Twenty-First Century Fox released third quarter earnings on May 6th, with revenue of $6.84 billion and adjusted earnings of $0.42 per share. Revenue fell slightly short of analyst estimates, while earnings per share beat the forecast of $0.39. Shares are up about 2% since the announcement.
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Following the release, President and COO Chase Carey, co-COO James Murdoch, and other company officials took part in a conference call to give some color to the quarterly results and guidance as to what the future holds for the company. Here are five key takeaways from the discussion.
Traditional TV market is strong, but promise lies in new distribution
The rise of streaming services like Netflix and new TV bundle packages like the Sling TV from DISH Network and PlayStation Vue from Sony are changing the content distribution game. However, Fox management believes traditionally oriented bundles are not losing their viability. Here is President Chase Carey on the subject:
We believe the current pay-TV ecosystem is strong and that consumers continue to value choice and breadth in content. While we're seeing a small decline in pay-TV subs, we believe the vast majority of customers will continue to want a bundle of channels that is priced appropriately, as opposed to a limited number of premium price channels.
Carey also stated that the existing carriage contracts provide leverage for hashing out new distribution deals and that new models will require different pricing. His comments run contrary to a recent Reuters poll indicating that 77% of adults would prefer a la carte programming options. Later in the call, he reiterated that the company views over-the-top programming as an opportunity but that most customers were not interested in a la carte and were instead looking for bundles.
Improving advertising efficiency and finding a better ratings system
Acknowledging the ways that digital content trends are changing the nature of distribution and advertising, Carey emphasized that Fox needs to help deliver advertising that is tailored to reach audiences that have more entertainment devices at their disposal than ever before. Carey pointed to the restructuring of the ad sales group and acquisition of digital ad company TrueX as steps that have been taken to improve the ecosystem for advertisers.
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The $200 million acquisition of TrueX, which specializes in ads for computer and mobile platforms, points to a greater focus on digital distribution, even as the company has not been very specific about its future in over-the-top programming. Carey also voiced his displeasure with the C3 and C7 rating systems, stating that the latter is an improvement over the C3 system but far from ideal for the current content viewing climate. Regarding the overall outlook for the ad business and the importance of long-term planning over short-term profit, Carey had this to say:
There will be short-term challenges, such as those we're experiencing today on the advertising side of our business, which can create pressure as we work to develop new business models. However, for those that navigate this transition successfully, the media industry that emerges on the other side will be one with enormous growth potential and an incredibly exciting future. One of the keys to success will be the ability to be disciplined in the face of industry noise and to be willing to invest and build on positions of strength, even in the face of uncertain times. This is a time to prioritize long-term gains over short-term pain.
Investing to get Fox Network where it needs to be
Performance from the Fox Network has been turbulent over the last several years, and the company made commitments to investing resources to improve performance during the call. This prompted UBS analyst Doug Mitchell to raise a question about an investment cycle timeline that the company had made roughly two years ago. The company had laid out a two-year investment period that was to be followed by improved margins, but Mitchell pointed out that comments from Fox indicated that the company was planning for another big spending stretch. Carey responded, discussing the need to invest in the Fox Network:
We think we need to continue to have the backbone to invest, to drive that business to what it can be, as opposed to saying how do we hit a profit target next year for the Fox Network, as opposed to investing to enable it to get to the right place three years from now.I think it's probably talking more about that type of investment.
He went on to state that the world is fluid, implying that conditions had shifted since investment timelines were made roughly two years ago. Earlier in the call, Carey declined reaffirming the mid-$7 billion EBITDA target for 2016 that the company had made in the last conference call, instead pointing to the year-end call as a time when targets would be provided.
Creating original content and controlling rights are goals going forward
Offering some insight into those plans for investing in the future, Carey put an emphasis on creating and controlling top-tier content. The company, and Fox Network in particular, is dealing with rising costs. Production expenses for Empire andGlee limited earnings in the last quarter. On the issue of whether or not the current level of original content production can be sustained, Carey was optimistic so long as the company can deliver the right content in the context of proper management and infrastructure. On the necessity of securing better distribution rights for content, Carey stated:
We also need to control a much wider set of rights to the content we distribute. The days of slicing and dicing rights are over. In order to create the best consumer experience and maximize the value of our content and networks, we need to have the flexibility that comes with the broadest set of rights. The best path to controlling our own destiny is to create our own product. We'll clearly continue to work with third parties, but the sweet spot is undoubtedly where we own and distribute our own content. Our leadership position in content gives us a big advantage in achieving that goal.
Sports coverage is a big part of the future
While original entertainment production has been having a mixed year, the company pointed to big additions in sports programming as a positive sign for the future. The company has secured coverage rights for the World Cup through 2026 and the U.S. Open through 2027. It is also looking to expand the strength of its regional sports networks (RSNs) and better serve developing markets like India with a big investment in cricket overage. Strong demand for RSNs helped Fox's cable network segment command a 20% increase in domestic affiliate fees. Here is co-COO James Murdoch on the importance of Fox Sports and regional sports programming to company identity:
At Fox Sports, we've locked up key local, national, and international rights well into the next decade. Our regional sports networks add a critical dimension to our sports business that truly distinguishes us. The sheer popularity of the RSNs have made that business a pillar of strength second to none for us. We've used our scale, experience, and broad affiliate agreements to enable us to continue to grow these businesses.
The article Twenty-First Century Fox Inc: 5 Things Management Wants You to Know originally appeared on Fool.com.
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