How Is FX Network Trending For 21st Century Fox?

21st Century Fox’s (NASDAQ:FOX) FX network has seen phenomenal growth over the past few years, primarily driven by the success of its programming, including Sons of Anarchy and Justified. It stood at fourth spot in 18-49 demographic ratings last year, up from sixth position a year earlier. ^[1] FX networks also includes movies and competes with premium cable networks such as Time Warner’s (NYSE:TWX) HBO & CBS’ (NYSE:CBS) Showtime networks. FX generates revenue from subscription fees collected from the pay-TV operators as well as sales of advertising slots to advertisers. We believe that the network’s focus on original programming will drive the subscription as well as advertising income in the coming years.

Note that the network continues to air some low-rated shows as well. Earlier in January, FX networks CEO, John Landgraf, stated that he wants the network to be the best network rather than top in ratings. ^[1] However, the landscape is changing for the industry at large amid the rise of alternative video platforms. Premium networks such as HBO and Showtime have gone over-the-top to offer standalone services, and we wonder if this strategy of FX to run lower rated shows such as The Americans and Louie will work in the long run. On that note, we discuss below the trends in FX networks and our forecasts and estimates.

We currently estimate revenues of about $30 billion for 21^st Century Fox in 2015 with EPS of $1.70, which is in line with the market consensus of  $1.71 compiled by Thomson Reuters. We maintain a $39 price estimate for 21^st Century Fox, which is close to 20% ahead of the current market price of $33.

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How Are FX Networks Trending?

FX networks include FX, FXX and FXM networks, which offer a variety of programming to cable and satellite subscribers in the U.S. FX has seen steady subscriber growth over the past few years, growing from 93 million subscribers in 2008 to 100 million subscribers in 2014. With the rise in subscriber base, FX’s subscription revenues also grew from $413 million in 2008 to $684 million in 2014, according to our estimates. FX’s bold and edgier shows have primarily led this growth. Viewers are also hooked to these networks because of the number of movies it shows, while being less expensive than premium networks such as HBO.

FX is bringing in more programming in the near term with Sex&Drugs&Rock&Roll scheduled to premiere on July 16th. The network will also bring second season of Married and Tyrant in the upcoming television season. The network is also boosting the licensing revenues for Fox. In December 2014, FX inked a deal with Hulu for some of the primetime titles, including Tyrant, The Strain, Married and You’re The Worst. These shows will also be available on Hulu ahead of their second season premieres. ^[2]

We believe FX networks will see continued growth in subscription revenues, driven by the appeal of its content and continued subscriber growth. The contracts between media companies and pay-TV service providers are long-term, and include pre-defined yearly subscription rate increases. Given the demand for good content, FX networks will continue to benefit from these yearly increases. Also, over the past few years, the cable networks have risen in popularity owing to their specific focus. This has helped them create a loyal audience base and, consequently, broadcast networks have suffered in terms of viewership. We estimate FX networks’ revenues to grow to over $800 million by the end of our forecast period. An estimated EBITDA margin of 38% will translate into EBITDA of over $300 million, representing 3% of company-wide EBITDA. However, the contribution will be much higher if we account for advertising revenues, which stood at around $750 million in 2014. ^[3]

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1. FX Wants to Be the ‘Best’ Channel on TV, Not the Highest-Rated One, AdWeek, Jan 21, 2015 [↩] [↩]
2. Hulu Inks Streaming Deal For FX Series, Including ‘Tyrant’, ‘The Strain’ & ‘AHS’, Deadline, Dec 18, 2014 [↩]
3. FX at 20: Cabler’s Revenue Soars on Movies, Original Series, Variety, May 15, 2014 [↩]