Fox’s Q2 Earnings Bolstered By Cable Networks Advertising & Affiliate Growth

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21st Century Fox’s (NASDAQ:FOX) fiscal Q2 results were in line with the street estimates despite the dismal performance of its studio business. While the studio benefited from the box-office success of Martian in the past quarter, lower home entertainment sales led to a double-digit drop in segment revenues. Currency issues further added to the woes for the studio. Barring studio operations, Fox’s fiscal Q2 results were positive with steady top line growth at its cable networks as well as broadcasting business. However, higher costs at broadcasting impacted the bottom line. The company’s management stated that currency issues will negatively impact FY 2016 earnings by $350 million. [1]

Fox’s domestic cable networks saw low-double-digit revenue growth led by higher affiliate fees as well as advertising income. This is remarkable given the ratings decline across cable networks and compares far better than Viacom, which posted a decline in advertising and only a mid-single-digit growth in affiliate fees for the past quarter. Fox’s results were well received with investors and the stock didn’t fall much in a weak market. On the other hand, Viacom’s shares plunged over 20% post its earnings release partly due to a slowdown in affiliate income growth and concerns over carriage renewal with Dish Network (see – Viacom’s Stock Plunges 20% As Subscription Growth Slows).

Fox’s broadcasting business also did well in the past quarter, led by a solid 20% growth in scatter pricing as compared to upfront sales, which boosted the segment’s revenues. [1] However, higher expenses pertaining to NFL and MLB rights weighed on the bottom line. Of late, the trend in the media industry has been more favorable for broadcasting rather than cable networks, which has seen significant decline in ratings. This can be attributed to the growth of digital video platforms, which has impacted the viewership on traditional television, which in turn has weighed on the advertising income for the cable networks. On the other hand, broadcasting networks have performed better, primarily due to sports programming. Total ad spending on broadcasting networks was down a mere 3% in 2015 while it was up 13% in the December quarter. [2] These figures are impressive given that the ratings continued to decline in 2015.

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Among Big 4 broadcasting networks, Fox’s ratings were down 15%, NBC 9%, CBS 5% and ABC was flat in key demographics. [3] If one looks deeper at these ratings, they weren’t that bad. For instance, Fox had rights to Super Bowl in 2014 so the viewership is not directly comparable. Similarly, NBC in 2014 benefited from its Winter Olympics coverage. CBS was slightly down in key demo but flat in total viewership and there was no remarkable change at ABC. Given these trends at broadcasting, we expect a slight uptick in revenues in the near term. In fact, Fox will telecast Super Bowl in 2017, which will surely boost its top line. Having said that, most of the growth across broadcasting can be attributed to sports programming while non-sports programming continues to garner lower viewership, which the networks are addressing by investing more into original programming (also see – Fox’s Broadcasting Revenue Growth Is Largely Dependent On Its Sports Programming).

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Notes:
  1. 21st Century Fox’s (FOXA) CEO James Murdoch on Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, Feb 8, 2016 [] []
  2. Broadcast TV Advertising Spending Jumped 13% to End 2015, AdWeek, Jan 25, 2016 []
  3. 2015 TV Ratings: ABC, CBS, Fox, NBC Battle For Bragging Rights, The Wrap, Dec 22, 2015 []