Fox Corporation (FOXA) Earnings Call Transcript & Summary

Welcome back. We are thrilled to have Lachlan Murdoch, Executive Chairman and CEO of Fox, joining us today. Lachlan, hope you're well. Great to see you.

So much has happened since the emergence of new Fox in March of 2019. COVID has disrupted the market for anything live, as we all know, and the landscape has really evolved in the time frame since you sold to old Fox Disney, with media companies building out larger and larger digital direct-to-consumer platforms. So not just Disney, but NBC. Viacom has announced a lot recently, AMC, et cetera. As all of these changes have taken shape, how has your strategy evolved?

Well, first of all, Jessica, thank you very much for having me. It's an honor to be here virtually. I wish we were together in person, not only with you, of course, but with all of your participants and guests today. It's been for all of us, right, an incredible year. And for new Fox, since our separation with the businesses that we sold to Disney, it's obviously been remarkable and remarkably hard in many ways. But luckily, and fortune can go your way sometimes, and luckily, we've been able to get through this COVID period really incredibly well, mostly due to the mix of our assets, our assets that we kept from the Disney transaction, we kept very deliberately and with an intentional strategy and structure that is as correct and robust today as it was 12 months ago or 2 years ago when we put the strategy together. Now obviously, that strategy is all around live news, which has been -- we're in the middle of one of the most remarkable new cycles in our lifetimes. Live sports, and we're very happy with live sports with NASCAR or Major League Baseball. And this weekend, actually tonight with the NFL has come back and with numerous entertainment products in our stations in FOX Entertainment. So the strategy really remains the same. And -- but through that, we understand we bought from the beginning of COVID was a big decision because COVID was just hitting us, we bought it from [indiscernible] in TV entertainment, an advertising video-on-demand platform that has seen really incredible growth, not only through the COVID lockdowns, as you'd expect from any VOD entertainment product, but actually sustain that growth post the lockdowns. So the strategy is evolving, but we really like our core businesses, and we've seen them actually strengthen during the COVID period.

So before we get into each of your individual businesses, I just wanted to ask a more general question or 2. So finishing fiscal '20 with over $4.6 billion in cash on hand and then receiving another almost $500 million, $490 million, post fiscal year-end related to the tax repayments paid to Disney at the time of the spin. How do you weigh uncertainty in the current environment against what's a very strong and liquid balance sheet? Can you talk about -- how do you feel about that?

[Audio Gap] Our interest brings us to roughly, since our Investor Day, it feels like a decade ago, but at our Investor Day, which was May of 2019, right, a little over a year ago. Since our Investor Day, we bought back $850 million worth of shares. And if you add that to our dividends paid, we've returned to shareholders about $1.3 billion since that Investor Day just over a year ago. Out of interest, that's almost exactly the same, but actually slightly more than we've spent in strategic acquisitions during the same period. So we think that's the balance. I'm not sure that's going to be the balance always. But as we look at our balance sheet, we certainly are looking at ways to return capital to our investors as well.

That's great. So in the midst of COVID and with your first full fiscal year behind you, and I agree that Analyst Day seems like eons ago at this point. It's amazing how -- what's happened since then. But how are you thinking about just the next 6 months?

Look, for us, and as I just mentioned, we are now seeing a return of the advertising market that's rapid to levels that were pre-COVID levels. With the return of sports, we're just talking about Major League Baseball, NASCAR, football tonight, entertainment coming back into production. The season on entertainment and I give a huge credit to our staff, Rob Wade the head of our unscripted entertainment and Charlie Collier to get our unscripted entertainment back in production safely and quickly. And with that, we're very happy that we'll have the Masked Singer, the #1 TV Show in America back on air in a couple of weeks. So we're very happy with that. And then, of course, news. We are in the middle of an election cycle, which is driving incredible ratings. Through -- and fortunately through November, call it past November 3, it's going to continue to be an incredible news cycle. And obviously, with that news cycle, there's a tremendous amount, probably a record amount of political advertising that we're seeing both at our local stations and really for the first time, nationally as well. So I think the next 6 months will be very strong.

That's actually incredible because you've never had -- look, I mean, there's never really been national political. So that's an amazing thing. So let's go into the...

And Jessica, so sorry to interrupt, but it's national political, both on FOX News, right? But also -- and just as importantly, and probably just a significantly, also in sports. So you'll see this Sunday, as we launch our NFL season, you'll see the Biden campaign spending quite substantial.

Okay. That is definitely different. So let's dive into the current -- your current trends for your businesses. Let's start with distribution. At the time of the spin, that was one of the strongest areas between affiliate fee growth, retrans growth. But since then, again, it seems like so long ago, but pay TV sub declines are accelerating. Last quarter, the industry was down 6.5%, and it just fell off a cliff. And that was, of course, partially offset by the price increases that you've had. So you actually grew affiliate revenue by 8% in the fiscal fourth quarter. Can you give us any insight into the trajectory for affiliate fee growth in fiscal '21 and beyond?

So yes, absolutely. So as you know, we completed about 70% of our distribution -- we renewed 70% of our distribution agreements in this past year. So just by the nature of the cycle, we have less to renew over the next year or 2. I think we -- I don't know if we've been asked, but we closed with [ Frontier ], which is a midsized distributor, in the last couple of weeks. And again, pricing increases in line with our other agreements increases. So we're very comfortable and very confident in our ability to continue to drive pricing, really for the #1 news network -- we'll come back to news later, but the #1 news was the #1 network in all networks all throughout the summer, but the #1 entertainment network and obviously with all the tremendous work that we have on. So we are very comfortable to be able to continue to drive pricing, offsetting those subscriber declines.

How much can the virtual MVPDs offset some of the traditional pay TV declines? Are you seeing any growth? Is it enough to offset these declines? I mean I'm highly doubtful, but how much can it offset?

Well, I think substantially up to the declines, we had the larger MVPDs this past year, I think they grew by about 2 million subscribers this past year. I think that brings us to roughly 9 million MVPD -- 9 million subscribers. And look, anyone who's used those services, they are a tremendous service. I'd like to say, we talked a couple of years ago about the core bundle, like keeping the bundle and the [ VMPD ].

I can't say...

I'm drinking lemon tea and it's making it harder. The -- we're talking about keeping that core bundle pricing as low as possible. We can have the lowest possible price for the most of the large possible ratings and viewership and audience. I think the digital players have -- the bundles have gotten a little bit big, and have started to look a little bit too much like cable bundles, but I'm sure there'll be people who are looking to disrupt that as well.

Right. And what do you see in regard to retrans, on the retrans side? So that was cable affiliate fee growth. And what about retrans?

So retrans, we grew retrans, I think, 19% last year in pricing. Obviously, when you look at retrans for us, we can talk about the strength of the FOX Network and our stations. The 2 parts of that are obviously being the #1 network, having the #1 show in Masked Singer, having tremendous sports. But also when you look at the local stations, the 1,000 hours of news that we produce each week across local news across the country also comes in that retrans negotiation or balance. Having said that, we obviously don't negotiate retrans to the stations on their own. We negotiate retrans with our cable affiliate distribution deals. And the strength of FOX News obviously just continues to get more and more significant. So with those factors all combined together, we're pretty confident or very confident that we'll continue to push retrans pricing in the years ahead.

You recently launched Fox International at a premium price point of $7 per month, I think that was in August, which is higher than FOX Nation's $6 per month price. Can you talk about how you think about price or fair value for the [ news ] and the demand that you're seeing for these 2 very different -- for these 2 offerings?

So they're very different offerings. And so FOX Nation is a -- is for FOX News fans who want more of our content, more from our stars and our hosts and our reporters. And I'll call us the shoulder programming to FOX News. It's doing tremendously well. Consistently over the last year, the trial to conversion rate remains above 80%. So that's terrific. It was a big beneficiary of COVID as people -- saw some of it's on the best growth weeks and certain months through the COVID lockdowns. So that business is doing very well and growing. FOX News international, I think you have to think of it in a different way as none of us have had to -- have been able to travel like we used to. But when you go overseas, the number of times people have asked me how much -- I get e-mails about this over time, about if they have FOX News, that they love it, and they love seeing what Americans are watching. I think globally, people appreciate that FOX News is the #1 news network by a long way in America, and they want to see what Americans are watching. And so we have requested all the time for FOX News in the markets where it isn't. And so Fox News international is really the linear feed of the channel that we watch today. Plus, you can have some of the shows on demand. So if you're in London or you're somewhere where prime times [ and you go at night ], you can catch up later. So it's a very different service from FOX Nation. And we see it as a service to some -- to supporting our viewers who want to watch the channel in markets where they otherwise wouldn't be able to.

Are there other opportunities to expand internationally?

I think probably -- but at the moment, we are really a domestic sort of American-focused company. And we like -- and so that's not to say there won't be opportunities that emerge. But we're focused on America, and we're focused, to be honest, on the America between New York and Los Angeles. Yes, we -- our brands, we think, are really about the middle of America.

Right. So let's move back to advertising. How has the advertising market embraced the return of sports? You mentioned NASCAR, MLB. NFL starts tonight. And what are the differences that you're seeing between broadcast and cable?

So on sports, so advertisers have really, I wouldn't say slot to sport, but they've embraced the return of sport very strongly. This is partially also, to be honest, because until the fall season starts and a lot of networks, I don't think ours, but we'll have a fall season, particularly in scripted shows than they have otherwise. So I think advertisers are obviously very, very savvy. And they understand that the live sport is the broadest, has the most reach, the highest quality programming that they can take and associate in advertising and use this fall. So specifically, NASCAR, when NASCAR came back, NASCAR did a tremendous job being the first sport in America to be back. That's -- NASCAR sold out within a few weeks. Major League Baseball has been selling very well, obviously, with baseball, the post season, right, and World Series were still selling now, but I think we're well ahead of plan. And the same with NFL football. With football, we are pacing ahead of where we were last year. So in every system, in every sport are doing very well.

Right. So this is the most unusual, I think, ever upfront advertising market that we've seen in our careers. Like what is -- can you just give us an update on where you are in the upfront selling process and what you're seeing in the scatter market?

Sure. So it has been unique upfront marketplace. We took the view that we have to work very closely with each of our clients and each of them, the agencies, in many cases, represent them to be as understanding and as flexible as possible to meet their needs. Some industries were ready to come back and advertise quickly. Other ones, and it's the obvious ones, travel, retail were harder hit by COVID and the COVID lockdowns. And so we're really very careful to work closely with advertisers to let them be flexible in terms of their spend and in the lockdowns to be able to move their commitments around. And then that led us to the upfront. And in the upfront, we can continue that kind of philosophy or working closely individually and trying to meet our advertisers' individual needs. Now what that's meant at the end of the day, and you combine that with the strength of the mix of our platforms, is that in all of our key categories, in entertainment, in sports and in news, we've achieved, depending on the client, low to mid-single-digit price increases across the board. And so I think we might be the only media company to be positive price increases across all of our platforms. So that's a tremendous result. While we've done that, scatter has been incredibly strong, particularly in news, but it's been double digits and more or significant double digits across our businesses as well. And so what we've done, we've withheld about -- we probably sold about 5% less volume than we would otherwise have done, say, last year. And we're very comfortable doing that because of the strength in the scatter market.

Right. So let's just parse out a couple of other pieces for advertising. So what's going on at the local level? Local obviously hit a lot more by small- and medium-sized businesses. What are you seeing currently? And how is that tracking?

So if I go back to -- and I think we talked about this a little bit, I can't member exactly what I said in the last earnings call. If we go back to the -- was it March, early March, April, the depth of sort of the COVID began, sort of the COVID lockdowns, we were seeing 50% declines in local advertising pretty much across the board. And what happened was the smaller markets or markets that came out of a COVID lockdown and opened up their economies earlier, their advertising started to come back relatively quickly. The larger markets, New York, Los Angeles, San Francisco, Seattle, I think perhaps Chicago, but the larger markets were slower to return. And they were the markets that continue to have lockdown and businesses shut. And that still a hit, right? But what we've seen from a 50% decline only some months ago in advertising, the larger markets are now down only about 23% in pacing. And the -- our second or our smaller markets are pacing up about 12%. And that includes -- just to be super transparent, that includes political, right? And so political, particularly in the big markets of Arizona, Phoenix, Georgia, Atlanta, Detroit and Florida, those markets are pacing very significantly above this time last year.