Fox Earnings: Company Continues to Report Decent Results in the Face of Industry Challenges

Fox FOXA continued to increase revenue in its fiscal first quarter, despite tough comparisons from the political election season in the same period last year and a continuing trend of declining cable subscriptions. Pricing strength and the success of Tubi, the firm’s free streaming service, offset the headwinds. We are maintaining our $43 fair value estimate.

Total revenue was up less than 1% year over year, with 2% growth in affiliate revenue more than offsetting a 2% decline in advertising revenue. We suspect the success the firm is having with Tubi, its ad-supported streaming service, helped blunt the lack of political ads in the quarter. Management said the women’s World Cup and timing of college football broadcasts also boosted ad revenue. We believe the firm’s heavy reliance on news and sports, which lend themselves to live viewing, will continue to support pricing for Fox ad revenue, though declining paid-TV subscriptions should continue to limit the ad revenue upside from television broadcasts.

Similar dynamics affected affiliate fees in the quarter, though strong pricing on subscription renewals more than offset subscriber declines. More importantly, the firm remains in a strong negotiating position with distributors. Management said it had one third of its renewals coming due this fiscal year, and it has come to agreement on virtually all of them without going off the air during negotiations. With its ownership of Fox News, which continues to lead among cable news network viewership, and several sports properties, notably the NFL and college football, we believe the firm will remain well positioned to expand affiliate revenue through pricing power.

Margins were under pressure during the quarter, with the adjusted EBITDA margin contracting to 27% from 34% last year. Higher sports programming rights and production costs were responsible for the pressure, and we anticipate these higher costs will be ongoing issues.