Fox Corporation (FOXA) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to day 2 of our conference. I'm really pleased to introduce John Nallen, who is the Chief Operating Officer of Fox. John, welcome.

Thanks, Bryan. Thanks for having us. Good to see everyone in person.

Why don't we maybe start off with strategy and capital allocation? The past few years have been pretty tumultuous times in media with major strategic shifts, M&A in nearly every company in the industry. Fox made its major moves early with the Disney transactions and a strategic shift toward live sports and news. How satisfied are you and the rest of the management team with the results so far.

I'd say we're quite satisfied with what's gone on in the last 3 years, but not -- we're not complacent with what we've achieved. I think you're right to point out the Disney transaction as kind of a moment where the industry made some pretty important moves following that. Four years ago, we announced Disney, and our shareholders were able to participate in really taking scale that we didn't have at 21CF and joining it with Disney. And through that transaction, our shareholders have been participating in Disney. But from that was the spin of Fox, which was a really focused -- is a really focused company, really around live news and sports. And if you think about what we've been able to achieve, you go back to the Investor Day, where we sat down with you and a lot of people that are in this room and set forth a set of goals that, looking back now, despite 2 tumultuous years of the pandemic, that I think you can point to almost all of them and say we were able to achieve those goals or pretty close to achieving in due course those goals. So whether it was affiliate, whether it was advertising, we spent a lot of time talking about the NFL renewal, which we were able to achieve. And looking forward back then to capital allocation, it became a pretty important element of the business for us. So I think overall, we'd have to say that we're feeling quite good about where we are.

And you mentioned capital allocation. Capital allocation and return on investment have really been integral to your strategic decisions. You've made some smaller, targeted acquisitions and investments, but you really haven't acquired any large assets since the Disney transactions. Can you talk to us about your capital allocation priorities? Why you're maintaining so much cash on the balance sheet? And what kinds of areas might you be inclined to make acquisitions or strategic investments?

So from a capital allocation standpoint, we look at it that there's 3 toggles really in it, which is organic investment in our own business, strategic M&A and returns of capital to the shareholders. If you look at each one of those, we've been pressing on every one of those toggles, depending upon the cycle and where we are in any investment cycle. But from an organic standpoint, we've been investing lately in Tubi, in some Fox digital areas, FOX Nation, FOX Weather. We'll probably talk about the USFL. That's one of our investments as well. From an M&A standpoint, Tubi was one of our bigger acquisitions. We've, obviously, been involved in sports wagering with Flutter and deployed capital there. But the place we've deployed the most amount of capital since the spin has been in returns to shareholders. We've returned about $3 billion of capital, $2.2 billion in the form of buybacks, $800 million in the form of dividends. We've got about $1.8 billion left on our authorization, which we fully intend to complete that. But all of this has been in the context of a fairly pristine balance sheet. We're on a -- I look at leverage always from a gross standpoint, not a net standpoint. The cash is there to be deployed for growth. So from a growth standpoint, we're sub-3x at this point. We just paid $750 million of debt back using cash to increase our earnings that way. But I think from a cash standpoint, too, it's being deployed for the organic investment, for the capital returns, and we are looking for strategic M&A. And clearly, we have the ability to grow the company through acquisition, and we've got the capacity on our balance sheet to grow the company through acquisition.

Is -- are there any particular areas that could be of interest and maybe even just broadly, I mean, more kind of adding to the scale that you have in your existing businesses? Or could it be adjacencies? Or...

Yes. It's more in the adjacencies. One place where we're leaning in pretty heavily, and we'll probably talk about it, is sports wagering. We've got this investment in Flutter and the opportunity to own interests in both FanDuel and FOX Bet. And some of the cash on the balance sheet you should think about as being notionally allocated toward deploying it toward those investments. But I think one big theme for us would be in the sports wagering area as an area for growth.

Okay. Great. Why don't we maybe shift to advertising? Your linear television networks have significantly outperformed the industry in both program and commercial ratings due to your sports and news focus. How do you view the underlying stability and engagement and in ad revenue over the next few years, ignoring the ups and downs of political and sports and that cyclicality?

It's kind of hard for us to ignore those ups and downs because the ups and downs are just part of the fabric of our business. I mean whether it's a Super Bowl or a World Cup or an election cycle that's in there, you can pretty well plot our business over the next 5 years and look at where those peaks in advertising are going to be. You can almost pick the dates when those advertising peaks are going to be. So the -- those cycles are vitally important to our business because it helps us with some of the growth initiatives on the business. Having said that, I think advertising overall, we're feeling good about where it is. We can talk about where it is immediately, but if I look out over the next many years, the assets that we have that are focused on bringing a mass audience to news and sports still are those assets that are in demand by advertisers. So if they're looking to deploy money against their brands, any place, it's against an audience. And I think increasingly, our audience has become more important to them.

And what are you seeing in the ad market today as far as demand and pricing? And maybe if you can comment both on national scatter as well as your stations?

So it's mix. The story is different depending upon what sector you're thinking about. So the real strength we're seeing continues to be in news and sports, where scatter pricing is probably 25% up from upfront pricing. And what we see is still some heavy demand in news and sports. For us, when you think about sports, in our fiscal year, June, roughly 70% of our impressions we've already booked because right through the end of football season, we're now into NASCAR and MLB, which is a smaller part of our business. But nonetheless, the demand is there in both news and sports. Where it's softer is on the entertainment side of the business, and I think that's true in the market overall. We're seeing high teens to 20% increase in pricing against upfront. But we're also seeing demand being a little softer, hence, the pricing being softer than the other areas. On the local side, it's -- the overall story is good, but it's a mixed bag when you peel into the business where auto continues to be down. We're down 25% to 30% from a year ago. That's industrial. It's not just representative of Fox. And virtually, all of that is supply chain, where there's just not enough cars on dealer lots for them to spend the money toward advertising. But countering that almost completely is the amount of money that's been invested in advertising for wagering on a local basis. It is just becoming one of our top 3 categories very quickly. It's now legal in -- or operational in 31 states. We are very active in virtually every one of the markets, the 18 markets that we're in. Take New York as an example. I mean we had -- in the football season, we had 4 operators that were vying for brand recognition and for customers during that period. Since that time, coming into March Madness and baseball season, they are now 9, all of which are spending toward market share and brand. So it's good to be a local operator. Some of this has kicked its way up to national because there's enough scale now to be able to spend there. The other place in spending, I should say, but it's more temporary in local, is in government spending. There's been a lot of investment around COVID, around vaccinations, masking and all of that. So -- but I don't see that as a category that's permanent. Auto will come back as a permanent category. Wagering is here to stay. So I think on a local basis, we're feeling pretty good.

Any thoughts around this year's upfront and how that could play out based on where the market is now?

I think it's a little early. We still have 3 months before really the upfront kicks in, in full form, the traditional upfront. I know our own strategy is to try to get ahead of it and book volume to the extent we can in advance of the traditional upfront. But I think it's still too early to tell. Some of the macroeconomic factors will play into it, I'm sure, and it's something we've got our eye on. But I come back to the fact that news and sports are going to continue to be dominant categories for advertisers, and entertainment will probably be softer.

Yes. Okay. Any -- can you give us any insights as to what you're seeing at Tubi today in terms of demand and pricing trends there?

Yes. I forgot to mention that when we talked about the national market because Tubi operates in the national market as an AVOD service. I think it's important to distinguish Tubi from its competitors in that Tubi is truly an AVOD service, meaning video on demand. It's not a linear service that you come into. It's -- you access the video, you serve the video, and you're then recommended -- the recommendation engine will provide other programming to you. But I think -- I know right now, Tubi is enjoying the benefits of being the #1 AVOD service in the country. And pricing is good, demand is strong. We only -- part of the service for Tubi is we only provide about 4 to 6 minutes an hour of advertising to a customer. So the experience and, therefore, the somewhat premium that we enjoy for advertising for Tubi is because the service is unique in that it doesn't -- I mean some of our competitors are double and triple that amount of advertising and just impacts pricing and impacts volume in those markets.

Yes. On the station side, how do you see political shaping up for the year? And are your own stations well represented in markets where there'll be competitive races in House, Senate and gubernatorial races?

So political should be big. I mean that's the sum point that comes out of it. If you look 4 years ago when we had midterm elections, we did $180 million across our markets in midterm election advertising. The presidential election doubled that number. That was $360 million. And clearly, we're not looking at presidential spending, but it's got to be in excess of what we did last time because the competition is that much more significant. We've got -- in 11 of our markets, we have hotly contested senatorial races; 13 of our markets, we have what would be hotly contested gubernatorial races. There's issues and advocacy topics on the ballots that we'll have a lot of spending toward it. What we won't see is likely a lot of national spending. So at FOX News, it's doubtful that you'll see a lot of money, maybe some pack money being spent at that level, but all of the money is going to be at the local level. And all indications are that it's going to be more significant than it was last time. So it bodes well for our fiscal '23.

Are you going to be positioned to take advantage of political with Tubi this year since it's targeted? Or is that not...

Yes, I think so. Digital spending will increase dramatically. So Tubi will be one of the homes. But I wouldn't -- if I contrast it to our local business, it will pale in comparison to what the local business is going to do. It's just -- that's where all the money is spent.

Okay. Maybe shift it to distribution. What's the outlook for affiliate revenue growth like over the next couple of years given the renewal calendar? And longer term, do you think you can sustain the kind of pricing power that you have today and -- in a way that you can mitigate the impact of sub declines and growth in the cost base?

So we've been very transparent, maybe [ 2 so ], about what our upcoming affiliate renewal period is like. We've got -- in the current year, we only renewed about 5% of our distribution footprint, whereas in the next 2 years, we have 70% that's being renewed. Now part of that timing was very deliberate because we didn't want to go into an NFL renewal period with pricing that was old pricing on our distribution. We wanted to ensure that we receive current pricing, matching our current NFL deal. So our expectation from a pricing standpoint across the portfolio, which is really broadcast and FOX News from a cable standpoint, is we are the #1 cable news channel and cable channel at times through FOX News, through the sports product that we offer on the network, particularly the NFL and now with current year with Super Bowl on Fox. Our expectation is that we're going to continue to sustain significant pricing power through those assets. So we feel pretty comfortable about where we are.

There's been a lot of changes already, obviously, to the pay TV distribution model with skinny bundles, virtual MVPDs becoming mainstream. Do you expect to see further change in pay TV bundle distribution? And if so, what do you think that might look like?

I'd like to see changes in it, but I'm not sure we will. I think all the media companies have long-tail channels that are attached to their core assets, be it a broadcast channel or news channels, whatever they have. But in selling them to the distributors, they protect those channels to ensure that they're included in the bundle. So I'm not sure that we're really going to see a paring of channels coming out of the bundle. What I see happening though is more of the wallet of the bundle moving toward the channels that are much more valuable and prominent in it. So you were talking about pricing power a second ago. That's where, I think, money will move from really cable entertainment channels and into news and broadcast channels because they're so important to the stickiness of the bundle. So I don't see -- again, I'd like to see a paring of the bundle down to core news and sports and some of the leading entertainment channels. I just don't see it really happening in the near term. But I do see a shift of wallet away from entertainment and news and sports.

Okay. Maybe we can shift to streaming and direct-to-consumer for a few minutes. You acquired Tubi 2 years ago for -- ended up being only about 1x 2021 revenue, just given the growth in that business. How strategic is Tubi now for the company? And what's its long-term role as the secular changes we've been seeing in the business continue?

Well, it's a very strategic asset. And probably next year, it will be a larger asset than the entertainment network from a revenue standpoint. That's the kind of growth that we're experiencing in Tubi. And if I look long term, it will be one of the clear growth drivers inside of Fox overall. So if -- some statistics I've seen over the weekend would say that the AVOD category between '21 as a baseline going to '26 will grow 4x from a revenue standpoint. I'm not here to predict Tubi's revenue over the next 4 years, but clearly, inside that category, Tubi is a leader. And that kind of growth would outpace any of the growth we would have in any of our other assets. So from a strategic standpoint, Tubi is a core -- now only 2 years into our company, really, Tubi is a core business of Fox.

And when you say it could be bigger than broadcast network next year even from an advertising perspective?

Yes, because Tubi is 100% advertising. Yes. You're right. If I contrast -- not retrans, if I contrast just advertising on the network and advertising on Tubi, Tubi should be a bigger business next year.

Okay. And bigger than -- just to clarify so people understand, bigger than just the national piece of your television advertising?

National entertainment piece of our television advertising, not sports.

Okay. All right. It sounded a huge number when you first said...

Yes. It's still a big number, still big -- still impressed...

What are your plans for Tubi from a programming perspective?

Tubi, those of you that don't know the asset well enough, it's a library-based product. It's got 41,000 titles in it. And what I think you should assume is that the lion's share of Tubi's programming going into the future will be a deep library program. Now we've augmented that with originals but not to the scale of the originals that you've seen in the SVOD spend. We've put 40 new originals onto Tubi in the last year. We'll probably double that number next year. But none of them are of the scale. It's not the kind of ones where you hear us promoting The Handmaid's Tale or any of the kind -- Yellowstone, those kinds of titles. But I think this balance between heavy, heavy concentration on deep library and a few originals is how you'll see the programming of Tubi for the future, for the -- not for the near future, but for the distant future.

Okay. Would you consider experimenting with live sports on Tubi as a way to potentially reach new audiences and generates incremental ad revenue? Or you think about -- maybe thinking about it a little differently, would you consider a premium pay tier for Tubi that gives subscribers access to sports that are on the FOX Network or other programming, whether it's prime time or local news or even content on the cable networks? It seems like you have...

Yes. We do some of it, but I would say you've got to come back to our core -- contrast our core business to Tubi. Our core business is providing exclusive content to our distributors in news and sports. That's the promise that we make to them that if you want the NFL on Sunday, you're paying us retrans because we're guaranteeing you that that product is not leaking into a free environment someplace else. If you're paying us an affiliate fee for FOX News, the promise is that that is exclusive to you, and it's, again, not leaking its way through free. So I don't see Tubi as being a platform for us to take national content and bring it over as an adjacency to that national content. What we have done is taken some local news and put it on Tubi. We've taken our talk shows on FS1 and moved them over on Tubi, but we haven't taken any live sports content or live news, live national news content and moved it over to Tubi. And I don't expect we're going to do that any time soon. To the second part of your question about tiering, again, the ubiquity of Tubi on 25 different devices around the U.S., focused on the U.S. and the ability to just access it on a free basis is the secret sauce of Tubi. So we don't have any expectation of tiering it or adding a subscription product to Tubi.

Okay. And I understand that it's deep library content on Tubi and it's based on a revenue share model. But are you finding it harder to source library content for Tubi just given so much demand out there for library programming?

Not really. If you look back when we acquired Tubi, we had, I think, it was 23,000, 25,000 titles in the library. And as I just said, we've got 41,000 titles now. So in the 2 years, we've been able to expand that library by 60%. And we're dealing with all of the majors, many of which were represented here at the conference. But from Disney, MGM, Lionsgate, Sony, even Paramount we're buying some product from. So all of this -- again, we're buying a deep library product. We're not buying their first-run product, which is going on to the places like Hulu or their own -- obviously, their own D2C product. So no, I don't -- we haven't seen nor do I expect to see any issues on acquiring product from the content providers we've been able to buy from.

Okay. And you mentioned that Tubi is really a domestic product today. I think you have launched it in a handful of international markets. Just curious if you have plans to expand internationally from here.

It's not the priority. I mean we're in -- the U.S. is our focus. We're in Australia, New Zealand, Mexico and Canada. But still the growth opportunity for us in the U.S. is significant. That's where we're concentrated. That's where it's easiest for us to acquire the kind of deep library product and the rights that we just talked about. You were asking about revenue share before. I should have said that still 95% of the library that we have is on a revenue-share basis and only 5% is licensed from an entirety of that 41,000 titles. So we're still able to get a very substantial amount of the library on a revenue share basis. But coming back, I don't think you should look as a priority for us to be going dramatically outside of the 4 or 5 markets that we're in right now with a focus on the U.S.

Okay. You launched FOX Nation direct-to-consumer streaming service a little more than 3 years ago. Can you provide any color on how large that business now in terms of subscribers and revenue as well as any color on the growth trends there?

So from a growth standpoint, we've doubled the subscribers in the last year. We grew them by 30% in the last quarter. Business is a very sticky business in that it's -- recall that it's basically a companion product to FOX News for the superfan of FOX News. So the market -- if you think about the overall market, the market is not infinity. It is -- the market is a core FOX News audience. And as a result, we've been very successful. It's also characterized this business different than other SVOD products by extraordinarily low churn. I mean these are loyal customers that are subscribing to FOX Nation. So churn management is not the one that we have to spend a lot of money on where, clearly, on the SVOD side, churn is a particularly big issue. So FOX Nation is doing just fine. It's one of the investments we continue to make into the product. We add content like Tucker. We've put the Cops series on there. We're doing a new feature with Kevin Costner on Yellowstone. So as we continue to add product, we get more and more subs going to the platform.

Given the demand for Connected TV Impressions, like you're seeing on Tubi, could it make sense to offer an ad-supported version of FOX Nation? Or...

I don't think so. It's kind of the flip of your Tubi question, where this -- the market is very defined for us -- for FOX Nation, as I said, the FOX News superfan. So it's $5.99 product. It's not break-the-bank subscription. So I don't think you'll see us looking to provide an ad-supported tier on FOX Nation. It will continue to be a subscription product.

Makes sense. Okay. You recently launched FOX Weather as another extension of the news franchise. Any color on how that's performed so far?

Yes. It's -- I think it's a sleeper asset for us that probably a lot of people in the room are not even familiar with. FOX Weather is basically 2 components inside of the single business. It's an app that you're able to download, that inside of it has a fast channel that we broadcast out of New York with a 150-person staff, meteorologists and talent, et cetera. But that fast channel has rapidly been pulled out to become distributed separately as a fast channel outside of the app. So we're now on YouTube TV, we're on Roku, we're on Amazon. And we're continuing to distribute the fast channel with significant advertisers on it as well. So if you get a chance to just look at any of those through Roku or Amazon, YouTube TV, what you'll find is a really robust weather service. And I think, as I said, it's a sleeper asset that we expect will have very significant growth ahead of it.

Is this sort of to satisfy the demand for the weather channel for those that have cut the cord primarily? Or I mean...

It should. Yes, we provide both national and local cut-ins to the product. So I don't like the people who cut the cord. That's different question entirely. But we are able to provide weather service for them that's pretty robust.

Okay. Do you see any other opportunities to extend the FOX News franchise, whether it's in the linear or the streaming world?

Well, we have extended it in a number of areas like our partnership with SiriusXM. We have podcast business, books business, a number of other areas, and we continue to look for extensions. But FOX Weather, take that as a recent extension. It's only 5 months old as an extension. So it's the idea generation around what more we can do with FOX News continues to be very significant. And you should look for us to try to continue to extend into adjacent areas there.

Maybe shift gears to content and costs. If we look at -- turn to operating expenses and margins first. In fiscal 2023, you've got a $350 million to $400 million EBITDA tailwind from Thursday Night Football rolling off. Plus, you've got political, you've got heavier MVPD renewals, as you alluded to. All should make for a strong EBITDA and free cash flow growth year in fiscal '23. So I guess a couple of questions here. One, should we expect some of that tailwind to be offset by higher investments into streaming or other areas in '23 from an EBITDA and cash flow perspective? And then secondly, as we look to '24, do you expect an abnormally high step-up in retrans universe to largely fund the NFL step-up as the new contract takes effect? Or should we think about the Thursday Night Football savings that starts in fiscal '23 as sort of funding that NFC right step-up in fiscal '24? Sorry for the long question.

So there's a lot there. We'll try to unpack it. The -- if you look at 23 alone, we've got 4 main factors that are contributing to the growth: we've got the Super Bowl, we've got Thursday Night Football rolling off, we've got our affiliate renewals and we've got political. The commencement of our affiliate renewals in that period of time. So every prospect for '23 is positive because every one of those factors are positive. When you look at the investment spend, I don't expect that -- what we said in '22 is we're investing $200 million to $300 million into -- of EBITDA into a number of initiatives led by Tubi and Fox Digital and a few other things. I don't expect that level of investment to materially increase in '23 to be a major headwind against the growth of those 4 areas that I described. So all in all, '23 is shaping up to be a really significant year for us. When you look at '24, your question about -- basically around NFL cost is you have to look at it first on a like-to-like basis because '23 had the Super Bowl. So let's throw that out and just look at pure season to pure season. We'll get a step-up of probably high teens increase because the new contract kicks in, in fiscal '24, but at the same time, as I said in my earlier comments, where the new affiliate renewals are kicking in as well. So our expectation is we're covering cost increases by the very deliberate timing of the increases of affiliate renewals in that period of time.

Okay. Okay. Yes. So I would interpret that as you get this big step-up in profitability in fiscal '23, some of that's temporary and rolls off because of Super Bowl and political, but there is still sort of a structural step-up in profitability that will be sustained.

That's right.

Okay. Great. There are obviously some different scenarios that could play out over the next, say, 5 years with respect to pay-TV subscriber declines, your ability to drive price, ratings and the other revenue drivers. In more conservative revenue scenarios and considering that sports rights costs are fixed and governed by long-term contracts, how much flexibility do you have to manage costs in a way that can more or less sustain EBITDA and free cash flow levels as you think about the different realistic scenarios?

Well, I think we run the business toward conservative scenarios. So I'd like to think we're an efficient organization, but it's not to say, my earlier point, we're not complacent in that we continue to look for efficiencies. But you're right, we've got a high fixed cost base in sports right contracts primarily. In other areas, like news, talent contracts are fixed as well. But clearly, the biggest cost base we have is in our sports business. So we continue to look for efficiencies around costs. Recognize that when we formed Fox, we had the ability to form a very efficient organization spinning out of it. So there wasn't -- it was a "synergized" company when we spun the company out of Fox. It wasn't one where we had to seek all of a sudden significant cost reductions because we were able to do it that way when we spun the company out. But again, we're not complacent. We continue to look for cost opportunities in the case that sub declines were far greater than people like yourself were predicting.

Okay. We don't have a lot of time left, so I'm going to jump ahead a little bit because I do want to talk a little bit about online sports wagering, given your earlier comments. How should we think about your strategy in sports betting? What's the totality of the opportunity for Fox? And would you go so far as owning a sports book beyond just your exposure to Flutter and FanDuel and exercising your option?

So we think about sports wagering in 2 buckets: one is our "traditional" business and the second is the business of sports wagering. In the first, we're enjoying the benefits I described earlier of advertising on a local basis. But increasingly, we're seeing that benefit on a national side, in our -- particularly in our sports business. With 31 states operating, it now becomes -- it's slightly inefficient, but it becomes more efficient for the national operators or for the operators that are in those 31 states to spend on a national basis. So we're enjoying that benefit locally and nationally on the wagering side. So that's the advertising bit of the business. On the business of sports wagering, it is one that we want to lean into. We've got the investment in Flutter, 18.6% option in FanDuel, 50% option in FOX Bet. Remember, FOX Bet includes the business of PokerStars inside of it. So you should look -- we've got to settle, obviously, some discussions we're in the middle of with Flutter, which should resolve themselves by June sometime. But you should look at us as wanting to be very active in the sports wagering area, not to run a book. It's not what we do, but we look to get licensed because there are certain investments that we can't make unless we're licensed and, therefore, be a better partner on a license basis. By that, I mean, in order to make investments above certain thresholds, percentage thresholds in wagering, you need to be licensed, which is why, for example, our Flutter investment is at 4.99%, not anything above that. But don't think about us as operating a sports book. Look at us as being very active in wagering.

So basically making money from advertising and programming towards sports betting and the ad revenue and affiliate revenue that may come with that? Is that the monetization...

That's the more traditional side, but the other side is to make money out of being an investor in sports wagering business itself.

So the returns on the minority investments.

Exactly.

Okay. Great. Okay. just out of time, so we'll stop there. John, thanks so much for coming. I really appreciate it.

Appreciate it. Thank you.