Fox Corporation (FOXA) Earnings Call Transcript & Summary

Good morning, everyone. Robert Fishman here. Hopefully, you can hear me okay and we are very excited to have Fox Corporation here with Steve Tomsic. So Steve, thank you for being here.

Robert, Thanks. Appreciate for having us.

All your support. So let's start big picture, if we can, really. High level and talk about the FOX share price, which has been mostly range-bound for some time now. And we at least continue to feel that it's undervalued. I asked the question on the earnings call, but I'm curious, just bigger picture. As you think about the valuation of the Fox Corporation, how does the stock price impact any decisions or actions? Clearly, we've seen the history of the 21st Century Fox and how the Murdochs approach that?

So that's -- it's an interesting question, and you did ask it on the earnings call. So I think big picture, we have enormous conviction in the quality of our assets and their long-term potential. The sports business, the news business, emerging to be and a plethora of other assets that sit around those. We also have enormous frustration in the valuation. I think I could mount at least -- I think you had us at just north of 4x. I could mount an argument that says we trade sub-4x. When you look at sort of asset value of things like Tubi where it's a deficit in the P&L, but has absolute asset value. You look at the value of the tax asset, which is like close to $2.5 billion, you look at the value of our betting assets that are kind of on the balance sheet but not through the P&L. So when we trade at sub-4x on an absolute basis, it's enormously frustrating and on a relative basis, it's also frustrating because our peers who we think we've got a superior set of assets versus our peers in a very concentrated set of assets, we think we should trade equal or better. So it is frustrating. When we look at it though you asked about actions that the company could take. And I think the way we view it is we have -- because of this enormous conviction we have in those assets, we're not the sort of company that -- like when we look at our book of assets, like in monopoly parlance, we feel like we're sitting on Mayfair in Park Lane and we've got 3 hotels on each, right and we feel though the market is valuing us like we're the electric company and the water works. And so -- but we're not going to sort of look at what other companies have done to chase share price and chase sort of the attractions from the market. So if you look at the past, some of our peers are guilty of this, but if you look at the broader market, debt-fueled buybacks, investing in literally billions of dollars in chasing subscriber-based multiples or revenue-based multiples. Which you look at where some of those companies are today, they're damaged from it, right? And they're vulnerable, and they're compromised as a result of it. And so I think when investors like the investors are in this room, I think we expect these investors to expect us when they invest a dollar of their capital in us, to be responsible stewards of that capital. And so when you think you've got fantastic assets. We're going to continue to build those assets for the long term. So that's the matter of the management team as we go forward.

So as part of all that, what I would argue also is a significant asset for the company is the balance sheet and the free cash flow that you continue to generate. So -- maybe just help us think about where you expect free cash flow to be roughly on '24. But even as we think going forward, like the sustainability of that free cash flow and we know '25 is set to be another probably strong year, lots of positives that should help that, including Super Bowl, political. So just maybe help frame how you think about the sustainability of your overall free cash flow?

Yes. I'll resist the temptation to start giving guidance given we don't put it out there. But I think from a free cash flow perspective for the balance of the year, I think the big swings that are not trained in terms of event or specific elements in the business for the last quarter. We've got both UEFA and Euro at the back end of this quarter, we've got Copa America back into the quarter. And then Tubi, we've been sort of trailing sort of the amount -- year-to-date, where under the amount of EBITDA investment we've put into Tubi so far, and we expect that to amp up a little bit in Q4. But then countervailing some of that will be the fact that we don't have USFL on the books in Q4. As I look forward to fiscal '25, the big things that are going to swing that around like this trend accretion in the business, but the big things from a free cash flow perspective, is the Super Bowl where from a free cash flow to be very accretive for us, right, because you've got like a 10% increment in the cash rights fee and then you write a significant amount of incremental revenue around it. It won't be the case from an EBITDA perspective because in a Super Bowl year, we obviously burn off a ton of amortization through the P&L. The other big tailwind for us from a free cash flow perspective and a P&L perspective, next year will be the election and the political revenue that we expect to generate. So we're really well positioned going -- finishing off '24 and going into '25.

So maybe just putting that all together, how do you think about being more aggressive on capital returns given where the share price is and the strong balance sheet and cash flow position?

No, I'm going to be a bit boring here. Because like, I think we've been balanced. If I look at -- we did $2 billion of buybacks last fiscal. If I look at history of company, we're now at $5.4 billion into the buybacks over a little over 4 years, which is close to more than 1/4 of the share count as it was back then. And so I think we've done a lot in terms of buybacks and should expect us to continue to sort of put money into the buyback. But we want to be balanced. If I look at that $5.4 billion that we have done in buybacks and compare that against sort of acquisition growth investments, that sort of net-net is about $1.5 billion. So so far in the life of Fox, we've been tilted towards returning capital to shareholders, and we'll continue to be balanced with it. But we also -- we don't want -- we like the flexibility and the strength of the balance sheet. And so we'll continue to want to keep that flexibility, albeit that we have an enormously high bar with respect to inorganic investment.

Got it. Okay. So maybe let's jump into some of the drivers of all this cash flow. Probably at the top of that list should be affiliate fees. And you've already made significant progress through the current renewal cycle. I'm just wondering if you can provide a little bit more color in terms of your approach and whether the negotiation strategy has changed at all given what you saw play out publicly through Disney charter and obviously, the big announcement that you guys made earlier this year with the sports JV.

So I think the industry -- the distribution landscape for media is evolving, right? I think there's no doubt that it feels like from a consumer perspective, I've said this at other conferences before. It feels like we're at peak frustration, right, because you've got choices around. You can either take the big bundle, which for what you pay has a lot of content that you don't watch or you're double paying for because you've taken the streaming products that sit alongside it, right. From a FOX perspective, as part of doing the Disney transaction, we narrowed down our assets. And the narrowing down of the asset from a wholesale bundle that we offer to a multitude of distributors, we already offer a really narrowed down skinny concentrated bundle of must-have content. And so I think the Charter outcome with Disney, I think is net positive for FOX because where I think we want to get to is the best of kind of distribution model, which takes the best of live sports, live news and the best of streaming and tries to bring that together at a price point and a user interface that's much more friendly to the consumer. And I think the way we view that is as long as we continue to invest in sports and us to make sure that our product is as good as it can be. It's always going to find carriage because we just deal in the events, whether it be sports events or news events that people are just glued to their TV in sort of big numbers for our content. And so we're encouraged by where the Charter Disney negotiations went. And now the next step is for Charter to sort of take -- sort of continue to run that model through other channel providers and be able to sort of ideally, like industry creating this sort of much more evolved bundle, but the proof will be in the pudding in terms of when that comes. We don't -- I think some people misinterpret what FOX is and see FOX as being a linear business that we are not defined by the means of distribution of our content. We're defined by the content itself. And so we think that where ever -- it just so happens that for sports and news linear distribution is the most effective from a consumer perspective and the most monetizable from a FOX perspective. It's not the means of distribution. The digital distribution of FOX does nothing for the content because the content is largely consumed live. And so whether that's in a streaming forward environment or whether it's a traditional linear satellite linear cable environment doesn't matter the content, and the content remains as resonating with the consumer as it ever has.

And that was the logic as far as the sports JV goes in?

Yes, 100%. It's like can we offer -- the logic of the sports JV is really around we're approaching a point where there are just as many people outside the bundle as they are inside the bundle and there's clearly frustration with what's inside of the bundle and the price point that, that pays -- that comes out. And so here is an opportunity to try and acquire more subs that are either Cord-cutters or Cord-nevers to take a more narrow, more competitively price.

So given all that, the slim down portfolio, the strategy of keeping exclusive to the pay-TV ecosystem. Just curious, can you share with us your confidence level that FOX can continue to outrun the pressures on the Cord-cutting side on the linear world and how we think about overall sustainability of affiliate fee growth.

So affiliate -- I think -- your guess -- sorry, your crystal ball is as good as mine in terms of where subs go to. I think from a traditional perspective, I think we said in the quarter, it's sort of minus the mid-8s at the moment for us. That will change as distribution evolves. I think what -- so I won't give a view about where I see growth in terms of whether it be cable affiliate or TV affiliate going in the future. I think what I can say with confidence is that our content, coupled with our distribution strategy should mean that we get an increasing share of wallet because we think that we have invested in the content accounts and our fatality towards the bundle should mean that we see that in terms of share of wallet from the distribution lines.

Okay. So maybe another share of wallet type of question on the advertising side. So again, we all know the pressure on the linear TV advertising ecosystem around you but curious how FOX is positioned or how you would characterize FOX's position to capture that greater share of total ad budgets over the next few years, right, as you think about where the focus on eyeballs is going to be, clearly, sports and news plays a big part of that. And as we saw in your upfront, Tubi plays a critical role there, too. So as you think about the total portfolio of Fox, how should we think about capturing more of that ad budget?

No, I think we're really well positioned, right? If you look at ultimately ad dollars will go to where audience is. And I think our message to advertise is really simple, but really powerful, right. Which is it is increasingly difficult to access audience, mass audience in a single moment in time. And we have that in spades with respect to our sports business, particularly with our -- with properties like NFL, MLB, college sports. And then we have that in terms of news with big events and news also comes with this incredibly engaged and committed audience, right? And so to be able to present that to advertisers as sort of our component of the portfolio is amazingly powerful. And when we go into -- we're in the midst of the upfront at the moment and you add the fact that this year will be an election year. This year is a Fox Super Bowl year if it comes a really, really resounding message with advertising you then have positioned Tubi within that. And Tubi is still sort of in its early days of development, right? But you have this mass audience platform with sports and news and then you have Tubi, which now is a significant player in the free streaming category, right, like the biggest in terms of free streaming and significant in terms of [ old ] stream like 1% share of viewing in terms of Nielsen gauge, which puts a neck and neck with Disney+, ahead of Paramount, ahead of Peacock, ahead of Roku, ahead of Max. And so it becomes -- as we talk to agencies and advertisers, where Tubi is still nascent in terms of a brand and what the service actually represents, it becomes a must buy in terms of their media mix. And it's not just the must buy because of the 1.7%, but it's a must buy for two other reasons One is you don't get access to that audience in the traditional world because 60% of Tubi users are Cord-cutters or Cord-nevers. And so on the 1 hand, you've got sports and news that kind of dominate within the cord or on the cord. And then on the other hand, you've got Tubi that services those advertisers outside of that ecosystem. And then the other piece to Tubi, which is really great is that a lot of people confuse Tubi as being sort of this passive fast channel sort of that just is on rotation in the background in a person's household. It's not 90% of Tubi consumption is VOD where it's a real lean forward experience. People have deliberately chosen the title and watch through it. And so it becomes a bit of an irresistible buy for advertisers. Now we need to do more work with respect to Tubi to get it front and center with agencies and advertisers. And so the upfront is a pretty meaningful step in that direction. But we feel very, very strongly about those 3 assets being able to flourish in sort of the advertising world in fiscal '25 and beyond.

I'll come back to Tubi in 1 second, but just to finish up the point on advertising, clearly, election is a nice tailwind for the overall company. I'm just curious how you think about the political advertising landscape. Obviously, primaries have been a little bit slower. But as we start to ramp up, getting closer to the end of the year. And then both from a TV station perspective, FOX News perspective and maybe even bring in FOX Nation as part of that, maybe less so on the advertising side, but how that plays into the election cycle?

To try and give you some sort of dimensioning of it. I think the high watermark was the fiscal '21 -- our fiscal '21, that presidential election. And I think we're on record of saying that was 350 plus. A chunk of that was national, and national can fluctuate quite a lot. And national is as much substitutional for what we would have placed in nonpolitical as truly increment right. So where the true incrementality comes through is in local, which is sort of around the give or take, around the 250 mark, right. As we look forward to the presidential election, which for us is a July to sort of November event from our fiscal year perspective. Current primaries are a bit of a nonevent, Presidential election shapes up is going to be an enormous event, and we'd expect from a presidential race perspective for there to be pretty significant sums of money invested in advertising. We think local -- we feel very bullish about locals capacity to continue to collect on that. Then you look at our station footprint and how that sits against sort of Senate races and so got great positions in our -- in places like Arizona, Michigan, Pennsylvania, Wisconsin, even Maryland with our DC station. So we won't have Georgia, and we won't have the Georgia runoff, which is a bit of a sort of a headwind versus '21, but they will be amazing races for us in those markets. And then you look at it at another way or below that, you look at where issue spend is going to happen and places like Arizona and Florida are going to be enormous for that. And so we feel really bullish about where we're positioned for this upcoming election from a local TV perspective. News can and will get a certain amount of political spend, but the biggest uplift for news is not necessarily the direct political spend, but the viewership growth that we're almost certain to see going into the election and our coverage of it, which just dominate all other sort of competitors in terms of election coverage. And so we'd expect that audience to convert into ad revenue, irrespective of whether that ad revenue is direct political or just audience related. So we feel very bullish about where we sit. I'm not sure if we get to the levels we saw in fiscal '21 because of certain sort of that [ Georgia ] factor that we're really bullish.

And so on the FOX Nation piece of that, like in terms of investing behind it. And so where are we in the life cycle of FOX Nation?

Nation is part of -- I think you're going to see Nation as part of a broader FOX Digital strategy and a broader FOX News media strategy, right? So where -- the investment in Nation year-on-year-on-year has been relatively stable. And in the grand scheme of FOX sort of roughly $3 billion of EBITDA in any given year is incredibly modest and for the option value, it gives us right. And so we have a very strong -- I hate to say this word, but we have the strong linear asset in terms of FOX News, FOX business. We have an incredibly strong and underestimated FOX digital business, which is the website and the apps. And you'll see us expand that, right? Because at the moment, those website and apps are heavily focused -- heavily news focused, and we want to expand that to sort of encompass lifestyle -- more lifestyle, because we think that we have license from our viewers to be able to expand and have a legitimate voice in those. And then Nation is just another subcomponent of that, where it's -- at the moment, it's more towards the FOX News super fan as another add-on. But as we think about sort of future D2C aspirations for the news and how that builds, it gives us a ton of optionality there. So I think you should expect the investment to remain similar to where we are now to drive sort of incremental growth and incremental engagement for that FOX News brand.

Okay. So shifting back to the more scaled digital player Tubi. You already hit on how it's been rising in the ranks in terms of viewership and engagement and advertising. Which naturally obviously comes with that. So I'm curious, as you think about it, I mean, again, what was a central part of the upfront, how do you balance investing behind it versus that focus on obviously reaching profitability and scaling from there?