The first year as a company without its newspapers is proving to be a bit more difficult financially than it seemed a year ago, according to the second quarter and first half financial report from Rupert Murdoch’s 21st Century Fox. Higher costs and spending on new cable networks in the US and Asia and weak returns from the company’s movie and US free to air TV businesses, have forced management into lowering a profit guidance for the full year.
Given this outlook and the fact that the higher spending in the US on new cable networks will continue for more than a year or so, its now wonder Fox is dropping its listing on the ASX. Australia is an easy cost saving at a time when the company is looking to trim non-essential spending. Staying a quoted company in Australia was non-essential. Fox will be gone by July.
Even the company’s best business, its US cable networks, led by Fox News, saw profit growth slow sharply, despite another sharp rise in revenues from more advertising and higher retransmission fees from cable TV companies.Thanks to the rising costs (much of which has been deliberate, such as the huge spending on building the two channel Fox Sports network to take on Disney’s giant ESPN), News’ profit growth this year will be from between 4% and 9%, instead of the previous range which peaked at 15% or more, according to US analysts.
The earnings growth momentum that many analysts and investors had seen coming after the split in the company last June, has failed to materialise in the two quarters so far reported. As usual Rupert Murdoch himself is partly to blame. It was his deliberate attempt to build the new sports network, plus weak movies from its film studios and higher costs in cable networks (and the usual seasonal fall in advertising in a non-election year in 2013. This year will see a surge in the final two quarters with the US mid-term polls) that have held back Fox’s earnings growth as a separate company.
Fox management, led by President and Chief Operating Officer, Chase Carey, blamed higher expenses related to the pay TV channel launches in the US (Fox Sports and FXX), the weaker performance of singing-competition shows X Factor and American Idol as well as weak movies released in the quarter and in the six months to December.
For the quarter, the company reported profit of $US1.21 billion, down nearly 50% from $US2.38 billion, in the same quarter of 2012, which was when the company included its newspaper and other businesses spun off into News Corp in June 2013. Revenue rose to $US8.16 billion from $US7.11 billion, thanks to the contribution of more than $US600 million from the consolidation of the Sky Deutschland business which became majority controlled a year ago. Cable Network revenues also rose by more than $US360 million in the quarter.
The Company reported second quarter total segment operating income before depreciation and amortisation (OIBDA, its favoured measure of profitability) of $US1.54 billion, compared to $US1.61 billion reported a year ago, a 4% fall.
The company said operating income before depreciation and amortisation – would grow in the mid – to high-single-digit percentage range in the current fiscal year over last year’s total of $US6.2 billion, a downward revision from the previous estimate that OIBDA growth would be in the high-single to low-double-digit range.
"There are challenges we’ve got this year- I take them seriously," President Chase Carey told a teleconference. But while he said the company was "disappointed" with the fourth quarter results and lower guidance, he believed "structurally and strategically, we’ve never been stronger and better positioned."
21st Century Fox’s broadcast television unit reported an 11% drop in operating income before depreciation and amortisation to $US218 million. Revenue grew 5.6% with much of that from TV stations’ carriage (retransmission) agreements with pay (cable) TV operators. But that small gain was more than offset by higher spending on TV programming for the Fox network and higher sports rights costs (for baseball and football). Fox also said TV advertising revenue hurt by weak the ratings at "X Factor," while "American Idol" is below expectations so far this season. The slide in political advertising revenues also hurt.
Fox has controversially moved to cut TV programming costs by abandoning making pilots for new shows wherever possible and going straight to series orders. And, when it buys pilots, it is looking to do so away from the normal pilot season in US TV (which is happening now). It will also try and launch new shows at other times as well as the industry usual time of the northern autumn.
Revenues in the core cable programming unit, rose 14% increase in the quarter, but operating income before depreciation and amortisation grew just 2% to $US1 billion (which is still an awful lot of money from the likes of Fox News). The impact of the spending on the new Fox Sports channels, FXX and Star Sports in India was seen in the 22% jump in programming costs. And there will be no let up in this huge spending plan – Fox has again told investors to expect higher costs in the short term as it rolls out these new networks.
The company said it was disappointed in the performance of the filmed entertainment unit, whose OIBDA fell 20% to $US337 million. Lower theatrical revenues and higher release costs for films contributed to the weak result. In fact bitter rival studio Disney, absolutely streeted Fox in the quarter, Thanks to mega hits Frozen and Thor, Disney reported net earnings of $US465 million in the December quarter.
