Aug 6, 2013
Executives
Reed Nolte - Senior Vice President of Investor Relations John P. Nallen - Chief Financial 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
Analysts
Douglas D. Mitchelson - Deutsche Bank AG, Research Division Benjamin Swinburne - Morgan Stanley, Research Division Jessica Reif Cohen - BofA Merrill Lynch, Research Division David Bank - RBC Capital Markets, LLC, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Twenty-First Century Fox Fourth Quarter 2013 Earnings Release Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr.
Reed Nolte, Senior Vice President, Investor Relations, Twenty-First Century Fox. Please go ahead.
Reed Nolte
Thank you very much, operator. Hello, everyone, and welcome to our fourth quarter fiscal 2013 earnings conference call.
On the call today are Chase Carey, President and Chief Operating Officer; James Murdock, Deputy Chief Operating Officer; and John Nallen, our Chief Financial Officer. First, we'll give some prepared remarks on the most recent quarter, and then we'll be happy to take questions from the investment community.
Note that our Q&A session today will be somewhat abbreviated, given we are hosting an almost full day investors conference this Thursday. If you are not attending that event, we encourage you to watch and listen to it on our website at www.21cf.com.
This call may include certain forward-looking information with respect to Twenty-First Century Fox's business and strategy. Actual results could differ materially from what is said.
The company's Form 10-K for the 12 months ended June 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-K filing. Finally, 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. And with that, I'm pleased to turn it over to John.
John P. Nallen
Thank you, Reed, and good afternoon, everyone. Before discussing the fiscal 2013 results, I'd like to highlight some of the changes that you will have noted in today's earnings release.
On June 28, the company completed the separation of its business into 2 independent, publicly traded companies, Twenty-First Century Fox and the new News Corporation. Following the separation, the company does not hold any equity interest in the new News Corp.
As a result of this transaction, the new News Corp's historical financial results are reflected in the company's financial statements as discontinued operations. The new News Corp will be providing further detail on their own financial results when they file their Form 10-K with the SEC.
At Twenty-First Century Fox, we are reporting our results in 5 business segments, including the segment now named Other, Corporate and Eliminations. This segment primarily reflects the company's corporate overhead costs, as well as the aggregation of all intercompany eliminations for all periods.
Prior to the separation, the old News Corporation, these eliminations were reported within the individual operating segments, primarily the Film segment. I would also note our use of segment operating income before depreciation and amortization, or EBITDA, as we refer to it, as our primary performance metric.
The company now evaluates and will be reporting performance of its operating segments based on segment EBITDA. Finally, the historical information reflecting all of these changes are presented in the back of today's press release for your convenience.
So with that housekeeping covered, let me turn to Twenty-First Century Fox's full year results first. Annual total segment EBITDA was $6.26 billion, 9% higher than the $5.76 billion generated a year ago.
This increase was driven by the continued growth at the company's Cable and Television segments, partially offset by declines at the DBS segment. The Film segment's contributions were consistent with the prior year.
Overall, the Twenty-First Century Fox businesses delivered growth in line with our expectation range. Reported net income from continuing operations attributable to shareholders this year was $6.82 billion or $2.91 per share, which included $3.76 billion of income included as Other net, relating to gains on the acquisition of additional ownership stakes in Sky Deutschland and ESPN Star Sports, as well as the gain on the sale of NDS.
Additionally, full year results include gains of $306 million from the company's participation in BSkyB's buyback program and $48 million in restructuring and impairment costs related to the company's digital games business, which we sold this past February. Excluding the net income effects of these items and comparable items in both years, adjusted earnings per share from continuing operations attributable to shareholders was $1.36 compared to the adjusted year-ago result of $1.20.
This 13% improvement principally reflects our net income growth and the impact of our share repurchases during the year. Now let me turn to the fourth quarter results.
For the quarter, the company reported total segment EBITDA of $1.49 billion, a 14% increase over the $1.31 billion reported in the fourth quarter a year ago. This increase reflects continued strong growth in our Cable Network segment, partially offset by lower contributions at the company's other operating segments.
The company reported net income from continuing operations attributable to shareholders in the fourth quarter of $977 million versus $596 million a year ago. This growth primarily reflects the increased contributions from the company's Cable segment, as well as the impact of restructuring and impairment charge recognized in the prior year fourth quarter.
Current year quarterly results also include gains of $89 million from the company's participation in BSkyB's buyback program and $81 million of income in Other, net, reflecting net gains on various asset sales and acquisitions. Excluding these gains and the restructuring and impairment charges and comparable items in the prior year, fourth quarter adjusted earnings per share from continuing operations attributable to shareholders were $0.31 per share as compared to $0.27 per share in the prior year quarter.
Now let me provide some comments on the fourth quarter performance at a few of our businesses. Let's start with the Cable Networks.
This segment continues to drive overall company results, generating close to 3/4 of the company's total segment EBITDA. Fourth quarter EBITDA contributions increased over 25% from year-ago levels to $1.08 billion, reflecting strong domestic growth led by FOX News and the National Geographic channels and significant increases at our international channels led by the Fox International Channels in Latin America and in Asia.
This growth continues to be primarily top line-driven, with segment revenues up 16%. Affiliate fees at the cable networks increased 17% over year-ago levels, with domestic channels' affiliate fees up 9%, driven by our affiliate renewals earlier in the fiscal year.
Our reported international affiliate fees were up 41%, with half of this growth reflecting comparable strong organic growth led by FIC and the other half relating to the international sports channels and foreign exchange. Fourth quarter advertising revenues for the segment were up 10% over year-ago levels, with domestic ad growth of 4% and international growth of 20%.
At our international channels, local currency organic advertising growth was approximately 10% after excluding the effects of the sports channels and foreign exchange. Fourth quarter expenses at the Cable Networks increased 12% over year-ago level, primarily reflecting the costs associated with the new international sports networks at FIC and at STAR.
At our Television segment, EBITDA in the quarter of $213 million declined $22 million versus the fourth quarter a year ago. This is largely due to the impact of a 7% advertising revenue decline driven by lower American Idol ratings and by lower-based ad markets and political revenues at the stations.
These reductions more than offset higher retransmission revenues. In our Film segment fourth quarter EBITDA was $117 million, a $23 million decline compared to a year ago, primarily reflecting a $35 million provision we took relating to some older library product, specifically the Mary Tyler Moore library, which we acquired in the 1990s.
This quarter also included continued contributions from Ice Age: Continental Drift and The Croods for DreamWorks Animation, offset by comparatively higher launch costs from the timing of this year's theatrical releases, including Wolverine and Turbo for DreamWorks Animation. Our DBS segment reported EBITDA of $156 million in the quarter as compared to $168 million in the prior year quarter.
This decline reflects the positive impact from the consolidation of Sky Deutschland's EBITDA results being more than offset by lower contributions from SKY Italia. Our results included $490 million in Sky Deutschland revenues, which reflected ARPU gains of 5% and a year-over-year increase in their subs of 320,000.
At SKY Italia, lower profit contributions are primarily the result of the current challenging economic environment in Italy that continues to impact subscriber additions, with SKY reporting a net loss of 27,000 subs in the quarter. Local currency revenues were below those of a year ago, with a slight increase in ARPU being more than offset by the reduced subscriber base, yielding lower subscription revenue.
So from the Twenty-First Century Fox total segment EBITDA basis, we ended the year up 9% and the fourth quarter up 14%. We also ended the year with approximately $6.6 billion in cash and $16.5 billion of gross debt.
Since the date of the separation, we have been consistently repurchasing FOXA shares, resulting in approximately $320 million of repurchases from July 1 through today. We will provide further specifics around our capital plans, including our dividend and share repurchase plan at the Investor Day on Thursday.
So now let me address our guidance for fiscal 2014. The base for our guidance that we will measure ourselves against is the fiscal 2013 total segment EBITDA of $6.26 billion that we just reported.
In 2014, our growth will be impacted by several strategic initiatives, most notably the launch of Sports Networks here in the U.S. and in Asia, as well as the launch of FXX.
Additionally, we are expecting adverse currency effects to impact 2014 growth, principally from Latin American currencies and the Indian rupee. Considering these items and based on all the assumptions inherent in our projections, we are anticipating our total segment EBITDA percentage growth rate for 2014 to be in the high single to low double-digit range above the $6.26 billion base level for fiscal 2013.
Now the overall growth will be driven by our cable segment, which represented 2/3 of our EBITDA this past year. This segment will post continued solid growth even after absorbing investments of $200 million and change in 2014 for the launch of the new channels and the comparative negative currency impact of approximately $100 million.
These factors will impact our company-wide growth by around 4%. We are expecting the Television segment to post strong growth in 2014 even after factoring in over $150 million and increased programming and marketing investments at the network to support rating leadership.
Growth at this segment will be underpinned by continuing increases in retransmission consent revenues. While we will also benefit from the broadcast of Super Bowl XLVIII, this benefit will be largely offset by reduced political revenues at the TV stations from the record level we had in 2013.
On the content side, we are expecting the fiscal '14 results at our Filmed Entertainment segment to be down a touch to this past year as we prudently would not forecast our releases to have the level of contribution that Ice Age 4 had during 2013. And finally, our DBS segment will benefit a bit from the inclusion of the EBITDA results from Sky Deutschland.
So overall, our businesses are well-positioned for continued growth, and we look forward to sharing considerably more details with you at the Investor Day this Thursday. So with that, I'd like to turn the call over to Chase for some additional comments.
Chase Carey
Thanks, John. I'll be reasonably brief in my comments today in light of our Investor Day upcoming this Thursday.
In many ways, the last year is the one in which we put in place the foundation for which we will grow Twenty-First Century Fox over the next 3 to 5 years. Obviously, the defining event for that foundation was the split of News Corporation to enable us to streamline our operations and bring an enhanced focus and alignment to Twenty-First Century Fox.
But we achieved much more than that. At our U.S.
channels, we continue to build in our leadership position in key channels like Fox News and FX while strengthening emerging channels like National Geographic and Fox Business, with stronger distribution and improved programming. We displayed the ability to continue to successfully navigate the regional sports arena by strengthening that business with the addition of an equity stake in YES and a new Ohio regional.
We successfully renewed affiliation agreements and drove advertising growth with continued momentum in our brand and programming. Most importantly, we positioned ourselves to add critical new networks in sports and entertainment to strengthen our overall portfolio and drive long-term growth.
Internationally, we also built in our leadership in our core entertainment area. Our success in launching series in a global basis like Walking Dead, The Americans and, most recently, The Bridge added an exciting dimension to our business and really began to distinguish our entertainment networks as the first truly global ones.
The most significant event has been building a global sports business over the past couple of years to go with our entertainment and nonfiction channels. Some of these sports businesses like Latin America were a bit further along and have already moved to profitability, while others in Asia and Europe are early days.
However, they are all underway to bringing a critical new dimension to our business. At the broadcast network, we had largely completed our initial retransmission agreements with MBPD [ph] and our affiliates.
While the fees still represent only a fraction of the value of our content, this provides a base to build a dual revenue stream that will enable Fox to have the economic framework of a cable channel and begin the process of building a profit stream that reflects its importance in the larger universe of cable networks. And we continue to make strides in streamlining our businesses through sales such as NDS or acquisitions to take control positions like Sky Deutschland.
While the foundation is in place, we recognize the real work lies ahead. In the coming year, our priorities include, first, building our new U.S.
sports and entertainment networks and Asian sports networks. We will invest $200 million plus in 2014 and a bit more in 2015 due to onetime cricket events in India.
These networks should turn profitable in 2016 and will be on their way to being major profit centers for us. Investing is well in our broadcast network and executing a plan designed for the future, not one quitted to broadcast rules of the past.
This means different order in launch practices, new development strategies and more. As John noted, we will incrementally invest about $150 million in Fox this year and we do that as an offensive, not defensive, strategy for this dual revenue business.
Hit content is more valuable than ever, and this network is a launching pad for the best-to-hit contents so we're excited to invest here. Additionally, our guidance for fiscal '14 includes an advertising outlook which anticipates that a result from the recent broadcast in cable upfront, along with incremental viewership expected for the Super Bowl.
And new domestic and international cable channels will provide continued advertising growth in the year ahead. At our broadcast network, we expect pricing to increase in the mid-to-high single-digits, led by our sports broadcasts, and we project low single-digit growth in the local ad markets.
Current scatter markets are strong with double-digit premiums to upfront pricing. Pricing trends at our domestic cable channels are expected to be up in the high single digits and even higher internationally on the strength of Latin America and Asia.
Another key priority is maintaining market leadership in our Film and Television production businesses. The guidance John referred to in the Film segment is a reflection of the challenge in predicting these businesses, not our confidence in them.
Our Film group continues to add new dimensions like DreamWorks Animation distribution and Fox International productions while successfully taking advantage of emerging digital distribution opportunities. Our TV group just finished the pilot season as #1 in new series orders.
They also look to build on their momentum and have shown the ability to navigate opportunity in network, basic cable, premium and digital networks. We have a multiyear Netflix deal in place, so the exciting digital arena suggests upside opportunity for this group.
We also aim to effectively execute the plans in place for our controlled satellite platforms. In Germany, with Sky Deutschland, this means building at our current top line momentum, and we expect this year to be one of exciting growth.
In Italy, with SKY Italia, the strategy continues to be maintaining market leadership with competitive strength while restructuring costs for the reality of today's Italian economy. We have a number of key content agreements expiring in the next 12 to 24 months that will enable us to achieve our goal of taking $200 million plus as the annual cost of this business.
Profit in 2014 will not be up much on 2013 because these agreements only begin to expire this year, but we will make real headway in 2015 while getting to our goal in 2016. This plan will enable us to have a very profitable and strong SKY Italia, even in the current economic circumstances, that can grow the top line more aggressively when the economy warrants.
There are number of other key initiatives for the coming year such as stretching our balance sheet and liquidity, but we will reserve comments on the rest for Thursday. With that, I'll turn it back to Reed.
Reed Nolte
Thank you, Chase. And now Chase, James and John will be happy to take a few questions.
Again, given we are hosting our investor conference the day after tomorrow, we ask you to limit your questions to the results and guidance we just reviewed, as we will be addressing a much broader array of topics on Thursday, with ample time for additional questions then. Operator?
Operator
[Operator Instructions] And we will start with the line of Doug Mitchelson with Deutsche Bank.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Chase, can you give us a sense in your budget for fiscal '14 what percentage of Fox Sports 1 subscriber base that launched will be on the new rate card versus the old speed rate card? It seems at least Comcast [indiscernible] more cable over there.
And is there any way to pull forward other distribution contracts? What have you assumed in the guidance for this year?
Chase Carey
Yes. I'm not going to get into individual discussions.
Look, I guess, in general right there is we're confident about the targets. We've got [indiscernible] channel, and we're comfortable with where we are in the process.
And we're engaged with a number of parties. This process usually has a lot of conversations that sort of have occurred.
Certain details to get worked out at the last minute, but we actually feel good about where we are. And I think those conversations with any individual players will probably best adding Friday[ph]
Operator
We'll go to the line of Ben Swinburne with Morgan Stanley.
Benjamin Swinburne - Morgan Stanley, Research Division
I'm sure we'll get into this on Thursday. Chase, I was wondering if you could comment on the decisions around Hulu, a fact that the business now seems to be more of a strategic asset for you guys and you're in an investment mode.
And I was just curious, John, if you could give us any sense for working capital for '14. It was actually a pretty big drag in fiscal '13 of about $1 billion.
I wondered if you had any comments as to sort of why that was and what we should think about for fiscal '14.
Chase Carey
Yes, I think on Hulu, yes, I think it's really a case where we know -- I think we've always known the importance of these digital platforms and the opportunities specifically at Hulu. I think the real question was partnerships are complicated and can we get aligned around the strategy we both believe we can execute to be successful.
And I think as we went through this process, we really found all the constituencies really sort of coalesce around the vision of how to really build this in a way that it can be something exciting content owners or something. It could be an exciting addition to the digital marketplace and something that, in many ways, could enhance the existing ecosystems.
And so I think we know the importance of digital, so making the capital, in many ways, would the easiest part once we had a plan that we all were aligned around and believed we could execute on.
John P. Nallen
And then to respond to the working capital, you'll see the biggest change there comes from our buildup of inventory, which is, at the end of the year, we had 5 enormous films in production as compared to where we were a year ago, led by Wolverine and a few other big ones coming out this year. And likewise, on the TV side, we've got the most new series in the history of the company under development right now.
So a lot of that is just the production spend toward those series. Looking to '14, our expectations are we're going to see our revenue grow much more significantly in the fourth quarter than this year.
So when you look at our overall year, we'll probably be a touch below where that working capital is, but it's all because of the growth in the business.
Chase Carey
Yes. And I guess the only other dynamic I'd add to that is as we're growing these new channels, clearly, there's a ramp-up to invest.
We want to invest in content. We want these channels to be channels we can be excited about.
So both from the sports and entertainment side, we've been investing to ramp up in the content to fuel FS 1 and FXX, as well as the international channel additions.
Operator
Our next question will come from the line of Jessica Reif Cohen with Bank of America.
Jessica Reif Cohen - BofA Merrill Lynch, Research Division
Just one clarification and one question. Chase, you said on Sky Deutschland, I'm not sure what you said about increasing your ownership.
I know you increased it already, but did you say that you're going to plan to own it fully?
Chase Carey
No, I didn't. I didn't say anything about -- I didn't touch on the ownership, [indiscernible] we are comfortable where we are.
Our focus is on driving Sky Deutschland to be as successful as it can be. But if I did, I didn't mean to.
I didn't think it. We did not -- right now, our focus is on driving it to be successful, and we feel good about the momentum in that business.
Operator
Next question comes from the line of David Bank with RBC Capital Markets.
David Bank - RBC Capital Markets, LLC, Research Division
Can you talk about -- in the underlying guidance, you just gave the impact of some of the lumpy syndication deals like Modern Family and Glee and Cleveland, how they impact you, as well as the assumptions for OTT revenues. And also, if you could just touch a little bit upon domestic ad revenue trends.
They seemed a little bit weaker domestically than I might have expected. Is there anything interesting going on -- anything that could be driving some softness there.
Chase Carey
I think in terms -- I mean, first, one syndication side, it's not actually as lumpy as it used to be. It used to sort of recognize everything on the first day of unveil [ph] and now really gets recognized-- like Modern Family, which obviously -- we think it could potentially be a $1 billion profit franchise.
But you don't -- you now recognize it really over the certain life of that flow. So you don't have the lumpiness you used to in the syndication marketplace.
So there are products that are coming in and out, but it doesn't have that onetime event. Some of the franchises like Simpsons are still a fiscal year away.
So The Simpsons is fiscal '15, not '14. So there's a benefit, but there are always some things -- there are a couple like -- and I think How I Met Your Mother is one that will be less than it was.
We had something this year that won't replicate this year. So yes, there's gives and takes in there but not the drama that used to be there.
I think our OTT, we're being reasonably [indiscernible]. To me, that's an upside opportunity.
I mean, what essentially we've got is a multiyear sort of foundation, now with the deal with Netflix in place. And so we sort of got the base.
We're not assuming just because I think it's difficult to predict. I think there's a lot of promise for new entrants and new opportunities probably in both U.S.
and overseas, but I think we are not going to sort of bank on those. So I think we've made it reasonably conservative assumption based on what we know, that we think there are opportunities for a much more dynamic marketplace as the year evolves.
And I guess the third?
David Bank - RBC Capital Markets, LLC, Research Division
Domestic ad trends.
Chase Carey
Domestic ad trends, yes. Well, I guess, look, we're out in the fourth quarter with -- because the network ratings worked well, obviously, it should affect the advertising in the stations and the network, and that's -- yes, there's no question of the fact that Idol did not deliver as we hoped, we've made some steps, put new leadership directly in place.
I mean, David Hill, who has shown a unique touch in a number of places, trying to believe that. It's still a show -- it's still a profitable show and still a top 5 show.
And we think there's an opportunity to reamortize that, but there's no question American Idol affected our broadcast. It still affected it there.
I think the other dynamic in the cable is probably at a degree of political spending that you sort of saw year-on-year as you went into that quarter. It obviously affects places like the news arena and others where you get that fairly significant slump[ph].
But midyear, politics, from 2012 to 2013. I think by and large, I mean, if I look at it today, actually, the local business at the stations is actually stronger than it was a quarter ago, and it's picked up.
It's at the scatter market on -- the broadcast network is actually pretty strong. And some of the cable networks like FX and some others, it's really dynamic.
So right now, there's actually some pretty good energy in the marketplace.
Reed Nolte
Thank you, David. At this time, I think we're kind of out of time, and I want to thank you, everybody, for joining today's call.
And we look forward to seeing many of you in the next day or 2 at our conference. Thank you.
Operator
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You may now disconnect. Speakers, you may remain on the line.