Fox Corporation (FOXA) Earnings Call Transcript & Summary

[Audio Gap] Everybody for joining. Welcome to the Fox fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Lachlan Murdoch, who is the Executive Chairman and CEO at the Fox Corporation. In addition to serving as the CEO of Fox, Lachlan is also the Chair of News Corp. My name is Mike Ng, and I cover Fox and media here at Goldman. We have about 35 minutes for today's presentation. So first, I want to extend a big thank you to Lachlan for being here today.

Well, thank you, Mike, for having me and thanks for all of you for joining us.

Wonderful. So I guess to start out with a big picture question, Fox has a streamlined portfolio of the broadcast network, TV stations, sports and news. And it's turned out to be a great strategy with FOX's stock outperforming most peers over the last several years. Would you just talk a little bit about the strategy between -- behind the structure of FOX's businesses and your vision over the next few years?

Sure. I'd be very happy to. When you say we've outperformed most peers, like if you go back to like 2019 when New Fox came out, I think if you look at the traditional peers, I think we've outperformed all of them. And that's really by [indiscernible] not losing our heads and investing good money after bad in streaming businesses, right? So we've really been able to stand outside of that and focus on live news and live sport. And then when you expand the peer group to include Netflix and others, I think there's one other, you're probably right. There are a couple that've outperformed us. But overall, I think we've done incredibly well compared to our traditional media -- media peers. So with the sale of our entertainment assets to Disney, that really allowed us to be incredibly focused. And we're not only focused just because we like live news and we like live sport and that's where our audiences are. But clearly, that's made our brands much more valuable in the cable ecosystem. So this year, and if I look at the past year, we did about $14 billion in revenue. Our EBITDA was just below $3 billion. And this is a tremendous result in an off year for us. We didn't have the Super Bowl last year. It wasn't a political year. So the growth that we were able to see was incredibly good to see, and I think it really shows off the value of our unique strategy as opposed to [indiscernible] year when you have a Super Bowl or something like that. So it was a very, very good year for us. And I think going forward, we'll continue to focus on live news and live sport.

Yes. Suffice to say, all of the networks in Fox's portfolio is really a must-have network at this point.

Yes, I think that's right. And we -- it's funny, and we haven't had a chance to talk about this before. But one of the -- if I probably look at the extreme example, like obviously, cable entertainment channels today are really struggling, right? And that's natural. I'm sure all of you and other families are watching more and more entertainment streaming. And that's hurt first and foremost, it's hurt cable entertainment, right? And so we divest ourselves of our entertainment channels, our cable entertainment channels, but we also divest ourselves of our regional sports networks, at least when we sold those to Disney and they unsold them. For the number of times, after 2019, where very smart bankers came to us and said, you have a great opportunity. You can buy back the regional sports networks at half of what you sold them for. And we stayed away from -- far away from that as possible because we knew that our core brands, FOX Sports, FOX News. And don't forget the power of our broadcast network and our local TV channels, which really drives tremendous amount of retransmission revenue for us. We knew the power of those brands, we could drive best-in-industry rate increases over the cable operators. And we didn't want to leverage that power on carrying along with us, channels that people didn't want anymore, like entertainment channels or the regional sports networks.

Right. And one thing that's been particularly fascinating to me is that there is a history of bringing on along these other entertainment channels and you don't have that anymore, right? And it obviously takes multiple years for all those carriage negotiations to reset. So there's still a lot of leverage there. Let's talk a little bit more about sports. FOX has several sports media rights, the NFL, College football and basketball, NASCAR, MLB, MLS, FIFA World Cup. What is FOX's Sports right strategy? What's FOX's appetite for adding more sports right or even rationalizing some which the company has seen in the past?

So we look at our sports rights very diligently, very, very carefully. And we see it as -- it is a portfolio. And you look at it through 2 different lenses. The first lens is for on broadcast television. We also -- we're big believers in the reach of broadcast. And so if you look at our NFL contract, for instance, what will rate the best? Which packages will rate the best? How do we drive the most amount of advertising revenue through those packages? But also when this goes to the second lens, what's most valuable when we come up for our renewals with our distributors. So the Americas game of the week, Sunday afternoons is number 1 rated sports broadcast in this country. That's important to have, and it's incredibly important for our distributors to be able to broadcast that whether it's on DIRECTV or Comcast or others. So there's a filter of reach and advertising and value through our audiences, but then also what can distributors -- what do they need as well? And what are they going to be willing to pay us when those renewals come up, and we our renewals come up about 1/3, roughly 1/3 every year.

Right. Okay. It's hard to talk about the TV.

I should say you mentioned rationalization. So when we look at that, we do -- we had WWE right, that didn't work as well as we hoped as we planned on broadcast. We moved on from the WWE. Thursday night football as well. We didn't need -- after having the best marquee event on a Sunday, we didn't need the Thursday night as well, so we're willing to move on from that. And then you replace that with other sports. So this summer, it's not huge, but it's very successful we had on the FOX Summer Soccer where we had the Copa America and the UEFA or Euro Cup, and that worked incredibly well and was fit nicely before the Olympics. So -- so we do -- we're constantly adjusting and working, but we think we're pretty diligent and careful how we do it.

Yes. And I'm of the view that things like rationalizing the rights cost for the WWE might actually end up being accretive for the company because it hasn't worked out as well as you thought.

That's right.

It's hard to talk about the TV ecosystem without talking about what's happening with pay-TV subscriber trends, cord cutting. Do we reach a point in time where everybody who's cut the cord has done it, and the subscribers who are left are more durable, more sustainable, and we might see cord cutting decelerate. What's your view of what's happening with pay-TV subscribers? And should we see any change in cord cutting?

Sure. Look, I think there is a floor. There is a point where your core channels that people watch is most efficient and most affordable for people within a -- within a bouquet or a bundle of -- through our cable or traditional -- whether it's cable or a YouTube TV or Hulu Live. And so I think there is a floor and the reason for that is that if you go back and you don't think back many years, the traditional big cable bundle was fantastic for consumers. You got everything, right? And for not -- a few years ago for not tremendous price. It was incredibly convenient, very good for consumers. And unfortunately, that's obviously that's changed now. So when we look at it is one of the reasons, again, why we just focused on those core brands because the brands that we have, whether it's the local TV stations held together by the network, FOX Sports and FOX News, those are -- 2 of those are in the top 5 rated channels on cable. So they're must haves for any sort of -- any skinny or any sort of essential bundle.

And maybe you can talk a little bit more about your outlook on skinny bundles? Obviously, a lot of attention paid to skinny bundles in the market right now. Lots of moving pieces to say the least, but I just love your view on that.

So I think what's happened is -- so people are moving more and more on entertainment side, obviously, to streaming. And therefore, how will they get the rest of their sort of content because entertainment is incredibly important, there's a huge amount of time spent watching dramas and comedies and entertainment, but news and sport, right, is still predominantly within the bundle. And we, as a company, I think, are being probably the most robust in our support of that bundle. We haven't taken, for instance, sports rights out of the traditional bundle, a traditional distribution and into streaming. And the reason for that is that we don't need to support kind of an anemic entertainment streaming service, right? So if you look at how sports has moved into streaming, whether it's on Peacock, last week or on ESPN+ or on Warner Bros. We haven't needed to support a streaming service by adding sport to it. So we're completely committed to the bundle, and we think that makes us the most valuable partner of our distribution partners.

Okay. And I can appreciate there might not be much to say here, but I was just wondering if you could talk about how investors should think about Venue.

There's a lot to say about Venue. So -- so how do I start there? So Venue was designed and the -- we were ready to launch Venue a few weeks ago until we were injuncted -- I'm not allowed to. It's a tremendous service. it's designed entirely to -- for the cord cutters and cord nevers, right? It doesn't look like -- and this is a -- I think, a misunderstanding of people who haven't seen them, haven't been able to actually use it and touch it. It doesn't look like a cable service right? It doesn't look like a bundle of channels. And in fact, in the marketing Venue, you wouldn't even use the channel brands to market it. So you're not going to say it's FOX Sports 1 or 2 and ESPN. And much rather, you'd say this is your home of NFL or NBA or -- and the consumer actually inside the service can search or it's organized by sport and buy what the consumer wants. Not by trying to manage what channel is my game on tonight. So it's a very innovative, very good service. And look, we are excited to launch it. We've been granted an expedited hearing appeal on the injunction. So we're very excited to launch it. But again, the important thing is we think it's pro consumer. It's pro sports fan. It's at an affordable cost, and it really cleans up a lot of what sort of -- I think what's become complicated or broken in the sports rights environment in the United States. There's an interesting -- entering aside when we had Thursday Night football. So it's like 3 years ago, right? And we had Thursday Night football only 3 years ago. You could guess all of the national games, right, national football games, NFL we're talking about, national NFL games and the local -- the in-market local games, right? So your San Francisco 49ers games if you're in San Francisco. You get all of that within the cable bundle. And I think that Hulu Live was $64, right? So on Hulu Live, $64, you've got everything you really cared about, all the big national games and your local team. Fast forward to today, 3 years, right? You have to have a cable -- your basic cable or Hulu Live, and you have to have 4 streaming services, Peacock, ESPN+, Netflix and Amazon, right? You have to have 4 of them. The price you're going to pay for the same games, you paid $64 for 3 years ago, you could pay $114 and you have to have effectively 5 different devices or 5 different subscriptions. That's not -- and so what we like to do is -- what we like to do as a company is solve -- try to solve problems for the consumer. And Venue is a way of solving it, at least to a large extent, solving that by having as many rights for the sports fan in one package.

Yes. No, that makes a lot of sense, and it's really about delivering content and how consumers want to consume it, not really thinking about network but thinking about sports. I think we saw a little bit about that in the Olympics with Peacock. I think they did a great job with Gold Zone. Is Venue the answer for Fox in terms of like how to deliver more consumer-oriented experience around sports through..

Well, I think, look, FOX, we want to have a content in front of as many people and as many places as possible. That goes for all of our channels. And so -- but primarily, look, we are committed to the cable bundle, and we -- that is -- that's where we have the greatest reach. I think this past weekend, our [indiscernible] Cleveland game did 23.9 million average viewers, which was 70% higher than the Peacock gameon Friday, 70%. And so that reach is incredibly important, both for advertisers but also and frankly, for the leagues. And so we're committed to the bundle. What Venue did for us, though, was to put our content in front of people that aren't watching it now, right, that are not in the cable ecosystem. And it's important that we're targeting them because if we lose a cable subscriber to Venue, we lose money in that transaction, right? Because we lose the subscriber to FOX News, primarily the local station retransmission is built within Venue, but we lose the FOX News subscriber. So we don't want to have a like-to-like swap of cable to Venue. We want to target Venue very much just as the cord cutters. We've already cut the cord or never in the system to begin with.

Great. And maybe just to round out the discussion on sports. I was curious if you would talk to us about whether Fox was ever interested in the NBA. Did that ever make sense for the Sports rights portfolio? Or was it just not going to be additive?

Yes, this time around, who knows in the future, but we decided it wouldn't be additive. So we weren't in the negotiations at all.

Okay. Great. Let's pivot over to FOX News. FOX News has undergone some very meaningful personnel and programming changes over the last couple of years. The viewership at the network certainly saw a little bit of a normalization, but the viewership in the last couple of months has been fantastic to say the least. Could you talk about the performance of the FOX News, your outlook for the network? How has ratings performance, advertiser demand, kind of played out relative to your expectations when these programming and personnel changes were initially made?

Yes. FOX News has had an incredibly successful -- another successful year. I think like 8 years in a row, we've been #1 cable held from the cable channel like period. And that's done every -- after every election cycle, we try to keep our programming and our hosts and consistent through election cycles, which are very high viewing times. And after a reelection cycle, that's when we tend to make adjustments. But the benefit we have at FOX, we have a very deep -- it's a huge business, and we have a very deep bench of talent that we're able to develop and grow and be ready literally for prime time. But the belief that, though, and I think this year, this is really important. You can't forget the value of news, right? Because there's one thing [indiscernible] your host how you present it, but the value of news reporting. FOX News this year has done a tremendous job reporting on the conflicts in the Middle East and particularly in Israel and in Gaza and also in the Ukraine. And the reporting from these war zones has been heroic and excellent. I was lucky enough to visit Jerusalem, I think, in our -- we were in Jerusalem in January of this year and late last year, I went to kyiv and visited our -- some of our teams, brought some our team into Kiev, and just to see that the work that these journalists do on the ground, bring that -- those stories and then put it back into our living rooms. So when we talk about the host and adjustment in programming, there's a ton of hard work that goes along with that, but then there's the day-to-day news gathering and news broadcasting, which is hard. But it's important as well, and it kind of pays great dividends to the business. So what -- so what that means, though, is we've had a tremendous year. I think in August, it was a sort of a soft month. We're up, I think in the demo -- overall 22% and the demo of 32% and [ 25, 54 ] demo, which is the most important demo, we sell our advertising by. What you don't know, right? People -- I keep telling people, but people that we are the -- in the demo, right, again, the important demo was [ 25, 54, ] we're the #1 channel for Democrats and we're the #1 channel for Independents, also in the demo, we're the #1 channel for Hispanics. And so the breadth of that brand and the engagement that we drive to FOX News is tremendous and growing very well. From an advertising point of view, the only dark cloud last year was the softness in direct response. That was really because of a competitor who had sort of had a lot of direct response supply in the market. And so direct response pricing was down and new direct response is a much bigger percentage of advertising revenue than in other categories of television. And direct response is now back up to -- it's about 20% pricing increases. So the dark -- if there were any dark clouds, direct response was one in the news industry and that's now lifted, which is very positive.

That's great to hear. Let's talk a little bit about political ad spending on the local TV stations. You're -- we're hearing a lot about political advertising strength, not only for the presidential election, but certainly down ballot. Are you expecting to see record political advertising spend this year, I think you guys have said record, excluding the Georgia runoffs. But -- maybe you can talk about how FOX's TV stations O&Os are positioned to benefit from this?

So we are expecting -- excluding the Georgia runoff, which is a huge amount of revenue, we have a television station in Atlanta. And so excluding the Georgia runoff, we are expecting a record political revenues this year. I mean, for presidential cycle. 4 years ago, we did overall in all of our channels, national, local. We did about including Georgia, about $350 million in political advertising. The local TV stations were $230 million of that. And so -- and we think we'll certainly exceed that for the TV stations. And then we're seeing more and more political advertising on a national level as well.

And a lot of that national is probably accruing to FOX News I guess.

FOX News at Tubi. Tubi gets political advertising now. FOX news, there's some in sports. It's -- political advertising has become -- it's still primarily local, right? Absolutely. But certainly, they're spending more nationally as well. But you have to look at our local footprint, right? So like Phoenix and Arizona. And these are also -- don't forget, it's presidential money, but it's the local issue money, you've senate, it's -- so there's a lot of tight senate races. So it's in Arizona, Michigan, Wisconsin, [indiscernible] Georgia, Pennsylvania, and our DC station, I guess a lot of Maryland money because they've signal overlaps with Maryland. So we're well positioned. We're in very close all post races around the country and we think that bodes well to suggest we'll break certainly the local record.

Right. And that's a great point around Tubi. I mean, I think we all understand political tends to be highly local and Tubi does not only have the benefit of very targeted on a geography basis but from a demo basis I'm assuming you can get more sophisticated customer -- viewer profiles right?

Now it's a fully digital business. You're very data-driven. You can be very specific on who you're targeting. But I think importantly with Tubi is the reach it gives you. These people are -- it's very high skewed cord cutters or cord nevers, right? It's obviously much younger. It's -- it's -- and it's people who are not watching traditional television. So that -- the added reach, if we look at how we sell political or how they -- when they come to us, obviously, the local TV stations is critically important. But if they can add that reach in those local markets with Tubi, it works tremendously well. And that's, by the way, not just for political, but for all advertising, the reach that Tubi gives you is huge.

And it was encouraging to hear that the DR market has certainly gotten better relative to a year ago. How would you just characterize the overall advertising market, linear, national?

It's much stronger than we expected, right? So going into this year, I think it was like a couple of quarters ago, I said the market was nuanced because there was positive areas and less positive areas. It's now -- for us, it's pretty strong across the board. And so if I look at our 4 key verticals, I start with sports. Sport is incredibly strong. And we have a Super Bowl this year, right? So I think that obviously helps. If you have -- do you have the Super Bowl and you're selling the Super Bowl, we're practically sold out. We have a few units left. It's in credit. It gives you a lot of strength in your sports on revenue. But not just the NFL also Major League Baseball is strong. So we feel very, very strong in sport. News we've talked about, the ratings helped tremendously. The direct response increase in rates by 20% and yield by 20% helps. So news is also very strong. In news, you do have when you have these high news cycles, you have -- you replace -- you take some spots out for live news, right? And -- and so we've -- but that's minor compared with the strength of the revenue coming in and the strength of the ratings. The TV stations we talked about are going to do very well with political and they're doing very well. And Tubi has gone from strength to strength. In fact, in this quarter we're in, I think July was up in the mid-teens revenue and August was up in the high teens. So revenue growth is reaccelerating at Tubi, which is very pleasing to see. The category -- so those are the 4 key categories. The category I left out was the Tubi network, right? So entertainment, if you look at purely the entertainment side of the TV network, that money as an industry is moving to places like Tubi. So TV entertainment, broadcast entertainment is an area that's softer but those other 4 categories are incredibly strong.

Great. Let's talk a little bit more about Tubi. Could you just talk about the state of the, I'll call it, the connected TV advertising market. Obviously, there's been some concern around increased supply coming from Amazon Prime and things like that. Is that much of a concern as it relates to Tubi pricing? Or has Tubi been able to navigate through those that competitive supply well?

Sure. So -- so what happened -- or Mike sort of alluding to or talking about is that last year when Amazon came into the market and went with the advertising supported programming, they've had a huge amount of inventory came into the market. And what they did was that depress -- there's an oversupply of inventory. And so everyone in the ad-supported streaming business felt downward pressure in pricing. The good news or the bad news, depending on how you look at it, is that Tubi's pricing is already incredibly efficient, right? It was already sort of low compared to the Disneys, the Netflixs, who price themselves very high. And so we were insulated from this effect. We certainly had the slowdown in growth, right? You can see because it was -- while the market absorbed this oversupply, but from a yield and from what we're charging for a CPM point of view, it didn't affect us like it affected everyone else. The market seems to have absorbed that and that's we're seeing -- why we believe we're back at sort of very kind of solid growth in revenue back at Tubi. I think the important thing with Tubi to realize is -- the breadth of the business now, I think marketers have now come to understand is we had a very successful upfront for Tubi because the marketers now see it in the same category as they see the Disneys, we're actually rating as well as Disney on the Nielsen gauge. We had 2.1% of the televisions in credit markets. It's incredible. That's because we have 260,000 hours of content, TV and movies on Tubi. But importantly, 90% of it is not fast channel. So people think of Pluto, which was the CBS streaming -- free streaming service. That was fast channels, right? That's what people -- and Tubi has fast channels. But 90% of our viewing is on demand. So it's video on demand. It's a highly engaged audience where the viewer is choosing to watch that content, and is sitting in front of their television and watching that content. It's not something that's on in the background. And so what we've been successfully able to do this year is shift the impressions of Tubi as being a fast channel or something that's free and out there sort of with this in a crowded fast channel market. They actually know it's a premium service that really sits alongside Netflix and Disney and Amazon.

Great. And we started this conversation talking about FOX's portfolio of must-have channels and maybe you can talk about what that means when you go into carriage negotiations, right? Affiliate fees for FOX increased 4% year-over-year last fiscal year, 9% growth in TV, flat in cable. Is there a capacity for fee rate growth to potentially outpace cord cutting at some point?

Yes. But with cord cutting declining around 8% a year, it's -- it's hard. Like a durable running on the spinning wheels. And so -- but we're running very fast. We're very, very fast, durable. And so you have to sort of to make up that 8% is hard. And what you're going to see though is that we'll -- there's cyclicality in it, right? So we believe with the value of our channels, the value of our content, we are not taking content outside of the bundle. We're leaving it in the bundle that we'll be able to achieve over the long term, certainly make up for the sub declines at this level, but it might be cyclical depending on the quarter, right? So depending on which renewals come in, how they -- when they take effect. So -- but we're very confident that we have the premium brands, and we're able to drive in premium pricing sort of industry-leading sort of level.

Yes. I wanted to ask about sports betting. FOX has an 18.6% option to acquire -- sorry, an option to acquire 18.6% of FanDuel and obviously, there's been a history with FOX Bet and things like that. And it feels like a feature that could be really additive to a video product. Could you just talk about how you're evaluating and assessing the opportunity in sports betting?

Yes. We saw a tremendous believers in sports betting. We think it's growing into a great business. It also drives engagement with sports, right, engagement with whether it's football or majorly baseball or any of the sports that we proudly broadcast. So we like it both from a television point of view and also obviously, as an opportunity to further engage with our viewers. I think Goldman Sachs has valued FanDuel as a stand-alone business at $35 billion, which imputes a value of our option at about $2.2 billion. But this is an option that expires in 2030. So we have 6 years to exercise that option, but we will exercise it. We're not going to leave $2 billion on the table. We think that, by the way, that option grows with value over the next 6 years. And so we've begun the process with state regulators around licensing, to fully monetize the option we need to be licensed as a game operator, even with only 18.6%. And so we've started that process with state regulators to begin the gaming licensing approvals.

In the last minute we have, I was wondering if you could just talk about key priorities, strategic goals. What does FOX look like in 3 to 4 years from now?

Yes. So we like our strategy. We like being very focused. So we'll continue to do that. We'll continue to engage with our audiences, be it in News and Sports around live content. You won't see us pivoting to entertainment, for example, but we do have the best, if not one of the best, I'd say the best balance sheet in the business. So while we'll invest organically in things like Tubi, the Tubi investments coming down every year. It's a modest investment compared to what others have spent in streaming. But we'll continue to invest organically in businesses like that, which we think are a tremendous future. but we'll also use our balance sheet increasingly, I think, for M&A as we go forward. I should also say that this year, we are -- one of the tools that we like to utilize out of the balance sheet is share buybacks. It's a great way to return capital to our investors. We bought back about $1 billion worth of shares this past year, and we'd expect to do the same this coming year to be at the same pace. So yes, so it's continued to drive Tubi, continued to be in live news, live sport. This year, we have the Super Bowl, which will be tremendous. This year, we obviously have the presidential elections this would be great for the station. So it should be a great year.

That's an excellent way to cap it off. Lachlan, thank you so much.

Mike, thank you. Thanks, everyone. Thank you.