Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA) released fourth-quarter earnings results after the market close on Aug. 5. EPS came in ahead of the average analyst estimate as polled by Thomson Reuters, with the estimate calling for earnings of $0.37 and actual results coming in at $0.39.
Revenue for the quarter was $6.2 billion, which missed the Reuters poll estimate of $6.46 billion. Adjusted fourth-quarter revenue was down roughly 9% year over year, owing to relatively soft performance from the company's film and television segments, while earnings per share were down roughly 7% from the prior year's quarter. Shares fell before the earnings report, as Disney gave a cautious outlook on the future of cable and headed into the weekend market close down an additional 3%.
Following the earnings release, key Fox officials took part in a conference call to provide additional insight on the quarterly results and annual performance, and to outline expectations for the future of the business. Here are five key takeaways from the call.
Fox's EBITDA target for fiscal 2016 has been revised downward
Fox shares declined as much as 12% in early trading following the earnings release and conference call, as the company issued a downward revision for its fiscal 2016 EBITDA target. Here's CFO John Nallen announcing the revision and providing some explanation for why the company will miss its initial forecast:
As we roll it all up, and based on all the assumptions inherent in our projections, we are anticipating total company segment EBITDA percentage growth rate for FY16 to be in the mid-single-digit range above the $6.49 billion base level for FY15.This range anticipates a negative 3% impact from foreign currency headwinds using current rates. Now, six months ago we indicated that we expected our FY16 results to be in the mid-$7 billion range, and our outlook today is below that level. The primary factors causing this change have been noted publicly, including headwinds from foreign exchange, and film releasing timing, further sports and digital investments in India to support long-term growth, and an updated view of the ad markets.
In reference to film release timing, the company indicated that EBITDA for key releases such as X-Men: Apocalypse and Independence Day: Resurgence would show up in fiscal 2017 rather than in the company's current annual term. However, the release dates for these films don't appear to have undergone meaningful changes over the past six months, so it's unclear how film release timing has factored into the EBITDA revision.
Latin America and India provide big growth opportunities
Continued investment in international territories was one of the company's stated reasons for its downward EBITDA revision, and Fox anticipates that it will see strong results in the long term from these emerging territories. James Murdoch highlighted sports programming in India as an especially big opportunity and pointed to a strong advertising market as an incentive for competing in these markets. Here's the CEO on the progression of the ad landscape in India:
I think the other piece here on Latin America and India, and particularly in India -- don't forget how strong the linear advertising market is. When you have a real position of ratings leadership that we have, and we can sustain that, we are able to really grow our linear advertising very attractively. Still, the majority of that marketplace for a while yet is that way, and there's a huge amount of growth to come. You don't see it really in the numbers consolidated because of the sports investment we've been making, but the entertainment business alone in India, in FY15 is over a $300 million EBITDA business, and that is something that is growing at a very rapid pace. There's a real advertising marketplace there that is growing organically, and we're able to grow our share in it as we go forward.
The company is returning value to shareholders with dividends and share repurchases
In conjunction with the earnings release, Fox announced a new buyback initiative. Here's Executive Chairman Lachlan Murdoch outlining the company's history of returning value to shareholders and its future repurchase plan:
Our record on delivering capital return to shareholders is solid. In fact, by the end of FY16, we will have returned in excess of $24 billion to shareholders through share repurchases and dividends over a five-year period. This represents nearly 200% of free cash flow over that same period. This includes the $5 billion share repurchase authorization we announced today, which we intend to complete within the next 12 months.
Fox currently pays an annual dividend of $0.30, with a yield of roughly 1% and a payout ratio of 16%. While the company's payout ratio is relatively low, Fox's recent history of paying out more in dividends than it generated in cash flow over the past five years may give reason to be cautious about expecting continued annual dividend increases, even with the company's solid debt levels. The company last lowered its payout in 2012 but has delivered increases in subsequent years.
MVPD platforms present significant opportunity
In the Q&A section, James Murdoch provided some color on the Hulu platform, stating that the service Fox co-owns will soon pass 10 million paid subscribers. He also indicated that the platform's momentum is at a high point, and that the company foresees a competitive environment where Netflix, Amazon.com's Prime, and Hulu can thrive, with many customers subscribing to multiple MVPD services to take advantage of each platform's unique offerings. Here's James Murdoch on that dynamic and the outlook for Hulu:
People want it in addition to other things, and that's driving really good growth right now. I think the standpoint of the plans for Hulu, right now Disney and us who are partners in Hulu, obviously Comcast is a partner, but it's operating under the consent decree for a while, we are very committed to growing this business. We think it's a very exciting business. We think we can grow it substantially more than it has gotten to, to date, and it can be a very valuable asset for us.
In reference to anticipated declines in billable television subscribers for its biggest channels, Murdoch indicated that bringing the company's content to Hulu and other MVPD platforms would be a business driver going forward.
Fox is aiming to improve ad efficiency across distribution channels
With some turbulence anticipated in television, Fox is looking to invest in advertising technologies and improve efficiencies across linear and digital platforms. Relative to fiscal 2015, Fox anticipates that broadcasting ad revenues will remain roughly flat, but it anticipates that continued investments in advertising will deliver wins over the long term. To that end, the company repeatedly touted its acquisition of ad company TrueX as a move that will help it provide better ad targeting and delivery on the digital side. Here's James Murdoch on the company's efforts to adapt to the changing ad landscape:
We're focused on enhancing our capabilities to capitalize on new opportunities to more directly reach and serve our customers and provide solutions for advertisers. On the advertising side, these capabilities are centered on obtaining better measurement of nonlinear impressions, improving the monetization of both linear and nonlinear impressions, enabling programmatic sales, and better leveraging TrueX throughout our portfolio. We are encouraged by the early progress we're seeing, and in fact, we expect and plan to be able to offset the decline we're seeing in domestic network entertainment advertising by better monetization of our digital and nonlinear audience over the next 12 months.
Responding to a question later in the call, Murdoch stated that the company sees a huge amount of opportunities for ad innovation on MVPD (NASDAQ: AMZN)(NASDAQ: NFLX) platforms.