.
Equally as impressive, FOX Sports had its highest viewership ever in calendar 2017 on the combined strength of our sports programming across the broadcast network and the cable networks, FS1 and FOX Sports 2. Live sport is clearly the most valuable content in our industry, and FOX Sports is the leader in live events. We are thrilled with the performance of our first FIFA Men’s World Cup, which set new viewership marks for non-U.S. matches in the Group Stage round of 16 quarterfinals and semifinals, all despite the absence of the U.S. national team and a challenging time difference between Moscow and the United States.
In addition to exceeding our financial expectations, the World Cup also vaulted FOX Sports 1 ahead of ESPN2 in total day viewership for the calendar year-to-date and puts FOX Sports 1 on track to achieve a fifth straight year of growth in total day viewership.
Looking forward, the launch of NFL Thursday Night Football in September will enhance FOX Sports' already dominant position in television’s highest rated programming. Fox’ 38 regular season NFL windows will be the most ever on a single network, and Fox will command approximately 40% of all regular-season NFL viewing.
We also expect that our NFL will account for three of television’s five highest rated programming -- programs of this fall and that AMERICA’S GAME OF THE WEEK will remain TV’s number one show for a 10th consecutive season. So in summary, we are pleased with our momentum as we plan for and stand up the New Fox. And as we make this progress, we continue to be focused on the entire operations of Twenty-First Century Fox, while we move towards closing our transaction with Disney. And with that, I’ll hand over to John.
Thanks, Lachlan, and good afternoon. We finished the fiscal year with a very solid fourth quarter, delivering double-digit revenue, EBITDA and core EPS growth while setting us up very well for fiscal 2019. I’ll start with some brief comments on the financial results for the full fiscal year, followed by more specific comments on the fourth quarter. Total full year revenues were $30.4 billion, up 7% over last year, led by an 11% increase in worldwide affiliate revenues and a 10% increase in content revenue.
These gains were partially offset by 3% lower advertising revenues, primarily reflecting the absence of the Super Bowl, which was broadcast last fiscal year. Excluding the Super Bowl, total company advertising revenues increased 2% over the prior year. Total full year segment EBITDA was $7.03 billion, down 2% from last year, as 10% growth at the cable segment was more than offset by both difficult comparisons of the Television segment, where the prior year included the Super Bowl, a record-breaking World Series and a national election cycle as well as the impact of incremental investments in our direct-to-consumer and FoxNext initiatives.
Income from continuing operations attributable to shareholders was $4.5 billion this year or $2.41 per share, while adjusted EPS was $1.97, 2% higher than last year. Now turning to the fourth quarter. Our total company reported revenues were $7.9 billion, up 18% over last year, reflecting double-digit revenue growth across all of our operating segments. Total segment EBITDA was $1.91 billion, a 32% increase over the $1.45 billion reported a year ago, led by higher contributions from the cable and film segment.
From a bottom line perspective, income from continuing operations attributable to stockholders was $925 million or $0.50 per share, while adjusted EPS was $0.57, an increase of 58% over last year. So now turning to the performance of our operating segments for the quarter. Cable networks EBITDA of $1.61 billion was up 12% on revenue growth of 14% and expense growth of 15%. Domestic cable revenues increased 9% overall, led by affiliate fees growth of 11%, supported by higher average rates across all of our domestic brands and increased subscribers.
Domestic ad revenues increased 1%, reflecting the continued strength of Fox News and the impact of the FIFA Men’s World Cup on FS1, partially offset by lower results at the RSNs. EBITDA at our domestic channels increased 4% over the prior year, reflecting the higher revenues, partially offset by increased costs from the World Cup and more original episodes at FX. Reported international cable revenues grew 25%, led by advertising growth of 55% and a 12% increase in reported affiliate revenue.
The sharp increase in ad revenues was led by the highly successful debut of the IPL tournament on STAR Sports. Reported international EBITDA increased 53%, led by higher contributions from both STAR Sports and its entertainment business. At the Television segment, EBITDA was $106 million, 23% below last year and principally reflects approximately 20% higher programming costs due to the broadcast of the Men’s World Cup and higher entertainment programming expenses from increased original programming.
Television segment revenues grew 14% on advertising gains of 12%, led by the broadcast of the World Cup and higher entertainment pricing and 19% higher retransmission consent revenues. Turning to the film segment. Fourth quarter EBITDA was $289 million, a $311 million improvement over last year driven by significant film studio contributions this year from Deadpool 2 and The Greatest Showman compared to a high level of releasing costs last year to support that higher volume of summer films.
In addition, television studio contributions increased this quarter, reflecting a higher amount of content available on SVOD platforms. The growth of the studios was partially offset by further investment in the launch of the Marvel Strike Force mobile game at FoxNext. Now these strong overall P&L results generated over $2 billion in cash from operations this quarter and $4.2 billion for the year. That’s Twenty-First Century Fox’ strongest cash generation result ever.
And from an overall balance sheet perspective, we ended the quarter with $7.6 billion in cash and $19.5 billion in debt. Looking ahead, there were a few meaningful items to note as we start our next fiscal year. At our TV segment, we will broadcast our first season of Thursday Night Football. While we expect this property to be value accretive in the aggregate over the five-year life of the contract, early on in the cycle, we anticipate losses as we begin to fully optimize these rights from a revenue perspective.
Also at the TV segment, we’ll continue to see increased retransmission growth and incremental local political advertising associated with the midterm elections. Within the cable segment, we expect to generate at least mid-single-digit domestic affiliate fee revenue growth for the full year. And on the cost side, you should expect an increase in international cable expenses in the fourth quarter associated with broadcasting once every four years the ICC Cricket World Cup at STAR.
Foreign exchange is always an item to be mindful of, where we’re currently seeing the U.S. dollar continuing to rise against the Indian rupee and some Latin American currencies such as the Argentine peso. Now I’ll remind you that, as a result of U.S. tax reform, we’re expecting our normalized effective rate for fiscal 2019 to be in the mid-20% range.
Now to finish off, just a little housekeeping on New Fox. Our current plan is to file a Form 10 with the SEC in the late fall, which will provide historical and pro forma financial information and other details on New Fox. We will not be communicating separate financial information nor forward commentary on New Fox until that filing is cleared by the SEC.
With that, I’ll turn it over to James.
Thanks very much, John and Lachlan, and thanks for joining us today. So as you just heard, in fiscal 2018 and particularly in our last quarter, the company delivered strong financial and operational momentum really across all the businesses. And much of this financial strength is driven by the growing value of our cable networks brands in the marketplace. We just delivered our fourth consecutive quarter of double-digit domestic affiliate fee growth, reflecting subscriber increases in both digital MVPD services and our younger underpenetrated channels. These gains more than offset declines in traditional subscribers.
For Twenty-First Century Fox in the U.S., we have more subscribers today than we did a year ago. And in fact, for our networks that are carried on all virtual MVPD services, revenue from subscriber additions on those services are now exceeding revenue declines from subscriber churn on traditional platforms. And these achievements, I think, are part of a growth strategy and a business agenda we’ve executed against really for the better part of the decade. The Disney merger and separation transaction we’re getting to the finish line and the value they unlock for shareholders clearly underscore this point.
Turning back to our fiscal year. I’m particularly proud of the creative excellence and unique experiences we delivered to customers across our businesses. We’re pleased with the turnaround of our film studio, which delivered a solid performance by any measure. It led the industry in awards, including the Best Picture Academy Award for Fox Searchlight Shape of Water, and on top of this, we ended the year with the box office success of Deadpool 2, which has exceeded $730 million in worldwide receipts.
Our television studio has three shows that were number one on their respective networks and four of the top 10 new dramas of the broadcast season, 9-1-1, The Orville, The Gifted and The Resident, driving multi-platform audience growth for entertainment on the broadcast network. At STAR India, the addition of the 60-match Indian Premier League on STAR Sports has yielded dramatic results.
The tournaments are almost a 30% increase in viewership over last year and the target audience on TV. Average match reach and engagement has increased by double digits, 15% and 30%, respectively. We also saw the IPL dramatically increase viewership on our Hotstar mobile platform. To give you one data point, with 10.3 million concurrent live viewers during the IPL final match, which was the most concurrently watched live digital event in the world ever.
So in closing, we’re excited by the performance of the business and the growth we’re seeing and the prospects for the future. Reed?
Thank you, James. Now operator, we’d be happy to take questions from the investment community.
[Operator Instructions] First, we have the line of Doug Mitchelson of Credit Suisse. Your line is open.
Thanks so much. I was just -- I guess, my overarching question is on your OTT plans and if you could just give us an update on Hulu, just a bit the loss trends. Have losses peaked at this point since maybe they’re starting to improve just slightly? And if you can just outline for us what you think about for Fox News and FOX Sports and Fox Broadcast for OTT and how FX+ is going, that will be helpful.
I should first talk a little bit on the sort of media plans with Fox, in particular, how it would relate to businesses that will end up within New Fox. And then, James, you might want to talk about our existing kind of substantial over-the-top businesses elsewhere in the company. We announced several weeks ago that the Fox News will be launching a direct-to-consumer offering called Fox Nation towards the end of this year. We’re tremendously excited about that as our first direct-to-consumer offering for Fox News.
We – there’s tremendous excitement about it and interest in it. So we’ll be seeing that towards the end of the year around the time of the midterm elections. Currently as well, within Fox, we have a very large within FOX NOW authenticated business for all of our channels, which, as we go through this transaction obviously, we’ll be separating with National Geographic and FX coming off of that FOX NOW platform. James?
Yes. And well, first of all just on Hulu, look, we remain very, very enthusiastic about the prospects for Hulu, and I think we and the other partners in Hulu are eager to invest and continue to grow the platform. But beyond that, I don’t think we’re going to give you guidance on where exactly that’s going, but the volume growth is very, very strong. And we’re very excited about that business and the sort of dimension that it adds to the overall company.
And then sort of more generally with respect to direct-to-consumer businesses, I mean, you’ve seen our affiliate, Sky, continue to grow well; the incredible strength in Asia, particularly with Hotstar at India, which is the mobile direct-to-consumer over-the-top business. And we think it’s been a real core competence of the company and one that has put us in good stead as it invested in content and this – the digital sort of vertical integration has really paid dividends for us.
Next, we’ll go to the line of Jessica Reif of Bank of America. Your line is now open.
I guess, two questions. On your programming that’s sold to third parties in like downstream, Fox Film, I guess, I think is still with HBO. Fox TV product is, I guess, sold to multiple players. What is the plan? Is your plan to – well, can you tell about the timing of HBO? And would your plan be to eventually put that on the Disney direct-to- consumer platform? By how long will it take to regain those rights? And on Fox Network, the news and sports strategy is really clear. Can you just go a little bit about what your entertainment programming strategy is? Will you build from scratch your own program production? And will you buy? Can you talk about ad sales and the structure as you go through this transition? Thank you.
Jessica, it’s James here. The, I think – first of all, I think the agreements that we have for the pay one window for the movie output with HBO goes well beyond our expected closing of the Disney transaction, so that’s really a matter for a later day. And with respect to the television production, we have lots of partners who will help us and who really create these programs. We try to find the best result for the program and the best result for us and our partners in terms of finding a home in terms of downstream licensing of that. Sometimes, that’s the best thing to do that is in- house. Sometimes it’s to seek partnership elsewhere, which we’ve done in some cases, where it’s clearly the right strategy. So we remain flexible and open-minded around what the right thing to do with each program and with each of our partners is.
And then, Jessica, to your second question on the entertainment strategy on the network, clearly, we have a heavy investment on sport and as John mentioned, in the early years of the Thursday Night Football coverage, and that deal, it is an investment and a significant investment for us. And the reason we chose to do that is really around the incredible promotional platform that gives us not only for sport and for news but also for entertainment.
And so if you look at the night, if you think about sort of next year when we also have WWE on Friday nights, you actually have a schedule in the fall. We are only programming entertainment Monday through Wednesday and Sunday nights. And I think that gives us an incredible opportunity and honestly an incredible advantage in terms of how we can really focus our programming choices onto those nights assisted by really the country’s best promotion platform in our sports lineup.
Thanks Jessica.
Next, we’ll go to the line of Michael Nathanson of MoffettNathanson.
Lachlan, following up on that question about investments you’re making at the network. Can you talk us through maybe the retrans cycle you have over the next two years to recoup that investment? And how co-terminus are the deals between Fox News and the Fox station? So just give us a sense of after you dig that hole on spending, how does it come back on retrans in the following years.
Michael, thanks for the question. I don’t – I’m not sure I should go into sort of detail in terms of these kind of commercial negotiations and how they’ll play out over the next couple of years. Clearly, I assume it’s pretty obvious to you that we do calculate the value of retrans into the programming and acquisition deals that we do. And I presume it’s also pretty obvious that in our long-range plans we are seeing or we expect to see significant step-ups in our retransmission revenues.
Next, we’ll go to the line of Ben Swinburne of Morgan Stanley. Your line is now open.
Just back on STAR. James, can you just – now that the IPL is behind you, fiscal 2018 is behind you, how did that perform financially for the company? I don’t believe the ad sales growth covered the license fees. So were you able to recoup that in higher affiliate revenues? And did you hit that $500 million target we’ve been talking about for a while at STAR? And then just for John on the guidance.
I think you said retransmission revenue growth would accelerate in 2019 versus the – what happened in 2018. Just wanted to go back because you had a nice increase in the fourth quarter in retrans growth into the 19% range from, I think, more like double digits earlier in the year. So just wanted to ask can you clarify your expectations for retrans growth in fiscal 2019.
Thanks, Ben. The – so with respect to the TV business EBITDA target of $500 million, we got there or thereabouts. Obviously, as you know, there was a big investment in the Hotstar platform, and that comes through in our international cable numbers. But we’re very pleased with the growth. And I think on the IPL, no, it was a very successful for us, and the advertising returns were very strong and monetization across the board there.
So really, the impressions that were delivered by the IPL was so much higher than what Sony delivered with its previous ownership of it or its previous broadcast really fell to the bottom line. So the sports business was very strong, and we’re excited. I look at lineup in terms of the overall growth of affiliate income in India. Really, the strength of the sports business with the IPL would be CCI and this year with the ICC World Cup coming up and continued strength in Kabadi. It’s a – I think at second quarter, I think we’re in a good position there.
Yes. And Ben, just housekeeping on retrans. What I said was we expected increase – continued increases in retrans from where we are this year. And look, we got out of the business of guiding on individual places, but we’re comfortable that the growth rate we had in the current year is still something that we can get next year.
Thank you, Ben. Operator, please next please.
And next, we’ll go to the line of John Janedis of Jefferies. Your line is open.
Thanks. I’ve got two short ones as well. One is you spoke to the strong acceleration in domestic affiliate revenue, John, but I assume the sub growth helped. But anything else to call out there? And based on your outlook, should we assume that you have less in terms of renewals this coming year? And then separately, I think you guys spoke to the increased SVOD revenue. Was that more international than domestic? And with the Disney direct-to-consumer offering coming, do you have a preference to sell on a nonexclusive basis to free up content for the platform?
Let me cover the detailed parts of that first. Now so the key driver during the year and in the quarter was price, and it was great to see in the fourth quarter volume being a contributor, but on a – just an overarching basis, price was the main contributor to growth. From an SVOD revenue standpoint, domestic is still our largest market by far. So you should take out of it that the increases that we got in the fourth quarter and that we experienced for the year were much more heavily weighted toward domestic streamers than they were toward international clients. And the part of the – second part was – John, what was the second part of the SVOD question?
Oh, licensing nonexclusivity.
Offering coming – exclusivity versus nonexclusive given I assume that they like to have some of that content freed up to the platform.
Well, look, we just had, as Lachlan mentioned earlier, 10 days ago the shareholder vote here, and we’re moving toward the close as we said in the first half of next year. And I think that’s – we’re not – we haven’t been and we won’t be getting into any gun jumping around trying to guess what comes next. We’re trying to operate the business on an as-is basis as effectively as we can.
Great. Thank you, John. Operator, this time we have time for one more question.
Thank you. Lastly, we’ll go to the line of Barton Crockett of B. Riley FBR. Your line is open.
Okay. Great, thank you for taking the question. I guess, I was interested in what you’re seeing about the political kind of environment in terms of political ad revenues at your TV stations and the political lift that you might see at Fox News given the kind of hyper-charged environment we’re in and the great momentum that they have. What’s your sense of how that plays out for you over the next coming months?
Sure. We expect – well, the political market today is certainly strong and strengthening. And if you look at this, looking forward sort of for the entirety of fiscal 2019, we have competitive Senate and house races in 15 of our 17 markets, and we have gubernatorial races in 16 of our 17 markets. So we are expecting very – I’m not going to give the number but a significant political revenue season flowing into our local stations. And as – in fact, we were talking just before the call started just in terms of the strength on political that we’re seeing at Fox News as well. So we’re very pleased when we look at the political market.
Thank you, Barton. Thank you, everyone, for joining today’s call. Please note that due to the pending merger with Disney, we’re not expecting to hold a conference call with investors in connection with our first quarter fiscal 2019 earnings release. Thank you, and have a great evening.
Thanks, everyone.
Thanks, everyone. All the best.
Ladies and gentlemen, that does conclude the conference for this evening. The replay of today’s event will be available at 6:30 p.m. through August 29, 2018. You can access that replay at any time by dialing (866) 207-1041 and entering the access code of 451514. Alternatively, international participants may access the same replay by dialing (320) 365-3844 using the same access code of 451514. Again, we thank you very much for your participation and using AT&T Executive TeleConference. You may now disconnect.