Nov 2, 2016
Executives
Reed Nolte - Executive Vice President Investor Relations Lachlan Murdoch - Executive Chairman James Murdoch - Chief Executive Officer John Nallen - Chief Financial Officer
Analysts
Michael Nathanson - MoffettNathanson Doug Mitchelson - UBS Rich Greenfield - BTI Reif Cohen - BofA Merrill Lynch Todd Juenger - Sanford Bernstein Ben Swinburne - Morgan Stanley
Operator
Ladies and gentlemen good afternoon, thank you for standing by. Welcome to the Twenty-First Century Fox First Quarter 2017 Earnings Release Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [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, Executive Vice President, Investor Relations.
Reed Nolte
Thank you very much, Operator. Hello everyone and welcome to our first quarter fiscal 2017 earnings conference call.
On the call today are Lachlan Murdoch, Executive Chairman; James Murdoch, Chief Executive Officer; and John Nallen, our Chief Financial Officer. First, we will give some prepared remarks on the most recent quarter and year and 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 strategy. Actual results could differ materially from what is said.
The Company's Form 10-Q for the three months ended September 30, 2016, 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 and the reconciliation of such measures can be found in our earnings release and our 10-Q 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 Lachlan.
Lachlan Murdoch
Thanks Reed, good afternoon everyone. We are pleased to have delivered a strong quarter from both top and bottom line earnings.
The progress we’ve made against our earnings objectives is broad based representing improvements across business segments and geographies. It reflects operational momentum across our businesses, driven by our focus on creative excellence and by our efforts to enhance the consumer experience plus better monetizing our content.
A number of key factors contributed to 17% year-on-year EBITDA growth from 7% increase in revenue. Our film segment more than doubled its quarterly earnings contribution, thanks to key film releases as well as the sale of some SVOD television rights.
Summer releases, Independence Day Resurgence and X-Men, Apocalypse were key contributors. Our recently released Tim Burton’s film Miss Peregrine's Home for Peculiar Children had a strong opening, which will primarily benefit the current December quarter.
Under the leadership of Stacey Snider the film studio has bolstered its team by attracting key senior executive talent spanning marketing, international distribution, business affairs and licensing and together they’re well focused on Starring the studio’s future course. In the short-term there’s a lot to do.
Our forward slate is strong Why Him, Assassins Creed, Jackie, Hidden Figures and Logan, all released in the balance of this fiscal year. It’s a diverse and high quality slate that we have solid expectations up.
Our cable networks earnings improvement was driven 10% revenue growth on solid gains in both affiliates and advertising revenues, both domestically and internationally. Of course FOX News has never been stronger amidst an intense election season.
It just marked 59th consecutive quarter as the number one in cable news and just finished October as the number network in both prime time and all day across all of cable. Last month also marked the first time a FOX News anchor moderated a general election presidential debate.
We have to give a shout out to Chris Wallace’s superb debate performance, which notably receive kudos on both sides of the aisle. Overall in the cable world and of particular note, we added overall domestic pay TV subscribers this past quarter.
We’re particularly excited by all the new DMVPD services that are emerging in the market place. Hulu is executing against its development plan and is on track to launch its new DMVPD service early next year as we have discussed previously.
Our major brands are included in every DMVPD service that has emerged, with affiliate fees that are absolutely on par with the first sub affiliate fees we get from traditional pay TV distributors. Importantly the strategic focus we put on our brands across our leadership in entertainment, news and sports positions us well for the transition to IP delivered.
We’ve our product focus that is as intense as it is unique and we’re seeing the benefits of all our efforts and investments in that area. Fundamentally, break out content is what drives up the value of our brands.
This is at the center of our growth strategy. A review of the business highlights underscores our momentum in this regard.
And I’ll turn it over now to John and James to provide more details.
John Nallen
Thank you, Lachlan and good afternoon everyone. We are very pleased with the strong financial results we reported for the first quarter of fiscal 2017, highlighted by double digit gains in both EBITDA and adjusted earnings per share.
First quarter revenues increased 7% to $6.5 billion, led by double digit revenue growth at the cable network segment and solid increases at the film segment. Total segment EBITDA was $1.79 billion, a 17% increase from the prior year, reflecting strong growth from the film and cable segments.
This quarter’s results include an approximate $40 million negative impact from foreign currency rates and absent this impact our overall EBITDA growth rate will be nearly 20%. From a bottom line perspective, we reported income from continuing operations attributable to stockholders of $827 million or $0.44 per share.
Excluding the net income effects in both years of other net and of equity earnings adjustments from Sky and the Endemol Shine Group, adjusted EPS was $0.51 this quarter, which is 34% increase over the comparable $0.38 reported a year ago. Now, while our tax rate in the quarter was below 30%, we expect the effective tax rate for the full year to be closer to the low to mid 30% range.
With that I’ll provide some added comments on the performance at our operating segments, Starting with the cable networks, with total segments EBITDA of $1.38 billion was up 6% on 10% revenue growth. Overall cable segment expenses increased 12% but excluding the impact of the consolidation of Nat Geo partners, they were up 8%.
Domestic cable network revenues increased 10%, with affiliate fee growth of 8% and 6% advertising increases. The affiliate fee increase primarily reflects higher average rates across all of our domestic brands as well as subscriber additions at some of our still expanding networks.
First quarter advertising revenue growth was driven by the rating strength at FOX News and also reflects a 2 percentage point benefit from the consolidation of the Nat Geo businesses we acquired last November. EBITDA at our domestic channels increased 9% over the prior year, reflecting a revenue growth partially offset by higher baseball cost at the RSNs, higher entertainment programming cost at the FX channels and the inclusion of the expenses related to the acquired National Geographic businesses.
First quarter reported international cable revenues grew 9%, driven by 8% increase in reported affiliate revenues, which were up 16% on a local currency basis. Reported advertising revenues increased 6% over the prior year on local currency growth of 11% led by Star in India.
International channel EBITDA contributions on a reported basis decreased 7%, but excluding the effects of foreign exchange primarily from Latin America, would have increased by 6%. As expected international channel expenses increased, largely reflecting higher sports cost from our broadcast of the Summer Olympics in both India and Latin America during the quarter.
At our television segment, EBITDA was $191 million versus the 196 million reported in the prior year. This slight year-over-year decline is primarily due to lower advertising revenues, largely from the absence of the prior broadcast of both Emmy’s and the FIFA Women’s World Cup Final as well as the market shift of advertising dollars toward the Summer Olympics.
The advertising revenue declines were largely offset by continued retransmission consent revenue growth and higher content revenues led by Hulu. At the film segment, EBITDA of $311 million was more than double the amount we reported in the prior year.
The current quarter was also driven by the SVOD licensing of Homeland, lower theatrical releasing cost as well as higher profits from this year’s summer film releases including Independence Day Resurgence, as compared to last year’s slate which included the release of Fantastic Four. Shifting over to capital management, during the quarter we repurchased approximately $410 million in Fox A shares, reducing total shares outstanding compared to a year ago by 10%.
We now have approximately $3.2 billion remaining on our overall repurchase authorizations. And with that let me turn it over to James.
James Murdoch
Thanks very much, John. Good afternoon everyone.
So as you’ve heard the fiscal year has Started well. So I just like to spend a minute on some highlights and then some things to focus on going forward.
First, I want to reiterate that our strategy, a focus on big brands that matter for customers and investment on screen that clearly differentiates in our detention and a program of work to make our programming and products more available not less is paying dividends. Furthermore, the changes we’ve made to the organization are delivering a leaner and more capable company and the team continues to move at a very fast pace.
Creatively the business is in good health. FX has set a new industry record for basic cable wins at the Emmy this year and our original series American Horror Story launched as the highest rated cable TV series and a new series Atlanta ranks number two in comedies behind only South Park.
National Geographic’s new programming strategy is just now kicking in with the November 14 premiere of its first global event series Mars, which begins its new premium programming push. And on the broadcast television side, we got real traction of the Start of the new season with a number of new series, including Lethal Weapon, Pitch, The Exorcist and Son of Zorn.
Currently network entertainment advertising is pacing ahead of last year after a summer that saw a lot of demand absorbed by the Olympics broadcast on NBC. At the television studio, we’re excited that we have three of the top four scripted series on broadcast television today, with Empire, This is Us and Modern Family.
Fox Sports 1 recently marked its third anniversary and its highest viewership ever. In fact the last two weeks marked its most watched in the highest rate weeks in the networks history beating ESPN around the clock for the first time ever.
In addition to the strength in live events, FS1 focused on building its pre and post-game programming is paying dividends. And the studio shows from, Skip and Shannon to the Herd and Garbage Time and Fox Sports live are surging and hitting ratings highs.
As for broadcast sports, the World Series has delivered the largest live baseball audience in over a decade, generating huge amount of interest from advertisers and pricing accordingly. We’re also pleased with how well Fox is doing with its NFL programming.
While there’s a lot of noise about declining NFL ratings, Fox’s game day viewership on Sunday is holding up well and is within 4 percentage points of last year. Meanwhile our NFL game continues to be televisions highest rated and most watched show in any day part averaging over 25 million viewers.
And from an advertising perspective, we continue a strong pace over where we were last year at this time with the year-to-year NFL ad pricing increases in the high single digits. Our regional sports networks continue to excel.
We had a great baseball season with five of our RSNs ranking number one in their markets among all broadcasting cable on game nights. Star India’s advertising revenues returned to double digit year-over-year growth on a constant currency basis and we continue to see exceptional growth of our mobile video platform Hotstar.
Between June and October, average watch time doubled on the platform and minutes viewed is currently more than double, all the mainstream competitors combined and more than 10X the watch time of Netflix, which launched in India earlier this year. Our Fox and National Geographic brands are also showing strong growth in almost every region, on global Ex U.S.
basis revenue growth in the teens on a constant currency basis. The Sky business our largest affiliate is also making great strides as the strength in breadth of the platform continues to drive accelerated growth, both in subscribers, but also in the tremendous content business that comprises so much of the company’s portfolio.
In closing, it’s an exciting time for us. As we look across the business, we forget about where we are.
We’ll turn it over to questions now and we’re happy to be as helpful as we can be. Reed?
Reed Nolte
Thank you, James. And now operator, we’ll be happy to take questions from the investment community.
Operator
Thank you. [Operator Instructions] Our first question today comes from the line of Michael Nathanson with MoffettNathanson.
Please go ahead.
Michael Nathanson
Thanks, I have one for the three of you and one quickly for John following up. For the three, Lachlan you definitely called out that there was acceleration subs this quarter which is a break from the trend we’ve seen.
Can you spend some more time talking about which networks drove to be, was there also an improvement in kind of matured networks and how sustainable is this trend?
Lachlan Murdoch
Great, thanks Michael. So I think there’s two important points to call out here and that is the - as I mentioned sort of net growth in subs.
A lot of this is actually with FX, FXM and FS2 sort of spinning down into broader bundles, right. So adding subscribers have been part of their broader bundles and I should add also this happened with our Fox business channel as well.
In addition to that obviously the emerging growth of some of the over the top platforms and our distribution on all of the new DMVPDs helped us grow subs in the quarter.
Michael Nathanson
Okay, let me ask John, you made a point in the last call saying, you expect a 32 [ph] growth feedback in weightage in this fiscal year, but already in this quarter you’ve accelerated from where you were just a quarter before. So can you update us on, is there more to come or was this more [indiscernible] is here?
John Nallen
No, I think still the back end weighted point stands just because of renewals that we have coming in the back half of the year. And look it is nice to get subscriber additions during the quarter, some expected some - less expected given the comments Lachlan just made about the emerging DMVPDs and it’s great to see the traction that they’re getting there.
Michael Nathanson
Thanks.
Lachlan Murdoch
Thank you, Michael. Operator, next question please.
Operator
Thank you, our next question is from Doug Mitchelson with UBS. Please go ahead.
Doug Mitchelson
Thanks very much. I think for James and Lachlan, I just love if you could talk about your latest view on the need for scale and media and your appetite for M&A, given the backdrop of an AT&T Time Warner merger announcement.
And then for John, this might be also reminded, but this as we think about the December quarter, the World Series going seven games, if you could give us any sense of how that might impact numbers. I appreciate it.
James Murdoch
It’s James. Hi, Doug thanks.
So in terms of scale, look I think as we’ve often said, this is an industry and a business that thrives on scale. But at the same time, scale for scale sake is you know are not something that we think should be pursued, we really like the business mix that we have.
We’ve really simplified the operating model over the last number of years and invested in these big scale brands that really operate at the top of their games, I think all over the world. And we feel pretty good about that and our focus remains, execution and operating the business as best as we can and growing it as fast as we can.
I think - so there is no heightened appetite for any inorganic activities proposed - recent activity and I would say as I said I think the last quarter, we really try to be very, very disciplined about this, we are very high heard all in terms of how we think about investment and how we think about doing things. We slowly passed on lot of opportunities that we thought were - the price was just not going to deliver the value for shareholders that we think that we want to deliver.
So I don’t think there is really any change there with respect to our own posture. I would say though that our business is growing really well and there’s investment in these brands, there’s investment in the content and programming, there’s investment in the capabilities around the business from a user experience perspective and a monetization perspective are really getting traction.
So we feel good about the business mix and as I said we are operating and are involved in it.
John Nallen
And just your question Doug on World Series, look we have all been around this and after you’ve been through four game sweeps and disappointment you get there, but to get seven game in a World Series with the nation really focused on tonight's game is - it’s a good benefit for us. So we are not getting into numbers, it’s positive segment.
Lachlan Murdoch
We just made a lot of pitching change, but the ads are getaway ads.
John Nallen
Right, and there will be.
Lachlan Murdoch
Thank you, John. Operator, next question please.
Operator
Thank you, we will go to line of Rich Greenfield representing BTI. Please go ahead.
Rich Greenfield
Hi, thanks for taking the question. First of all just AT&T, I think Randall, when he was on stage at the Wall Street Journal conference, him and Jeff announced that FOX was part of the Direct TV now bundle.
A, is that accurate or did they jump the gun and is the $35 tier without RSNs something you are okay with or is it a non-Starter given that I think you have entry level bundling on sling - one of the sling package and I think Hulu, the RSNs are in the entry level package, so just wondering how you think about that and I have strategic follow up.
James Murdoch
Rich, thanks, look all our phase we certainly anticipate to be part of major brand to be part of - all of these emerging DMVPDs are all the major ones anyway and beyond that I don’t want to go into any particular commercial relationship until they are - sort of it is more out there. But we certainly anticipate the inclusion of his brands and that’s why we have been investing these brands and it is why we really adopted the strategy we have around these brands that matter for customers and I think seeing that early growth now and these new DMVPD entrances that we see in this quarter.
We really think an exciting moment of growth over the next number of years as this downstream competition really increases with lower barriers to entry for these players and at a price point I think that do make a difference for customers. To your second question around those price points and the inclusion of different brands all of our MVPD contracts have certain provisions for penetration rate, for packaging et cetera, so there is an amount of flexibility that our partners have, but we certainly expect all of our brands to be available to the customers of those DMVPDs, but the packaging, much of the packaging is really to come.
You leave the packaging up to the DMVPD themselves and the pricing, how they choose the price and differentiate themselves with their customers, I mean the key thing for us is that we are monetizing our content in exactly the same way as we all with the traditional MVPDs so we are not out of pocket regardless of how they pay package or choose package.
Rich Greenfield
And then just strategically Bob Iger made a comment recently that despite all of their great content and even with their ownership of Hulu, which he actually didn’t talk to, that he may need more of a direct access to the consumer, we’re just wondering how do you all think about that issue of - obviously you have Sky in the UK, or the Sky platforms across Europe, but how do you think about that issue as you think about U.S., is Hulu an offer, do you need more direct access in the U.S.?
James Murdoch
I think certainly the user experience is kind of dimension of competition that is really important and we look you mentioned sky across Europe and you know what the business there has been able to do with creating user experience that is really seconds and I think globally but also our affiliate Hulu being able to do that here, which said in multiplatform viewing if I look at our entertainment network for example on Hulu and our owned operated apps on an authenticated basis is almost 20% of our prime time viewing now. And we think that is really encouraging Start, so it is not just to say that direct to consumer or user experience means you have to be an independently priced sort of offering out there, it is also something through the authentication process and through new partners like the DMVPDs we can do quite a lot.
One of the most exciting things is, ad innovation, so having that closer relationship with customers or working with partners like the DMVPDs and Hulu going forward, where we can innovate in terms of advertising, we can reduce loads, we have much more capability there, we think the real positive for the business. So I don’t think it is - I don’t think you have to necessarily say that an independently priced a la carte or otherwise kind of direct to consumer offering is necessary, but where it is appropriate and where we think we can do some really interesting we will for example in India with HotStar which is growing gang busters and we really saw an opportunity in mobile video to do something around the content that we create there and that’s been a great success and we think it is going to be a huge platform going forward.
So I think it is the mix depending up to the region but there is no question that user experience is really important in terms of how people discover our programming, how they interact with them and how we can monetize in the best way possible. Thank you Rich
Rich Greenfield
Thank you so much.
James Murdoch
Thank you, Rich. Operator, next question please.
Operator
Thank you we will go to Jessica Reif Cohen with BofA Merrill Lynch. Please go ahead.
Jessica Reif Cohen
Thank you I would actually like to follow up on that topics on what steps are you taking specifically to kind of drive the targeted average I think across all platform, so I mean obviously AT&T, talks a lot, albeit that on their platform but that’s a link one and you just mentioned two little so what you are going do to really drive adjustable [ph] advertising across all platforms and I guess also on the advertising side can you just comment on current what market conditions what you are seeing and to just in fiscal Q2?
James Murdoch
Sure, with respect to add innovation across the piece, certainly we work with number of partners, our distributers and downs in distributors and to be very candid with you now we would like to work more closely with them. Some of that has been challenging in terms of actually getting targeted advertising, dynamic ad insertion all of those things access to data can be challenging, we monetize streams for example on our owned and operated apps where we have some ability to target and we can actually put new ad product in place at a much, much higher rates and we do on cable DOD services.
And that’s something that I think MVPDs have to address and that’s I think we have put a better user experience together there. So I think those things will level up as competition increases, but also across the board from Hulu to O&O app [ph]to some of our third party distributors as well as the these the DMVPDS emerging, the opportunity for ad innovation is much, much greater than in the legacy infrastructure that is there.
So we think that’s really exciting.
Lachlan Murdoch
And then just in terms of future advertising pacing and scatter pricing obviously through this quarter we are now looking past the Olympics effect and the comparison with the Emmys revenue last year as John mentioned in the FIFA Women's World Cup revenue, this thing more normalized sort of pattern having said that we are at this point with the level of political spending that obviously we have seen or we would have expected but having said that pacing is up in the low to mid-single digit and scatter pricing is conservative up between 20% and 30% and with significant enough inventory that is making an impact.
Jessica Reif Cohen
And then just one last thing on this you mentioned the asset mix that you have is and focus on strong brands but with the weakness in the Pound, are you rethinking potentially buying the balance of Sky?
James Murdoch
Look I think you know as every quarter we talk about this with you guys and I would just say that Sky business is great business, it is growing really well, the integration of three Sky's has been successful and we are very focused on that business growing and executing as well as it can.
Lachlan Murdoch
Thank you Jessica, could we have next question please.
Operator
Thank you we will go to Todd Juenger with Sanford Bernstein. Please go ahead.
Todd Juenger
Hi, thanks. I wanted to take your temperature on couple of major sport fields that are coming up and then a quick one for John which seems to be norm here.
One of it, explore the Indian Premier League in India I believe that is currently Sony controls, I think that comes up at the end of next year, looks like people are saying according to press Amazon might be interested, I am sure you guys are interested, but love to know how that factors into your thinking about the targets for Star India EBITDA growth and how aggressive you need to be or not be for that guy. And then similarly in the States on the MMA contracts right, should be coming up as a cornerstone for Fox Sports 1 how you think about it what you do with or without that and how aggressive you need to be there.
And the quick one for John I guess would be just be can you help us in a situation where you are in a dispute with a big traditional distributor about - actually way to get dispute about the rate card for your networks, how are you accruing that affiliate fee revenue are you accruing it at the rate that you believe you should be paid or at the rate that your counter party believes you should be paid? Thanks.
James Murdoch
Todd, it is James here. So first of all to say on the IPL, I think it is well known that there’s a - it’s well known that it’s very unclear when those rights will come to market.
There has been a delay in that process. But I would say, look with respect to the Indian business we obviously look at different rights packages as they come up, we have really grown the breadth of that business in terms of sports with BCCI domestic cricket contract as well as the growth in Kabbadi and the Indian Super League, so it is really a broad business there and new rights come up where we always will have a look at.
There is nothing at this point I can see in the outcome of those things that would deter it from the medium term target that we have laid out for profit growth at Star which were pacing towards pretty well, so we feel confident about that. And then with respect to UFC and also with any rights packages as well, you make choices about these things and it is really fundamentally about value.
I think at Fox Sports 1we really try to broaden the overall rights package as well, the right offering to the customers and the live event offering to customers and we would look at any renewal or new rights packages coming on to Fox Sports 1, from perspective of value and the perspective of what we think is really can continue to bring to customers. But the UFC has been a great partner for us and we got little ways to run on that and that’s really not until fiscal ‘19, the impact would be and we will take it as it come.
Just on the other question we booked the fees on the contract rates and we had a contract with charter and we are booking the fees at that level.
John Nallen
Thank you Todd, operator at this time we briefly have time for one more question.
Operator
Thank you, our final question then will come from the line of Ben Swinburne representing Morgan Stanley. Please go ahead.
Ben Swinburne
Thank you, just wanted to focus on domestic cable network, it’s obviously a highlight this quarter. Anything besides the subscriber improvement that drove the acceleration in revenue growth, I think you went from kind of the mid six last quarter to 8%.
And John, I just want to confirm that you were saying that this to accelerate again in the second half of fiscal year as you go through some more renewals. And then just wanted to come back to FOX News, may be for James, lot of changes in management there including I believe head of affiliate sales which has been a big diver of growth for the company over time what are your thoughts on strategies for driving rates on FOX News going forward, you still bullish that there’s upside there and any change in strategy from the management change on that probably will be helpful thanks.
John Nallen
First on the first part of the first question, in this quarter there have been no renewals at a higher pricing, so the drive in affiliate revenue is really from volume [indiscernible] pricing. as you look at it Ben sequentially which is six to eight that’s all volume, pricing, brands and the same Q4 as it is in Q1, but what we do have, we have significant deals coming up in the near future.
James you want to talk to that?
James Murdoch
Yeah and then on the FOX News side, its - look I think there is absolutely growth there in affiliate fees. The channel is as strong as it’s ever been and just completed another quarter of leadership in record viewing.
Obviously, we expect the ratings and stuff like that sort of come off after the election that usually happens and then comes back. So we feel that the product has enormous amount of value to customers and that’s have been reflected in its ability to and our ability to continually grow those affiliate fees.
And we do have some renewable in the near term on FOX News that are pretty old contracts, so leveling up to the market and merely leveling up to the market creates growth opportunities there, so there is no real change in strategy there and from time to time certainly there are leadership changes and other things like that I mean affiliate side as well, but nothing that would change their basic trajectory in course that we’re on.
Ben Swinburne
Great, thank you.
James Murdoch
At this time we would like to conclude the call and thank you everybody for joining us today.
John Nallen
Thank you very much every one and enjoy the ball game.
Reed Nolte
Thanks everyone.
Operator
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