Fox Corporation (FOXA) Earnings Call Transcript & Summary

Good morning, I'm Doug Mitchelson, Credit Suisse's Media and Cable Satellite and Wireless analyst. Very pleased to have with us today Fox Corporation, Steve Tomsic, Chief Financial Officer. This will be a 30-minute fireside chat with Steve, and my questions are likely to run the full time. Feel free to e-mail me questions if by chance, we do have some remaining time. Apologies if we don't. Steve, welcome and any disclosures? Or should we jump right in?

No, we can jump right. Thanks for having us, Doug. It's a real pleasure to be here.

Of course. Well, let's start with State of the Union. So if you wouldn't mind walking us through any learnings from the past year, particularly anything that surprised you one way or the other? And how has FOX strategy and growth outlook evolved?

Yes. I'm sure you want to unpack a lot of these topics as we go over the next 30 minutes. But I was looking back at my diary, and it's a year ago to the day that we sat here virtually in our last fireside chat. And so you asked if there are any surprises. I think it'd be fair to say that you and I weren't talking about war in Europe or 8% plus inflation or tech growth, stocks drawing down sort of 70% from highs to lows at the moment. So I think from a macro perspective, it's been surprising how quickly things have changed. Your question was really around what the State of the Union. And from our perspective is the Union is incredibly strong. If anything, the things that happen macro or even in the industry, really have served to sort of highlight our strategy and it's a strategy that I think we've stuck to and focus over the last 3 years since the formation of FOX. And it's a strategy that actually distinguishes us from our peers rather than tries to emulate them and served this incredibly well. So if I look at where we are across the portfolio, we'll go into this over the course of the call, but we've got an exceptionally strong sports portfolio, which will be showcased over the next 12 months. FOX News just goes from strength to strength and now consistently beats the cable news peers on a combined basis -- on a really regular basis and we increasingly see the changes that we continue to make to the schedule. So you talk about surprise and why I am surprised, but it never ceases to amaze me how strong the attachment of the audience is at FOX News. And so you've seen us introduce Gutfeld! into Late Night, Jesse Watters into Prime Time. Both have been incredibly successful in the schedule and the 5 consistently ranks as the highest-rated cable news program in the country. And so FOX News, we increasingly sort of judge it not by sort of its cable news peers, but by it's almost become the 5th broadcast network. And often out rates, one of the broadcast networks on any given night. And so that asset goes from strength to strength. As I said, the broadcast network continues to go from strength to strength. And then we have investments in new assets, which is designed to sort of capture audience flow as it migrates from traditional linear viewership across some more digital streaming. So our most important asset there is Tubi, which has been a real winner for us and consistently delivers top line growth for us. And so I know you want to unpack a ton of that over this half hour, Doug, but the Union is really strong. We couldn't be more pleased about where we are even with the macro environment. And in fact, I think the macro environment sort of tends to favor going towards sort of assets of strength and we think our portfolio is really, really concentrated with those assets of strength. And so we think that our focus has served us really well over the last 3 years and will continue over the next, however, many.

It wasn't -- one pleasant surprise for us was you hiring the absolutely terrific Gabby Brown.

Thank you. I'm sure she wants...

[indiscernible] So look, fiscal '22 is coming to an end. What are the execution priorities as you think about fiscal '23? What are the important milestones you're focused on?

Yes. So fiscal '23, shape has been a monster for us in terms of showcasing what we're all about from an on-screen perspective. And so if you look at what we've got ahead from October, November, which is when the midterms will really start to kick in, that will have an enormous impact on FOX News because it really showcased our on-screen skills from a FOX News perspective. And it's also really important from a monetization perspective. Let's talk FOX News, but absolutely sell with respect to the local television stations. And then you look -- as we then go sort of October into November and then into December, you've got our FIFA World Cup where thank goodness the U.S. has qualified. And so we'll have a really, really strong sports suite with you got the FIFA World Cup, which then sort of dovetails in with that starts with our Thanksgiving slate in terms of sport, where you're going to have an incredible selection of World Cup plus College Football plus NFL. And then it culminates with the Super Bowl that we have in late fiscal '23. And so really, the priority for us there is to make sure that on screen execution is second to none, which we're super confident that it will be, as it always is, but also being able to monetize all of those events because it really goes to showcase what FOX is all about from a live news and live scores perspective. And so there'll be no better year for us to show that to the world. And then if you look at other assets, we absolutely are continuing on a growth cut with Tubi. So we expect to continue to drive total dealership growth and also to continue to drive advertising monetization there. And I think we've called out on a number of earnings calls the last sort of 4 quarters the fiscal year that we're currently in now has been incredibly light from an affiliate renewal perspective. We now go into fiscal '23 and fiscal '24. We're about roughly 70% of our affiliate book is up for renewal. And so it's going to be really, really important for us to set new pricing benchmarks for the full suite of networks that we represent there. And so fiscal '23 is really -- it's a benchmark year for us. It's, I think, even going back to our Investor Day, we talked about FOX being sort of -- it's focused on live news and sports means it has these cyclical features to it, means, in some respects, you have to see through those cycles but fiscal '23 is sort of peak cycle in some respects. And so we've got a number of priorities, and we're really well placed to deliver on.

I want to run through some of the growth investments. I think some of the traditional businesses are reasonably well understood, and we'll touch on those a bit towards the end. But I want to spend a little bit of extra time on the growth investments because I think that's sort of the area of opportunity. And you mentioned Tubi, and so we'll start there. And I'm just curious what you think the long-term, how you articulate the long-term vision for the asset in particular, how big is the market going to be for free AVOD And how much competition do you expect? How do you have maintain or grow share in this dynamic marketplace.

Yes. So the investment thesis of Tubi sort of around 2 years ago was that we recognized that, a, there was an increasing shift, particularly of linear entertainment, viewing to streaming, and then we looked at the shift to streaming and said, you can see even 2 years ago, and it's absolutely apparent now. This proliferation in SVOD services, where I think the average household is running out of wallet to be able to afford all of those SVOD services and need free alternative. And so you can sort of see this shift of audience from linear to streaming and within streaming, you're going to see a shift of audience to AVOD. And so Tubi will absolutely be the beneficiary of that. And our expectation for that asset given that it sort of can grow up in our environment and survive truly on the message of free and the simplicity and the Christmas of that message. Our expectation is we expect Tubi to win in AVOD.And we expect AVOD to be a really, really important advertising category across the sort of the TV ecosystem. So if you measure sort of between broadcast and cable advertising plus add support at SVOD plus true AVOD, that marketing round numbers is worth about $50 billion. And we would anticipate AVOD to actually grow the market but also taking an increasing share of that. And we think with Tubi built specifically for AVOD because a lot of our peers have got a foot in both camps. They've got an AVOD service, plus they've got SVOD service or the SVOD service with ad supported service. Tubi is absolutely crystal clear about what its mission is, which is to be a free service. And the other thing with Tubi is it's got true ubiquity of distribution. And so it captures more titles than any other service that's in the market at the moment and then distributes those literally everywhere. So it's got true sort of the Switzerland of distribution in terms of being able to get to reach. And so we think that Tubi is really, really well positioned. It will benefit from the fact that it comes through from the FOX sort of portfolio of assets, which gives us the opportunity to help Tubi with the development of content. And we get to help Tubi be with respect to monetization by being able to plug into our sort of direct sales force, which is probably we had the most initial impact from a financial perspective on Tubi. And then in the third place, we can help Tubi is you can take these mass reach networks that we have, whether it be the network or FOX News and be able to cross-promote Tubi be able to share content to get Tubi to that next stage. And so we feel really good about the development of Tubi since we've owned the assets. So since we've owned the asset, it was doing run rate a touch under $150 million of revenue in the first full year that we have owned that we pushed that up to close to $400 million, and you've seen the growth rate of that continued for the first 3 quarters of this fiscal year. And so everything we thought Tubi would be, it's being. And I think as we look to planning for Tubi, we continue to sort of lift our sights in terms of the size of the opportunity and our capacity to capture that market share%.

So one thing you get asked about a lot is margins Tubi. And you correct me if I'm wrong, but I'm not sure that there's been that much context you've shared so far. So I guess what I was wondering is there obvious guard rails for what the long-term margins could be given how much of Tubi's content on revenue share deals or the overhead position that you foresee? Is there any clear line of sight for long-term margins you're willing to share.

So I think you've got to look at it from, I guess, two perspectives, Doug, which is, first and foremost, our focus at the moment is about Tubi winning the category and driving top line growth. And so, for us, we're not going to make a short-term decision around driving a short-term pathway to sort of profitability and margin growth and staining our capacity to take that top line opportunity because we think that maybe it's not winner take all but probably winner take most, and we want to be that winner. And so it's important for us to continue to invest in the service to seize that opportunity. As you look to the sort of the medium- to long-term, you look at where margins could get to once you sort of win what you want to win from a top line perspective. You're right, there's an element of -- we've got 42,000 titles on the service now and the overwhelming majority of those titles are revenue share titles. And therefore, the revenue share constraints on margin are there, but the way that you try and improve margin over the passage of time is you begin to shift that content investment to either license programming where it's more fixed cost base as long as you can pick that license content well and you can get that return on investment as well as producing originals. And we've already move down the path on both of those categories, both licensed content and originals, and we're seeing great success there. And so if you can get better than revenue share margin on the titles that you're either choosing or you're producing yourself, then that helps with that sort of bottom line margin. The other place we go. And so at the moment, there's a lot of money that Tubi spends on customer acquisition/marketing as well as technology. And so when you look at Tubi brand recognition is probably a touch north of 50%. As you get Tubi to be a recognized household name in 80%, 90%, 100% of the households in the United States. And more importantly, as you get Tubi to become habitual part of people's TV viewing, you can really, really downsize that customer acquisition cost over time. And then the idea is to continue to invest in technology but get scalability out of that technology investment so that you can drive better bottom line returns. So that's the levers you need to pull at the bottom line to work better for you, but we're not -- we're not looking to optimize bottom line in the near-term because we're really, really trying to seize that opportunity on top line and what we think will be a really, really important market in sort of the broader medium mix here in the United States.

Got it. So we'll watch the scale of the assets can scale ultimately determines the margins. So FOX Nation. So can you give us an update on subscribers and engagement and monetization? Where are you in the investment cycle for FOX Nation.

So FOX Nation, it's probably -- we're stepping back. FOX Nation initially started with, I would say, relatively modest ambitions and a relatively modest consumer proposition, which continues as we get success and traction with both subscriber recruitment as well as engagement. We continue to invest in that service. And it's a relatively modest amount. When you look at the overall P&L of FOX, the investment we put into FOX Nation from a net perspective is relatively modest and is well worth us continuing down that track from an investment cycle perspective to keep to give us the optionality to continue to preserve the FOX News fan. But you've already seen the service develop in a really, really encouraging way. So over the last [indiscernible] months we've tripled the subscriber base. We continue to add content that has had real residence with respect to engagement. So our most recent quarter has been our biggest quarter from an engagement perspective, where I think we had 10 million hours of viewership on the platform. And that is embedded by fresh content investment in the platform, whether it be things like Tucker Carlson Today, reigniting the Cops franchise, Prime time all the time, all of these things feed that engagement. And we're seeing great sort of retention, great retention rates and great conversion rates. So our conversion rates we do what many SVOD providers do in terms of giving people an opportunity to freely sample the service, and then we try and recruit those and we get north of 80% conversion rates from those try to pay subscribers. And so you'll see us continue -- I think when we first started out with FOX Nation, it was a service for the FOX News super fan. I think we're broadening the church of that, but we're going to do it in a sensible and measured way as opposed to thinking we're going to build this into an SVOD service, it's going to compete with the top 2 or 3. What it also does is, it is a pay TV -- sorry, an SVOD service that gives us real optionality with respect to direct-to-consumer as we think through distribution over the really, really long-term. So we're really excited about the FOX Nation prospects.

You all have been mentioning FOX Weather a lot on recent calls. Fox Corporation is a reasonably large company. Is this ultimately going to be material to FOX?

I think it's kind of odd that FOX News being such a successful News service hasn't had a weather service in its history and so I think it's neither -- I think it's going to become an important part of the programming and financial portfolio of the company. We're taking it seriously here. It's got -- the first step was to build a really, really good product. And we think we've got a great product that we've put in market. And so the next step after building that great product was to get distribution. And so we started off with it being distributed up on all the FOX News media platforms. That's still -- that's now moved into YouTube TV plus Amazon plus Roku. And so we've seen that -- if I look at the number of minutes consumed at the start of this year on service, it was sort of in high single-digit millions of minutes consumed, and that's quickly moved to sort of -- I think it's close to 80 million minutes now. And so it is really, really growing quickly. We think from a monetization perspective, particularly with respect to News, where you can have advertisers that got mixed feelings about advertising against certain News flow, FOX Weather is a much more easier sell from a monetization perspective and so we can really broaden the advertiser base that buys inventory on the service. And so we think it's not in the short-term, but over the sort of medium- to long-term. So we think that we can build this into a really important part of the portfolio.

One other area of interest...

And Doug, I should mention going back to sort of Nation in my earlier comments on News. It comes with the attachment of that FOX News audience that is really, really willing to follow us into these new categories. And so we think it will start with a running start, and we expect that momentum to grow over time.

Well, I also still looking for weather service that can actually predict the weather, so we'll give it a shot. Another kind of last area of investment prime time FOX broadcast network programming. The returns on those investments pay that was expected. I know the pandemic was a little bit disruptive. And what's the opportunity going forward? Is there incremental investment? Or are we at the point where we're actually getting incremental return on prior investments? How should investors think about that?

No. So if I look at specifically the Entertainment -- when you talk about prime time, I'm assuming you mean the entertainment side of the broadcast network. And so Obviously, when we are a 21st Century FOX, the broadcast network served as a showcase of marketing engine for the TV studio that was supporting it, and it was umbilically linked to one another, right? And so with Charlie and the team have done an outstanding job of cutting that umbilical cord, right? And for the first sort of 2 or 3 years that we've been FOX, the entertainment network has been profitable for us. We're continuing to equip the entertainment network with the capacity, I guess, to get more creative return out of the dollars invested. And so when you look at the things that we've added to the portfolio there. We've got TMZ that's in that portfolio. We bought Bento Box from an animation perspective. We bought MarVista from a content perspective. and we invested in Studio Ramsay, which gives us a ton more -- and on top of that organically, we've built an unscripted production engine. And so that's going to allow us to get more bang from our buck from a content spend perspective. And then when you look at where some of the organic investment has gone in terms of the broadcast entertainment network, as we've taken ourselves -- as we've broadened sort of our sources of content supply for scripted programming beyond 20th TV, we've done that with an eye to co-production arrangements where we capture an element of the long-term economics of the show based on the fact that we light up the show in the broadcast entertainment network and we want to capture the revenue streams from later windows from using the capacity and the promotional power of that network. And so that's been an investment deficit for us for the last 2 years, and we've called that out. But I think as we go into fiscal '23 and beyond, I think that becomes a push and is probably accretive. And so I think I don't want to minimize the, I guess, the macro headwinds and the industry headwinds that broadcast entertainment faces, but I think we're approaching it from a different -- from a much different perspective the way we manage the broadcast network, and we think we can do that in a really profitable and effective way.

So I'm not sure if you're willing to add all this up for us as we look into fiscal '23, but we think all just walked through. And I guess, anything else that you're thinking about on the margin. As you said, you've sort of highlighted investment levels coming into the last couple of years. As we get to fiscal '23, does revenue growth, the investments you've already made offset OpEx investments to continue to grow these in other businesses. Are we at the point where kind of the deficit remains the same year-over-year? Are we still in investment mode? Or are you starting to see margin expansion?

No, as I see fiscal '23, I think you've got -- there's this immense tailwind from just the event programming that we're going to have in fiscal '23. So Political plus Super Bowl are really going to [indiscernible] us forward and give us a really bumpy year financially. And then when I look at -- we called out at the start of the fiscal year, we're currently in a $200 million to $300 million net EBITDA investment for fiscal '22. As we look forward to fiscal '23, that net EBITDA investment, I think, we're not going to go further down. I think to use your all words, I think we're going to steady that line. And if anything, I think we're going to see that on many of the initiatives. We have continued to increase the cost base to invest in the initiatives. But I think on many of the initiatives, the revenue growth will outpace that investment.

Interesting. So I've left this time and as I said, sort of upfront, I was going to focus on the growth investments so a little bit less on some of the traditional drivers. But I think I left this time to perhaps its sports betting advertising and capital allocation, hopefully, relatively efficiently. And so let's do sports betting. Three topics that aren't necessarily concise by nature, but we'll try. So valuations have shrunk obviously, in the sports betting space. [indiscernible] seemed to express some frustration with FOX Bet will be in only 4 markets. I think we have value from the rights the sport betting rights that you have, where do you see the operational overlaps with your businesses at FOX Corp. at this point in time?

Not I think we're saying -- you've seen the valuation. I'm not sure we believe the valuations where they were 12 months ago. And they're probably oversold now. So I think when we look at it, we take a 10-year view on this. And so whether the market valuations in any given 3-month window here or there is [indiscernible] in there to us. And so we think that the category is going to be super important from a financial perspective in the long term in the United States. We've seen it in other comparable markets. And so we think we were early on the train here in terms of our -- in terms of the partnership we struck initiatives to Stars Group, which morphed into a partnership with Flutter. I'll leave the frustrating elements of that aside, but we continue to believe in the thesis and we absolutely believe in our capacity to be a really, really important partner and value driver to a sports betting operator. And you've seen that just in our experience with Super 6, where we've put our shoulder to the [indiscernible] and we've quickly ramped that free-to-play game to north of 6 million users. We think it has benefits for us from a quasi equity owner and has benefits to us reverberating back from an advertising betting perspective from sports betting operators as well as viewership benefit as people engage more with sports product [indiscernible] I'll pause it there because I'm -- it's tricky to say everything I want to say then we're moving into arbitration, but -- and I know we're running out of time, Doug. But listen, we're super excited about the opportunity and our capacity to deliver on.

Hopefully, that attrition will wrap up soon. Any macro-related slowdown in advertising that you see and buyers are telling me the upfront, CPMs were up 6% to 9%. Sellers are telling me more in the 9% to 12% range, perhaps, where is FOX shaking up?

So advertising-wise, spot market at the moment with I think it's a quiet period for us like Q4, our Q4, most of our sportswear really fall into winter. But if I look at the -- I think there is a sort of flight to quality from an advertising perspective, and there's no better quality in terms of the market. You going to put our dollars down on big audiences, you go to us for sports and news. And so I think we feel really strong about representing that portfolio. I think there's probably an element of softness in things like linear entertainment, which is a relatively small component of our portfolio. And there's -- and some were probably programmatic more broadly. But as we move towards the end of our upfront, we've achieved all the goals that we set out for ourselves pricing in the ranges that you just quoted, really, really strong levels of commitment, which are north of where we were this time last year. And just importantly in all of that, apart from doing it for all of our traditional linear mix, we've been able to get really, really strong increases in commitments for Tubi. So we've had a -- as we come to the end of the upfront, we've been super successful. Maybe it's an element of the whole macro, we're trying to talk ourselves into a recession, but we're really not seeing it from the perspective of sort of what we've seen from the upfront.

And then any final thoughts on capital allocation with stock prices pulling back, perhaps those getting more attractive and the macro environment is a little bit more uncertain and interest rates are going higher. So how do you balance all that?

Well, we're balanced with it. So you should expect that we're in the market sort of buying back as we have been. But when I look back, we will close Q3, we'd sent back $2.4 billion to shareholders in the form of buybacks. Inception to date, we've sent back close to $1 billion in dividends. So it's $3.4 billion of capital going back to shareholders. When I look at our M&A program, gross [indiscernible] spent about $1.9 billion on assets. We've sold about $500 million [indiscernible] so the buybacks and the dividends are way outpace sort of what we've done from an inorganic investment perspective. And when I look at where the balance sheet is now, we closed Q3 with $4.6 billion of cash on the balance sheet. Our leverage levels are really comfortable. And we see that in a market where there's so much turbulence and uncertainty where we are today, we see that fortress of the balance sheet as being a strategic asset for us, both from the perspective of being able to return capital back to shareholders or being opportunistic from an M&A perspective. We're going to be balanced about it. We're going to be opportunistic about it.

Yes. It's nice to have $5 billion in cash on the balance sheet. Thank you so much for spending some time with us today. Really appreciate it. Thanks for coming to our conference again this year, and look forward to catching up soon.

Thanks so much for having us, Doug. Have a great week.

Thanks, everybody.

Bye-bye.