Softer Ratings And A Muted Quarter At The Movie Division Weighs Over Fox’s Earnings

Twenty-First Century Fox (NASDAQ:FOXA) recently reported its second quarter earnings for fiscal 2014. While the company saw 15% jump in top line to $8.2 billion, EBITDA (earnings before interest, taxes, depreciation and amortization) declined by 4% to $1.54 billion, primarily due to higher programming costs and muted performance of the Filmed Entertainment division. ^[1] The company lowered the full year guidance and expects EBITDA to grow in a mid- to high-single digit range due to its film division’s results at box-office and softer TV ratings. ^[2] Overall, the company reported a profit of $1.21 billion as compared to $2.38 billion in the prior year period. ^[1] However, the significant drop in profits was due to its  publishing operations, which were earlier part of the company and contributed $1.3 billion in income.

We currently have $32 price estimate for Twenty-First Century Fox, which we will soon update based on the second quarter earnings announcement for fiscal 2014.

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Growth In Cable Networks

Revenues at the cable networks jumped 14% to $2.96 billion while the EBITDA saw a modest growth of 2% to $1.04 billion as compared to prior year levels. The top line increase can be attributed to a 17% increase in affiliate revenues led by higher rates and 7% advertising growth. ^[1] Twenty-First Century Fox is successfully reducing its dependence on advertising revenues. With affiliate fee growing at a much higher pace than that of advertising revenues, the company can look forward to a more stable growth outlook.

Fox News continues to be the leader in the news ratings far ahead of CNN and MSNBC. The network averaged 1.10 million viewers in prime time and 1.76 million viewers total per day, which is 5% and 14% decline respectively over 2012. ^[3] However, the decline this year is industry-wide as 2012 was a presidential election year.

The company continues to expand its Asia business with STAR’s recent launch of the STAR Sports brand across its six sports channels, including Star Sports 3, which is first 24-hour Hindi sports channel in India. The company stated that this initiative should prove to be one of its largest drivers of growth in the next 5 to 10 years. ^[2]

The television segment struggled amid softer ratings at some of the popular shows such as X Factor and early results of American Idol. While the broadcasting revenues increased by 6% to $1.6 billion as compared to the prior year period, operating income declined 12% to $218 million.

Higher Costs At Filmed Entertainment Weigh Over Profits

At the Filmed Entertainment segment, second quarter revenues were up 7% to $2.48 billion, primarily due to higher sales of television content. However, EBITDA was down 21% to $337 million, reflecting lower theatrical revenues and higher releasing costs for this year’s films, including The Secret Life of Walter Mitty, Walking with Dinosaurs and The Counselor. ^[2] Fox studios ended the year with close to 10% market share at the U.S. box-office, similar to what it did in 2012. ^[4] The studio has number of key releases over the next six months, including Rio 2, X-Men: Days of Future Past and Dawn of the Planet of the Apes. However, these results won’t have a big impact on fiscal 2014 due to timing of the releases and the company will start to see their benefits primarily during the start of next fiscal year.

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1. Twenty-First Century Fox’s SEC Filings [↩] [↩] [↩]
2. Twenty-First Century Fox Management Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 6, 2014 [↩] [↩] [↩]
3. Cable News Ratings 2013: Fox Tops While CNN Slides Into Second, The Wrap, Jan 2, 2014 [↩]
4. Box Office By Studio – 2013, Box Office Mojo [↩]