Studio Operations Likely Boosted Fox’s Q3 FY15 Earnings

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21st Century Fox (NASDAQ:FOX) will report its Q3 fiscal 2015 earnings on May 6th. (Fiscal years end with June.) The company should continue to benefit from the growth in subscription fees. However, rising programming costs remain  a concern for the cable networks. Moreover, currency headwinds could weigh over the the company’s performance during the March quarter.

The company will surely benefit from Fox News, which continued to dominate at the top spot in the March quarter and was up 10% in primetime ratings. [1] This likely boosted the network’s advertising revenues. Fox’s studio business likely  benefited from its wide success at the box-office. The studio grossed more than $340 million in the March quarter at the U.S. box-office. This is much higher than $210 million it grossed in the prior year quarter.

We estimate revenues of about $28 billion for 21st Century Fox in 2015, with EPS of $1.73, which is in line with the market consensus of $1.56-$1.78, compiled by Thomson Reuters. We currently have a $39 price estimate for 21st Century Fox, which is about 20% ahead of the current market price.

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Watchout For Broadcasting Operations In Q1

Fox News has stayed on top for a long time and continues to enjoy higher ratings and viewership among the news networks in the U.S. Fox News was the fourth highest-rated network across all of cable behind only ESPN, TNT and USA during the quarter. However, looking at Fox’s broadcasting network, it is seeing softer ratings in the 2014-15 season, primarily for scripted shows such as Sleepy Hollow and New Girl. Advertising income is largely dependent on television ratings, which have been declining for most of the broadcasting as well as cable networks in the recent past. This can be attributed to a shift in viewing habits, which has led to a growth in digital platforms. The only scripted show that has been successful for Fox this season is Empire, which has seen massive viewership growth since its premiere episode in January. Empire viewership grew from 9.9 million in the premiere episode to 16.7 million viewers in the season finale. [2] The broadcasting operations likely benefited from huge success of Empire. Fox currently stands at the fourth spot with 6 million total viewers. This compares with CBS’ 11.4 million and NBC’s 8.8 million viewers. [3] While the overall softer ratings at Fox may adversely impact the advertising revenue, rising programming costs could further add to the woes of the media house. Accordingly, we don’t expect any significant growth in the company’s broadcasting operations in the near term and estimate the revenues to be a little over $5.30 billion in 2015. An estimated EBITDA margin of 18% will translate into EBITDA of over $940 million, representing 12% of the company wide EBITDA for the year.

Movie Business Likely To See Solid Growth

We expect higher revenues from the company’s filmed entertainment division given the success of the movies released during the quarter. Kingsman: The Secret Service was made with a production budget of $81 million and has grossed over $400 million at the box-office globally. [4] Similarly, Taken 3 was another hit in the March quarter with grossing of over $325 million at the box-office while the production budget was $48 million. [5] Other movies that did well at the box-office include Home. Looking at the worldwide box-office, the studio has so far grossed over $1.10 billion in 2015. Given the box-office success in the past few months, we believe the studio saw higher revenues in the March quarter. However, a stronger dollar may weigh over the international collections during the quarter.

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Notes:
  1. CNN Sees Big Jump In Q1 Ratings, But Fox News Still Tops All, The Huffington post, Apr 1, 2015 []
  2. TV Ratings: ‘Empire’ Finishes Unstoppable Season With More Growth, The Hollywood Reporter, Mar 19, 2015 []
  3. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 31 Ending April 26, 2015, Zap2it, Apr 28, 2015 []
  4. Kingsman: The Secret Service, Box Office Mojo []
  5. Taken 3, Box Office Mojo []