Shares of 21st Century Fox (FOX) (FOXA) dropped following the release of its second-quarter earnings and conference call on Feb. 4. The stock drop came even as earnings for the period were substantially better than the average analyst estimate. Revenue for the quarter ended Dec. 31 came in at $7.42 billion, ahead of the consensus projection of $7.36 billion, and earnings of $0.53 per share soundly beat the average estimate of $0.42. While Fox delivered a solid overperformance in the last quarter, the earnings beat was paired with reduced targets for fiscal 2015 and 2016.
Following the earnings release, investor relations officer Reed Nolte, CFO John Nallen, President and COO Chase Carey, and co-COO James Murdoch participated in a conference call to shed some light on the quarter's results and what the future looks like. Here are five key takeaways from the the call.
Fox is rewarding investors with dividend increases and share buybacks
Fox announced that it was raising its semi-annual dividend payout from $0.125 to $0.15, a 20% increase. The stock now has a dividend yield of roughly 0.9%, and its payout to shareholders of record as of March 11 will occur on April 15. On the buyback front, CFO John Nallen noted that the company had completed $2.9 billion in share repurchases from July 1 through Feb. 4. Fox is on track to complete the remainder of its scheduled $6 billion in buybacks over the next six months. Here's Nallen addressing concerns that the company's balance sheet is overly liquidity heavy even following the buybacks:
Our priorities for capital remain the same: invest in our core businesses to grow long-term value, opportunistic flexibility, and return of capital to shareholders. We continue to pursue our goal of achieving an efficient balance sheet, but we'll do so in a deliberate manner.
Fox's trailing-12-month payout ratio sits at just 8.94%, so even with the payout increase it still has plenty of room for dividend growth.
Broadcast advertising shortfalls and currency fluctuations are dinging the company's bottom line
Unfavorable exchange rates and softness in broadcast advertising have prompted Fox to lower its profit targets for 2015 and 2016. The company anticipates that currency fluctuations will result in a $450 million hit to the company's initial 2016 profit target. The company lowered its adjusted profit outlook for 2016 from $8 billion to the mid $7 billion range. Here's Chase Carey explaining the advertising component of the expected miss:
On the broadcast side, network and stations, the issue is primarily entertainment rating shortfalls at our network, exacerbated by adverse industry trends, the linear network rating and the television advertising markets, which, combined, leave our expected ad revenues well short of plan.
Fox won't cut costs to meet profit targets
Following up the earnings estimate revisions for 2015 and 2016, Casey admitted that Fox was disappointed that it will probably miss initial targets but indicated that it won't institute cost-cutting measures at the expense of long-term growth:
If our goal was to hit a short-term profit target, we would pursue efforts like cutting marketing and programming costs at the expense of future profits. We'll not do that, because we believe shareholder value is built through long-term growth.
The company views the creation of hit film and broadcast content and digital and international expansions as the keys to long-term success, so the decision to not cut costs in favor of driving short-term profits appears sensible.
Fox isn't looking to make another bid for Time Warner
In the question-and-answer segment of the call, an analyst suggested that Fox and Time Warner might need each other to combat the growing strength of Netflix and asked whether Fox was engineering another purchase bid. Here's Carey's response:
Oh, Time Warner. No, we are not. I won't give my "moved on" spiel, but we've moved on.
Carey continued, stating that Fox's most recent SVOD deals had been with Amazon.com and Hulu, and that the company expects the digital streaming market to become more competitive. He also stated that Fox had recently concluded a deal with Sony and was looking for other partners. Earlier in the call, James Murdoch said Fox was more focused on investing in its existing enterprises than in acquisitions.
Fox anticipates strong growth from international markets
Asked about the maturity of Fox's business and room for growth in international markets, Carey replied that foreign markets are broadly "somewhere midstream" relative to their full potential. He followed up with a comment on how he sees the company's international business progressing:
So I think, in many ways, I think, it will -- it'll obviously put short-term pressure because the pressure short-term will not -- it will take time to build the vehicles that replace the short-term pressures. But as we go forward, I think, it's an area of tremendous growth for us.
Fox is looking to India, other Asian territories, and Latin America as revenue boosters and anticipates that sports and digital content expansion will be big international growth drivers.
