May 10, 2017
Executives
Reed Nolte - EVP, IR Lachlan Murdoch - Executive Chairman John Nallen - CFO James Murdoch - CEO
Analysts
Michael Nathanson - MoffettNathanson John Janedis - Jefferies Doug Mitchelson - UBS Anthony DiClemente - Nomura Instinet Ben Swinburne - Morgan Stanley Marci Ryvicke - Wells Fargo
Operator
Welcome to the Twenty-First Century Fox Third Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I'd 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 third quarter fiscal 2017 earnings conference call.
On the call today are Lachlan Murdoch, Executive Chairman; James Murdoch, Chief Executive Officer; 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.
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 March 31, 2017 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 reconciliation, of such measures can be found in our earnings release and in our 10-Q filing.
Please note that certain financial measures used on 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. GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release.
And lastly, please note that our offer for Sky plc that was announced last December is governed by the U.K. Takeover Code.
As such, there are strict limitations as to what we can say with respect to that transaction and we are restricted to providing information that has been publicly announced. And with that, I’m pleased to turn it over to Lachlan.
Lachlan Murdoch
Thanks Reed, good afternoon everyone. I apologize for cold that I have.
We are pleased to have delivered another quarter of solid growth. The strength of these results generated the highest core earnings per share in the company's history.
This record results reflect continued positive progress across our businesses with revenue and EBITDA growth coming from both our Cable Networks and Television segments. And whilst earnings at the film studio decreased when compared to one of our most profitable film quarters ever in the prior year when we benefited significantly from Deadpool, they were robust nonetheless.
Importantly we have driven our business forward against all our strategic priorities to growing the distribution of our video brands on both traditional and demand emerging platforms, to innovative digital advertising products and partnerships such as OpenAP and most critically to delivering outstanding sports and news broadcasting. In fact, the scale and health of our sports and news broadcasting businesses continue to be differentiator for us with over half of the company's advertising revenues earned in these zones.
Of course we had an incredible Super Bowl but we also saw viewership gains for the Daytona 500 on FBC and for MLS Soccer on Fox Sports 1 which for the first time beat ESPN2 for entire month in February. Additionally viewership at our regional sports networks continues to be exceptionally strong with major league baseball leading the way.
Yankees ratings are up 39% over last season and the Atlanta Braves ratings are up over 54% this season so far. The business is in great shape with all expiring team rights deals satisfactorily renewed.
Not to be outdone, Fox News is the number one basic cable channel in both total day and prime time viewing for 61 consecutive quarters. In fact, Fox News has delivered its highest rated quarter ever rating strength we expect to continue.
In scripted programming our partnerships with the world's best storytellers continue to produce groundbreaking new series that drives a long-term value of our core brands. FX debuted successful first seasons of Taboo, Legion and Feud adding to the networks reputation as a creative powerhouse.
National Geographic has made great progress in its goal to more closely align its programming with its brand. The recent Genius premier from producers Ron Howard and Brian Grazer, Nat Geo's first scripted anthology series, drew over 4 million viewers in the U.S.
alone and was distributed further across the global reach of the National Geographic International channels. The Fox Broadcasting networks mixed performance in ratings this season has been frustrating for all.
So we are encouraged by our development for the fall and look forward to presenting a strong schedule at our upfront this Monday. Of course the network does provide our TV studio a powerful launch platform for it shows and it is important to consider these two businesses together.
Twenty-First Century Fox television is coming of a stellar 2016-2017 broadcast season. This past year our TV studio produced a number one show on five different networks including Empire on Fox, American Crime Story on FX, Modern Family on ABC, This Is Us on NBC, and American Dad!
on TBS. The solid performance of our film studio with the box office successes of Logan and Hidden Figures underscore the range and quality of what we bring our audiences.
Looking out over the next year, we feel good about our slate when Alien: Covenant directed by Ridley Scott coming later this month, followed by War for the Planet of the Apes in July, Kingsman: The Golden Circle in September and The Greatest Showman at Christmas. We've also recently announced the June 2018 release of Deadpool 2 something my young boys are wildly looking forward to but which they won't be allowed to watch.
Turning to our international businesses, the financial impact of the Indian demonetization we believe is behind us but the financial impact has obscured impressive operational progress, most notably Star India is increasing its viewership lead over our competitors and the continued rise and rise of Hotstar as the emerging platform of choice in India. James will have some more to say about that in a few minutes.
The company continues to attract great new leaders such as Amy Listerman, who has joined us as Fox News CFO and Marianne Gambelli was has joined us as President of Fox News' Advertising Sales and we welcome them to the company. We feel good about where we and confident that the strategic plan we continue to execute against is differentiating us from our competitors and building long-term value across our businesses.
With that, I'll hand it over to John.
John Nallen
Thanks Lachlan, and good afternoon everyone. Today we reported another strong quarter of financial results posting double-digit gains in adjusted earnings per share and growth in EBITDA despite the very difficult year-over-year comparisons at our film segment which Lachlan referred to.
Third quarter revenues increased $336 million or 5% to $7.56 billion led by higher advertising revenues at the Television segment from the broadcast of this year Super Bowl and affiliate revenue growth at the Cable Networks segment. This was partially offset by slightly lower content revenues at the Film segment.
Total segment EBITDA for the third quarter was $1.94 billion, a 3% increase from the prior year reflecting double-digit increases at our Television segment and mid-single digit growth at the Cable Networks offset in part by lower Film segment results from the challenging comp to a year ago. From a bottom-line perspective we reported income from continuing operations attributable to stockholders of $811 million or $0.44 per share.
This quarter included charges of $142 million reported in other net which primarily represents the fair value adjustments on currency hedges related to the pending sky transaction. Excluding the net income effect in both years of other net, impairment and restructuring and equity earnings adjustments, third quarter adjusted EPS was $0.54 which is a 15% increase over the comparable $0.47 reported a year ago.
So, now turning to the performance of our operating segments for the third quarter. The Cable Network segment reported EBITDA of $1.45 billion up 5% on revenue growth of 2% with total segment expenses pretty much unchanged from last year.
Domestic cable revenues increased 6% led by affiliate fee growth of 8% which reflects higher average rates across all of our brands. Domestic ad revenues were equal to the prior year as increases from the rating strength at Fox News, and at FS1 were offset by reductions from the non-channel businesses at Nat Geo Partners.
EBITDA at our domestic channel was equal to the prior year as higher revenues were offset by increased investments in programming most notably the planned investments to support our expansion of original series at FX and the new programming initiative at Nat Geo, as well as contractual sports rights step ups. Third quarter reported international cable revenues declined 7%, as low advertising and syndication revenues were partially offset by mid-single-digit affiliate fee growth.
Reported advertising revenues were as expected down 18% versus the prior year principally due to the absence of Stars prior year broadcast of the ICC T20 World Cup and Asia Cup cricket tournaments, and the continued negative impact from India's demonetization initiative. Now while the major effects of demonetization are now behind us, it negatively impacted the third quarter revenue by approximately $20 million.
Reported internationally EBITDA contribution increased 44% primarily due to the lower sports programming costs at Star and affiliate fee growth. At our Television segment, EBITDA in the quarter of $190 million increased 52% from last year on revenue increases of 30%.
This revenue growth was driven by our broadcast of this year Super Bowl where we generated approximately $500 million in gross revenues on Super Bowl Sunday and from continued retransmission consent revenue growth. These increases more than offset the impact of lower primetime entertainment ratings from the absence of American Idol.
At the Film segment, third quarter EBITDA of $373 million was $97 million below year ago. This quarter is very solid earnings were led by the theatrical releases of Logan and Hidden Figures and higher television production contributions from the licensing of American Crime Story and Homeland.
The comparisons to last year's third quarter as Lachlan mentioned are challenging since last year included significant contributions from the theatrical release of Deadpool and the home entertainment release of the Martian. These difficult comparisons will continue in the fourth quarter from the ongoing strength of these films last year, as well as from the quarterly timing of spot sales and reduced syndication sales versus last year's fourth quarter.
And finally from a balance sheet perspective we continue to accumulate cash reflecting our priority to point our capital toward the planned acquisition of Sky. And with that, let me turn it over to James.
James Murdoch
Thanks very much, John and good afternoon everyone, and thank you for joining us today. So as you've heard the first nine months of the fiscal year have been strong and we made good progress on a number of fronts, but I just like to spend a minute or two addressing some of the key things we've been seeing in the marketplace and share some thoughts on our priorities going forward.
So a few points to make on the following subjects. The advertising trends and performance, the distribution universe for our video brands, and the velocity of the business in terms of revenue that might not be so obvious at first glance.
So first of all we're very pleased with the advertising performance in the quarter which grew 16% companywide year-over-year. Now obviously as mentioned at Super Bowl was a major contributor which was offset in part by the lack of both the Asia Cup and ICC T20 Championship at Star, which we had in the comparable quarter last year and softer demand due to the effect of the demonetization as John mentioned, and the absence of American Idol at FBC which had its final run on Fox last year.
But it's important to note that all but one of our U.S. cable brand saw good advertising growth with only the National Geographic Channel down which we expected due to our shift in programming strategy that Lachlan talked about earlier.
National scatter remains strong, although local appears a little softer than we like particularly autos. For the month into the fourth quarter, we're looking for at least high single-digit growth for both our domestic and international cable portfolios.
As for the distribution landscape a few highlights, domestically as John mentioned we saw affiliate income growth year-over-year about 8% and acceleration from the same period last year and from the last quarter as planned. We expect that growth to continue to accelerate in Q4 and into next year.
The U.S. paid subscriber base for us was up slightly about 0.5% but obviously we some declines in the most widely distributed tiers of about 1.5% year-over-year which we have not seen accelerating since last quarter.
In fact, everywhere we look we see a landscape of opportunity as downstream distribution becomes more innovative and competitive. Despite renewed market commentary over the last week's, we remain of the view that innovation and competition from new entrants and incumbent operators will ameliorate and then reverse the trends as digital rebundling drives overall universe growth.
At Star we continue to grow at a good pace but the timing of some affiliate renewals last year affect this quarter's comparisons. You may recall that we had extraordinary growth last year in Q3 of some 20% in international cable affiliate revenue, so we are comping very nicely against a very high bar.
This year we grew affiliate revenue in every key region with some of the pace at Fox Network Groups international channels slowing due to some local events such as the closure of two distributors in Thailand and some other weakness in Southeast Asia. And the Hotstar platform in India continues to make strides expanding its watch time over the prior year quarter by 220% making it by some estimates about 14 times the watch time for Netflix.
In Europe, Asia and Latin America we've introduced innovative nonlinear packages to each of their regions under the labels Fox Plus and Fox Premium all tailored for specific market and offering consumers more choice, a better experience and ultimately for us making a better business. And in the U.S.
the digital MVPD revolution has only now reached the starting line. So taken all together, if we exclude the film segment which obviously didn't have a Deadpool in the quarter, revenue globally grew at about 11%.
We think that's a pretty good clip and it's a testament to the diversity and breadth of the business geographically and by mix. And year-to-date our EBITDA is up 11% which underscores how all this comes together with a durable velocity underlying the business.
I want to reiterate that our strategy to focus on big brands that matter for customers and investment on screen that clearly differentiates and earns attention and a program of work to make our programming and products more available not less is paying dividends. Our business has been an expression of the technological advances shaping our industry from way back from silent movies to talkies, from feature film exhibition to broadcast television and from broadcast to multichannel cable and satellite TV.
And the underlying technological advances today ubiquitous high-speed connectivity, a continued proliferation of end user connected displays and the potential for unfettered access to creative assets in the cloud for customers globally presents an opportunity for accelerated growth for new and existing video creators and platforms. We think this is only just the beginning and the combination of strengths required to operate a high-volume content business and a vast international video platform is precisely the combination of strengths that we're developing.
In short, if content is indeed King and using it to build platforms that are expression of these current underlying trends presents the most promising opportunity for our company in decades. Now before closing I like to quickly touch upon Sky.
The business continues to deliver on its growth strategy recently reporting good financial performance with subscriber growth across the group. Last month we welcomed the decision by the European commission clearing unconditionally our proposed transaction.
And we continue to work with U.K. regulators and we’re confident that the proposed transaction will be completed by the end of this calendar year as we said before.
Thanks very much and we’re happy to take any questions you may have. Reed?
Reed Nolte
Thank you, James. Operator, we’ll be happy to take questions from the investment community.
Operator
[Operator Instructions] First question is from the line of Michael Nathanson with MoffettNathanson. Please go ahead.
Michael Nathanson
Thanks I have one for James. Given that you were the last major media company to report and we appreciate the update in your subscriber trends.
No one yet ever has framed how big the virtual MVPD universe is currently. So could you tell us in aggregate how big virtual subs have been for you in the past quarter and what was the number a quarter ago so just give a sense of within your trends how much is the virtual MVPD business helping stabilize your cautious global trends?
James Murdoch
So first of all I don’t want to get into disclosing sort of individual partners of ours kind of paid customer numbers, but I would say that it is very, very early days. And really I think mostly for us the think that I point out is number one, the inclusion of our core brands and the investment in those core brands that we've been making over the last couple of years has really worked in terms of inclusion in new virtual MVPDs in every major one all pretty much, all of our brands are there.
And we see that growing pretty fast over the next number of quarters and years. But today which is a pretty small number because you really have really just DirecTV Now and Sling in the quarter and a little bit of Sony.
But it's really now I think the increased competition YouTube launching after this quarter I think it was just in April and Hulu really just getting out of the gates last week. So it's really just early days there.
So what’s really driving this more is the fact that we've been investing in these brands and some of our brands are less mature. And we have continued growth in a number of our channels in terms of the existing traditional MVPD subscriber base as well.
And I think actually one of our major brands saw any shrinkage in the quarter.
John Nallen
Michael I’d add to what James said and James also touched upon on his prepared remarks. The pleasing thing from our point of view is how different all the emerging MVPDs are and they’re targeting different segments of our so the consumer audience.
So between DirecTV Now and Sling TV, YouTube obviously Hulu, and PlayStation Vue they all very different services and we think this is incredibly important because not only are they designed - many of them are designed to replace traditional MVPDs subscriber numbers and losses but they’re targeting entirely new segments of U.S. households, segments that have broadband now but potentially don’t have traditional MVPDs.
So that's why it gives us a lot of confidence as James mentioned in his remarks that not only will these new services ameliorate decline in traditionally MVPDs but will actually grow the universe quite significantly over time.
Reed Nolte
Thank you, Michael. Operator, can we have the next question please.
Operator
We’ll go next to John Janedis with Jefferies. Please go ahead.
John Janedis
Thank you. One for John I think on the Cable Networks it was obviously a lot of movement on the cost front so as you look out I don’t even the June quarter or beyond are there more sports rights costs or incremental investments we should be thinking about or are you entering more of a normalized out of the mid single type of growth going forward?
John Nallen
We'll see I'm only looking forward to the fourth quarter John but as I do we’ll see kind of mid single on the domestic side which is the continued investment in Nat Geo and FX of the programming, but we don't have a big sports step up having domestically. But uniquely international we have a big cricket event in Star the Champion's Trophy.
So we'll see a higher growth in that quarter uniquely for that event otherwise our expenses should be in that mid-single zone.
John Janedis
Thank you.
Reed Nolte
Thank you, John. Operator, can we have the next question please.
Operator
Next question is from Doug Mitchelson with UBS. Please go ahead.
Doug Mitchelson
I was hoping some more detail on India James, I mean competitor highlighted yesterday that the Indian marketplace is challenging they were pleased at low exposure that obviously conflicts with your commentary and prepared remarks. Can you talk about the trajectory towards the long-term target of $1 billion of profitability and at what point Hotstar's cannibalistic and any other thoughts in the marketplace relative to that other point of view would be helpful probably?
James Murdoch
Look we’re very enthusiastic about our business in India. I think what we’re seeing there today as Lachlan mentioned an increase level of leadership in terms of our entertainment share.
Our sports businesses is really going from strength to strength since we've acquired half of the ESPN STAR Sports joint venture number of years ago and really reinvented STAR Sports in the marketplace. It's been very, very successful not just in Cricket but also with Kabaddi and with the Indian Super League, the Soccer League there really rounding up the schedule.
So we feel very good about it. I mean when look at the marketplace we obviously had a disruption with the demonetization and as John mentioned that's largely we largely through that now.
It wasn't that big an impact in the last quarter and we’re at the run rate that we need to be at to get to our targets at this point. So we feel on target, we feel like the business is in pretty robust health creatively it’s performing very, very well and we feel confident about the overall the Indian environment generally.
I did note some of those comments I heard about that and I was surprised because at least from our business perspective we take the view that you go into a market like India in the expectation that in success it's really going to change your life. So you’re really don't go anything other than the whole hog and that has really paid off well.
We have a very profitable an exciting business there and I think speaks to really the differentiation you're seeing across the media sector today. When I look at all that it’s very performance so I think I urged you to think about all of these firms have different strength and weaknesses.
And our business has been on very clear path about investing in these big brands around the world, being global first, getting exposure to market that we think in success can really, really move the dial for us. And investing on screen for customers in a way that is committed to the best possible context experience they can have and maybe that’s different from other players.
Reed Nolte
Thanks Doug. Operator, can we have the next question please.
Operator
We have a question from Jessica Reif with Bank of America. Please go ahead.
In case we've lost Mr. Reif line one moment.
We will go Anthony DiClemente with Nomura Instinet. Please go ahead.
Anthony DiClemente
I have two, one for James and one for John. James just wanted to ask about the appointment of Joe Marchese as the Head of Ad Sales I mean talk about the new model and kind of given his background in advanced advertising what is that appointment, and what’s your thought process in appointing Joe say about your expectations or where the TV broadcast advertising model is going in terms of ad product.
And then for John, you guys have really outperformed the market in terms of domestic affiliate revenue growth of course that's due to some recent large distributor renewals or at least one. So can you just talk a little bit more about the outlook for that?
I mean I think James said in his prepared remarks, strong growth heading into '18. I think some folks are wondering about the second half of '18 after you kind of laughed at big renewal.
And step up from that. So will other renewals help?
Could you just remind us what portion of your footprint is up by that time that can perhaps pick you guys up despite the anniversary? Hope that make sense.
Thanks.
James Murdoch
Thanks, Anthony. Well, I think on the advertising side, obviously when you have leadership changes and transitions you really look to what you think the needs of the business are going to be over time, and in the future.
And I think in Joe and also in Danielle, Majid, also reporting to Randy in that area. We’ve got leaders that are really very, very capable.
And I think that the advanced advertising piece, combining now with the sort of core advertising sort of broader TV advertising piece, I think is just makes a lot of logical sense. We look at this business as an audience business and attention business.
And having an organizational structure and the leaders of it aligned with that is the right strategy going forward and we're really excited about the next chapter for our domestic ad business. Lachlan, you want to add anything to that?
Lachlan Murdoch
Joe Marchese is an extraordinary executive. We're very lucky to have him driving our new advertising, advance advertising initiatives over the past couple of years.
He’s going to do a tremendous job across all of our advertising sales portfolio.
John Nallen
Anthony, it’s John to deal with the second part, I got out of the guidance business a couple of years ago, but clearly, our domestic affiliate fee growth is strong and we look at the peers, and we are putting some real points on the board here. So we've accelerated this quarter.
We’re going to accelerate again next quarter and into '18. So if we get volume from the new virtual MVPD, then that's icing on the cake.
So we're feeling very confident about our growth.
Operator
We have question from Ben Swinburne with Morgan Stanley. Please go ahead.
Ben Swinburne
Thank you. John, if you wouldn’t mind just humoring - I just want to confirm.
You were saying that '18 would accelerate from the fourth quarter level in '17.
John Nallen
Not necessarily saying that, Ben, but I was saying that from where we are in the third quarter, there's acceleration still ahead of us.
Lachlan Murdoch
By the way, I think it's something John has pointed to in the at least two or three earnings call. So I think the credibility of how closely we watch the affiliate revenue and growth, I think we’ve got a track record of delivering what we are.
Ben Swinburne
And my bigger question is, Fox News has been a tremendous business for you guys. Obviously there’s been a lot of change there and a lot of commentary in the press about advertisers showing some frustration and then you’re coming back to the business.
But I’m wondering, affiliate fees are a huge part of that business model. I think its most of the revenue.
Have you had any impact or conversations with distributors about some of the volatility there and the changes in talent and how you’re feeling? I mean, the numbers sort of speak for themselves, but how are you feeling about that networks programming and position with distributors who are out there every day with consumers for that network?
Lachlan Murdoch
I think it’s interesting if you go on YouTube TV, for example, and you see the number one trending live challenge shows on emerging the MVPD, it's almost always the case, Fox News. And that continues obviously post lot of the programming changes in line that we’ve had.
As we've said, the channel continues its ratings dominance. Move forward very strongly, very strong with both affiliates and with advertising sales.
We’re very confident in the future of that business.
Ben Swinburne
Thank you, guys.
Reed Nolte
Operator, we think we have time for one last question.
Operator
That comes from the line of Marci Ryvicke with Wells Fargo. Please go ahead.
Marci Ryvicke
Just curious about how you think of the TV station business with the Blackstone JV, you are bidding for Tribune, and you may not have bid Tribune, maybe you’re going back to bid Tribune. We're just curious how your distribution strategy may have changed.
James Murdoch
So first of all, look what I don't think is - I think this is not a forum to get into hypothetical conversations around M&A that may or may not have happened. I would say that in the end we didn't bid for Tribune, we talked about this with investment community and our shareholders in the past, the station business is a strong business for us, it's an important part of our network distribution, it's a strong business in terms of local programming, local news and so on.
But it isn't a place that we're targeting to deploy capital into and so anything that we look at there is more about, can we change our strategic position, could we think about scale in a different way but not in a way that would be - not in way that would be a use of capital for us at all just to be clear. But it remains - look it’s a strong business and I think the local - relevant to those local bands and the local stations in their communities continues to be very high.
Marci Ryvicke
Do you feel that the leverage maybe shifting to stations does that get bigger, do you worry about that?
James Murdoch
Look I think our affiliate agreements are constantly something that we think about and adjust. They come up in different cycles and we feel that we have quite a lot of options with respect to the working with our partners.
Tribune is obviously a big partner of ours and we look forward to continuing to work with them. We provide an enormous value for our affiliate partners as they do for us.
So we think it's a pretty balance relationship and one that we strive to make fair.
Lachlan Murdoch
I think that’s exactly right. When you're speaking of retransmission consent in particular, obviously the value of the network programming in particular sport is incredibly important part of that relationship with the affiliates and what they can achieve through their retransmission consent.
James Murdoch
I think that's all we’re going to have time for folks. So much appreciate everyone joining the call and thanks very much for your time.
Operator
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