Business context and reporting period
Fox Corporation’s Form 10-Q covers the three months ended September 30, 2019—its first quarter of fiscal 2020, rather than calendar 2019 Q1. FOX is a news, sports and entertainment company with Cable Network Programming, Television, and Other, Corporate and Eliminations segments. FOX became a standalone public company in March 2019.
Comparison with the quarter ended September 30, 2018 is not fully like-for-like: 2018 results are combined historical results from businesses previously within Twenty-First Century Fox and include allocated corporate costs; FOX’s 2019 results are consolidated standalone results.
Financial results and liquidity
| Metric | Quarter ended Sep. 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $2.667 billion | $2.541 billion | +5% |
| Adjusted EBITDA (non-GAAP) | $856 million | $761 million | +12% |
| Net income | $513 million | $615 million | -17% |
| Net income attributable to FOX stockholders | $499 million | $604 million | -17% |
| Diluted EPS | $0.80 | $0.97 | Down $0.17 |
| Operating cash flow | $202 million | $247 million | Down $45 million |
Adjusted EBITDA margin was approximately 32.1%, versus 30.0% in the prior-year quarter. FOX reported interest expense of $90 million, up from $16 million, primarily reflecting $6.8 billion of senior notes issued in January 2019. Other, net was a $15 million expense versus $139 million of income, largely reflecting lower unrealized investment gains ($43 million versus $183 million). The effective tax rate was 27%, compared with 26%.
At September 30, 2019, cash and cash equivalents were $3.340 billion, borrowings were $6.752 billion, and approximate net debt was $3.412 billion. The fair value of borrowings was $7.889 billion. FOX had no borrowings outstanding under its $1.0 billion revolving credit facility and reported compliance with its covenants. Cash increased $106 million during the quarter. Investing cash outflow was $40 million; financing cash outflow was $56 million.
Total assets were $20.534 billion and total equity was $10.330 billion. Current assets were $7.049 billion and current liabilities were $1.890 billion. The company declared a $0.23-per-share semiannual dividend, paid in October 2019.
Material changes versus the prior comparable period
- Revenue growth was led by Television (+6%) and Cable Network Programming (+2%). Affiliate fees rose 4% overall; advertising declined 2%, while other revenue increased 65%.
- Cable Network Programming Segment EBITDA increased 8% to $684 million. Television Segment EBITDA increased 47% to $251 million. Other, Corporate and Eliminations worsened to a $79 million loss from a $43 million loss.
- Lower political advertising after the 2018 midterm elections, fewer FIFA World Cup broadcasts and lower FOX Network entertainment ratings weighed on advertising. Higher affiliate rates, television-station fees, digital licensing and PBC pay-per-view revenue supported results.
- Operating expenses fell 2%, partly due to fewer FIFA broadcasts and the absence of UFC content. Selling, general and administrative expense rose 18%, reflecting standalone-company costs and equity compensation.
- Operating cash flow declined, primarily due to higher cash interest payments and seasonal sports-rights payments, partly offset by higher Segment EBITDA. The prior-year investing outflow included investments in Caffeine and Caffeine Studios.
Outlook, risks, contingencies and unusual items
The filing provides no specific earnings or revenue guidance. Management said FOX expects to invest approximately $150 million to $200 million in standalone technical facilities over the two years following the Distribution. It cited affiliate agreements and advertising markets as important to liquidity. Approximately $4.5 billion of revenue from remaining performance obligations was expected to be recognized primarily over the next one to three years. Total firm commitments and future debt payments were approximately $40 billion; this broad figure includes contractual operating commitments, not just borrowings.
FOX adopted lease accounting on July 1, 2019, recording initial operating lease liabilities of approximately $635 million and right-of-use assets of $585 million. At quarter-end, operating lease liabilities were $605 million. The quarter included $9 million of impairment and restructuring charges.
The Bones profits-participant lawsuits were settled, with FOX contributing $34 million. FOX also disclosed ongoing FOX News-related claims and investigations; it said amounts settled or reserved were not material to date, but potential liability could not be estimated. The company recorded a $50 million liability for the U.K. Newspaper Matters indemnity. It stated that it could not estimate possible losses beyond accruals for certain contingencies.
Subsequent to quarter-end, FOX announced a $2 billion share repurchase program, including a $350 million accelerated repurchase and an intended $150 million Class B repurchase. It also acquired 67% of Credible Labs for approximately $260 million and committed up to $75 million of additional capital. FOX agreed to acquire three television stations for about $350 million and sell two stations for about $45 million, subject to approvals and closing conditions.
Key risks include changing viewing and distribution habits, subscriber declines, advertising-market weakness, competition, renewal and cost of sports rights, reliance on affiliate agreements, standalone operating costs and transition services, and regulatory, legal and cybersecurity matters. The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the period: this is fiscal Q1 2020, ended September 30, 2019, and assess the limitations of comparing standalone results with 2018 combined results.
- Track whether affiliate-fee growth offsets subscriber losses and whether advertising trends improve beyond the unusually election- and event-affected comparison.
- Assess cash generation against debt service, sports-rights commitments, standalone investment plans, dividends and the announced repurchases.
- Review the terms, timing, approvals and financing implications of the Credible acquisition and television-station transactions.
- Monitor legal and indemnity exposures, the substantial contractual commitments, and the voting and governance effects of the Murdoch Family Trust ownership and repurchase arrangements.