Fox Corporation (FOXA) Earnings Call Transcript & Summary

Good afternoon. I'm Jessica Reif Ehrlich, senior media and entertainment analyst at BofA Securities. And I couldn't be more thrilled to end our conference, our 2021 Media Conference with Lachlan Murdoch, who is the Executive Chair and Chief Executive Officer of Fox Corporation. So Lachlan, welcome back.

Thank you very much, Jessica. So it's a pleasure to be here, and thanks for having me.

Thank you. So much has happened since the emergence of new FOX in 2019. It's kind of incredible when you think about it. COVID has obviously significantly impacted our lives and the economies around the world. Most traditional media companies have pivoted to DTC in that -- just in that time frame. So the models have changed. Media companies are trying to gain scale, as you know, through M&A. I mean I couldn't be more surprised at the Warner-Discovery combination when that was announced and then Amazon's acquisition of MGM, which kind of makes you wonder where the rest of the things are, what they're thinking, and then of course, the JV with Comcast and ViacomCBS. So given kind of like the change in the world, what -- how is your core strategy evolving?

So I think I'd point out it is amazing, you're right, to think back -- what is it -- 2.5 years ago to the Investor Day and the sort of the creation and the launch of new FOX post our sale of the assets to Disney. And you remember, at the time, we talked a lot about the logic behind our strategy of -- for FOX was around media fragmentation and really on doubling down and investing in the most engaging and the most powerful brands in media. And now it's our strategy. And of course, that's in live entertainment -- or entertainment and a lot of news and live sports. Now on what's happened over the last couple of years and COVID as a -- potentially an accelerator of this is that the media world and particularly the entertainment segment of the media world has only become more fragmented. The fragmentation has only accelerated. And what that's meant is that, that decision we made a few years ago to create new FOX and focus on these core brands has actually proven prescient and incredibly valuable. We're seeing an environment where news is never more important and never more engaging. And our share of audience is are incredibly strong and at near peak highs. And in sports, we're seeing an audience return to sports and importantly, advertisers and clients understanding the importance and the power of large aggregated audiences. And so we're seeing a flow of our revenue from our advertising clients are into these sort of must-have properties. So from a strategic point of view, I think we're seeing the strategy well executed and showing incredible signs of success and strength. But nonetheless, our investment in digital media and streaming continues apace and is also an extremely important leg of our strategy. So the acquisition of Tubi, for example, for one example, has been proved to be very well timed as audiences look for entertainment programming, off linear broadcast networks and cable networks and streaming platform. And so Tubi as an AVOD platform offering streaming entertainment has been an incredible addition to the company.

Right. The timing on that was absolutely incredible. But just to maybe touch on the kind of the scale question, the linear TV and virtual MVPD bundles in addition to Tubi, of course, and FOX Nation, is that enough scale in terms of distribution? Or would you consider partnering with other networks or streaming companies as a way to monetize these assets? FOX Nation will potentially pivot some of your traditional, pay-TV-focused assets into more of a streaming environment. I mean there's -- you've kind of resisted losing all of that money that other people are doing but how -- where do you go from here?

First, I would -- to answer the question, look, I think scale is obviously kind of -- scale or distribution is obviously very important. But particularly if you're a subscription, video on demand service to -- it's becoming a more and more crowded marketplace. And to earn a share of the consumer's wallet to kind of pay fee on a monthly basis, whether it's $5 or $8 or $10 for your content, will become increasingly difficult. And that's why you can see many media companies that have bet on a subscription video service continuing to invest and spend a tremendous amount of their capital on content and programming to feed those services. We are in a very different business and in a very different position in that we have decided to go full bore and have a focus on winning the advertising video on demand service, which is a free service. So we don't really have to compete as much in terms of expensive headline content, but we need a breadth of licensed content. We need the best ad tech, which we have. And we need to be able to let people know about 35,000 titles that are on Tubi. So Tubi doesn't really need the scale that a subscription video on demand service requires, and we're certainly seeing that in the performance of the business. Our other streaming business, FOX Nation, which is doing very well, is a subscription video business but it's very targeted to FOX News super fans. And we know that, that market is -- are -- is watching us on linear like never before. And we have a tremendous platform to capture them and offer them an added service in FOX Nation. So FOX Nation doesn't need the scale either in the way that some of the other entertainment on-demand services require.

Right. So -- which is amazing because you really do have a -- you stick to where everyone's at and it seems to be working. But through some of your recent investments and some acquisitions, you've gone into new areas as well. I think your timing on sports betting was phenomenal, but also consumer finance, blockchain, AVOD streaming, as you just mentioned. How do you think about the FOX asset mix today and how M&A fits into your strategy going forward?

So what we look for is businesses that can -- from a content or business model perspective, can plug in to our model platforms, right, where we can help monetize them through entertainment, through news, through sports and, of course, always with digital-first -- have a digital-first aspect to them. And Tubi is a great example of how the whole company has come together now with driving news on Tubi. We've just launched sports on Tubi. And we've promoted Tubi across all of our platforms. And of course, we have our franchise entertainment programs also on Tubi. We just -- I think yesterday, there was -- this morning or yesterday announced the acquisition of TMZ, the celebrity and entertainment news business, which has both a syndicated television programming and also, very importantly, a very strong digital presence. When we look at TMZ, we see a business that we're not in, in terms of celebrity and entertainment news, but they can absolutely fit alongside all of our other brands and platforms. And we can really sort of help drive it across the board. It was a modest acquisition but one that we are very excited about. And I think this goes to that model where can we acquire businesses that within FOX are much more valuable and have a much higher growth profile as they would stand-alone or perhaps in another media company.

Right. Okay. That was a really interesting acquisition and one that we all know the consumer [ knows ]. So let's go into some of the current business trends for your divisions, starting with maybe distribution. Pay TV sub declines seem to maybe have moderated a bit, but you're also lapping a very heavy renewal cycle. Can you give us any insight into what the trajectory will look like in fiscal '22 and beyond for your affiliate fees?

So first thing on affiliate that's important to note but it does inform our results is we have the strongest brands on cable television today. Since the Olympics -- the Summer Olympics finished to now, FOX News in prime time has been the #1 network, including broadcast networks in the United States. And so when you look at the strength of that brand and engagement that brand has with its audience, it really is a driver of value for our distribution partners. And so -- and we see that as we go through these renewal cycles for our networks. This year, we have a relatively quieter year in terms of renewals. And then next year, I think we had about 35% of our distribution coming out for renewal, and the following year, about 33% or 34% coming up for renewals. So while this year is quieter, we have just completed a small distribution renewal. And it's -- one indicator which is important is that in that renewal, we saw significant commercial improvements on prior sitting and other terms across the board, which will -- speaks very positively towards what we'll be achieving or hope to achieve next year.

Right. And then on the other side, distribution as well, but on retrans, your retrans prices have really been like top end of the industry. I remember when -- Chase, when he worked for you, said $1 a sub and everybody thought he was like insane. But from here, is there still room to -- for meaningful growth? And given your focus online versus everyone else kind of putting their content not just on their linear channels but also on streaming, which takes the differentiation away, like the uniqueness of that programming, do you really differentiate yourself there, you're different than kind of your peers? But -- so I guess just on retrans, is there still an opportunity to grow from here?

I mean absolutely. We talked about this before, but certainly, when we go into these retransmission and affiliate renewals, when you have a large bouquet of channels and a lot of competing interests internally, I think in the past, retransmission has been used to help -- and I know it's been used to help launch other services or perhaps flatter other brands. We're not in that position. We're very focused on our core brands and our network and our stations and assets. We're really able to drive our retransmission revenue and increases very strongly and very helpfully. So we see that continuing. Obviously, it goes with the renewal cycle with our distributors, but we see retransmission continuing to be a strong growth area for us. I should mention 2 things. One is that I think on the -- I mean all the way back into our first Investor Day, we talked about $1 billion of incremental retransmission revenues that we would achieve from the birth of new FOX on that Investor Day to, I think, the calendar '22. And we are well on track to achieve that target. It's always a worry as a CEO, as a management team, when you put out high targets and aggressive targets to the market. But it's really pleasing when the team has come together and worked hard to be able to achieve those targets. So we're on track to achieve that. The other thing on retransmission which is important -- we haven't had a chance to talk about this. But clearly, the court loss for the rogue piracy business, Locast, it was an important one for us. We will always vigorously defend our intellectual property. And it's just pleasing to see that a threat out there or someone who thought they could steal our content for free and subvert the business model of television, broadcast television in this country, it's pleasing to see that threat has been averted.

Right. And then moving on to advertising and we -- by all accounts, everyone said this is historic upfront, like your -- in everyone's lifetime. Did you see that as well? And what are you seeing on the national segment? What's the outlook for national advertising figure of properties for the next 6 to 12 months?

So the upfront was historic. Everyone said it's -- I don't know which adjective you want to use. I think everyone used a lot of positive adjectives but they're all accurate. So I would endorse what my colleagues across the rest of the industry has said. And importantly, the scatter market since the upfront has remained tremendously strong. We are talking sort of a national advertising, Jessica. This NFL marketplace has never been stronger. We've never seen anything like it. And pleasingly, we are seeing new advertisers coming to sport and frankly, new advertisers come into news. And I think that goes to what I was saying earlier, which is that major brands and major clients are seeing news and sports, and there's nothing like the NFL and Major League Baseball in terms of where they can reach such a large audience. So we're seeing new clients and tremendous volumes.

That's great. It didn't hurt that NFL ratings started out very strongly.

Look, the weekend was a great weekend. I think on aggregate, on Sunday, there -- for us and CBS, it's about 20% up in ratings. I think for the whole weekend, it was about 16% up in ratings, which is great to see. I think that's a 5-year high. So it bodes well for the whole season and makes us even more pleased to be partners, partners with the NFL for the long term, for the next 10 years. I should also mention that -- because sometimes it falls off people's radar but college football also had a tremendous start. I think up over 40% in ratings. So the combination for us at both the NFL but also college bodes really well for the fall season.

That's incredible because we haven't talked about ratings being up for quite a while.

It's nice.

Yes. And then like -- just we talked early but COVID, with the rise in COVID, are there any headwinds that you're seeing in your advertising business? I mean it's -- one, it's COVID which may lead to like slower openings. But the second thing is just the supply chain, like autos. Obviously, there's just no supply.

Yes. So the auto sector, we have 2 segments that are down, auto, which is -- because of chip shortage, which will sort -- it's a supply issue, not a demand issue. So we expect those clients and those partners to come back strongly once they have the supply of their cars to be able to sell. So auto was down and telecom is down somewhat. Every other category is up, on average, 20% coming to this fall. So from a COVID perspective, there's a -- to answer your question, absolutely COVID has affected supply chains and, thus, on the auto category for our national and local auto advertising. Having said that, the flip side of this is that throughout the past 18 months of the pandemic, we saw a tremendous amount of new clients coming into broadcast and cable television that were sort of the digital clients, clients such as -- like Uber Eats and others that came in for the first time at scale, also obviously a lot of the streaming companies, entertainment. What we're now seeing is the pre-COVID clients, travel and retail and others, coming back strongly in the market in the fall, but the COVID climate is remaining. And so you have more demand for our programs and for our time, and that's a positive trend to see.

Right. That's great. So what role did Tubi play in the upfront discussions this year?

Sorry. What was the Tubi...

What role did they play in the upfront discussions this year?

They played a huge role. But to make very clear, they were part of every conversation. And I think the marketplace, not just with FOX but obviously streaming platforms and obviously ones that held advertising, was a focus for a lot of clients. For FOX -- so Tubi was part of every conversation we had and it was a tremendous benefit both to Tubi and to FOX. The key thing for Tubi for us -- and I can't talk for others, but for Tubi for us, was that all the dollars were truly incremental, right? Tubi offers our advertisers a reach that they -- that somebody don't get on broadcast, on FOX alone. So the combination of FOX and Tubi has worked tremendously well.

All right. And then just to go back to sports for a second and I'll come back to Tubi in a second, but on sports, you mentioned the ratings given the ratings for football, college football and NFL. You mentioned MLB. But we're going to have a normal schedule as well. So is the demand overall up versus like a normal year in 2019? Is that what you're saying?

Yes. Absolutely. It's an incredibly strong sports market. Demand is very high. We are having -- I think it was reported the other day. We've had inbound calls on Super Bowl advertising for next year. And so it's a very robust market and one that's, importantly I think for us, we also made sure in our upfront that we kept enough availability in our back pocket for scatter -- for the scatter market going forward. You always make these judgments in terms of how much -- how many avails do you keep to sell into the scatter market going forward. And so far, our decision to hold back enough time to be actively in sale as scatter pricing is strong is proving a good decision.

Just to clarify what you just said, you mean Super Bowl '23? Because NBC doesn't -- so they're calling you now in '21 for...

Yes.

Wow. That's amazing. Okay.

It's a very strong market.

And then on local, like what are you seeing? What kind of trends are you seeing at the local O&O broadcast station level? You don't have political. I know you have a big new category in sports betting. So it's a lot of puts and takes. Can you give us some color?

Sure. So local, again, the same local issues as national had in terms of -- in auto being the soft category but all other categories, tech and telco, now up very strongly. And of course, the standout, as you mentioned, is the gaming category. So I think [ content ] was the first quarter of the number I saw, moving up 650%. And we're only in -- it's only in 1/3 of our footprint, right, of our markets or the markets that we touch. And so at -- where sports betting is legal. So this is a tremendous category for us. It's growing incredibly fast. And I think it's on track to be in the top 2 or 3 advertising categories for our local stations.

Right. I'll come back to sports betting in 2 seconds. Let's shift on advertising. You said before that FOX News ratings are -- I guess that you -- I guess the share versus others has climbed. So do you feel like you're finally monetizing it well? Or is there still room to go...

That -- absolutely still room to go. The share is tremendous. We're over 50% share in the news category. I think 52% and 55% in our demographic. So the share has been tremendous. The news cycle is exhausting, but our producers and journalists are doing a tremendous job keeping apace with the news cycle and continue to inform our viewers. And that's really what's led to like the share and led to tremendous ratings. The ratings are what they were for anyone in an election cycle and it's like we're -- there's also a lot of intent and viewing. But we're incredibly happy with the share. And from a ratings point of view, as I said, being the #1 network, including broadcast network in late August, early September, was really wonderful to see. From an advertising point of view, we're seeing new advertisers come into news just as we are into sport. We are seeing advertisers that we're building on vehicles for them to advertise, whether it can be a non-opinion programming or lifestyle programming or now with the launch next month of FOX Weather. We're seeing tremendous interest in brands, who would not be traditional news advertisers, come into -- or show tremendous interest in FOX Weather. So as we look at our FOX News media brand and you see the -- you can -- prime time and our news program, opinion program but now a lifestyle program and weather and other adjacencies, which are important for our advertisers.

Is FOX Weather going to be a cable channel or digital only?

It's a fast channel. So it will be -- start with a digital channel, free across multiple platforms, so...

Okay. And then let's move on to sports betting business because it's kind of -- it's really exciting right now. So as more states legalize sports betting, does your approach change? And how should we think about the potential exercise of your FOX Bet and FanDuel options?

So you don't need me or your guests on the broadcast this afternoon to tell you that the market is booming. It's growing incredibly fast. As I said, it's only -- we touch, I think, 6 markets and it's already, I'd say, one of our top advertising categories. And the reason for that is it's very competitive and there's a big prize to play for. We are in a good position. We've put ourselves in good position in that we have both the option for 18.6% into FanDuel, which is incredibly valuable. They're a partner. And clearly, they're going to be one of the winners in this space. And we have our joint venture with them in FOX Bet. If you look at the FOX Bet joint venture, if you remember, we had a free-to-play game that sits on top called FOX Bet Super 6, which is now also a partner. It's one of the sort of official waging partners with the NFL. And FOX Bet Super 6 this weekend, it's 3x the number of active players, people who participated in the first weekend's competition, 3x number of active players that were played in the first weekend last year. So the market is growing exponentially. I think our brands are very well positioned. And we're in a good position that we're -- we actually participate across the marketplace.

I mean it seems like there's really a potential intersection between media properties and sports betting, where you're obviously well positioned with FOX Sports, which is an amazing brand. Could you talk about some of the opportunities you have or may have to integrate FOX Sports brands with sports betting?

Sure. So the -- and again, it goes to our strategy on -- in other parts of the business as well, where you can take the brand, the FOX Sports brand, and look at how you monetize it in different ways, right? So as -- you can monetize through advertising. You can monetize it through affiliate revenue, but what's a third revenue stream that we can garner from such a highly engaged audience and having invested so much in truly the world's best sports programming. And sports wager is clearly the great opportunity today in that way. So what you'll us do is you'll see us integrate, say, odds into our FOX Sports app. You'll see us pushing Super 6 across platforms and not only sports platform but where it's fun -- it's a free-to-play game and where the content is compelling enough that people want to play that game over a weekend. So there's lots of different, across the company, opportunities to really drive our wagering business. And FOX Sports is obviously a key one but in other areas as well. And in fact, it's -- something that's worth noting that with the new company, we purposely designed an organizational structure and a management team that was small enough and nimble enough and could work quickly enough to be able to execute on a number of these initiatives. And so with FOX Bet and the overall relationship entirely with Flutter, you see sort of weekly and fortnightly senior management are engaged on how to drive those businesses and how to outperform what we did even in great success last year.

Great. And then on just growth investments in general, you guys talked about $200 million to $300 million in net EBITDA losses in fiscal '22 associated with some of these newer businesses. So I guess Tubi, FOX Nation, FOX Weather, how should we think about the allocation of the investment across each of these assets? And what's the path to breakeven?

So I think we called out $200 million to $300 million of investment in those businesses. And there are 2 investments in -- we see as the strategic future of our business. And you can look at them. Each one is obviously very different. They're very different businesses. Tubi and what drives Tubi with a total viewing time, bringing new users in, the marketing cost behind that, also the ability to acquire or produce a low cost but highly engaging content is very important for the success of Tubi. And that's where we're allocating our costs towards to because they're really important levers in the success of that business, which has -- we talked about, have grown so strongly. FOX Weather, another -- a big initiative, it was tremendous to see in New York last week. The FOX Weather team joined the FOX family. So welcome everyone from FOX Weather. Weather is something that all of our audiences cares about and it's going to be a tremendous business, really driven by the source of advertising interest that we're already seeing or coming onto that platform. And FOX Nation continues to grow. It's important that we have a direct, one-on-one relationship with our most engaged super fans. So we think that's an important and a strategic investment as well.

Right. So there's a bunch of questions from the investors. I'll just take one. Just on FOX Nation, it said, FOX is starting to buy content for FOX Nation with Cops. So is this the start of deploying more capital into this growth vector?

Well, we've always bought content for FOX Nation, some of it licensed for shorter periods of time. Others is produced. And others, we purchased. And we've seen in this last year the success of FOX Nation and the subscriber acquisition really take off in great part to the content that we now have on the platform. I think we may have talked about this before, Jessica -- I'm not sure, but you have to build up a library. It's great to have key sort of programming throughout the week and be dropping live programming. The live program, in fact, on FOX Nation has done incredibly well this year. But it's also important to have that library subscription video on demand service. So we've started to carefully license and purchase other programming. But we're doing it in, I think, a careful way that we just designed for driving those subscriber acquisitions and engagement.

Right. And then I guess just one more thing on FOX Nation but you've had some -- a couple of really good quarters of customer acquisitions. Whether you -- I don't know that you've ever talked about but what are your longer-term goals for this asset? Like how big can it get?

Look, I think it can get pretty big. But it's -- you have to remember it's -- today, right, and [ in the interim ] we just talked about the acquisition of the new series of Cops because as a pure news and documentary, unscripted service, there's a super fan market for that. But in order to grow beyond that, you'll see us get into other lifestyle and entertainment categories that resonate well with our audience. So it's -- we've been strategic about the growth of FOX Nation. We'll continue to be strategic about it. And we really see it as a tremendous opportunity, as I said, to have that one-on-one relationship with our super fans that are frankly already watching our linear program.

Right. So we're kind of running out of time. Let's just get in the necessary capital allocation questions. So you finished last year, fiscal '21, with almost $5.9 billion of cash on hand, recently approved -- your Board approved $2 billion in buyback authorization. You have such a strong balance sheet. What are your capital allocation priorities from here? And then one last question after that.

Well, I think we have a whole kind of quiver of tools to mix that -- to mix metaphors, but a tool -- chest of tools to allocate our capital and ultimately to return capital to our shareholders. So as you said, the Board has just approved an increased extension of our buyback program. You'll see us continue to buy back shares. I think we have over $2 billion capacity still to use and allocate towards buying back shares. And you'll see us -- our expectation is that we'll continue to do that. We also, this year at the end of full year earnings, increased our dividend. And so those are 2 levers that we feel are important particularly when we have -- we're in a great position to have not only have all of our cash but have very strongly cash-generating businesses. It's important that we have those tools where we can allocate cash, return cash, capital to our shareholders. Having said that, M&A is important to us as well. We'll look at them -- well, we do look at a lot of M&A opportunities but we're careful to search for businesses that -- I said that complement the whole and then we can really drive across news and sports and entertainment.

Right. I mean I guess the last thing is that because your balance sheet is so strong, would you consider levering up whether it is -- or any of the things you just -- maybe different but buyback or M&A?

Look, there's no need for us to lever up now. We were -- because of the strength of balance sheet, we have a tremendous amount of product power. If we were to go looking for any larger assets, we haven't seen anything that's of interest to us at the moment today. But we certainly have a lot of flexibility to be strategic as we go forward. Our strategy has worked over the last 2.5 years. It's accelerating. The media fragmentation we talked about is -- actually is helping our assets. And we're in a great position going forward. So we will be strategic and we've got a great balance sheet, and we'll certainly put it to good use.

That's great. Thank you so much. So with that, we'll finish with the conference, and I can't thank you enough, Lachlan, for coming and closing it out for us.

Jessica, thank you very much for having me. It's lovely to see you, and thanks for -- everyone for listening.