Fox Corporation — Fiscal 2020 Second-Quarter 10-Q
Reporting period: Quarter and six months ended December 31, 2019. The filing is for Fox’s fiscal second quarter, not calendar-year 2019 Q2. Dollar amounts are in millions unless otherwise indicated.
Business context
Fox is a news, sports and entertainment company operating through Cable Network Programming, Television, and Other, Corporate and Eliminations. Fox became a standalone public company in March 2019. Accordingly, fiscal 2020 results are consolidated, while the comparable 2018 results are combined historical results from businesses previously within 21st Century Fox; allocated historical costs may not match the costs Fox would have incurred as a standalone company.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior year | Six months ended Dec. 31, 2019 | Prior year |
|---|---|---|---|---|
| Revenue | $3,778 | $3,583 | $6,445 | $6,124 |
| Net income attributable to Fox stockholders | $300 | $8 | $799 | $612 |
| Diluted EPS | $0.48 | $0.01 | $1.28 | $0.99 |
| Adjusted EBITDA | $261 | $445 | $1,117 | $1,206 |
| Adjusted EBITDA margin, approximate | 6.9% | 12.4% | 17.3% | 19.7% |
Quarterly and six-month revenue each increased 5%. Affiliate fees rose 7% and 6%, respectively; advertising was nearly flat, while other revenue grew 32% and 44%. Fox attributed growth to affiliate rate increases, higher FOX Network advertising pricing, additional MLB World Series broadcasts, and growth in other activities, including the FOX Studios lot and Credible.
Reported net income rose sharply, but operating performance weakened: Adjusted EBITDA fell 41% in the quarter and 7% for the six months. Quarterly net income included $328 million of unrealized investment gains, compared with $255 million of unrealized losses in the prior-year quarter. For the six months, investment gains were $371 million versus losses of $72 million. These fair-value changes materially affected reported earnings.
- Cable Network Programming: Revenue increased 2% in both periods; Segment EBITDA increased 7% in the quarter to $556 million and 8% for six months to $1,240 million.
- Television: Revenue rose 5% in the quarter and 6% for six months, but Segment EBITDA was a loss of $214 million for the quarter versus a $14 million loss previously; six-month Segment EBITDA fell to $37 million from $157 million. Higher sports rights and production costs, including NFL, college football and WWE programming, weighed on results.
- Other, Corporate and Eliminations: Segment EBITDA loss widened to $81 million for the quarter and $160 million for six months, reflecting standalone-company costs and Credible and FOX Studios lot activity.
Interest expense was $90 million for the quarter and $180 million for six months, up from $15 million and $31 million, primarily because of $6.8 billion of senior notes issued in January 2019. Effective tax rates were 25% for the quarter and 26% for six months.
Cash flow, debt and liquidity
- Six-month operating cash flow was a use of $256 million, compared with $36 million provided in the prior year. Fox cited seasonal sports-rights payments and higher cash interest.
- Investing cash outflow was $349 million, including $260 million for the Credible acquisition and $110 million of capital expenditures. Financing cash outflow was $638 million, including $421 million of share repurchases and $169 million of dividends and distributions.
- Cash and cash equivalents were $1.991 billion at December 31, 2019, down from $3.234 billion at June 30, 2019. Borrowings were $6.753 billion; simple borrowings less cash were approximately $4.762 billion. The disclosed fair value of borrowings was $7.879 billion.
- Fox had no borrowings outstanding under its $1.0 billion revolving credit facility and reported compliance with its covenants. Current assets were $6.398 billion and current liabilities $1.816 billion; current assets include substantial programming inventories.
- Ratings were Baa2 (Moody’s) and BBB (S&P), both with stable outlooks. Total firm commitments and future debt payments were approximately $37 billion.
Material developments, outlook and risks
- Fox acquired 67% of Credible for approximately $260 million net of cash acquired and may contribute up to $75 million over about two years. The acquisition added goodwill and redeemable noncontrolling interests.
- Fox agreed to acquire three TV stations from Nexstar for approximately $350 million and sell two stations to Nexstar for approximately $45 million. Closing was expected in fiscal 2020’s third quarter, subject to customary conditions.
- The board authorized a $2 billion share-repurchase program. Fox had repurchased shares and had approximately $1.6 billion of authorization remaining at December 31; the accelerated Class A repurchase was settled in January 2020. A semi-annual dividend of $0.23 per share was declared after quarter-end.
- Fox reported approximately $4 billion of expected revenue from remaining performance obligations, primarily affiliate and sports sublicensing contracts, generally to be recognized over the next one to three years. The filing provides no quantitative earnings or revenue guidance.
- The reinstated FCC newspaper/broadcast cross-ownership rule affects Fox’s New York station ownership in light of the Murdoch family’s interest in The New York Post. Fox said it would seek an FCC waiver; timing and outcome were uncertain.
- Fox contributed $34 million to resolve the Bones profits-participants litigation. It recorded a $60 million liability for the U.K. Newspaper Matters indemnity. It said it could not estimate potential losses for certain other disclosed matters, including pending FOX News-related claims, but did not expect those matters to have a material adverse effect.
- Key disclosed risks include advertising-market weakness, audience and distribution shifts, affiliate agreement renewals, sports-rights costs and availability, competition, regulation, technology and cybersecurity, and costs and execution risks of operating as a standalone company.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus unrealized investment gains and losses.
- Whether Television’s higher programming and production costs ease and Segment EBITDA recovers.
- Cash conversion and liquidity as seasonal sports-rights payments, interest, dividends and buybacks continue.
- Completion and financial impact of the Nexstar station transaction, and the performance and funding needs of Credible.
- Outcome of Fox’s FCC waiver request and developments in litigation, indemnity and other contingencies.
- Comparability of year-over-year results given the standalone-company transition and the combined-basis 2018 figures.