Fox Corporation (FOXA) Earnings Call Transcript & Summary

Good morning. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. Really excited to kick off TMT, Day 4, at least on our end, with Lachlan Murdoch, Chairman and CEO of FOX Corporation. Lachlan, thanks for coming back.

Thank you. Good morning, Ben.

Good to see you.

Good to be here. And I guess it has been a year since we were here last, so I just want to say thank you and very appreciate you have the opportunity to talk to everyone. So thank you.

Absolutely. So I want to start with some higher-level strategic questions. As most people are aware, FOX made a decision years ago to really not kind of chase the streaming prize. And all this week, we've been talking about streaming with a lot of your peers or competitors who are now, I think, revisiting a lot of those strategies. But obviously, there are also known challenges to the pay TV landscape. So when you think about the biggest opportunities for growth for FOX, what are you most excited about?

Well, Ben, you're exactly right. We've taken, at FOX, a contrarian strategy when it comes to streaming and how we monetize our brands and our content. And I think sitting here I assume it was almost exactly a year ago, I alluded to this bloodshed in this sort of gladiatorial battle that was happening in streaming, particularly obviously in subscription video on demand. And as the years passed, the analogy comes back and refreshes in my mind over time. And we see ourselves like I think I alluded to this before, it's like the Monty Python Life of Brian scene in the coliseum where the gladiators are chopping each other's arms off and there's blood splaying everywhere. And it's the poor little guy, the smallest guy who runs away from them all, and does run away from the bloodshed that ends up surviving and winning the day. So I feel like we're the little guy. We're going to be the ones that survived because we haven't had our arms or legs cut off and bled out. So we think it's a good strategy. We're not going to go up against Disney or Netflix or Prime in terms of trying to launch entertainment subscription business. And in fact, the whole thesis behind our sale of our entertainment assets to Disney, now sort of almost 4 years ago, was based on this. We could give our entertainment assets to Disney and really create a winner in the SVOD space. while simultaneously focusing ourselves on our core brands, which are really focused on live news and live sports. And that comes back to your question in terms of what are the big opportunities for us. Well, because we're so focused on live news and live sports because that's where audiences are pivoting to and advertisers are pivoting to, that gives us tremendous comfort in our ability to drive pricing both from -- on our distribution platforms with cable operators and retransmission, but also in advertising. So we see our core businesses as very robust and importantly, very resilient, particularly through the last couple of tough years for the industry. And we also see the future of those businesses around, I know we're going to talk a lot about Tubi coming up, but we have a great digital strategy in advertising video on demand. So we're not chasing subscribers but we're very focused on advertising. And we love the position that Tubi is in, which is free. And for 99% of America between the coasts, free is a great proposition and a great place to be operating in.

Lachlan, you mentioned the strength of your networks and the ability to drive pricing. We had Comcast and Charter here yesterday and a lot of the pay TV providers, they're sort of deemphasizing video, to some extent strategically. How are you feeling about the opportunity? Because you're now entering, I think you're at the beginning of a renewal cycle for your networks on the distribution side. How are you feeling about the opportunity to drive price right now in this environment? And any comparison to how you felt when you went through the last one, which I think was maybe 3 or so years ago?

Yes. So we're at the beginning of an important cycle for us. I think this coming year, we have about 1/3 of our distribution volume sort of up for negotiation. If we look at the past couple of years and particularly in the past year, we feel incredibly confident about our ability to drive pricing going forward. The reason we feel that way, we combine in our negotiations are our cable distribution deals and with retransmission for our broadcast stations with cable, sort of combine, we separate them when we report but we combine effectively broadcast retransmission and cable distribution together in those negotiations. In our spin in 2019, we committed in our first Investor Day, we committed to $1 billion of incremental retransmission revenue as part of that spin. And we're very happy to achieve that $1 billion target of incremental revenue last year. So that really goes to and illustrates the strengths of our brand and I think the prudence of our strategy. In the smaller specific deals we've done in recent history in the past year, I think we really have industry-leading pricing and industry-leading terms. And that goes to the, again, the power of live news, live sports and also great entertainment that we produce.

That's great. Just going back to your Monty Python anecdote, the little guy, reminds me you always get asked about scale at FOX and sort of the need for scale. And I did think a little bit on the last earnings call, it came up in the FOX and the now abandoned but proposed idea of considering merging FOX with News Corp, I thought reflected an interest in more scale. And feel free to push back on that. I guess the question is do you think FOX has enough scale to maximize the opportunities in front of it. For example, sports betting is an area you guys are excited about, how could scale help you in an area like that?

So I should know this, and I apologize, but what was it your question on last earnings call, was it coming off of...

It was not.

Someone else Okay. Because you're having a second bite of the apple. So thanks for the question. So the -- look, I think scale for scale's sake is often a mistake, right? But if you can have a strategic scale and scale that really informs and reinforces your existing businesses, I think makes an incredible amount of industrial logic. If I look at our businesses today, though, we are incredibly pleased with where we are. I think we have an industry-leading balance sheet. And our core brands, again, being focused on live news and live sports, which is where audiences are highly engaged, our core brands are doing incredibly well, even through, again, sort of difficult couple of years for the industry. So we're very, very pleased about where we sit and the way our businesses are performing today. Having said that, when we look at capital allocation, we're clearly looking at how to drive accretive shareholder returns. And part of that will always be sort of inorganic growth, right, through sort of mergers and acquisitions. And we'll continue to look at accretive growth, utilizing our full tool set of sort of strategic options. The proposed merger, which wasn't really a proposed merger because there was never a proposal that's eventuated, it was a suggestion that this could be something that's worth looking at. But that suggestion for a merger with News Corp is really based on driving accretive value and driving shareholder returns in the long term. And when we looked at that, it was really about combining tremendously strong content verticals and news and entertainment and sports across multiple geographies that we thought was -- made tremendous logic. Now we've moved on from that. I think both companies are focused on their own things, and we've dropped that as a concept. And -- but whatever we do, do, we'll be focused on those core things that are driving accretive value and driving long-term shareholder returns.

Okay. Makes sense. So let's talk about some of those core brands you were just mentioning. I want to start with sports. Sort of the debate around sports is it's obviously attractive. Given you have a passionate audience that you can monetize, it's driving the television industry to put it mildly. But obviously, you're also not the owner of those rights. You're renters, so you have to go back and pay more and FOX and News Corp have navigated that for decades around the world. How would you describe FOX's sports portfolio? Why do you have the sports you have? Why is it strategically fit with what you and Eric have put together? And how does it position the company for growth?

So we have a leading sports portfolio, obviously. And if you look at the way we look at it, we look at the core sports that are fundamental to driving our business, both our ability to drive pricing in cable distribution deals. So driving pricing sports is very important, particularly the NFL, Major League Baseball, Big Ten Network and also driving premium advertising revenue in those big, scaled, hugely popular sport. So those are the critical ones. We've just renewed. I think our Major League Baseball deal and our Big Ten Network deal goes out to the end of the decade and our NFL deal, the latest renewal takes us to 2033. So we feel very -- we feel like we're in a very strong position in a good place with those core sports that really drive the underlying value of the FOX Sports business. We now have multiyear -- long multiyear contracts. And that ensures our ability, again, to drive pricing, both in distribution and in advertising.

And how are you thinking about distribution of your sports IP, both your ability to and also desire to outside of the bundle? I mean there's cord-cutting means that there's more and more homes in the United States who can't access a lot of your sports content?

Yes. So a lot of other media companies and our competitors and colleagues at other companies have moved sports into their SVOD services. We don't think this is a good strategy. It's certainly not good for us, and I don't want to talk for others. But I think the impetus for that has often been to drive subscribers in those SVOD services, right? Where contents hasn't been enough -- entertainment content hasn't enough, so they put sports in to continue to drive subscribers into those services. We don't have a general entertainment underperforming SVOD service so we don't need to put sports in, right? And so the value for us, right, is to keep those sports exclusive to our broadcast signal and our broadcast partners and affiliates and importantly, to our MVPD our cable and satellite and digital MVPD partners because that -- by keeping our sports exclusive to those platforms, it's what really drives us to increase pricing and sort of industry-leading terms as we renew those deals. So as long as those sports drive that value and ultimately drive the value for our partners, our distribution partners, we're going to keep our sports exclusive on those platforms.

Okay. That makes sense. You have a partnership with WWE. They've been on FOX Friday nights on broadcast for some number of years now. They've announced their plan to sort of a strategic review of the company, which could lead to a sale. What are your thoughts on the evolution of your partnership with WWE and how does that fit in your broader sports entertainment offering?

So I don't think it's an evolution of the partnership. I think they've been great partners. They've been great partners throughout our partnership, our relationship. If they ultimately sell the business, I hope the acquire or I'm sure they acquire will be as good a partner as they have been. I hope that the management team stays intact there because they've done a tremendous job. From a rights point of view, we're focused on their rights renewal. We're ready -- we haven't engaged with them on the rights yet. We're ready to engage with them when they ask -- when they're ready. But ultimately, our appetite for a renewal depends on what happens with the rest of our sports portfolio.

Okay. Speaking of sports, how should we think about the USFL opportunity at FOX, which some of may not realize you own.

So the USFL is a spring American football league, which we are resurrected like a phoenix and is doing very well. It's only had one season last year and we're incredibly pleased with how that season performed. We had tremendous ratings. We broadcasted not just on FOX, but NBC broadcast as well. So we give it the maximum possible reach and I think the ratings really go to illustrating the appetite for spring football in this country. So we're incredibly pleased with it. We rolled it out in with -- a view to long term and sort of incremental manner with -- originally with 1 central hub where the games are played. This year, we're moving to 4 central hubs. We're gaining a lot of blue-chip kind of corporate sponsors and the advertising and the partnerships with the league. And so we're excited for the second year.

Okay. Maybe just one last one on the FOX broadcast side. On the entertainment front, that's been an area where you guys continue to invest. But how do we think about the strategy for FOX Entertainment and whether you need to continue to grow your content spend to sustain a healthy network?

It depends on how you define a healthy network. I define a healthy network as profitable. Thank you. So we're on the same page there. And so Rob Wade is our new CEO of FOX Entertainment. He came from the reality side, the unscripted side of the business and he's newly installed in the chair and he's doing a tremendous job and his team is around and is doing a tremendous job. The business will continue to invest in both scripted and unscripted programming. And when you look -- and that will mean we'll take creative risks, but always on an eye to be prudent and to drive profitability in that business. Having said that, when we look at FOX Entertainment, which is the broadcast network, it really provides the glue, the bonding agent between the entertainment network, our stations, our highly profitable television stations, Tubi, drives value into Tubi. It also works very closely with sports and news. So the smaller, more focused FOX, we see a lot more marketing and advertising sales synergies through all these businesses. And then the entertainment network is something that sits across them all.

Okay. Well, let's shift gears to FOX News. I want to ask you about the business. How would you describe the sort of strength, relative strength of the brand and the business today, particularly relative to CNN and MSNBC?

This is the softball question. So it's doing very well. The FOX News -- the position of FOX News is -- if you research or you talk to the focus groups with any of our viewers, they see FOX News as not just a news channel, but really a channel that speaks to sort of Middle America and respects the values of Middle America as a media business, that is most relevant to them as opposed to simply a news channel. So the brand is incredibly strong and that's why we've launched new businesses off of FOX News. So under the FOX News Media umbrella, we've launched FOX Weather, which is doing incredibly well as a fast channel advertising focused channel and FOX Nation, which is a small SVOD, subscription video on demand service for FOX News that sits alongside. It's sort of a complementary programming at the FOX News. Those businesses have done incredibly well. But obviously, that's really because the core business is incredibly strong. If I look at just February, so a few days ago, at the end of February, we finished February, not only beating MSNBC, specifically to your point of your question, MSNBC and CNN combined, but we finished February as the highest rating channel, not just news channel, but channel in all of cable television in the United States. And this has really led off the strength of our programming. The strength sort of shows like The Five, people will be surprised, but the number 1 news show in America is The Five, right? And it's a great energetic show -- panel show that has opinions from all sides of politics. It's probably one of the reasons why FOX News has the best demographics and the best diversity of any news channel. We have more democrats and independents watching FOX News than watch CNN or watch MSNBC, so more democrats watch FOX News than watch CNN or MSNBC. We have more Hispanics watching FOX News. We have more Asians watching FOX News than watch CNN or MSNBC. So the position of the channel is very strong and doing very well. And this is really important that -- it's a credit to Suzanne Scott and all of her team there. They've done a tremendous job at running this business and building this business. I think you might ask me in the past, what's the moat around FOX News? How easy or hard is to sort of maintain this leadership. And the truth is, I can talk about it. You might not -- you might agree with it or not, but if you look at CNN, and it's widely known, like seen in sort of struggles at the moment, CNN has a terrific management team as well. They have a great owner. They have deep pockets and yet, it's hard for them to get traction. This is a hard business to run. And I think Suzanne Scott has done a tremendous job.

So I wanted to ask you about the Dominion lawsuit. It's obviously been in the press a lot, especially lately. Is there anything that you can share with the audience on that situation?

Well, I think the update is -- a short update is that goes to court in April. So we'll be waiting for that. I think, fundamentally, what I'd just say about it is that a news organization has an obligation, and it is an obligation to report news fulsomely, wholesomely, and without fear or favor. And that's what FOX News has always done, and that's what FOX News will always do. And I think a lot of the noise that you hear about this case is actually not about the law, and it's not about journalism and it's really about the politics, right? And that's unfortunately more reflective of just the sort of polarized society that we live in today.

Anything else on the time line? I think you mentioned April, but is there any other dates we should be keeping in mind? Or...

It starts in April, it will go several weeks.

Okay. You mentioned a couple of times Tubi, which is a business in the fast industry that's been talked about a lot of this conference as well. What differentiates that asset, both to consumers and advertisers. And with Netflix and Disney now coming into the ad-supported tiers, does that create a more competitive backdrop for Tubi that may slow the growth down?

So there's a few parts to this question. The -- so Tubi, I don't know how much detail you're going to go in, but -- so Tubi is very differentiated. And for a couple of different reasons. First of all -- well, first of all, to the consumer, it's a video-on-demand service, right? It's not really a fast channel service. So it's very different, for example, from Pluto, right? And which is more sort of streaming kind of loop channels. So every -- and then the second part of that that's important from a consumer point of view is that it has the largest library by far of any video-on-demand service like in the world. It is over 50,000 titles, which is a factor of 4, 5x larger than sort of Netflix, for instance. But they're all library titles, right, which is what keeps the cost down. So from a consumer point of view, it's the largest number of channels. It's on demand. It has very intelligent sort of AI that suggests to you what you might want to watch and it's free, right, which again is a great position. The quid pro quo being free is that there's a few minutes of advertising, which most people by far, the largest majority of people are willing to accept. So because of that and because of the high engagement in Tubi, you have to -- like 90% of on Tubi that are total viewing time or time spent viewing are actually people that have clicked to watch that TV show or click to watch that movie. So there's a very high engagement with our viewers, which makes that interaction incredibly valuable to advertisers. So that's what makes Tubi so unique and it's different from any of the other AVOD players and obviously, different from SVOD players. A lot of the new volume that's coming into the market, a lot of the new advertising opportunities, are sort of a hybrid or combined between SVOD players that have decided to launch AVOD options, right, AVOD tiers within their SVOD service. We think that's great. We think ultimately, when some of them like an HBO or something can help drive up CPMs that's fantastic. We think it will help to be in the long run. But we also like the fact that we are the only true video-on-demand service that's entirely focused, at least the only one at our scale, that's entirely focused on advertising. It's always been focused on advertising. It actually started as an ad-tech business when it was launched 8 or 9 years ago. So we think it's a tremendous space to be in, and we think it's a -- and we can see it in the performance, both in the performance of total viewing time and in the advertising performance we can see the results very tangibly.

I wanted to -- you touched on advertising a bunch there. I just wanted to step back and ask you about advertising kind of broadly across the company, been a lot of commentary at this conference about generally weak macro advertising environment, particularly in digital. So what can you tell us in terms of an update around your footprint and what you're seeing?

So we're in an odd situation. It's a good situation, but it's different from the rest of the industry in that once we got through the Super Bowl and after the Daytona 500, the week after the weekend after the Super Bowl, we wrote -- we've already written about 80% of our advertising for the fiscal year. So we now are in a quiet time for advertising. We don't have a lot of impressions that we're selling. And so we're in a bit of a different position from others who are trying flog to their wares now. For us, it's been an incredibly strong advertising year. We had a record Super Bowl, the third highest ratings Super Bowl -- very close to beating the record, third highest-rating Super Bowl in history, but $600 million across the company of revenue on Super Bowl Sunday. You combine that to a great playoff games. You combine that with the World Series earlier and the Soccer World Cup, and we had a tremendously strong advertising portfolio and performance over the last few months. So we really haven't seen the weakness that some other people have started to see. Having said that, as we get towards our -- even in this quiet period, returning our thoughts towards our upfront, which is in May and how we negotiate with the ad agencies and our different advertising partners. As we do that, we're keeping a close ear to the market. And what we're seeing is mixed depending on the category, right? So we're seeing automotive back to being a very strong category, travel back to being a very strong category. And the other category that's really picked up, and I think you told me, Ben, that a lot of people think about entertainment and the movie business being back, we're absolutely seeing that in our revenue, right? So the entertainment business, movies are back advertising very, very robustly. So we're seeing a lot of strength in certain categories, and that's partially offset with some weakness around finance, around like some consumer packaged goods because of inflation, there are categories like that, where there is also, I think, tech, there's some weakness into the tech sectors. So we're seeing a little bit of a mixed bag. Overall, we think it's going to be a healthy upfront, but you're going to see differences category to category.

That's very helpful. We've only got a couple of minutes left, and I want to make sure.

I think the timer has been on like fast forward, you cut the time back this year.

We did. I want to make sure we had a chance to talk sports betting as I know is a big strategic focus for you and the company. How would you sort of give the audience a sense of your exposure to the sports betting growth in the U.S. and sort of your long-term vision for how FOX evolves there?

So there we have 2 exposures to sports betting and very different sort of categories. One, simple one that I think all big media companies have a particularly -- well, I don't all big, particularly companies that are focused on sports and there's no other company is focused on sports as we are, but we're in a tremendous position to capture advertising, marketing revenue from or sports betting, that's really boomed over the last couple of years. Unfortunately with California, not -- the data was shifting to national advertising as opposed to market -- local market by local market and because of our station footprint, we really gained very strongly local market to local market. that were shifting the national. It's not sort of going back to the local markets, and that's been soft as it shifted back. But also the other -- our other exposures, obviously, our option in FanDuel. So when we created FOX Bet and then the Stars Group, which we created a FOX Bet with as a joint venture was bought by Flutter, we were able to garner an 18.6% option into FanDuel, which is obviously the leading sports betting operator in the United States. That's a 10-year option. We think it's worth billions of dollars. And so we have our chips placed, I think, in the winning operator and we have an option which we'll we will exercise at some point over the next 10 years, but we're in no rush to do so.

That's great. Well, Lachlan, I really appreciate you coming back. Any last comments for the audience before we wrap up?

No, look, thank you, everyone, for having the patience to listen to me and I look forward to actually meeting with a lot of you during the year and coming back next year, Ben. So thank you very much.

Thanks, everybody.

Thank you.