21st Century Fox reported lower second quarter net income despite strong revenue growth at its cable and broadcast TV operations.
Net income was $748 million, or 34 cents a share, down from $6.3 billion, or $2.89 a share a year ago. Excluding large net gains a year ago from Sky and Endemol Shine Group, earnings per share from continuing operations was 44 cents a share, compared to 53 cents a year ago.
Revenues were $7.38 billion, down 1% from a year ago.
The earnings were in line with Wall Street forecasts, but revenue was lower than expected.
Revenues rose at the company’s cable network programming and television segments, but they were more than offset by lower revenues in filmed entertainment and the spinoff of Shine. The stronger dollar also impacted revenues by 3% or $207 million. In a conference call with investors, CFO John Nallen highlighted the growing currency challenges for the company's portfolio, which includes significant international assets. He said that last year the company predicted a full-year hit of $200 million, but now sees it as coming in closer to $350 million.
“During the quarter, our cable business continued to drive our growth, delivering sustained increases in domestic affiliate fees and gains in advertising revenue, underscoring the power of our global brands and distinctive programming, executive chairmen Rupert and Lachlan Murdoch said in a statement. “In addition, we are encouraged by progress at the Fox Broadcast Network, which delivered significant advertising gains from both our sports and entertainment programming. At our television production business, we deliberately invested in a higher number of new original series this quarter in support of the network’s new primetime schedule and in creating valuable long-term assets for the company.“
Cable network operating income rose 8% to $1.25 billion as revenue rose 9%. Domestic affiliate revenue was up 10% reflecting growth at Fox Sport 1 and Fox News. Domestic ad revenues were up 3% as gains at Fox News and the regional sports networks were offset by lower revenues and ratings at FX. Domestic operating income was up 7%.
Television operating income fell $11 million to $279 million. Revenues were up 6% thanks to retransmission consent revenue increases and a 4% increase in ad revenue, which included double digit growth at the Fox Broadcast Network. Ad revenues benefited from higher pricing and audience growth for NFL football and entertainment shows including Empire. Costs were higher, particularly for sports rights.
Between the difficulties with foreign currency and the underperformance of the film group, Nallen said the company was reducing its full-year guidance for earnings before interest, taxes, depreciation and amortization (EBITDA) growth to the flat to up low single digit range.
Though 21st Century Fox fell more than 2% in after hours trading, the lowered guidance didn't seem to shock to analysts.
"The big negative on the quarter – if an unsurprising one – was that foreign exchange headwinds would continue to constrain EBITDA growth, and by more than previously expected," noted Brian Wieser of Pivotal Reserach. "Guidance provided in August of last year presumed that foreign exchange would hurt EBITDA growth by -3% for the full year. However, using current exchange rates it now appears that the impact will be more like -6%.
More encouragingly, "once the foreign currency headwinds subside, we expect FOXA could again demonstrate amongst the highest growth in the media industry over a multiple-year period given its diverse growth drivers," said Vijay Jayant of Evercore ISI.
During the call, CEO James Murdoch addressed topics including stepped-up investment in Hulu, strategy regarding on-demand windows and relations with distributors.
Hulu's recently introduced ad-free tier is "going well," Murdoch said. While Fox intends to keep feeding its content to Hulu, a lucrative income source for it and other major suppliers, the company also has a vested interest in maintaining ties with MVPDs and OTT partners. "We are interested in having fewer hold-backs outside the SVOD window so that we can provide a better product for customers," he said. "I don't think those two things are incompatible at all." Just as customers crave flexibility in terms of content access, he added, the company "needs to have more flexibiltiy" on windowing, advertising and the use of data, especially given the growth of time-shifted viewing.
Relations with distributors are "pretty good," Murdoch affirmed, noting the completion of two large affiliate deals during the quarter. "We haven't seen any material change in the distribution requirements," he said. "While the total universe for extended basic has contracted, we continue to see growth."
Dade Hayes contributed to this report.
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