Fox’s Broadcasting Revenue Growth Is Largely Dependent On Its Sports Programming

21st Century Fox’s (NASDAQ:FOX) broadcasting network witnessed double-digit drop in key demo ratings as well as total viewers in calendar year 2015. This can be attributed to the absence of Super Bowl, which aided the 2014 viewership. Fox will air Super Bowl 51 in 2017 and that will surely lift its overall revenues and ratings next year. Television ratings primarily impact the advertising revenues for a media company. Even if we exclude the impact of 2014 Super Bowl, Fox has still posted advertising losses at its broadcasting segment in the past few quarters. This can be attributed to lower viewership at its television shows as more people embrace digital video platforms, thereby impacting the ratings on traditional television. Also, the broadcasting advertising trends are uneven, as they are driven by various events such as political campaigns and sports. In 2015, U.S. broadcast ad spending declined 3% while it was up 13% in Q4, reflecting strong scatter market. ^[1] Q4 numbers are impressive and this will likely bode well for the broadcasting networks in upcoming earnings. 2016 will also bode well for broadcasting networks due to the Olympics and the Presidential election. These events will likely accelerate television ad spending and Fox, along with other broadcasting networks, will benefit from the trend as well.

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Sports Programming & Higher Scatter Pricing To Aid Advertising Growth

Fox’s advertising revenues have been hovering around $5 billion in the last few years. The network’s advertising is impacted by lower ratings, which were down 15% in key demographics and down 12% in total viewership for calendar year 2015. ^[2] We estimate the broadcasting revenues will have declined around 3% for the calendar year 2015. Despite the ratings pressure, we expect Fox’s advertising to grow in low-single-digits in the coming years. Below we discuss why.

Fox has an abundance of sports programming to leverage higher ad revenues in the coming years, especially Super Bowl 51 in 2017. The Super Bowl generates solid ad revenues for broadcasters. For instance, ads for 2015 telecast were sold at $4.5 million for a 30-second spot by NBC, and the 2016 price are expected to be around $5 million for CBS and even higher for Fox next year. ^[3] Apart from the Super Bowl, Fox has rights to college football games, among others. In fact, broadcasting networks (the big 4 networks) have seen stellar growth of 35% in their advertising income from sports coverage in the last 5 years. For the 2014-15 television season, the big four networks generated close to $8.5 billion in sports ad sales, representing 37% of the overall ad revenues. ^[4] We expect the broadcasting networks to continue this trajectory in the coming years.

Fox will also benefit from low upfront sales for the current television season. The network had more units to sell in the scatter market, which is seeing solid growth in pricing, as is evident from the ad spending uptick of 13% in Q4. Also, Fox being one of the Big 4 broadcasting networks will absorb a significant chunk of political ad spending amid the Presidential election this year.

Non-Sports Programming Continues To Be A Drag On Fox Broadcasting

Non-sports programming has been a concern for broadcasting networks in the past few quarters. Ratings for most of the shows declined in 2014-2015 television season as more people embrace digital platforms, such as Netflix and Hulu, which continues to post subscriber growth. This has taken a nasty toll on advertising income for cable and broadcasting networks, which are largely dependent on television ratings. Overall Fox’s advertising revenues (including broadcast and cable) fell 7% in FY15 (ended June) to $7.6 billion. ^[5]

Looking at current television season ratings, Fox’s last year hits such as Empire currently averages 12.27 million viewers as compared to 12.97 for the previous season. ^[6] The only shows to post viewership gains are Bones, The Simpsons, New Girl and American Idol, which is running its final season. In fact, viewership of some of the shows such as Sleepy Hollow and Family Guy is down around 30%. ^[7] Given the ratings trends, ad volumes at non-sports programming are likely to take a hit, which to some extent will be offset by ad pricing growth. Given these factors, we estimate low-single-digit growth for Fox’s broadcasting revenues despite expected strong uptick at sports programming and increased ad spending. We currently estimate Fox’s broadcasting revenues to increase from $5.3 billion in 2014 to a little over $6 billion towards the end of our forecast period in 2022. An estimated EBITDA margin of 19% will translate into EBITDA of over $1.1 billion, representing 10% of the company-wide EBITDA. It should be noted that estimated EBITDA margins at broadcasting are much lower than 38% figure for Fox’s cable networks, reflecting higher sports programming costs for the broadcasting network.

• Trefis has a $37 price estimate for 21st Century Fox’s shares, translating into a $73 billion market cap. This is roughly 35% ahead of the market price of around $27 seen over the week.
• We estimate the company’s revenues to be around $29 billion for earnings per share of $1.64 for the calendar year 2015.

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1. Broadcast TV Advertising Spending Jumped 13% to End 2015 9% overall growth in Q4, Ad Week, Jan 25, 2016 [↩]
2. 2015 TV Ratings: ABC, CBS, Fox, NBC Battle For Bragging Rights, The Wrap, Dec 22, 2015 [↩]
3. This is how much a 2016 Super Bowl ad costs, Fortune, Aug 6, 2015 [↩]
4. Sports Now Accounts for 37% of Broadcast TV Ad Spending, Ad Age Sep 10, 2015 [↩]
5. 21st Century Fox’s SEC Filings [↩]
6. Empire Season 2 Ratings, TVSeriesFinale, Jan 15, 2016 [↩]
7. FOX 2015-16 Season Ratings, TVSeriesFinale, Jan 26, 2016 [↩]