Fox Corporation (FOXA) Earnings Call Transcript & Summary

Okay. Good morning, everyone. We're going to get started here or restart, I should say. So I'm Bryan Kraft, Deutsche Bank's Media, Telecom Services Analysts. Thrilled to introduce John Nallen, who is the President and Chief Operating Officer of Fox. John, welcome and thanks for joining us.

Thanks, Bryan. Thanks for having us. We really appreciate it.

Very welcome.

So Fox has been the second best performing stock in all of media over the past year, up 90%. Maybe to start off, if you could talk about some of the highlights and accomplishments over the past 12 months and touch on what's ahead for FOX.

So I don't want to spend a lot of time going backwards, but it's probably a good launch pad for the rest of the discussion. But if you look over the last year, and even up to where we are now, starting with advertising, it's been really strong for Fox across news, sports and our local business. On the affiliate side, we renewed about 25% of our base during that last 12 months, you didn't hear a lot of noise and it was quiet during that whole renewal. On screen, it was a really good 12 months for us. If you think from a news, both national and local perspective, we had the election cycle and a lot of both national -- local, national, international news keeping our national FOX News and our local stations busy. Sports was particularly active over the last year. We had a great World Series, College Football was good. It wasn't great for us. It was a good season, but the NFL culminated with the Super Bowl we had just a couple of weeks ago with an $800 million gross stay for us. So it was strong. Tubi continued, I'm sure we'll spend some time on that, going from strength to strength over the last year, breaking the $1 billion run rate top line for us. And then from a corporate standpoint, we've been talking about this for as many conferences as you and I have sat through, Bryan, but we finally announced our D2C initiative a few weeks ago during the earnings release. We continued, I think, to be good capital allocators over the history of Fox and certainly over the last year with returns to shareholders. And the stock, to your point, I think there's finally a recognition of the strategy, the focused strategy of Fox, the focus on live news, on live sport and some of the hidden assets that we call Tubi wagering, a lot tax shield. So -- yes, all in all, it's been a good 12 months, but our focus is really looking forward now and what's going on there.

Okay. Okay. That's a great overview. Maybe we'll start with affiliate. I think one of the surprises we've seen over the past couple of quarters has been just the improvement in the rate of pay-TV subscriber declines. What do you think is possible from a subscriber volume improvement perspective, just given the changes we're seeing in pay-TV packaging, charters, bundle of streaming services, now included with pay-TV, which I think could expand to other MVPDs?

Yes. When we look -- as I said, we did 25% of the base was renewed in the last year. We're done. For fiscal '25, all of the renewals were finished. So we don't have anything ahead of us in the current year. And as I look at it from a subscriber erosion standpoint, if you look at our Q4, our Q1 and our Q2 fiscal, we were down 8.5%, down 7.8%, down 7%. So the trend is really moving in the right direction. And that's before the announcement or introduction of the skinny bundles or as Lachlan calls them as Jack Bundles that are in the market. So the trend was moving -- is moving in the right direction. And I particularly more so than my colleagues are more -- are very encouraged about the introduction of the skinny bundles. Take DIRECTV, Comcast and Fubo have put 3 products into the market. They're priced in the $50 to $70 range. Importantly, we -- all of our -- all of Fox product is in every one of those skinny bundles. And again, the focus of the skinny bundles is live sports and news. That's what we do, and that's the encouraging part. I do think the skinny bundles are a real positive. It's finally innovation between the distributors and the content owners talking about this. And I think that the rest of the distribution market will be offering skinny bundles. So it's not just these three.

Yes, it's expanding.

It will expand. It's just contractual when each of these contracts renew that others -- the big names that you all know will offer skinny bundles in the market. So I think it's finally a real positive toward erosion -- ameliorating the erosion that we've had on the sub base. And those numbers I gave you were even before that happened. So it's a real positive for us.

Yes. It's really encouraging. Staying on affiliate, you mentioned you've completed all the affiliate renewals for this year. What did you achieve in those renewals? And maybe if you could talk about what the renewal cadence looks like going forward when that certainly starts again?

So the two debates always in an affiliate renewal around pricing and packaging. That's where all the noise is. And if you look at what happened in '25, and as I said, we're completely done now, we achieved all the objectives we were after in both of those areas, including the introduction of the skinny bundles. If you look at '26, we have just a touch under 25% of our base renewing at that point in time. But importantly, they're of the same vintage as '24 and '25. So we're not breaking new ground from a pricing or packaging standpoint. We have market prices, market packaging for our product in the market. And as we talk to distributors who are renewing in '26, it's of the same ilk as we had in the prior years. When you look beyond that to '27 and '28, we get back to a cadence of about 1/3 or a touch more than 1/3 of our base renewing in those periods. Skinny bundles will be even more important in those years because I think by then everybody will be offering the skinny bundles. And as we look forward and we stay in our lane with the focused portfolio that we have, I think these renewals will be quite successful for us as well.

Maybe if we could talk about FOX News for a few minutes. What are you seeing in national news advertising? FOX News ratings have only strengthened since the election and you've talked about in new national advertisers coming to FOX News. What are you seeing there?

So it's hard to talk about advertising at FOX News without talking about share and strength of viewing. If -- because it's just gone from strength to strength. If you look at Q3 to date, we're up 50% on viewing from where we were a year ago. If you look at January as an example, we were second to NBC in prime time weekday. February, we were second to CBS. So -- in many ways, FOX News is the fifth broadcast network now when you look at competition on a prime time basis. Weekend is quite different because of sports calendar that happens during that. But its share and news varies between 2/3 and 70% now. So from a competitive standpoint, we're really looking to the broadcast market more than we're looking to the cable market just because of those kind of statistics that we have. But a lot of advertisers have come to the FOX News media platform, particularly since the election and the inauguration. Just by way of example, across pharma, auto and travel, we have 9 of the top 10 advertisers in America on FOX News. Across retail and financial, 8 of the top 10 are on FOX News. So it's a complete [ sea ] change from where we were certainly 24 months ago, where the viewing is on FOX News, and I just think it continues.

How about on the rating side? How sustainable do you think the FOX News ratings are?

You'd have to tell me about this administration and how sustainable it is. I mean the President has 2 press conferences a day. And the amount of news that's coming out of this is just shocking the amount of viewing. An example I'll give you is last week, the equivalent of the State of the Union address, FOX News had 10 million viewers for it, which was -- if you look at ABC and CBS combined, we beat that combination. So from a sustainability standpoint, I certainly think the next 3, 3.75 years will be really sustainable amount of news and viewing on the FOX News platform.

I think most people in the room are hoping a little less on a daily basis, given these markets. But we are particularly given this morning's movement in the market -- how is demand from the new advertisers that you mentioned impacting CPMs at the network? It seems like it should be pretty positive?

Yes. If you look, we brought about 125 new advertisers to FOX News since the election. And the demand along the -- from a viewing standpoint is what I outlined. From a pricing standpoint, it really is pretty significant. Upfront is not huge for news in any -- for any news category, but use it as a just a barometer for the moment because there is some news that's booked there. Our pricing is up 50% from upfront, 53% to be exact, where we are in the market. From a DR standpoint, which is an important part of FOX News' advertising, year-on-year, we're up 28%. And -- so I said it's hard to talk about advertising at FOX News without talking about the share and the viewing and all of that has really come back to pricing.

Yes. Okay. That's helpful. I think that the past years, as you mentioned, has proven that FOX News is strong from a linear perspective. But can you talk about what FOX News is doing on the digital side? And how does your recently announced acquisition of Red Seat fit into your strategy and what are your plans around the business?

It's interesting because when we talk about FOX News, virtually all the time, people are focused on the linear network. And the digital part of FOX News is a really important element to what we call FOX News Media, the wider group inside of FOX News. And one of the secrets of FOX News is a massive digital site that almost feels like 1.0. It's FoxNews.com. In January, we had over 110 uniques come to FoxNews.com. And it does feel like 1.0, but it's where people post -- leading into the election, what we saw was that people either supplemented their news consumption with digital or solely sourced their news consumption with digital, be it dot-com, social or whatever. So while we've seen at FoxNews.com, really healthy engagement. On YouTube, in January, FOX News had something like 410 million views. It was 2.5x the next news brand inside of YouTube. It's the #1 news brand on YouTube, which is, again, people don't appreciate the digital side of FOX News. January also was a really historic high for FOX News across social media. So whether it was Instagram, TikTok, X, Facebook, it was the best that FOX News has ever done from a consumption standpoint. So I said in the opening, the best kept secret about FOX News is the digital side where there is really significant consumption happening.

Maybe we could talk for a second about advertising more broadly. So you touched on FOX News advertising trends. How would you describe current ad trends across the networks, the stations as well as Tubi?

So I probably won't spend a lot of time talking about the verticals because Steve and Lachlan did a thorough job, if you go back to the earnings release going through each of the verticals. But around this time of the year, this conference, we started looking toward the upfront. Even though physically, we have our upfront held on the 12th of May, really start planning toward at this point in time. And the upfront is about two things, pricing and supply. And if you look from a pricing standpoint, all indications for us, at least, are for a healthy upfront. I mentioned what FOX News is achieving from a pricing standpoint. Across entertainment and sports, we are up high single digits above upfront, and our cancellations are at historic lows. So that bodes well from a pricing standpoint, looking toward the upfront. From a supply standpoint, there's only two big events that are going to add linear inventory into the upfront. And one of them is ours, the World Cup and then the Winter Olympics that NBC has across. Absent that millennial perspective, there's not a ton of new inventory coming in. That's not the case in digital. In digital, we're going to see inventory increases from just natural growth of the SVOD and AVOD participants, including, of course, Tubi. And you've now got product on digital that you didn't have a year ago, like the NBA on Peacock and Amazon. And you've got ESPN flagship that's coming into the market, well, which will be more digital inventory that's going to be sold. So I don't see pressure. I think the market will absorb the supply and Tubi in particular, to be a real player in it, but it is more supply that you're going to see on the digital side. And there could be some headwinds generally as you look at it. Clearly, what we're talking about last week and over the weekend, with tariffs in the area of auto and retail, there is question mark, does that impact what's going on? Pharma was a question for some time. People had raised around regulation. I don't see it as big that to be a particularly big issue. And importantly, it's a big pharma -- consumer pharma year. There's over 70 new consumer drugs coming to market in the upcoming year versus 50 that were in market currently. So there's -- from a demand standpoint, I'm sorry for all of you who that watch commercials for pharma, but there will be more of them coming out in the upcoming year. So the punchline of all of that is the upfront for us looks to be -- looks for us to be a healthy upfront. I don't know, across other peers, how they're looking at it. But certainly, we're looking at it quite positively.

Okay. Maybe we could talk a little more about Tubi, which you touched on. So Tubi is on track to generate more than $1 billion in revenue this fiscal year. I think that's in our model anyway. What's the path forward for Tubi over the next few years? What do you need to do to continue to grow the business while at the same time turning it profitable because you have talked about during profitable in a couple of years?

Very important. So we've said publicly that Tubi has now broken the $1 billion run rate for us. So it's a milestone, but only one of many milestones that we'll have. If you look at the growth of Tubi alone in Q1, we were up 19% in revenue. In Q2, we were up 31% in revenue. Now that had some political inside of it. Ex political, Q3, so far, we're pacing at or above where we were in Q2. So the trends for Tubi from a top line perspective, are all very encouraging. The investment that we've made into Tubi from any measurement against an AVOD or SVOD product are modest. I mean we peaked our investment in it fiscal '24. And we've been moderating our investment into Tubi in '25, and it will moderate yet again in '26. This business will achieve margins at "maturity," at somewhere in the 20%, 25% range. And it will be a real growth engine for Fox. I mean this will be a big grower. The rest of our verticals, we feel very strong about how they'll grow in line with the market. But Tubi is -- growth is a bit outsized. Tubi is also my frustration. I don't mean that from a business standpoint, to the people that are running Tubi. My frustration inside the value of Fox that I don't think we're getting the appropriate or the full value for the kind of growth that Tubi has ahead of it or has achieved inside the stock. Some market participants just capitalize our television segment. By doing that, Tubi is got a negative value inside the stock. So without pulling out Tubi and separately analyzing it, comparing it on the sum of the parts basis to peers or other SVOD platforms, I think is -- again, is a frustration for me at least inside the stock.

Okay. New segmentation next quarter, it sounds like. How -- maybe like related to that, how sustainable is Tubi as a business, just given the number of other free ad-supported streaming services in the market. What is the moat around the business? How is it differentiated? I think that's people would love to hear more about that from your perspective?

Yes. I think Tubi's got probably the three things that are the moat for Tubi or the what sets it apart are content, it's user experience and its scale. And if you take each one of those, from a content perspective, you've heard these stats before, but there's over 275 million -- 275,000, episodes and films inside of the platform. There's a great user experience in the fact that the personalization engine. Tubi started as a tech company, didn't start as a television company. So the personalization engine for Tubi is really strong for consumers. The experience also for viewers is better than, I think, some of the comparators because there's less than 6 minutes of ads for -- in an hour or any one consumer and substantially less. And it's just a good platform that way. From a scale standpoint, there's 97 million monthly active users on this platform. And 65% of them are cordless. So from an attraction of advertisers to try to access a market, Tubi acts as a market that's been very difficult for them to get to. And clearly, they can't get to from a linear perspective because they're [ coordinates ]. So I think those three factors, content, user experience, scale are the three factors that we focus on in growing Tubi into the mode that I described earlier from a profit standpoint.

Yes. Okay. Great. I wanted to ask you also about just Tubi's ad sales model. How much of Tubi's ad inventory is sold programmatically versus through your sales force? And how integrated are Tubi sales with the TV side of the business?

So whether it's -- just thinking about this, whether it's SVOD or AVOD, what's vital to advertisers in those platforms is data, where they can get much more data in those environments than you can in the linear than you ever could in a linear environment. So therefore, programmatic is important to it. And we saw this in the election cycle, where the Tubi did attract a lot more advertising than we expected because they were able to target for campaigns or issues into certain markets and certain communities advertising. Importantly, Tubi is a VOD service. And by that, I mean it's not a fast service. 97% of the consumption on Tubi is video on-demand, not jumping into a fast -- sorry, set of FAST channels. So over -- just over half of the revenue that we generate on Tubi is programmatic. The balance is direct sales, which is right out of our sales group that -- and Tubi is an important part, therefore, of the upfront to us. Different than what I described on FOX News, where very little sales happen in the upfront. Tubi has a substantial amount of direct sales happening in the upfront. And therefore, if you watch our upfront last year or you see our upfront this year, Tubi is center stage where our direct selling. So it's about balance between programmatic and direct selling to touch more on the programmatic side.

Yes. That's helpful. Maybe we could talk about your new direct-to-consumer service. So finally getting to that. Finally, we got a chance to talk about that -- after all these years.

Right.

So you recently announced that you'll be launching the Fox streaming service. It would be great to hear your thoughts on what segments of the market you'll target, which content you think will primarily drive new subscriptions and really any other details that you can give around the service?

So the one place that we won't be offering the D2C service or competing with, more importantly, is the traditional bundle, the traditional distributors. From a pricing standpoint, we're going to respect the wholesale arrangements we have with the current distributors. So you won't see us competing from a pricing standpoint with the traditional distributors. From a content standpoint, there'll be nothing exclusive on it. So whatever the traditional distributors are offering their consumers, we'll be offering the cordless community, which is where we're pointed to on this D2C service. And all the marketing and promo that as we look toward it, will be addressed towards the cordless community and the worst thing we could do is take a consumer from the traditional side of any of our big partners and move them out and bring them into D2C. So our target market and therefore, our aspirations for the size of the platform to us from a subscriber standpoint are pretty modest, at mid-single-digit millions over the next 3 to 5 years, and that's about what we're targeting.

Okay. Could you give us a little more on just how you plan to go to market and sell it from a marketing and distribution standpoint?

Yes. I can't believe this product will stand on its own. By that, I mean, this will have to be bundled with other products by a consumer, self-bundle. Alternatively, we may partner with other streamers who are in the market to offer a bundle to consumers at some price point that's a little different than if you offered it onto itself. But again, our focus is everything outside of traditional. Pete Distad has come to join us who -- those of you that may not know he ran the venue project for us that we shut down about a month ago. He has a history at Hulu and Apple and he will launch that D2C service for us. You should expect it to be in the market before football season this year. So therefore, the promo -- the digital promotions that will happen in marketing will happen in the summer in advance of the autumn launch of it.

Just maybe a follow-up there. When you talk about partnering or bundling with others, other streaming services or more distributors, whether it's a wireless distributor or a broadband distributor?

So a couple of there. First, and I should have made this clear. If you're a linear customer of one of our partners, you will get this product for nothing, as this will be part of your linear service. So if you're in your linear service, you're in a skinny bundle and you have FOX News and FOX Sports, you will authenticate into the service as part of your subscription over there to access FOX News and FOX Sports. And that helps that traditional ecosystem retain and avoid churn. From a bundling standpoint, no, I expect that other streamers we would bundle with, so that not integrate with, which our service won't exist inside of another service, but it will sit alongside other services. So that if you're an NFL fan and you're in the cordless world and you're trying to put together an NFL package, you'll need a couple of other services to join and to get it done, and we will likely partner with that.

Okay. That makes sense. How should we be thinking about losses early on to launch the service? What incremental costs will there be to support it?

Well, if I go back and comment on the SVOD losses that other peers have incurred, it's because they've added exclusive and original content to their platforms. We're not doing that. So -- we currently have the rights, and we don't need to pay any more for the rights that we have for all of the product that will be on our D2C. So that's News or Sports or local, those rights exist. They were paid for inside of contracts that have been negotiated. So I don't particularly -- content is not an issue. From a tech standpoint, we had kept warm a tech stack for D2C ever since Fox started nearly 6 years ago to the date. But we've augmented that with the venue platform where each of the partners had access to the platform. So from a tech standpoint, again, there's not going to be the big incremental cost. So most of the costs will go toward marketing and promo to launch the product. Our intent is there will be a margin, and it will be a profitable platform after we launch, but there will be some launch costs associated with it. But nothing along the lines of what you saw the big SVOD streamers.

Right. Okay. That makes sense. Maybe moving on to sports and content a little bit. On the sports side, FOX has assembled portfolio of really premium sports rights, I mean you've got the best NFL package. You've got Big Ten, Major League Baseball, then you've got rights in NASCAR, World Cup and then more recently, you've added Live and IndyCar, MotoGP. Is this current sports rights portfolio complete? Is there anything you want to add if the opportunity came up? And if so, how would you go about evaluating that opportunity?

There's not really that much available, to be honest. You mentioned [ 3 ] that just came on board in the last month or so with MotoGP, IndyCar and Live. And Live the first event we had was on Super Bowl weekend and last week was the first event we had for IndyCar. So there's not from a big sports standpoint, obviously, they're all contracted. I think what will come to market in some form will be some baseball product particularly after baseball and ESPN announced that after the season, the relationship would change. So baseball has been a great product for us. And we'll probably look at that and look at it in the context of how it makes sense for us overall. But absent that, from a product standpoint, there's not a lot out there that we'd be attracted to at this point.

Okay. I'd say the worst kept secret in sports is that the NFL has this clause to opt out of the current media rights contracts after the 28th season.

29th season.

29th season, sorry. Two questions here. So I guess, one, how do you make sure you retain those rights? And two, how do you generate the incremental revenue to make the economics work at a higher price tag?

I don't see how it's been -- you're right about it, but how it's been worst kept secret because in March of '21, when we announced the new deal with NFL, we specifically put in our press release that the NFL had a termination right after the 29th season. So 30, 31, 32 and 33 were optional by the NFL. We're firm through the 29th Season. And then after the 30 Super Bowl, they have the right to terminate the contract. But we're firm through 29. So we've got a great, robust product there. I have no idea whether the NFL will invoke that termination right or change the character, change the game, whatever -- at this moment, I have no idea. But what I do know is that in any negotiation we've had with the NFL, the discussion around it happens well before the termination date. So in prior three contracts we've had with the NFL, the discussion is 2 years ahead of time or 18 months ahead of time. So I fully expect that any discussion around those option years will happen well in advance of the 30 Super Bowl, which is under contract. Look, the NFL is vitally important to us. We provide them with great production quality, the ability to do national and regional games. We give them the reach for broadcast that they can't get elsewhere. So we'll evaluate whatever it is, if there is something in those option years, focused principally on our 2 top line revenue. 50% of our revenue today is advertising, 50% is affiliate. And those are the drivers behind supporting virtually all of our businesses, with advertising being particularly important to our sports contracts and particularly to the NFL. So in evaluating it, that will be an important element for us. I mean -- you have to look today, counting it up over the weekend, the NFL has 8 partners, different platforms between the broadcasters, the streamers and Sunday Ticket. And that's a lot of partners to be involved with.

Yes. It sounds like we have at least 3 years before there's even a conversation anyway?

Yes, I think that's right.

Okay. That's really helpful. Do you see any opportunities for FOX in the disruption that's taking place in local sports right now? Obviously, you're in the local sports business before, got out of it at probably the best time you could have, but now it seems like there may be some new opportunities?

I'm smiling because if it's a question of are we interested in getting in the RSN business again, the answer is no.

It wasn't really that.

Or even on a stealth basis, it's not that way. But we have -- across our local stations, we have some contracts with NHL teams, WNBA teams. We'll look at ones that come up, but it -- if I look at big strategies for the company, that's not one. So getting involved in local sports in a big way, basically taking on RSN contracts into the local stations, shouldn't expect to see us doing that.

Okay. I don't know if there was anything new models that you were looking at potentially on the streaming side?

We've started, like I said, with these NHL and WNBA contracts, but they're -- they're modest. And I think that's what you should expect to see from us.

Okay. We only have a little bit of time left. Maybe just to talk about capital allocation for a second. I mean you've been a very prudent allocator of capital, as you mentioned in your -- in the beginning, really ever since the divestment of assets to Disney or including that decision. What are your capital allocation priorities from here? You've got quite a bit of cash on the balance sheet. It looks like net will be below 1x by the end of this quarter?

So we talk about a lot of the assets of the company up until now. Another key asset of the company is our balance sheet. We are really focused on maintaining a pristine balance sheet and having firepower available to do something. And -- we did Red Seat. We talked about -- we got a comment on Red Seat, but it's a modest acquisition that we made using our capital to get into an aligned industry. So you should see us basically, as I've mentioned to you in the past, 3 focuses of our capital allocation, our organic investment, take Tubi as an example of that. Take D2C as an example of that. FOX Nation was an example of that. Aligned to M&A, we haven't found anything really big there. If you look -- Tubi was an example of that. Red Seat recently is an example of that. And then absent a good use of capital for those two in a moment or in a cycle, we looked at capital returns. And we've delivered $6 billion by way of a buyback since Fox -- since the inception of Fox 6 years ago, a little over $1 billion in dividends. And that's really where the allocation of capital is. We have a maturity coming up, the $600 million debt maturity, we'll use cash, make that maturity. And importantly, the way I look at our balance sheet, I look at gross debt and cash. The cash is intended to be deployed for growth of the enterprise and for shareholder returns. And the gross debt is what I look at to see how levered we are. So some people look at net debt, and Steven Tomsic, our CFO, and I were really focused on the gross debt position and deploying cash for shareholder value.

Great. That's a great way to end it. John, thanks so much. Thank you, everyone.

Thank you.