FOX FY2027 Q1 EARNINGS CALL - FOX CORP

Ladies and gentlemen, thank you for standing by. Welcome to the Fox Corporation First Quarter Fiscal Year 2027 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. I would like to emphasize that functionality for the question and answer queue will be given at that time. If you require assistance during the call, please press star then zero on your touch-tone keypad. As a reminder, this conference is being recorded. I'll now turn the conference over to Chief Investor Relations Officer, Ms. Gabrielle Brown. Please go ahead, Ms., Brown. Thank you, Polly. Good morning, and welcome to our fiscal 2027 first quarter earnings call. Joining me on the call today are Lachlan Murdoch, Executive Chair and Chief Executive Officer, John Nallen, President and Chief Operating Officer, and Steve Tomczyk, our Chief Financial Officer. First, Lachlan and Steve will give some prepared remarks on the most recent quarter, and then we'll take questions from the investment community. Please note that this call may include forward-looking statements regarding Fox Corporation's financial performance and operating results. These statements are based on management's current expectations, and actual results could differ from what is stated as a result of certain factors identified on today's call and in the company's SEC filings. Additionally, this call will include certain non-GAAP financial measures, including adjusted EPS and adjusted EBITDA, or EBITTA as we refer to it on this call. Reconciliations of non-GAP financial measure are included in our earnings release and our SEC filings, which are available in the Investor Relations section of our website. We also refer to free cash flow, which we define as net cash provided by operating activities less capital expenditures. And with that, I'm pleased to turn the call over to Lachlan. Thank you, Gabby. And thank you all for joining us this morning to discuss our fiscal first quarter earnings. Good morning to you all. Fiscal 2027 is off to an outstanding start. We posted revenue growth of 22% to reach $4.6 billion and EBITDA growth of 54% to reached $1.6 trillion. both our first quarter records both a direct result of the focus strategy that we are executing on and both reflective of the strength of our content and brands which are driving consistently exceptional results advertising revenue rose 47 in the first quarter driven by our successful broadcast of the FIFA Men's World Cup and healthy trends across the Fox portfolio, which continue into this current quarter. Distribution revenue rose 9%, with cable distribution up 10% on increased rates and the strength of Fox One, along with a meaningful improvement in industry subscriber trends in fact when including the incremental subscribers from fox one we saw positive subscriber growth for the trailing 12 months fox one launched just over a year ago and has consistently exceeded our expectations for users and engagement we are encouraged by fox one's trajectory and are confident in its potential to drive incremental growth in the quarters ahead notably related to fox one's momentum in the month of september subscriber acquisitions increased over 30 percent versus the start of last year's football season and we have seen a very healthy engagement balance by subscribers between news and sports consumption sports as expected drove a considerable amount of engagement across the the entire Fox platform this past quarter. We began the quarter with a historic broadcast of the FIFA Men's World Cup Final, the most-watched soccer telecast in U.S. history. This was followed by the start of the Major League Baseball postseason and, of course, the opening weekends of the National Football League and college football seasons. We just wrapped an exciting World Series between the Milwaukee Brewers and the Tampa Bay Rays, a five-game series that averaged 12 million viewers and capped an MLB playoff that exceeded our expectations. Per-game revenue was robust, which is illustrative of the strength of the sports market. Looking at the NFL season to date, Fox's America's Game of the Week is the number one show in all of television with an average of nearly 25 million viewers. With plenty of football still to come, we look forward to an NFL triple header on Fox in week 15, a strong Thanksgiving holiday weekend that will feature one of college football's biggest rivalries, Michigan versus Ohio State, and a blockbuster between the Eagles and the Cowboys on Thanksgiving Day. The NFL Thanksgiving Day game will also stream live on Tubi, which posted another record quarter. Tubi grew revenue 35% year-on-year, underpinned by a 23% increase in total view time. Engagement was driven by Tubi's deep content offering, including its tremendous library, its World Cup hub, 10 new originals, and viral content from more than 600 creators. Fundamental momentum at Tubi continues into the second quarter, supplemented by the recognition of political campaigns of Tubi's large, mostly cordless audience, as an ideal destination to invest for this year's midterm cycle on a targeted basis. More broadly, across our businesses, political advertising has surpassed $350 million, dollars, a record for a midterm cycle. This encapsulates the full Fox portfolio working together at scale during one of the biggest news events of the year. As you would expect, audiences have turned to Fox for our comprehensive coverage of this election cycle with national coverage led by the Fox News team, while our broadcast stations provide essential local perspective, particularly in many battleground states. Heading into tomorrow's vote, more Americans have relied on Fox News than any other news network for coverage of the key issues and news this cycle. While we had difficult ratings comparisons to last year, Fox News notably finished the quarter as the most watched cable news network while maintaining audience share levels that are higher than our peers in both prime and total day these first quarter results underscore the position of financial strength we are approaching the roku transaction from since the announcement of the roku acquisition our confidence in the strategy and our conviction in the opportunity has only grown combining roku's leading streaming platform with our premium sports news and entertainment content will build our position in the fastest growing segments of the media landscape and will deliver both sustained growth for the company and value for our shareholders from a process standpoint we have made significant progress towards closing including receiving all required fox and roku shareholder approvals and foreign regulatory approvals we are continuing to work cooperatively cooperatively with the DOJ in order to obtain HSR clearance and expect to close the transaction as soon as we can after a record fiscal year 2026 and first quarter 2027 fiscal 2027 will once again demonstrate our differentiated differentiated strategy the quality of our assets our ability to deliver both on screen and financially and the strength of our balance sheets, all while creating value for our shareholders in a deliberate and a disciplined manner. I'll now turn you over to Steve to discuss the financials. Thanks, Lachlan, and good morning, everyone. The strong momentum we saw throughout our fiscal 2026 has continued unabated into the first quarter of fiscal 2027, highlighted by total revenue growth of 22% and record quarterly EBITDA of $1.64 billion. Advertising revenue across the company grew 47% led by our broadcast of the 2026 FIFA Men's World Cup along with higher political advertising revenue and continued growth at Tubi. Distribution revenue grew 9% over the prior year with growth of both our cable and television segments. Content and other revenues were broadly in line with prior year with lower entertainment content revenue partially offset by higher sports sub-licensing revenue. Total expenses increased 10% led by costs associated with the World Cup and higher digital content costs. Net income attributable to stockholders was $943 million or $2.20 per share as compared to the $599 million or $1.32 per share reported in the prior year period. Excluding non-core items, adjusted net income was $1,009 billion and adjusted EPS was $2,054, up 68% compared to $151 recorded in the priority period. Now turning to our operating segments, starting with the cable segment, which reported an 8% increase in revenue and a 7% increase. Cable advertising revenue was up 8%, primarily a result of higher sports advertising revenue, including the broadcast of the World Cup, partially offset by lower digital news advertising revenue. Cable distribution revenue grew 10%, driven by pricing growth from our affiliate renewals and a net increase in subscribers. The subscriber growth reflects the combined benefit of an improving rate of subscriber declines across our third-party distributors, which is now running at below 6%, coupled with a meaningful positive contribution from Fox One. Cable content and other revenue increased 1%, driven by higher sports sub-licensing revenue. Expenses at the cable segment increased 10% due to high sports programming rights and production costs, including the World Cup, and high news programming costs. Now turning to our television segment, which delivered 32% growth in revenue and a 134% increase in EVA DAV. Television advertising revenue was up 60%, driven by the World cup and early midterm political advertising revenue, primarily at our owned and operated television stations. Tubi was once again a highlight, delivering mid-30% revenue growth and growing its year-on-year EBITDA contribution. Television distribution revenue grew 4%, driven by healthy growth in fees across Fox-owned and operated stations and a net increase in subscribers. Television content and other revenue fell 4% as a result of lower content revenues tied to our entertainment production studios. at the television segment increased 8% due to higher sports programming rights, amortization and production costs, led by our broadcast of the World Cup, along with higher content costs at Tubi. These were partially offset by lower NFL costs associated with the timing of games. Now turning to cash flow, where free cash flow was positive $503 million in the quarter. As a reminder, the strong improvement in quarterly free cash floor was in large part due to the timing of working capital related to the World Cup, where rights payments to the tournament landed in fiscal 2026, while advertising receivables continue to be collected through the first half of fiscal 27. In terms of capital allocation, while we are temporarily inactive with our buyback program in the quarter, we continue to expect full-year share repurchases to be in line with our historical range and anticipate returning to share repurchases this quarter. This is all supported by the strength of our balance sheet, where we ended the quarter with approximately $4.5 billion in cash and $6.6 billion in debt. And with that, I'll turn the call back over to Gabby. Great. Thanks, Steve. And now we would be happy to take questions from the investment community. Please note that, as with our prior earnings call, we do not anticipate taking questions about Fox's pending Roku transactions. We have filed materials with the SEC that provide information about the transaction. And for today, we would ask that questions focus on Fox's standalone results. Ladies and gentlemen, I would like to emphasize the functionality for the question and answer queue. If you wish to ask a question, please press star, then one on your touch-tone keypad. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by once again pressing star, then one. If you are using a speakerphone, please pick up the handset before pressing the numbers. It has been requested that you limit yourself to one question. Once again, if you have a question, please press star, then one at this time, and one moment, please, for the first question. We have a questions from Michael Ng of Goldman Sachs. Please go ahead. Hi, good morning. Thank you for the question. I wanted to ask about Fox One and the impact on distribution revenues. Very encouraging to hear about the net positives of cyber growth in the trailing 12 months. What does that tell you and inform how you think about long-term distribution revenue growth? And if you could talk a little bit about the biggest opportunities for Fox One gross ads, especially as we head into the NFL season more firmly. That would be helpful. Thank you. Thanks, Mike. So, look, I think in summary, Fox One has hit it out of the park. It's, you know, executing on the strategy we lay out for, you know, extraordinarily well. The most pleasing aspect of this is the fact that the subscribers are almost entirely incremental to our subscriber base, which is why we can offset, we have been able to offset in this quarter, traditional subscriber declines with Fox 1 additions. I think it's something like 97% of new subscribers into Fox 1 subscribers into Fox 1, 97% do not have a cable subscription. That's a tremendous result. And frankly, when we did our strategy and our budgets for Fox 1. Frankly, I didn't believe that we'd be able to achieve that. But it's really the result of being very focused, being very careful in our marketing, understanding that a subscriber from the pay TV system into into fox one uh doesn't do us any favors and so we've been we've been uh i think uh remarkably uh uh focused on on achieving that result and the team's done a tremendous job now having said that as you move forward uh the fox one subscriber base is going to be uh somewhat seasonal uh with sports uh with uh sports seasons coming and going so i would just sort of uh um press a sort of modest note of caution that as we move forward, is Fox 1 always going to be able to supplant the subscriber losses in the traditional ecosystem? Probably not as sports seasons come and go. So I just add that one small note of cautions. Great. Next question, please. We have a question from John Hodlick of UBS. Please go ahead. Great. Thanks, and good morning, everyone. Maybe just a couple quick questions on the advertising side. First of all, can you give us an update on your efforts to sort of close the CPMs on the broadcast side, or on news with what you're seeing in the broadcast market? And then, you guys seem to have bucked the trend with Tubi in terms of revenue growth, given what we've seen from YouTube and Netflix. Any comments, Lachlan, on what you're seeing in terms of the health of the CTV ad market? Thanks. Great. Good morning, John. So overall, you know, advertising trends for us, and I can't talk to the market, but are incredibly healthy. Really across our portfolio, it's always a point in time every couple of years, you've got to be you know careful to understand the um that the strength of the you know political cycle this is clearly being a uh you know a dramatically uh positive sort of uh political revenue cycle you know across the board and we're the beneficiary of a lot of that i think i mentioned it before but it's you know now over over 350 million dollars in political revenue uh throughout the cycle. That breaks down into sort of $250 million plus on the local stations. What tends to happen in local stations, you run out of availability, so that pushes some of the base market aside during that cycle, but it's an incredibly positive number. We then have about $50 million of to be our revenue throughout the cycle, which is you can allocate that as sort of as effectively local revenue because it is targeted. And another, and this is another fantastic number, another $50 million plus of national political advertising revenue that sits across sports and news and entertainment. So that's tremendously strong. In terms of CPMs bridging the gap between Fox News and broadcast, we still have a tremendous amount of upside and room to go. As you know, the strength of Fox News, we do compete more with broadcast networks as opposed to our cable news peers. You can't really call them peers, but our cable news competitors. And we have tremendous upside in terms of continuing to push our CPMs into the broadcast CPM range. And then on 2B, our revenue growth, as we've said it before on calls, the 2B business really driven by TBT growth continues to be very strong. That's for a number of reasons that you well know. It's based around the fact that such a large percentage of them, while they're young, they're diverse, and the majority of them are cordless. They're a very hard market for advertisers to reach, which is one of the reasons why Tubi has been so successful in garnering that advertising revenue. The pleasing thing is that we're seeing this growth continue into the current quarter, and so Tubi continues to go from strength to strength. Next question, please. We have a question from Michael Morris of Guggenheim. Please go ahead. Thank you. Good morning, guys. I wanted to ask, Nielsen has reported some ratings declines at Fox News ahead of the midterm elections. I'm hoping that you can share your thoughts on why this may be the case, what it means for the ad revenue trend, as well as any strategic or content changes you might consider or make going forward. Is the Fox One viewing, is that accurately included in the Nielsen ratings as well. And if I could just ask one second one on bundling of Fox One, you know, John recently said that bundles had only had a modest impact from Fox. For Fox, I'm wondering why these bundles haven't been impactful and what you might need to see to strike a deeper distribution agreement with a large streaming platform. Thank you, guys. Thanks, Michael. So let me start with the Fox One ratings. So, you You know, again, we've finished the year and congratulate everyone. Sorry, Fox, not Fox, Fox News. I'm sorry, this is both Fox News ratings. You know. We finished the years incredibly strong. Number one, with more share than, you know, our two cable competitors combined. So, you now, we have the business is in incredibly good shape and, you know, we're very proud of the team. What we are seeing, though, is some viewer fatigue, where our viewers are – I've gone through this incredible news cycle the last few years. I think last year was a record, really hard comps for us to comp against with the inauguration, the Charlie Kirk tragedy, Doge, I think the flooding. It was a tremendous news cycle this time last year, which we're comping against. But having said that, we are seeing some viewer fatigue, which we've seen before. It's that this cycle is analogous, not entirely, but somewhat analogous to the 2006 midterms when you have a second-term president going into their midterm halfway through the second term, and you just see this viewer fatigue. Those viewers are not going to any other news channel. They're not switching to MSNB, MSNOW, or to CNN. They're just, you know, fatigued and watching, you know, slightly less television overall. So we feel pretty confident where we are, and we've seen the playbook, and мы know how to move through it. Fox One bundling, you Know, Fox One will bundle with all sorts of distributors and platforms and other content providers. You know, it's in its infancy, Fox One, and so you'll see we'll roll out further bundles as the service develops. Next question, please. We have a question from Jessica Reeve-Ehrlich of Bank of America. Please go ahead. Thank you. Good morning, everyone. Two quick questions. First, on Tubi, Lachlan, I remember, I don't know if it was a year or two ago, but to be reached like mid-teens growth, you said something like, I do not think it is sustainable or do not expect it to be sustainable. Now we are at 30% plus revenue growth, and I think you just said that is continuing in the current quarter. What can you say about the margin outlook for 2B on anything, where it is now, where you think it can go? And then I think Steve just said, that buybacks will resume in the current quarter. Does that – what does that say about the timing of the – did that say something about the timing that the Roku closed? Did you say it was on hold until it closes? Timothy Stenzelman Hey, Jessica, good morning. So thank you for proving me wrong on Tubi. I don't remember saying that, but I'm sure I did if you said it. And look, it's been – it's being – doing tremendously well, TBD continues to grow. obviously a ton of ton of work uh has gone into that and and as i said uh we're seeing that growth continue into this into this current uh quarter so um but thank you for for calling me out on that one uh and and margins we think you know i think we've said many times before we we think it will be a 20 sort of range uh margin uh business uh once it reaches uh you know further maturity yeah and and to to reinforce that point jessica to be had a nice nice amount of even dark growth this quarter versus last, so continuing on that well and truly positive EBITDA momentum. On the buyback, you shouldn't draw that linkage between us restarting the buy back and our expected timing for the transaction to close. They're two separate decisions. Great. We have time for one more question. We have a final question from David Karnofsky of JP Morgan. Please go ahead. Hey, thank you. Maybe just following up on the advertising questions, the release called out lower year of your ad revenue for cable digital news. I just wanted to see if you could unpack that a bit, how your platforms are operating amid a kind of difficult web traffic environment generally. And then just separately, given the success of the World Cup on Fox, how are you thinking about rights for the 2030 cycle, where I think FIFA is looking to sell English and Spanish language on a combined package? Thank you. Thanks, David, and welcome. On sort of digital, you know, as you be aware, Fox News Digital is the number one digital news site in America. From a revenue perspective, I think it's a hyper-competitive market, and we're very pleased with the results there. On the World Cup, I think the question was just will we be bidding for World Cup rights. We were obviously happy with the performance of the World cup this past year and we'll be looking at the rights for 2030 and 2034 in a disciplined manner as we would with all sports rights. Great. At this point, we are out of time, but if you have any further questions, please give me or Charlie Costanzo a call. Thanks so much for joining us today. Thank you. Ladies and gentlemen, that does conclude the Fox Corporation First Quarter Fiscal Year 2027 Earnings Conference call. Thank you Thank you.