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Morningstar | Fox Posted Strong Quarter to End Fiscal 2018; Shifting Focus to New Fox

Fox reported a strong end to fiscal 2018 as fourth-quarter revenue came above the Street projection and EBITDA was in line with the consensus projections. On the last scheduled quarterly conference call as Twenty-First Century Fox, management began to try to shift investors' focus towards New Fox Co and its large bet on news and live sports, as the deal with Disney is expected to close in the first half of 2019. One of the key drivers for the successor firm will be the NFL, which management expects to generate three of the top five rated shows on Fox each week this fall. We are maintaining our wide moat rating and our fair value estimate of $46. As a reminder, our fair value estimate is based on the Disney deal and the value of the successor firm. If the deal were to collapse, our standalone fair value for the firm is $35.

Quarterly revenue was up 18% versus a year ago to $7.9 billion as three segments posted double-digit growth. The cable segment was up 14%, driven by 11% domestic affiliate fee growth, as Fox continues to drive fee growth at its core brands while expanding the sub base of its newer channels. Domestic advertising revenue improved by 1%, as the strength at Fox News and the FIFA World Cup more than offset the declines at the RSNs. International cable continues to expand with 25% revenue growth, driven by the improvement in affiliate fees (up 12%) and ad revenue (up 55%). EBITDA margin for the cable segment fell by 50 basis points to 38.7% as the revenue growth was more than offset by the increased programming and marketing costs at FX and increased Sports rights for FIFA World Cup and the IPL.

Revenue for the studio business was up 27%, driven by growth in TV production, licensing and home entertainment, and filmed entertainment. EBITDA for the studio segment was $289 million, up from a loss of $22 million a year ago as the studio benefited from a stronger slate, including Deadpool 2. The 14% year-over-year growth in broadcast television revenue was largely due to 19% growth in retrans revenue and 12% increase in ad revenue, driven by the FIFA World Cup. As a result, overall EBITDA fell by 2% to $894 million and EBITDA margin declined by 10 basis points to 25.5%.

While management pointed towards its future, the fourth-quarter results and fiscal 2019 guidance demonstrated why Disney and Comcast both fought to acquire the Fox media assets. While a large portion of revenue and profit from the domestic cable division will remain at Fox (Fox News and FS1), Disney appears poised to reap much of the benefit of Fox's large investment in its international cable business. After many years of struggles, STAR India hit management's target of $500 million in annual EBITDA with strong performance during the recent IPL season. The IPL finals were viewed on Hotstar by 10.3 million concurrent viewers, a record for a live digital event. Even though New Fox will retain Fox News and FS1, the growth in both subscribers and affiliate revenue should benefit Disney via the acquisition of FX and the other domestic entertainment cable networks. We expect that Disney will have no issues in maintaining carriage for these networks on both traditional and OTT pay TV platforms.