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Twenty-First Century Fox Misses on Q2 Earnings

Twenty-First Century Fox, Inc.’s (FOXA) second-quarter fiscal 2014 adjusted earnings of 33 cents per share fell short of the Zacks Consensus Estimate by a penny and declined 5.7% from the prior-year quarter.

Including one-time items, earnings per share came in at 43 cents, down 4.4% year over year.

However, the media conglomerate reported a 15% year-over-year increase in total revenue to $8,163 million.

The rise was due to growth across Cable Network Programming (up 14.1% to $2,964 million), Filmed Entertainment (up 6.6% to $2,477 million), Direct Broadcast Satellite Television division (up 66.3% to $1,517 million) and Television (up 5.6% to $1,630 million). Total revenue handily surpassed the Zacks Consensus Estimate of $7,773 million.

However, the company’s total segment operating income before depreciation and amortization (:OIBDA) slid 4.3% year over year to $1,544 million in the quarter, owing to decreased operating income at the company’s Direct Broadcast Satellite Television, Filmed and Television segments, partly offset by OIBDA growth in the Cable Network programming segment.

Segment Discussion

Operating income at Cable Network Programming grew 2.4% from the prior-year quarter to $1,038 million on the back of growth across all networks and benefits from the consolidation of the recently acquired businesses. These positives were partly offset by a 22% rise in expenditure related to the new cable channel initiatives, 3% negative impact from fluctuations in foreign exchange rates and the higher programming expenses at the Regional sports Network (:RSN).  

OIBDA contribution from domestic channels increased 6% as OIBDA growth at the RSNs, FX Network, Fox News Channel and Fox Business Network was more than offset by investment costs in the launch of Fox Sports 1 and FXX.

Further, at the domestic cable channels, affiliate revenues grew 15% due to increased rates across all networks, with growth primarily driven by RSNs and FX Network. Advertising revenues climbed 7%.

On the other hand, OIBDA contribution from International cable channels decreased 12% year over year. Affiliate revenues grew 22% on the back of improved performances at FIC and STAR, partly offset by an 8% negative impact from the stronger U.S. dollar, chiefly in Latin America and India. Advertising revenue rose 9%.

Filmed Entertainment’s operating income fell 20.5% year over year to $337 million, as there were no major releases to match the success of Ice Age: Continental Drift and Taken 2 in the prior year quarter.

Television segment’s operating income slid 11.0% year over year to $218 million due to lower political advertising revenues, decline in ratings for X-Factor and substantial rise in sports costs. Higher retransmission revenues were not enough to mitigate the negatives.

Direct Broadcast Satellite Television posted a segment operating profit of $30 million, a sharp fall of 45.5% from year-ago quarter due to the consolidation of Sky Deutschland OIBDA losses, which offset $25 million improvement in results (due to lower marketing and operating costs) of SKY Italia.

SKY Italia ended the quarter with a subscriber base of 4.76 million.

Other Financial Details

Twenty-First Century Fox ended the quarter with cash and cash equivalents of $6,345 million, borrowings of $17,472 million, reflecting a debt-to-capitalization ratio of 50.0%, and shareholders’ equity of $17,649 million.

Further, the company declared a dividend of 12.5 cents per share, payable on Apr 16 to shareholders’ of record as of Mar 12, 2014.
 
Earlier, on Aug 8, 2012, the company’s board of directors approved a share buyback program of $4 billion. Till Feb 5, 2014, Twenty-First Century Fox bought back approximately shares worth $8.9 billion at an average price of $21.71 per share.

Other Developments

In Feb 2014, the company filed a proxy statement with the U.S. Securities and Exchange Commission (:SEC) for holding a special shareholders’ meeting to obtain approval for the removal of its listing from the Australian Securities Exchange (ASX). The meeting will be on Mar 21, 2014 and if it turns out to be fruitful, de-listing would occur around May 8, 2014.  

In Jan 2014, the company had announced its decision to remove its listing from ASX, subject to approval from its shareholders.

In the same month, Twenty-First Century Fox entered into a deal to increase its stake in Yankees Entertainment and Sports Network (:YES) to 80%. The company already holds 49% stake in YES that it acquired in Nov 2012. The deal is likely to be sealed by the end of March this year, subject to regulatory and requisite approvals. The company is likely to shell out $690 million for the 31% additional stake and $160 million of extra costs on behalf of YES Network.

Guidance

Management remains cautious regarding the performance of the Filmed Entertainment and Television segments. As per management, lower-than-expected results of Filmed Entertainment in the first half of the year will be reflected on the full-year outlook. However, the company remains upbeat about the fourth quarter due to the slated releases of films such as X-Men Days of Future Past and Rio 2.

On the flip side, lower prime-time ratings of X-Factor and American idol are expected to weigh on advertising revenues in the Television segment.

Taking into consideration the above factors, management expects total earnings before interest, taxes, depreciation and amortization (:EBITDA) in fiscal 2014 to grow in the mid to high single-digit range, above the $6.26 billion total segment EBITDA base level of fiscal 2013.
 
Twenty-First Century Fox carries a Zacks Rank #3 (Hold). Other media stocks worth considering include DreamWorks Animation SKG Inc. (DWA) with a Zacks Rank #1 (Strong Buy) and Time Warner Cable Inc. (TWC) and Entercom Communications Corp. (ETM) with a Zacks Rank #2 (Buy).

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