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Twenty-First Century Fox, Inc. (NASDAQ:FOXA)
Q3 2018 Earnings Conference Call
May 9, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 21st Century Fox third quarter 2018 earnings call. At this time, all lines are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call, press * then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Reid Nolte, Executive Vice President, Investor Relations.

Reed Nolte -- Executive Vice President, Investor Relations 

Hello, everyone and welcome to our third quarter Fiscal 2018 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 then we will be happy to take questions from the investment community. This call may include certain forward-looking information with regards to 21st 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 ending March 31st, 2018 identifies risks and uncertainties that could cause actual results to differ. These statements are qualified by the cautionary statements contained in such filings.

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 addressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release and our 10-Q filing. With that, I'm pleased to turn it over to Lachlan.

Lachlan Murdoch -- Executive Chairman

Thanks, Reed, and good afternoon, everyone. Thanks for joining us today. Before giving comments on the quarter's results, I'll take just a minute to provide an update on the two transactions we announced at the end of 2017. But first, we want to note recent press reports about the potential of a further offer for our businesses. Consistent with past practice, we are not going to comment on market speculation.

Regarding our agreement with Disney, we jointly filed a preliminary proxy three weeks ago. It is a detailed filing, which should answer any questions people have about this transaction. Once finalized and cleared by the FCC, we anticipate being in position this summer to request shareholder approval for both the merger with Disney and the creation of New Fox.

Planning for New Fox is well under way and we'll keep you posted on our program, including announcements on the new company's leadership team and organizational structure. In the meantime, we are making strategic investments, such as the addition of key sports markets through our acquisition of seven Sinclair stations announced this morning and our deal with the NFL for Thursday Night Football that will deliver New Fox the very best content available.

Now, let me provide some highlights on the company's performance this past quarter. A couple of things really stand out -- first and foremost, the earning power of our cable networks. The segment delivered 16% growth and its highest EBITDA quarter ever. While John will provide more details on the financials, much of this strength was driven by continued double-digit affiliate revenue growth at both our domestic and international channel business.

This growth reflects the strength of our video brands to distributors and audiences. Cumulative domestic subscribers grew year over year, driven by subscriber gain at our younger channels as well as the continued ramp in new virtual MVPD subscriptions.

We saw continued strength in sports and news, demonstrating the competitive advantage of our outstanding brands and content that are primarily viewed live. The Fox News Channel achieved its highest quarterly EBITDA in its history. Its younger sibling, Fox Business Network, beat its competition in viewership for the sixth consecutive quarter.

Our domestic cable sports networks were also major drivers of profitability, with our local RSNs and national sports networks, Fox Sports One and Fox Sports Two generating double-digit earnings growth. The RSNs saw higher viewership this past NBA season and ratings for the new Major League Baseball season are up as well.

We also delivered creatively, generating long-term value with standout entertainment content we produce and monetize. At our broadcast network, new hits, "911" and "The Resident," and strong return shows, "Empire" and "Star," drove growth in seasons-based total audience over a year ago. This coming Monday, we will announce next season's schedule at our upfronts presentation and we could not more excited by the lineup.

At FX, we had a successful run with the second installment of the "American Crime Story" saga, "The Assassination of Gianni Versace," and the current season of "Atlanta" and the final season of "The Americans" are each performing well.

Our film studio had a great set up for the quarter, with holiday releases that continued to deliver at the box office, supporting by industry-leading awards recognition. These include "The Great Showman," "Three Billboards," and the Oscar Best Picture winner, "The Shape of Water." The home entertainment release of these films along with the theatrical release of "Deadpool 2" next week should propel a strong film fourth fiscal quarter.

Ultimately, it is our consistent long-term investment in creative content that has propelled this company and made it unique. This quarter's result demonstrate the success of that strategy and its ability to continue to create growth and value accretion for shareholders. John?

John P. Nallen -- Chief Financial Officer

Thanks, Lachlan, and good afternoon. At the start, I'll remind you that this quarter, we're comping against our broadcast of the Super Bowl a year ago, which contributed about $425 million of net revenues and approximately $100 million of EBITDA at our television segment. That said, the current underlying trends across our businesses reflect good progress toward our financial goals as reflected in this quarter's results.

So, for this third quarter, total company revenues were $7.4 billion, down $144 million compared to a year ago. Ex the Super Bowl impact, revenues grew 4% over the prior year, reflecting double-digit increases at our cable network segment being partially offset by lower television segment revenues. Total segment EBITDA for the third quarter was $1.89 billion, a 2% reduction from a year ago.

Included in this quarter's results is an approximate $60 million charge which is reflected in the other segment, which reflects the modification of stock compensation expense related to the proposed Disney transaction. So, absent last year's Super Bowl contribution and the stock compensation charge this year, quarterly EBITDA grew 6%, paced by double-digit growth at the cable network segment partially offset by lower results at the film segment.

From a bottom line segment, reported income from continuing operations attributable to stock holders of $876 million or $0.47 per share increased from the $0.44 per share reported in the prior year. Adjusted EPS in the current quarter was $0.49 versus a comparable $0.54 in the prior year. However, this year's adjusted result of $0.49 includes a $0.02 per share charge from that transaction-related stock comp expense that I just referred to. Additionally, our share of increased Hulu losses negatively impacted this year's earnings by $0.04 per share.

So, now turning to the performance at our operating segments, the cable network segment's EBITDA was $1.68 billion, up 16% on revenue growth of 10% and expense growth of 6%. Domestic cable revenues increased 10% overall, led by affiliate fee growth of 10%, which was supported by higher average rates across all of our domestic brands and continued subscriber growth at our expanding networks.

Ad revenue increased 3%, reflecting the continued strength of Fox News, partially offset by fewer episodes of original series at FX. EBITDA at our domestic channels increased 15% over the prior year from the strong growth across our entire portfolio of brands. You should note that sublicensing of Big Ten rights this quarter increased domestic cable revenue growth by 3 percentage points and expense growth by 5 percentage points with no effect on earnings.

Reported international cable revenues grew 9%, led by a 14% increase in affiliate revenue. International advertising revenues were about level with last year, as continued growth at Star Entertainment and the international channels were offset by the impact of substantially reduced cricket matches on STAR Sports. Reported international EBITDA increased 23%, led by a more than doubling of contributions at Star TV.

At our television segment, EBITDA was $78 million, 59% below last year and principally reflects the absence of contributions from last year's Super Bowl. Secondly, lower NFL results this year from the ad revenue impact of reduced postseason ratings and three fewer games than last year were offset by higher contributions from double-digit retransmission content revenue growth and improved entertainment results.

At the film segment, third quarter EBITDA of $286 million was $87 million below last year, primarily reflecting lower TV production contributions owing to a substantial increase in the number of new first-year drama series delivered and their related deficits, as well as the absence of the prior year SVOD licensing of "American Crime Story."

Additionally, the current quarter includes a loss of approximately $20 million supporting the release of Marvel Strike Force, the first game produced by our new mobile game studio, FoxNext. We're encouraged by this inaugural release and as we continue to build out this business, we expect the aggregate investment in support of its future growth to approximate $100 million in this fiscal year.

At the film studio, results were in line with last year and included the successful performance of our holiday movie film slate carrying into the third quarter, led by "The Greatest Showman," "Three Billboards," and "The Shape of Water."

And lastly, from an overall balance sheet perspective, we ended the quarter with $7.4 billion in cash and $20 billion in debt with our capital allocation priority remaining focused on the Sky acquisition.

With that, I'll turn it over to James.

James Murdoch -- Chief Executive Officer

Thanks very much, John and Lachlan. Good afternoon and thanks everyone for joining us today. With three quarters behind us in the fiscal year, we've made considerable progress on a lot of different fronts and we feel that the business is in very good health.

As Lachlan and John said, we're focused on moving all of our businesses forward, driving improvements in the viewer experience, making our content more available, not less, both inside and outside the home and pushing ourselves creatively to drive long-term value with our IP, while driving up the value of our overarching video brands and more importantly, creating a more engaging advertising experiments.

For example, over the last several months, we've been doing a number of important RSN partnerships. We're readying the direct to consumer Fox News products and have developed a strong number of pilots and scheduling for the next broadcast season.

In addition, we're making great progress internationally. In the Indian TV business, our entertainment channels achieved significant regional market share growth over the past year and two of the largest regions when launching the number one national free to air in the country, Star Bharat.

Our sports channels are growing at a fast clip, including driving massive scale of our mobile platform, Hotstar, which saw its reach exceed $140 million in the month of April and it's currently showing more than 2.5 times growth in IPL watch time over last year. Overall, Hotstar continues to thrive as the go-to digital video platform and is now seeing a billion minutes of daily watch time regularly.

To put Hotstar's scale into perspective, we had seven million concurrent livestreams during a single IPL match this season, which is likely the highest ever for a sporting event on a streaming service in the world.

We're very comfortable that we'll hit our $500 million EBITDA target at Star TV. We had decided, however, from the strong quarter in the year to continue to increase our investment in Hotstar, which for the year will be about $50 million. As we proved with the IPL, leveraging standpoint sports is a strategy we've demonstrated time and time again that can drive strong returns to the business. We expect no less in recent investments in other sports rights, such as the NFL's Thursday Night Football or the recently acquired extension of the BCCI rights in India.

Turning now to Sky, which recently reported strong results, the group continues to see strong demand for its products and services, with its continued development enrolled out of Sky Q in millions of homes across the UK, Ireland, Italy, and as of this week, Germany. As a founding shareholder of Sky, we remain committed to our bid to buy the remaining Sky shares we do not own and expect to receive UK regulatory approval in a month our two.

Comcast has just begun its regulatory process and we think it's very reasonable to undergo a robust regulatory view, which could take months. A Comcast review would be appropriate given the important role Sky and Sky News play in the UK media market. Given Comcast's bid for Sky, we're considering our options, with a further announcement to be made in due course.

While we're obviously focused on a number of important transactions ahead of us, we're no less focused on driving all of our businesses forward. With that, we're happy to take your questions.

Reed Nolte -- Executive Vice President, Investor Relations 

Hi, Ryan, we'd be happy to take questions from the investment community, if you could tee it up.

Questions and Answers:

Operator

Okay. Ladies and gentlemen, if you wish to ask a question, please press * and then 1 on your touchstone phone. You'll hear a tone indicating that you've been placed in queue and you can remove yourself at any time by pressing the # key. If you're using the speakerphone, please pick up the handset before pressing the numbers. In the interest of time, we ask that you limit yourself to one question. Once again, if you have a question, please press *1.

Our first question will come from the line of Rich Greenfield with BTIG. Please go ahead.

Rich Greenfield -- BTIG -- Managing Director

Hi, thanks for taking the question. We have a lot of investors wondering -- is the Disney-Fox transaction the only one you'll consider or are you still open to competing offers from third parties? Then I just have a quick follow-up.

Lachlan Murdoch -- Executive Chairman

Hey, Rich, it's Lachlan. As I said in my open comments, we're not going to engage in a lot of speculation around this. I can say that we are committed to our agreement with Disney and are working through the conditions to bring it to a closing. In addition, our directors, though, are aware of their fiduciary duties on behalf of all shareholders.

Rich Greenfield -- BTIG -- Managing Director

Okay. In the Disney proxy, it made it pretty clear that you preferred both the Disney currency over competing stock offers and that you also needed a significant break fee. The break fee, it seemed, was very important to protect Fox and its shareholders from the perceived regulatory risk. If the board, as you just mentioned as a fiduciary duty to listen to other offers, would you have interest in an all-cash offer with significant regulatory protections or is Fox only interested in stock deals at this point.

James Murdoch -- Chief Executive Officer

Rich, it's James here. I just want to reiterate here the directors are very aware of their responsibilities.

Rich Greenfield -- BTIG -- Managing Director

So, cash is certainly on the table?

James Murdoch -- Chief Executive Officer

Look, I don't think we're going to comment further on what Lachlan said, I think, pretty succinctly and pretty clearly.

Rich Greenfield -- BTIG -- Managing Director

Thank you very much.

Lachlan Murdoch -- Executive Chairman

Thanks, Rich.

Reed Nolte -- Executive Vice President, Investor Relations 

Operator, can we have the next question, please?

Operator

That comes from the line of Jessica Rief with Bank of America. Please go ahead.

Jessica Rief -- Bank of America -- Analyst

Thank you. I'm curious what your comfort level is with leverage, whether you need more cash for Sky or other assets like the TV acquisition you announced today. Then secondly, can you talk about how your upfront approach will change? As you guys said, your presentation is next Monday. So, it's right around the corner. Will you sell on a unified basis or will you split the approach between broadcast and cable given the pending transaction?

Lachlan Murdoch -- Executive Chairman

Do you want to start with the leverage and I'll talk to the upfronts?

John P. Nallen -- Chief Financial Officer

So, it's John. I'll start with the leverage question. I think you know us well enough that we operate our balance sheet in a very conservative way. We take pride in our solid investment grade rating. Any actions we take, we'll have that in mind and we'll look to retain that. I don't think you should expect us to change our leverage profile dramatically.

Lachlan Murdoch -- Executive Chairman

And then Jessica, on the upfront, we couldn't be more excited going into Monday with the schedule that we've put together. I think last year, we coined the term and made the comment that Fox would own the fall, particularly with the strength of our then very strong football but also very strong Major League Baseball and postseason.

This year, we're going in with Thursday Night Football, which will be in an even stronger and more enviable position. As I said, the schedule, which has just been finalized now, couldn't be stronger and I think we'll have a tremendous autumn. We will be selling, as we have in past years, the aggregate across both the broadcast network and the cable assets as well.

Jessica Rief -- Bank of America -- Analyst

Can I follow up then? Is there any change in your operational focus in the interim period away from direct to consumer or toward something else?

James Murdoch -- Chief Executive Officer

Jessica, we're operating the business to drive it forward. We've got a regulatory process that is unfolding with respect to these transactions and in the meantime, we're running the business on a business as usual basis in terms of focusing on the velocity, focusing on new product development, as well as executing across the world in what's, as you know, a pretty diverse and dynamic business. So, there's no shift what we've been doing, vis-à-vis these transaction, if that's what you mean.

Jessica Rief -- Bank of America -- Analyst

Right. Okay. Thank you.

Reed Nolte -- Executive Vice President, Investor Relations 

Thank you, Jessica. Operator, Next question, please?

Operator

The next question comes from the line of Michael Nathanson with Moffett. Please go ahead.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks. I have two. The first one is on the seven stations you acquired. I know you won't give me the actual retransmission rates of those stations versus where you are now. Can you talk about the magnitude gap between the stations you acquired and how you monetize your own stations in retrans and then how quickly can you turn that retrans money on after acquisition? Secondly, on cord cutting, we spent most of the past three years worried about cord cutting. You're at a point where you're seeing growth in subs. Talk a bit about how big the virtual business is for you in terms of virtual MVPDs. Any idea where those subs are coming from?

Lachlan Murdoch -- Executive Chairman

I'll start with the stations. Again, without wanting to go into two much detail around our retransmission agreement and affiliation agreements, the purchase multiple of these stations when you add in what is effectively an unautomatic step up in retransmission means that we're buying stations at about a 7.5 multiple and that will drive -- it will at about $350 million of revenue to the station group and about $112 million of EBITDA through that.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks for that.

James Murdoch -- Chief Executive Officer

And Michael, with respect to the pay TV universe domestically in the US, I think we're seeing very strong growth, as we said last quarter, around the digital MVPDs, these new entrants. I know you say over the last few years you've been worried about these declines.

You will know that we always thought the increase in downstream competition would actually expand the market and the growth in subscribers and new entrants would actually be able to drive volume in the business while our ability to monetize our rates due to the strength of our brands and our investment in the content would also compound. That's why you see another quarter of double-digit growth in terms of our affiliate revenue.

At this point, so, this is a little bit after the close of the quarter, we're seeing a good bit over $4 million digital MVPD customers in that universe. I would say from what we can tell, the cable deterioration is not as fast as the DBS and teleco deterioration in the subscriber base. How much of that is shifting to digital MVPDs and how much is new customers in the market?

I think it's split. We're also seeing a lot of the so-called cord-nevers acquiring really attractive bundles from the new entrants, particularly YouTube TV and Hulu Live, which continue to grow really well. So, we couldn't be more excited about the affiliate universe and I think it just goes to show new competition and lower barriers to entry drives real innovation for customers. That competition can expand the overall marketplace. We would expect it to continue.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks, James. Thanks, Lachlan.

Lachlan Murdoch -- Executive Chairman

Thank you, Michael.

Reed Nolte -- Executive Vice President, Investor Relations 

Operator, next question, please.

Operator

That comes from the line of Steven Cahall with Royal Bank. Please go ahead.

Steven Cahall -- RBC Capital Markets -- Analyst

Thanks. First on Fox News -- it sounds like pricing is really strong there. I know we're in a tough comp period. I was wondering if you could give us a sense of do you expect ad revenue to accelerate as we enter the midterm election season in the back half of the calendar year and as you launch direct to consumer, if you could give us any indication of how CPMs compare on that versus linear and how much of that will be dynamically advertised?

Secondly, I think you announced one of the stations you're acquiring is a CW affiliate in Miami. That's a pretty big NFL market. Would you expect that as a CW or is there an opportunity to convert that to a Fox affiliate over time? Thanks.

Lachlan Murdoch -- Executive Chairman

Steven, let me deal with the end first -- in Miami, we're not going to announce any plans for that CW station yet. We're looking forward to getting ahold of it. We expect this transaction to close with Sinclair in probably six to nine months. So, there's time to work on that. We're not making any announcements of any affiliate changes today.

In terms of the Fox News comp, I think one of the important things to mention, as you said, the comp is difficult when you compare them to a year ago, so the first 100 days of this presidency and then what were incredibly record-breaking ratings.

I should say, though, that if you look April to April, it's actually just outside of this quarter we're reporting, last April was the last month where Bill O'Reilly was leading our primetime before he left the channel. If you look April to April, we've held our ratings incredibly well. We're basically flat with last year. I think that's a real testament to the strength of the brand and the strength of the talent on air. So, we feel very strongly about that.

In terms of D2C, obviously, the advertising on the D2C platform when we launch it, we expect to be able to drive significantly higher CPM.

John P. Nallen -- Chief Financial Officer

Steven, it's John -- to your question about local races and the impact, that impact will most notably impact us at the station, where we're over-indexing in the amount of races that are in our existing station. So, it will much more positive there than at Fox News, although Fox News should enjoy some of it as well.

Reed Nolte -- Executive Vice President, Investor Relations 

Thank you, Steven. Operator, we have time for one last question.

Operator

Okay. That question will come from the line of Alan Gould with Loop Capital. Please go ahead.

Alan Gould -- Loop Capital -- Analyst

Thank you. John, I was wondering, can you break out a little bit of the results of the cable operation in RemainCo versus the cable operations in New Fox? Put some color on it.

John P. Nallen -- Chief Financial Officer

Alan, we're not -- yeah, at this point, we're not going to separate out the companies as we look toward getting closer to a closing and the filing of the form 10 of New Fox, which is probably in the fall. That's about the time that we'll start to separately report on them.

Alan Gould -- Loop Capital -- Analyst

Okay. Thank you.

Reed Nolte -- Executive Vice President, Investor Relations 

Thanks, Alan. Thank you, everybody, for joining today's call. If you have any further questions, please give Mike Petrie or me a call. Thanks.

James Murdoch -- Chief Executive Officer

Thanks very much, everyone. Have a good day.

Lachlan Murdoch -- Executive Chairman

Thanks, Everyone. All the best.

Operator

Ladies and gentlemen, as you heard, that does conclude today's conference. Thank you for your participatin. Today's call was recorded for replay. If you'd like to call the replay, it's available today at 6:30 through May 23rd at midnight. You can dial the AT&T replay system by dialing 1-800-475-6701 and entering the access code #446188. International callers, dial into the United States at 320-365-3844. Those numbers again, 1-800-475-6701, international is 320-365-3844. The access code is #446188. You may now disconnect.

Duration: 29 minutes

Call participants:

Reed Nolte -- Executive Vice President, Investor Relations 

Lachlan Murdoch -- Executive Chairman

James Murdoch -- Chief Executive Officer

John P. Nallen -- Chief Financial Officer

Rich Greenfield -- BTIG -- Managing Director

Jessica Rief -- Bank of America -- Analyst

Michael Nathanson -- MoffettNathanson -- Analyst

Steven Cahall -- RBC Capital Markets -- Analyst

Alan Gould -- Loop Capital -- Analyst

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