FOX Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Fox Corporation is a news, sports, and entertainment company that manages and reports its businesses in the following segments: Cable Network Programming, Television, and Other, Corporate and Eliminations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Fox Corporation (FOXA) operates as a diversified media company, with a significant presence in cable television, broadcast television, and digital platforms. Its business is categorized into:

Cable Network Programming: This segment comprises popular cable channels such as FOX News Media, FOX Sports, FX, and FS1, known for their news, sports, and entertainment content. This segment also distributes content through linear and digital platforms and generates revenue through affiliate fees and advertising.
Television: This encompasses FOX’s owned and operated television stations across the U.S., which broadcast local news, sports, and syndicated programming. Revenue in this segment is primarily derived from local advertising, retransmission fees, and sports programming contracts with the local stations and networks.
Other, Corporate and Eliminations: This segment primarily comprises FOX Studios and other corporate overhead. FOX Studio Lot, located in Los Angeles, California, provides production and sound stage services. Corporate overhead costs include expenses not allocated to operating segments.

Recent changes: On September 10, 2023 the Company entered into a transaction with WBD, by which the Company’s broadcast sports business (“Fox Sports”) was combined with WBD’s sports programming and production assets. The resulting partnership is called Diamond Sports, however, FOX does not own nor control the partnership. As such, the operation of Diamond Sports is not included in the presentation.

Moat Analysis: Fox Corporation’s moat is rated as 2/5. This rating is based on the following considerations:

Brand Recognition: The company’s powerful brands, like FOX News and FOX Sports, give it a degree of pricing power and customer loyalty. However, brands in media are not entirely unassailable, particularly with the rapid pace of change in consumer habits and content consumption (think Netflix, streaming etc).
Content Ownership: Having unique content, including live sports programming rights, does create some barriers to entry and can increase the value for customers. However, as can be seen from the financials, this requires significant capital expenditures to obtain and the benefits are not always clear cut.
Network Effects: Although there are large audience share for certain channels, like Fox News, the network effects are not nearly as strong as in other sectors. The presence of one broadcaster is not strongly related to others, such as with credit cards or the Internet.
Switching Costs: For customers, including both subscribers and advertisers, switching costs are low, as there are multiple media options.
Cost Advantages: FOX does not have a significant cost advantage compared with many of its peers in media. Some parts of the business, like operating the television stations has high up-front costs and the profits tend to come very predictably over time. Other parts of the business, like Cable Network Programming, require massive investment in programming licenses.

Risks to the Moat and Business Resilience:

Technological Disruption: The rapid changes in technology are constantly disrupting the media landscape. The shift from linear television to streaming presents a significant challenge to FOXA’s business model and could potentially erode the value of the company’s core business. The rise of social media also presents significant new competition for viewership and advertising revenues.
Shifting Consumer Preferences: Consumer preferences for media content are rapidly changing. Younger generations are increasingly opting for streaming content over traditional cable TV and broadcast, putting pressure on legacy media companies.
Competition: The media and entertainment industry is intensely competitive and the company faces intense competition from cable, broadcast, streaming, social media, and other content creators. New entrants in the market can impact the share and revenue of FOX.
Programming Costs: The escalating costs of sports programming and other high-profile content continue to affect the profitability of the business and put significant pressure on profit margins. Failure to secure key programming contracts can lead to a significant loss of subscribers.
Dependence on Sports: The business has a heavy reliance on the availability of sport programming. Any loss or cancellation of major sporting events (due to a strike, change in ownership of licensing rights etc.) can be a significant negative factor for the company.
Regulatory Environment: FOX is subject to regulation by authorities such as the Federal Communication Commission. Changes in regulations can affect their operations and profitability.

Business Resilience

Despite these risks, FOX demonstrates moderate business resilience. This resilience stems from:

Diversification: Fox is diversified across different types of media-news, sports, entertainment. This helps to reduce the impact of a disruption to one sector. The partnership with WBD also brings in other business elements as well.
Established Brands: The strength of FOX’s well-known and established brands gives the company a foundation to adapt to changing market conditions and provides customer loyalty, providing a degree of protection.
Operational Expertise: The company has many experienced professionals who are familiar with changing markets and environments.

Financial Analysis:

The financial performance of Fox is crucial to understanding its current status and future prospects. Here’s an in-depth overview of the company’s financial standing:

Revenue Distribution:
- Cable Network Programming: The revenues from this sector come primarily from subscription revenue that is paid by cable operators to carry its networks. This is the largest piece of the pie. They also earn from advertising revenues but less so. For example, in the quarter ending September 2023, $2,761 million (or ~70%) of the revenue came from this segment. For all of FY 2023, this was about 70% as well.
- Television: This is the second largest component of revenues. In the quarter ending September 2023, $1.15 billion (or 29%) of revenue was generated by this sector. The full year figure was again about 29%. This segment is far more reliant on advertising than Cable, with that accounting for a bulk of the revenue in the segment.
- Other, Corporate and Eliminations: This portion is a small part of revenues, usually just $30-$70 million in total, consisting of expenses and other services provided.
Profitability:
- Adjusted EBITDA: Adjusted EBITDA is one of the main ways in which they manage the company’s performance. In Q1 of 2024, adjusted EBITDA is $428 million, which is down considerably. Management attributes this to lower revenues at the Television segment due to less political ad spending as well as the consolidation of streaming operations for a sports channel that is now part of the joint venture with Warner Brothers Discovery. For 2023 the adj. EBITDA was ~$3 billion.

Note: Adjusted EBITDA does not include amortization expenses, interest expense, non-operating items, income tax expenses. As a result, it is an attempt by the company to showcase the success of their operation and business model with such expenses excluded.

Profit Margins:
- The operating margins of FOX are quite high. For 2023, the overall operating margin (operating income before depreciation and amortization compared to revenues) was approximately 21%. However, the Cable Network division has higher margins compared to the other parts of the business.
- The margins have come down significantly in Q1 of 2024, dropping to 8.8%, but this was attributed to specific economic conditions. This does make the business vulnerable to economic shocks.
Balance Sheet:
- The balance sheet is relatively healthy. Cash and equivalents have decreased year-over-year by roughly $2.5 billion, which was attributed to the payment that was due for the partnership deal with WBD. Total debt was reduced by over $200 million to ~$7.8 billion, which is quite healthy. Total assets as of September 30, 2023 are at roughly $22.35 billion. Overall, the balance sheet has a relatively good asset base and the debt is manageable.

A large part of the liabilities is ‘revolving credit agreement’, a short-term liability. In a time of rising interest rates, this could lead to significantly higher interest payments.
Financial Trends:
- There has been some weakness seen in the earnings calls. One of the drivers has been a decline in TV viewing hours and subsequent weakness in ad sales. Moreover, there has been pressure in the sports segment due to increased programming costs. The company is seeking to mitigate these issues in several ways.
  - Increase in affiliate fees.
  - Cutting out costs by sharing resources between news and sports operations.
  - Trying to improve advertisement sales.

Understandability: The business is rated as a 2/5 in understandability. While at its core, it’s a media company distributing content, the intricacies of revenue distribution from affiliate fees, and the impact of constantly changing digital platforms makes it less easy to understand for a layman. Moreover, a lot of the value drivers in this business are highly qualitative and not quantitative, which can be difficult to appreciate.

Balance Sheet Health: The balance sheet is rated a 4/5 for health. As discussed, the company has good liquidity and a manageable debt load. However, the fact that the interest rates are currently increasing, coupled with a high revolving credit portion of debt is of concern. The asset allocation and debt allocation are well-balanced, but there could be vulnerabilities arising from economic factors.

Recent Concerns and Controversies

The company’s management has publicly addressed concerns on several occasions.

Linear TV Viewership Decline: Management is attempting to move towards a more diverse multi-platform revenue model to try and hedge against declining linear TV viewership. They emphasize the value of live programming, including sports, which still generate big audiences.
Economic Uncertainty: In the Q1 2024 earnings call, management mentioned that there were concerns of the global economic situation, that could impact advertisement revenue. They said that cost-cutting is being prioritized to deal with this uncertainty.
Cord Cutting: The trend of “cord-cutting”, which is the movement of consumers to online streaming platforms is of big concern and the management says they are doing all they can to try and adapt to this.

Conclusion

Fox Corporation is a media conglomerate with strong brands and a solid footprint in the entertainment and news industry. Despite this, the business is undergoing significant change due to external forces. It requires close monitoring of the overall performance as well as management actions as well as constant vigilance against risk. The rating for moat is moderate given the strengths in brand and content assets but risks that can arise from technological disruptions. The financial performance is also acceptable and gives confidence. The understandability rating is low as there are a lot of intangible factors which are not easy to assess.