Business context and reporting period
Fox Corporation’s Form 10-Q covers the quarter and nine months ended March 31, 2019, the third quarter of fiscal 2019. The supplied “2018 Q3” metadata does not match the filing period. FOX became a standalone, publicly traded company on March 19, 2019, separating from Twenty-First Century Fox (21CF) as part of the Disney transaction. The business comprises Cable Network Programming, Television, and Other, Corporate and Eliminations.
Fiscal 2019 results are consolidated after the separation; prior-period results are combined historical results of the businesses transferred from 21CF. Pre-separation corporate costs were allocated, and management cautions that historical results may not reflect the costs of operating independently.
Financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Three months ended Mar. 31, 2019 | Three months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Revenue | $2,752 | $2,463 | $8,876 | $7,759 |
| Income before tax | $706 | $654 | $1,568 | $1,577 |
| Net income | $539 | $466 | $1,178 | $1,748 |
| Net income attributable to FOX stockholders | $529 | $457 | $1,141 | $1,716 |
| Diluted EPS | $0.85 | $0.74 | $1.84 | $2.76 |
| Total Segment EBITDA | $766 | $706 | $1,972 | $1,852 |
- Quarterly revenue rose 12%; nine-month revenue rose 14%. Growth reflected higher advertising, affiliate fees and other revenue.
- Quarterly Segment EBITDA increased 8%; nine-month Segment EBITDA increased 6%. As a share of revenue, it was approximately 27.8% for the quarter versus 28.7%, and 22.2% for nine months versus 23.9%. Segment EBITDA is a non-GAAP measure and excludes, among other items, depreciation, impairment, interest, other items and taxes.
- Quarterly stockholder net income increased 16%. For nine months it fell 34%, principally because the prior-year period included a $624 million provisional Tax Act benefit.
- Operating expenses increased 15% for the quarter and 18% for nine months, driven mainly by sports rights amortization and production costs; they also include a $55 million write-down of entertainment and syndicated programming rights. SG&A rose 4% and 8%, respectively.
Segments
- Cable Network Programming: Revenue was $1,383 million for the quarter, up 4%, and $4,082 million for nine months, up 8%. Segment EBITDA rose 7% and 9%, respectively, supported by affiliate fees and advertising. Management cited subscriber declines at traditional distributors, partly offset by online distributors, and higher sports and news costs.
- Television: Revenue was $1,370 million for the quarter, up 20%, and $4,796 million for nine months, up 20%. Segment EBITDA rose 22% for the quarter but fell 4% for nine months as higher expenses, including the programming-rights write-down, more than offset revenue growth. Advertising benefited from NFL programming, midterm political spending, and entertainment programming; comparisons also reflected the prior-year Winter Olympics airing elsewhere.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,624 million, versus $785 million. Investing used $311 million, versus providing $197 million; financing used $995 million, versus providing $780 million. Cash increased by $318 million to $2,818 million from June 30, 2018.
- At March 31, cash was $2,818 million and current assets were $5,964 million against current liabilities of $1,297 million. The balance sheet reported $6,750 million of borrowings, net of debt issuance costs; the $6.8 billion face amount consists of fixed-rate senior notes due 2022–2049. Their disclosed fair value was $7,320 million.
- FOX had an undrawn $1.0 billion unsecured revolving facility maturing in March 2024 and reported compliance with its covenants. The $1.7 billion bridge facility arranged for the transaction was terminated without borrowing. Credit ratings were Baa2/BBB, both with stable outlooks.
- FOX issued $6.8 billion of notes in January 2019 and used proceeds and cash to fund the transaction dividend and related costs. It paid 21CF an $8.5 billion dividend and received $2.0 billion from Disney, a net cash effect reducing the dividend. A $6.5 billion transaction-tax determination included an approximately $700 million prepayment subject to adjustment.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expects to invest approximately $150–$200 million in standalone technical facilities over the two years after separation. It estimates that the tax basis step-up may generate about $1.5 billion of annual tax deductions and reduce annual cash taxes by approximately $360 million at the stated tax rate; estimates depend on final appraisals and other adjustments.
- Management attributes revenue growth to contractual affiliate-rate increases, sports and political advertising, and digital content licensing. It noted moderating sequential affiliate-fee growth as prior-year rate increases are lapped. Risks include traditional subscriber declines, advertising-market weakness, competition and consumer shifts, sports-rights costs and renewals, standalone costs, reliance on transition services, and tax and separation-related liabilities.
- Other, net included $204 million of quarterly unrealized investment gains ($132 million for nine months), primarily from Roku fair-value changes, alongside transaction costs of $106 million for the quarter and $184 million for nine months. The nine-month tax expense was $390 million versus a prior-year tax benefit of $171 million.
- After the quarter, FOX announced a sports-wagering partnership with The Stars Group and a $236 million investment for a 4.99% stake. Also after quarter-end, on May 2, 2019, a court vacated the entire approximately $129 million punitive-damages award in the Bones profits-participant matter. FOX News-related employment claims and regulatory inquiries remain; the company said recorded and settled amounts were not material and it could not estimate potential liability.
- Total firm commitments and future debt payments were approximately $41 billion at March 31, 2019, up from $32 billion at June 30, 2018. The increase mainly reflected the notes issuance and expanded, extended sports-rights arrangements, including MLB rights through the 2028 season.
- FOX reported effective disclosure controls. It is continuing to build standalone processes and controls following separation. A temporary stockholder-rights plan and dual-class voting structure may affect takeover prospects and shareholder influence; the Murdoch Family Trust held approximately 38.4% of Class B shares immediately following the distribution.
Important facts for investors to verify
- Confirm the reporting period: this is the quarter ended March 31, 2019, not 2018 Q3; assess comparability given the March 2019 separation and historical cost allocations.
- Track affiliate-fee growth, traditional and online distributor subscriber trends, advertising demand, and sports-rights costs against revenue and segment EBITDA.
- Reconcile reported earnings and cash generation for investment fair-value gains, the programming-rights write-down, transaction costs, and the prior-year Tax Act benefit.
- Review debt service, covenant headroom, programming and other firm commitments, and the final adjustment to the transaction-tax prepayment.
- Monitor standalone transition costs and facility investment, the estimated tax benefits, material litigation or regulatory developments, and the FOX Bet investment and partnership execution.