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Twenty-First Century Fox Management Discusses Q1 2014 Results - Earnings Call Transcript

Twenty-First Century Fox (NWSA) Q1 2014 Earnings Call November 5, 2013 4:30 PM ET


Reed Nolte - Senior Vice President of Investor Relations

John P. Nallen - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Chase Carey - President, Chief Operating Officer, Director, President of the Media & Entertainment Arm and Chief Operating Officer of the Media & Entertainment Arm


David Bank - RBC Capital Markets, LLC, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Todd Juenger - Sanford C. Bernstein & Co., LLC., Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Robert Fishman

John Janedis - UBS Investment Bank, Research Division

Michael C. Morris - Guggenheim Securities, LLC, Research Division

Alan S. Gould - Evercore Partners Inc., Research Division

Vijay A. Jayant - ISI Group Inc., Research Division

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Daniel Salmon - BMO Capital Markets U.S.

James G. Dix - Wedbush Securities Inc., Research Division

Barton E. Crockett - FBR Capital Markets & Co., Research Division


Ladies and gentlemen, thank you for standing by, and welcome to the Twenty-First Century Fox First Quarter 2014 Earnings Release. [Operator Instructions] And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Reed Nolte, Senior Vice President, Investor Relations, News Corporation.

Reed Nolte

Thank you very much, operator. Hello, everyone, and welcome to our First Quarter Fiscal 2014 Earnings Conference Call. On the call today are Chase Carey, President and Chief Operating Officer; James Murdoch, Deputy Chief Operating Officer; and John Nallen, our Chief Financial Officer.

First, we will give some prepared remarks on the most recent quarter, and then we'll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to Twenty-First Century Fox's business and strategies. Actual results could differ materially from what is said. The company's Form 10-Q for the 3 months ended September 30, 2013, identifies risks and uncertainties that could cause actual results to differ, and these statements are qualified by the cautionary statements contained in such filings.

Additionally, this call will include certain non-GAAP financial measurements. The definition of and the reconciliation of such measures can be found in our earnings release and our 10-Q filing. Please note that certain financial measures used in this call, such as segment operating income before depreciation and amortization, often referred to as EBITDA, and adjusted earnings per share, are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release. Finally, also note that the historical results for periods prior to June 28, 2013, described in the press release and on this call have been adjusted to reflect the separation that was completed at the end of fiscal 2013.

And with that, I'm pleased to turn over to John.

John P. Nallen

Thanks, Reed, and good afternoon, everyone. As you have seen in today's earnings release, our financial results continue to reflect strong top line revenue growth. We reported first quarter fiscal 2014 revenues for the total company of $7.06 billion, which is up 18% compared to the first quarter a year ago. This growth reflects both the inclusion of revenues from newly consolidated businesses, such as Sky Deutschland and our new international cable sports channels, as well as overall organic revenue growth, which was up in the high-single digits.

Total segment EBITDA for the first quarter was $1.62 billion, a 2% increase over the $1.59 billion reported in the first quarter a year ago. This increase was led by our DBS and Television segments, partially offset by a challenging film comparison and by slightly lower cable network contributions, which reflected the anticipated investment in launching our new cable channels. Additionally, unfavorable foreign exchange movements reduced our total reported EBITDA by 2%.

You will also note that our depreciation and amortization expense in the quarter of $313 million is up $139 million from the first quarter a year ago. This increase is almost entirely due to the consolidation of Sky Deutschland and the related acquisition amortization expense of approximately $100 million. Nearly 2/3 of this Sky D amortization expense results from a onetime cumulative impact as we move toward finalizing the purchase price allocation by the third quarter. Going forward, we expect Sky D related amortization to run at approximately $30 million per quarter.

From a bottom line perspective, we reported income from continuing operations attributable to stockholders of $768 million as compared to $2.25 billion reported the first quarter a year ago. Last year's quarterly results included $1.37 billion of income in other net, principally related to the gain on the sale of our ownership stake in NDS. Excluding the net income effects in both years of amounts reflected in other net, in impairment charges and the gains from participating in BSkyB's share repurchase program, first quarter adjusted earnings per share were $0.33 this year versus $0.38 in the prior year.

Now let me provide some additional context on the performance of a few of our businesses, and let's start with the Cable Networks. Overall, total segment revenues increased 12% from last year, highlighted by a 17% increase in affiliate revenues and 11% advertising growth. The 17% affiliate revenue growth was led by higher rates across our channels. Domestic affiliate fees increased 10%, primarily from higher average rates led by the RSNs, FX and FOX News.

Our reported international affiliate fees were up 40%. Within this overall increase, affiliate fees at the non-sports channels, at FIC and at STAR, grew 19% in local currency terms. The balance of the affiliate fee increase was from the international sports channels, led by this year's inclusion of ESS, Star Sports, EMM and Fox Sports Italy, which was partially offset by the unfavorable foreign exchange impact.

First quarter advertising revenue growth was led by a 21% increase at the international channels, which reflected an approximate 20% local currency increase at the FIC and STAR non-sports channels. The increase in ad revenues related to the international sports channels was fully offset by the negative impact from unfavorable foreign currency movements. Domestic advertising increased 6%, reflecting double-digit gains at FX and the RSNs, partially offset by political advertising declines at FOX News.

As anticipated, this quarter's EBITDA results at the cable segment reflected the commencement of the investments we are making in our new channel launches, as well as the impact of unfavorable foreign currency comparisons. As a result, total segment EBITDA in the quarter of $991 million declined 2% from year-ago levels. We had continued strong EBITDA growth from the RSNs, FOX News, FOX Business, National Geographic and our international channels. This growth was more than offset by the impact of the investments in the new domestic channel launches, a 3% negative impact from foreign currency movement and the absence of prior year distributor credits. Combined, all of these factors impacted year-on-year comparisons by a bit over $100 million, with the new domestic channel launches alone representing around a $50 million impact. In addition, we had increased programming and marketing costs at FX related to the launch of new series.

At our Television segment, EBITDA in the quarter of $231 million increased 30% over the first quarter largely due to a doubling of retransmission revenues. Total segment ad revenues were similar to a year ago as the benefit from higher sports ratings and ad pricing was offset by lower general entertainment ratings and reduced political revenues at the stations.

At our Film segment, first quarter EBITDA was $328 million, down 24% from a year ago. While we are pleased with the hit releases impacting the quarter, including The Wolverine and The Heat, we did not have a comparable film to last year's extraordinarily successful release of Ice Age: Continental Drift. Revenues and EBITDA contributions at our Television production units were up year-over-year, primarily due to Modern Family entering domestic syndication and the sale of the first 2 seasons of New Girl to Netflix.

Our DBS segment reported EBITDA of $190 million in the quarter as compared to $95 million in the prior year quarter. This increase reflects a nearly $60 million improvement at SKY Italia, driven by the absence of costs associated with last year's London Olympics broadcast. It also reflects the impact from the consolidation of Sky Deutschland's positive EBITDA results.

Total revenues at the segment increased by $562 million, principally reflecting the inclusion of $520 million in Sky Deutschland's revenues. Sky D reported ARPU gains of 6% and a year-over-year direct subscriber increase of 317,000. At SKY Italia, local currency revenues in the quarter were similar to a year ago as the 2% ARPU increase was offset by lower average subs for the period. Quarter-end subscribers of 4.76 million were unchanged from the end of June

Now before I turn to guidance, let me make just a couple of comments related to our capital structure. We ended the quarter with $6.7 billion in cash and $17.5 billion in gross debt. This debt position reflects the issuance of $1 billion of new long-term debt during the quarter, recognizing that we have approximately $900 million of scheduled debt maturities in calendar 2014. Related to the stock buyback, since the date of the separation, we have been consistently repurchasing FOXA shares, resulting in approximately $1.3 billion of repurchases from July 1 through today. We are on pace to complete the $4 billion buyback within the 12-month time frame we previously announced.

And let me finally address our guidance update for fiscal 2014. Chase will provide more commentary a moment -- in a moment around our businesses. And while we have 1 quarter under our belt, it's still quite early in our fiscal year. However, based on all of the assumptions inherent in our current projections, we continue to expect that our total segment EBITDA percentage growth rate for fiscal 2014 will be in the high-single to low-double-digit range, above the $6.2 billion total segment EBITDA base level of fiscal 2013.

And now let me turn the call over to Chase.

Chase Carey

Thanks, John. There's only been a few months since we outlined our objectives and strategies for our business at our Investor Day in August, yet we're more excited than ever about our future. We're on plan in building the foundation for sustainable long-term growth and are on course overall to meet our financial targets for this year.

The highlight of our last quarter was the successful launch of our 2 new U.S. networks, Fox Sports 1 and FXX. Our short-term priority was establishing the distribution base from which we can grow ratings and subscriber revenue, and we exceeded our targets in launching FS 1 and FXX to 90 million and 72 million homes, respectively. Our initial ratings have been mixed, with success in certain places, particularly with established events and programs. These new channels generated ratings that are a multiple of their predecessors. However, programming schedules are clearly a work in progress. We knew going in that building these networks would take a few years, not months, and many of our signature events and programs are yet to be launched.

At our more established U.S. cable networks, results were in line with our plans. We had strong results in areas like our Regional Sports Networks, where other -- while others, like FOX News, although it's dominate as ever, competitively, faced expected year-on-year headwind comparisons due to 2012 political spending. It was actually a relatively quiet quarter for our established networks as we prioritized the new channel launches.

The last month has been busier with an array of initiatives. FOX News launched a new primetime lineup, live new structure and hosts on our morning show, with great early results. For example, primetime ratings in the first 2 weeks of the new lineup are up north of 20% in both demos and overall. FX launched new seasons of Sons of Anarchy and American Horror Story to record ratings. National Geographic channel has a number of specials and series launches, such as Killing Kennedy, scheduled for this month.

Internationally, we continue to expand, launching new sports channels in Italy and The Netherlands, bringing the total reach of FOX Sports outside of the U.S. to 75 million homes. Last month, we announced the groundbreaking multiyear rights agreement with the German Bundesliga, one of the world's premier soccer leagues. This agreement is a testament to the strength of our global portfolio of channels and our unique ability to reach every corner of the globe. Overall, our international channels continue to execute well and are on target in spite of some economic headwinds in southern Europe and the adverse consequences of the strong dollar. We continue to be very enthusiastic about the long-term growth potential of our international businesses and believe they are better positioned competitively than ever before.

In our broadcast business, our results have been mixed this fall. On the positive side, we continue to build a dual-revenue stream business through both retransmission and reverse compensation with our affiliates. Sports has been a strength, and we're excited about the start of our new drama, Sleepy Hollow, and believe a few of our new comedies show promise. On the flip side, the ratings of a number of returning franchises have been below our expectations. With our new focus on year-round programming, we're in the early part of the broadcast season, and we look forward to new series like Almost Human, which premieres in 2 weeks, as well as the return of American Idol in January and event series like COSMOS and 24 later in the year.

The advertising market trends continue to be solid, scatter is being sold at double-digit pricing to the upfront for broadcast and scatter pricing for cable networks like FX is even stronger. The local ad market finished the September quarter up mid-single digits, excluding politicals and Olympics, and is also up a bit excluding politicals for the December quarter. Our stations successfully launched Modern Family in syndication in September, and our newest station, Charlotte, is already ahead of our targets.

Our studios continue to look to take advantage of the global demand for content, particularly at our television studio. 20th Century Fox Television and its sibling studios are producing 40 series for 16 networks this season, including series like Modern Family, Homeland, American Horror Story and How I Met Your Mother, which were all Emmy award winners this year. Our film studio has been a bit more up and down to start the year, however, we're excited about holiday releases, like Walking With Dinosaurs and The Secret Life of Walter Mitty, and releases in the second half of the year, including Rio 2 and X-Men: Days of Future Past.

At our distribution platform businesses, our goals are to grow market share through premium content, technology leadership and superior customer service. In Italy, we're executing our plan to rightsize SKY Italia's cost structure and believe we're stabilizing subscriber base in spite of an Italian economy that continues to struggle. In Germany, Sky Deutschland announced its results this morning, with another solid quarter that maintains the growth of recent quarters as further proof that this business is succeeding in Europe's dominant economy. We're also really pleased about the appointment of Mike Hopkins as the new CEO of Hulu. I can't think of a better executive to lead Hulu's exciting future.

Bottom line, we feel good about the momentum of our business. We have a few soft spots to address, but that is always the reality of our business. We're excited about the future and look forward to taking our business to the targets we outlined in August.

With that, we're happy to take your questions.

Reed Nolte

Operator, can we go to taking questions from the investment community now, please.

Earnings Call Part 2: