Fox Corporation (FOXA) Earnings Call Transcript & Summary

Good afternoon, and welcome back to JPMorgan's TMC Conference. I'm Alexia Quadrani, the media analyst here. And we're thrilled to have the COO of Fox, John Nallen, here with us this afternoon. Fox is a leader in developed -- in delivering compelling news, sports and entertainment content through its iconic domestic brands, including the highest-rated cable network, FOX News. John, thanks so much for being here with us this afternoon.

Thanks for having us, Alexia. Really appreciate it.

I guess, we have to start at the obvious place, which is, given the recent announced planned consolidation that we heard last week, and I guess there is another one today, how do you see this impacting your competitive positioning, if at all?

Yes. I don't see -- I mean, those -- I think those transactions should be looked at in different ways. I looked at the first one, the Warner Media, Discovery, AT&T one as a transaction all about focus. I won't comment for the players. They have their own view as to what they were, but clearly to allow AT&T to focus and Discovery and Warner together to focus on their plans, it's a brilliant transaction, brilliant structural transactions as well to see it happen. Then the Amazon transaction, I see, is completely around supporting their content and streaming aspirations. So they're a little different now. Inside of that, those are areas we really don't play in. And you think about the big SVOD aspirations that both of those, the enlarged Warner Media, Discovery and that Amazon have, they're not really places that we play. We're focused much more on live, sports news and event entertainment. So I don't think it changes at all the trajectory for Fox. But clearly, I'm not sure the landscape has finished shifting yet inside of media because there's still a lot of chatter about other transactions to happen.

Do you believe that you have the scale in what you focus on needed to go forward?

I think so. If you think about it, we're the #1 broadcast network across news and across sports and entertainment. We've got the #1 news channel in total viewers, and sometimes, it's the #1 cable channel or for many times, it's the #1 cable channel, not just news. We've got a leading AVOD player in the form of Tubi that's got this path to -- near term to $1 billion of incremental revenue to the company. So if I look at that collection of assets that we own, I'm not so sure that scale for scale's sake matters because of our positioning of those assets. We're doing quite well. You would have seen our results through the 9 months on ad and affiliate growth. We posted 10% affiliate growth alone in the quarter that we just put out. So scale for scale's sake, I know it's a common term, is not something that we're focused on. We're really focused on how do we grow the enterprise for the long term, and we're in a great position to do that given the strong financial profile of the company. We've got a great balance sheet, just superb cash flow. We've got these "hidden assets" that we wish we were given greater value for and wagering assets, the tax asset, a lot. Even Tubi, I'm not sure we get the appropriate value for that. I think we've demonstrated a really good approach toward capital allocation in the short 2 years of the company. So scale within what we do is not something that we're striving to look for other assets to do, but to branch out the company and to get involved in adjacent areas is really what we're focused on.

It sounds like from what you've said that the Warner, Discovery announced transaction doesn't change your view in the need to kind of pivot or invest differently or whether in streaming or content?

No. Again, if I come back to the 3 real hallmarks of the company, live sports, live national and local news and our primetime entertainment, there is not a -- we're not an SVOD. And we don't have current aspirations to be -- to play there. It's a high multibillion-dollar game that's being played there. There will be winners. But it doesn't change our view that we ought to pivot and really start focusing on an SVOD strategy.

Yes. There are a lot of players, and they won't all be winners. That's for sure.

For sure is right.

COVID has accelerated the changes in the ecosystem. I guess, how do you think you are positioned now versus sort of before the pandemic?

Look, I think we did -- hopefully, let's talk about it as if we're coming through it now toward the end because it's -- then at least could provide some excitement and hope that we are. But as you would have seen through that period, we continue to innovate by putting sports on screen. The news cycle was just crazy from a national and local basis from social issues to the election, and we had a really disrupted calendar in entertainment that our team there was -- just did great work on putting on, getting programming into production and getting it onto the network. So thanks to the 9,000 employees at Fox, think we've come through the pandemic. We've shown resilience during it, and we're as strong now as we were 18 months ago, if not stronger.

News obviously thrived during the pandemic, as you had mentioned. I guess, digging into FOX News a bit further, can you elaborate on what you believe has been the biggest drivers behind the success? And how do you view the competitive landscape? Is it just cable news? Or do you look at it more broadly?

So FOX News, you can just say, it is one of the strongest brands in media. It just is. And it's become much more than a cable channel, given all of the extensions that we have. In fact, we've dubbed the enterprise, FOX News and FOX Business, FOX News Media because of everything else that we're involved in. But at the heart of it, at the heart of it, there's no question, is the FOX News channel, which has an engaged -- the key asset to it is, it's engaged, loyal, center-right audience who trust a 25-year-old brand. And they continue to trust it, even given the oscillations and ratings that we've had. I think the strength there is going to continue to drive industry-leading advertising and affiliate revenue growth coming out of FOX News. The ratings -- behind that question is also a question about ratings and competition, and we were completely transparent during the last 6 months about what we thought would happen post-election to the ratings, and in fact, they did. But we also were transparent that we expected a normalization of the ratings after the -- after a period of time in the election. So if you look now, if you look at last week, total day, we were 44% market share. Primetime, we were 47% market share, which is equal to where we were pre-pandemic. So the audiences have migrated back to news and have migrated back to FOX News to really levels that they were at before, which points to the strength of FOX News. So yes, we look at competition. We clearly look at the other news channels because that's the way we all measure share. But as I said earlier, FOX News channel unto itself is oftentimes the #1 cable channel. So it's also -- we take a peek at the rest of cable when we look at that the competition for FOX News.

How do you think FOX News -- you did mention the rebound in ratings, as you had predicted, did happen. But how do you generally see FOX News as positioned during the Biden administration? Is it more favorably positioned, less favorably versus Trump? Or is it really kind of irrelevant?

Yes. I think it's -- it becomes irrelevant. It's not irrelevant in -- right around the changes of administration. We found that out before. And whether you go to Clinton, Bush, Obama, you go back to all of the administration changes that we've seen. Right around the change of administration, things change, but then, you come back to a much more normal share of strength coming out of FOX News Media. So I don't think that the current administration is going to change at all the profile of FOX News Media.

Can you frame for us the opportunity for FOX News in terms of affiliate growth?

Yes. I think if you look at us overall on affiliate, we've had the strength that I referred to earlier. In the short term, obviously, the 2 toggles, we'll probably talk about them, are volume and price. Everybody's got their view about volume. You have one. We have one as well. But from a pricing standpoint, we have a year coming up, a fiscal year, where we don't have a lot of renewals. So we've harvested real growth, and we'll have more growth going into '22 coming off of renewals that we've -- we already made. So it's '23 when the next cycle turns up again for renewals on -- not only on FOX News, but really across our platform. Having said that, I think it also comes at the right time because of the strength of those assets, not only FOX News Media, but the Fox brand, such that there's no doubt in my mind that we will continue to have industry-leading affiliate revenue growth going forward.

And how do you think FOX News -- when you think -- I guess, how do you -- when you think about FOX News, how do you think about its ability to capture the younger demographic, both kind of thinking about the existing channel, the way it exists, but also new platforms?

I've joked with you about this before that no one asked Nickelodeon, how are they going to skew old? News just is an older demo. It always has been, it always will be. We innovate through things like FOX Nation. Some of the aspects of foxnews.com, things on FOX Radio to attract the younger audience, but to be just fair about it, the news category will always have an older skewing audience. And therefore, if you look at advertising, which is really robust, it has an older skewing product mix that's in there. So I'm not coming out to say, we've got this detailed strategic plan to attack the 18 to 23-year-old market because the reality is news just skews older.

Maybe can you talk or elaborate on sort of the evolving FOX News into kind of a multi-platform digital news outlet? For example, talk a bit about FOX Nation and the content strategy there?

Sure. As I said, the success of FOX News is not just limited to the cable channel, it really applies to the digital initiatives that are out there. Surprisingly, foxnews.com, both as a site and an app, is a -- not surprisingly, when you talk about a .com, people kind of yawn or roll their eyes. foxnews.com is a powerful asset for Fox and particularly, for FOX News. Other extensions include Nation, Radio, Podcasting. We're going to launch this weather initiative that you would have seen us announce FOX Weather later in the year. But if you look at the digital properties of FOX News holistically, they attract 100 million unique users a month. So it's not a small business at all for us. Outside of the channel, it's 100 million unique users. One of the extensions that people are particularly focused on and we are is FOX Nation, which is -- just to remind everyone, is a complementary service to the linear feed for the news channel, which really attracts the most avid fans of FOX News. What we have found out is we had a lot of library type content or factual type content that's on there. But what we found out is that when we put on live event content like CPAC or exclusive content like the Tucker Carlson Originals that are on there now, that the subscription rates go up dramatically. And in fact, on the heels of those 2 pieces of content, we saw subscriptions go up 40% in the last 2 months on FOX Nation. We've seen -- yesterday, we announced -- because of this, we're looking to add more and more content to FOX Nation. So yesterday, we announced that we're adding the next day, the primetime, into FOX Nation. So primetime that occurred the night before, whether it's Saturday, Ingram, Tucker, you're going to now be able to see on FOX Nation the following morning. And again, these are all subscription drivers to attract the AVOD fans for FOX News. So yes, with channel, again, I come back to it, is at the heart of everything, but the ability with that loyal audience to extend the brand into these other areas is what we're really focused on.

And moving over to FOX Sports. Can you talk about your decision to back out of Thursday Night Football maybe a little bit early? And could there be an impact there to your affiliate agreements?

Well, first, I wouldn't call it backing out of it. I'd call it a great transaction among 3 parties. But let me first deal with the renewal itself, the major -- the more macro point because we're thrilled for Fox to be the home of the NFC for the next 13 years as part of the overall NFL renewal. And it secures for us a key asset that was an overhang. I mean, your commentary and others would comment, investors as well, as to continuously what the status was, what the length was going to be, what the issues were going to be on a contract. But securing it for that period of time just allows us to plan our business well into the next decade, and it obviously adds to the rights we have of Pro and college rights. But on -- as part of that deal to secure Sunday, we had always planned to be out of Thursday. So it wasn't something we said publicly, but as the negotiations for the Sunday package came up, we made it clear that we were going to exit Thursday in the extension period, but -- because Sunday was always our priority. We also wanted to be sure we could demonstrate financial discipline by not having both those packages from our perspective. But getting out a year earlier was really kind of a bit of lightning striking where Fox, the NFL and Amazon had a pretty unique opportunity to transfer over that last year of the existing contract to Amazon to allow them to start a year early on air. That will be a 12-year deal for them. But importantly, for us, it frees up somewhere between $350 million and $400 million of EBITDA in that year. So it was a really valuable piece of financial discipline for us to be able to get out that year.

And does it impact your affiliate agreements at all?

No. We're -- what we'll look at is, we basically get 2 hours of primetime back at that point. Even though the game would have lasted longer, we'll put 2 hours of primetime and the third hour has traditionally goes back to the local news. There are no real sports that are out there to program for weekday. I mean we did look at the NHL, but our view of value fell a bit short on that. So we'll program those 2 hours through the Entertainment division. We're in planning for it now, but there is no expectation that it will have an impact with our relationships with affiliates.

Just in general, not necessarily for a weekday, but in general, would you look to expand into other sports properties, if the opportunity arise?

We look at everything. My point on the NHL, we looked at even XFL when that was up, all the sports properties. But there just isn't anything that's coming up in the near term for us to really look seriously at. But at the heart of what we are, we're a sports broadcaster and producer. So any of those that come up, we'll certainly be looking at.

And looking at the new NFL deal for Sunday, I guess, what are you most excited by? And are there concerns about the ability to continue to capture viewership as consumers move to streaming?

So I guess, most excited by is our retaining Fox as the home of the NFC. I mean that -- it is the #1 -- it's not only the #1 package in football, it's the #1 programming in American television. So for us to retain that NFC package was very important to us. As you know, we built our station footprint around the NFC, right? 14 of our -- we're in 14 of the 16 home markets of NFL -- NFC team. So I'd say #1, the fact that we were able to retain the NFC was clearly the top attribute. The second one, I'd say, which is surprising, is the length. It's the longest contract the NFL has ever done. It's -- but for us, that's good. It gives us the ability to look long term now to our business and the plan. And importantly, as our business will evolve during that period, we have the flexibility in these rights to pivot to any new business model that might emerge during that period. So we're not locked into the broadcast model. Having said that, we still think that that's the -- that drives the biggest audience scale. It's the best business for us. It's a great arrangement we have with that with our station affiliates involved. But if there is any new business model to -- eventually in the long-term nature of this contract to go to, we have the ability just like everybody else, to move into those business models.

Why do you think it ended up being such a long contract? Is it because of the flexibility built into it for both parties? Or is there another reason?

I don't know the -- I don't want to speculate on the motivation by the NFL as to why. But when they asked us if we would consider that length, we jumped at it. It was something that was -- we could see. So you and I wouldn't have to deal with this in 6 years' time, and have an overhang yet again as to where does Fox and maybe the other companies stand on the NFL renewal. I think to secure that period of time was pretty important to us.

That makes a lot of sense. Shifting to sports betting. I guess what is the opportunity in sports betting for Fox longer term? And maybe you could provide a bit more color on the puts and takes or what you would look to, to take the option to step up your ownership down the road?

And so if you look at wagering overall -- just as a reminder to everyone, we believe we're the most leaned-in media company on wagering. Our principal assets are just over 2% ownership we have in the top co, Flutter, and then the options we have in 2 of their subsidiaries, the FOX Bet subsidiary, which houses not only FOX Bet, but Poker Stars. We have a 50% option over that. And second is the 18.6% ownership option we have in FanDuel. And while that's subject to an arbitration, and as we've said on our Q3 call, we're not going to comment on it, the 18.6% is not really the subject of the arbitration, it's a question of value. And on top of that, we've got this free-to-play games, FOX Bet Super 6, that has upwards of 5 million entrants that play the game. So we're really leaned into these investments. Some -- the ability of us to exercise these options, some -- they're long term in nature. So we have a lot of runway to decide when we want to execute on these. It also somewhat depends on licensing and how -- what degree of licensing Fox wants to get in certain of these jurisdictions. But overall, we are really, as I said, "leaned in" wagering. We think it's a big, big growth area for the company. So we've got optionality as the states open up. The other piece I would mention on what comes out of these wagering assets to our traditional business are the benefits of advertising. And as you see, if you just turn on your local -- a lot of it has played at the local level. If you turn on your local channel, you're going to see a great degree -- great deal of wagering advertising. So we benefit not only through the investments, but as a business, we benefit through the advertising that's coming out of the wagering.

Can we talk about advertising in general? You just came out of the upfront. How strong is the appetite for your portfolio, and the comments on the ad market and the demand there?

I would -- I assume others have commented on the upfront, but I can only say that there is great optimism in this upfront market. There is a -- what we see is a lack of uncertainty. A year ago, it was all uncertainty. This year, it's a complete lack of uncertainty by advertisers compared to where they were last year. There is a feeling, as we said in the opening, of a return to normalcy. We have great visibility towards sports calendar, great visibility to our primetime schedule, where -- which we announced both of those last week. Consumer confidence, GDP outlook is really strong. So the result of that is a quite buoyant and very strong demand for both linear and digital in the upfront. So advertisers', for example, that sat out last year's upfront are back. Advertisers that decided they wanted to have more money in scatter last year have moved more money into the upfront. The demand is very significant. And for us, not only news, sports and entertainment, but recall Tubi is a really important part of every conversation we have in the upfront. And just as an example, we're -- compared to where we were a year ago, we doubled the number of advertisers that are coming into Tubi through the upfront, and we're only started in the upfront. So what you can take away from me and probably, you've taken away from others that are -- we've got a really healthy upfront right now.

Well, let's talk about Tubi for a minute because we've just seen such incredible growth under your ownership there. Maybe you can talk about the long-term strategy for that asset? How important is original content? What about sports and news?

Yes. So I think going back, if you talk about pandemic early on, there were 2 things we accomplished in the pandemic: One was the closing of the NFL deal that we said; and the second was just before it all hit, we acquired Tubi. I mean, it was literally days before -- right at the start of all of this. And I think we clearly have, during the pandemic, taken that platform, that Tubi AVOD platform and grown it even more significantly than our initial expectations were a year and 14 months ago, whatever it was. So it was a thoughtful, a disciplined acquisition, and we acquired a great platform. As far as growth, we've called out, and I don't see any reason why not. But in the near term, there will be $1 billion of revenue coming to Fox out of that. Importantly, that is incremental revenue. It's not revenue that's shifting from one part of our organization to another. This is pure digital revenue coming from the market. It'll be -- we said it'll be bigger than our Broadcast/Entertainment division when it hits that number. So the benefit of Tubi, to us at least is, it's the only -- again, I'll use "independent platform", in that it's independent of any studio or vertical integration at scale. So it has had and continues to have unencumbered access to production. I mean we deal with everybody in acquiring library product for it. And we don't have any -- importantly, we don't have any competing priorities at Tubi. We're not using it as a funnel to move users someplace else into a paid service or up a tier to something else. It's really you come to Tubi and you know exactly what you're getting, which is a pure AVOD service. The business also is just focused on one metric, one key metric, which is total viewing time. I mean that is the metric that, at the end of the day, determines the ad revenue. First, get users in, and second, provide compelling program that will keep them on the platform. Now what you're going to see us do in the coming year is expand in 2 ways. One is some original content. This -- the investment in original content will be manageable. I don't think you're going to see -- not don't think. You are not going to see the kind of investments that you're hearing about over on the SVOD world on what they're putting together there. The second is, we will add some sports content, mainly an NFL-themed channel. That was part of the deal that we just finished with the NFL on to Tubi. So in addition to library product that is a heart and soul 30,000 library titles that are on Tubi, we'll be adding originals, in a measured way. We'll be adding sports. And there is a news -- a very significant news service that's already on Tubi. So it's really rounding out into a much more complete service than when we originally bought it.

So it's not actually NFL games at this point. It's more NFL content?

That's right. That's right. It's a theme channel with various forms of content that you will see beginning this coming season. We're continuing to focus at the games are exclusively on broadcast because of the value that provides not only to us but to our advertisers as well as to our affiliates.

Well, there seems to be a lot of interest in Tubi, because all of a sudden, we got a bunch of questions that came in. One on them is I guess how much of Tubi's -- I guess, there, they need to say advertising -- is sold direct commercials and your ad deals is programmatic?

We haven't given out that I'm not about to but there is a good blend of direct and programmatic. And probably the way to underscore that are my comments earlier in that Tubi is a healthy part of the upfront for us now, which is not programmatic selling it's -- that's direct selling.

Okay. And how do you see Tubi positioned versus other AVOD competitors?

Well, Lachlan used the phrase before that we're in AVOD to win. So we know we're a leading AVOD player. At the end of the day, our intent is to be the leading AVOD player for a very long period of time. So Tubi is a big focus of this company. So it's not a side investment by any means. We put a good deal of capital to work in it. We'll invest in Tubi. In particular, we'll invest during fiscal '22 in those kinds of areas, in content and marketing and acquiring viewers. So long term, it's just going to be a great ROI coming out of it.

And just speaking of investment in general or investing in content, is there any concern about navigating the content landscape when other networks are increasingly vertically integrated? I mean, why are you -- are you able to find the content you need? Would you consider buying a studio, acquiring more IP? I guess any thoughts there?

I think -- I don't think we're at a disadvantage. If you go back and picture the room we were all in on the Investor Day, we made it pretty clear then that being independent of a studio was not a disadvantage for the company. It has proved to still be the case. If you look at, for example, in the fall schedule that the Entertainment division announced last week, we're in partnership with Disney, with Warner, with Lionsgate, with Banijay and others, to name a few. So it's not like firms that are dealing with their own vertically integrated products and platforms are not doing business with us. And remember, we're the home to 2 hours of primetime a night. So -- and hey, Sunday is filled up with animation. Thursday and Friday right now are booked with sports. So it's Monday, Tuesday and Wednesday that we're filling a calendar for us. So we're finding a lot of people coming to Fox, trying to get that shelf space in front of a large, large broadcast audience. We do own -- it's fair to say we do own IP, one of the smaller studios we have, although they're very active in animation, is Bento Box. And they're doing a number of projects where we have an ownership interest in the assets coming out of them. But the punch line is we still believe we're not at a disadvantage for not owning a studio. I wouldn't, therefore, see -- you shouldn't take away that we're looking to own a sizable production studio as a priority.

We only have about a minute left. I wanted to ask you about, I guess, your digital revenues. I think they're over $1.2 billion annually, if I have that number correctly. I guess, how do you see that growing over time? And what can you do to accelerate it?

I think the 2 -- we talked about them briefly, the 2 big levers for that will be Tubi. There is no question about that, and the second will be FOX News Media's digital extensions. Those as we -- Sports will be important, Entertainment will be important. But when I look at the 2 big levers in digital, I would include that the $1.2 billion you referred to does not have our digital MVPD revenue in that. It's principally advertising revenue and a bit of content revenue coming out of it. So the main levers will be Tubi and FOX News Media.

All right. Well, we're out of time. Thank you so much, John. I really appreciate. This has been fantastic.

Alexia, always great to see you, and congratulations on the conference. Thanks.

Thank you.