Sector: Cable/Media Dave Novosel June 17, 2021 [email protected] Avoiding The Streaming Wars Three of the major broadcast networks (Disney/ABC, Comcast/NBC, and ViacomCBS/CBS) have turned their focus to streaming. But Fox Corporation (FOXA) has not followed this path, other than a minor effort with Fox Nation and Tubi. Tubi is advertising supported and Fox is not making huge investments in programming and marketing. Instead Fox is concentrating on news and sports. People can argue with the perspectives and editorial comments of Fox News. What they can’t argue about is the success of Fox News. After of few months following the presidential election when the audience migrated away from news, the channel is once again the highest rated news network. Meanwhile, Fox just renewed its Sunday NFC football package, the most watched NFL package for the past 15 years. Management will continue to look at sports rights that become available. The bulk of the success at Fox is driven by the Cable Network Programming segment. Although this unit accounts for less than 45% of total revenue, it generates more than 80% of total EBITDA. The segment does so by generating EBITDA margins that have averaged more than 47% over the past three years. Moreover, we think margins will approach 50% this year. Margins have generally risen because of the improved revenue. But they have also benefited from lower studio show production costs at Fox Sports, including the absence of Super Bowl week studio shows this year. Lower programing rights amortization and productions costs have lifted margins too. We estimate that the Cable Network Programming segment will post growth of roughly 2% this year and in following years, which would be consistent with the growth delivered in fiscal 2020. Television segment revenue dropped 12% in the fiscal third quarter since the network did not telecast the Super Bowl this year. Therefore full year growth for all of fiscal 2021 is not likely to be nearly as good as the 11% expansion recorded last year. Nonetheless, we expect revenue to increase almost 5% this year. Most of the improvement stems from hefty increases in affiliate revenue because of fee increases from third-party Fox affiliates and higher average fees at its owned and operated television stations. We expect significant revenue growth over the next few years. Following postponements and cancellations of major sporting events, things are returning close to normal in the sports world. By the time the college and professional football schedules begin in the fall we expect even more normalcy. EBITDA margins in the TV segment have averaged just over 7% in the last three years. We project margins of approximately 8% this year, aided by the absence of costs associated with the Super Bowl and lower scripted programming expenses due to the pandemic. Unlike its competitors that are spending lavishly on content for their streaming efforts, Fox is spending very modestly on Tubi. Consequently, free cash flow for this year should be approximately $2 billion. We expect a similar figure in fiscal 2022. We estimate that Fox will spend about $1 billion on share repurchases this year, leaving around $1 billion available for debt reduction. Given the significantly improved EBITDA in fiscal 2021 and the level debt, leverage has declined to 2.6x versus 2.9x at the end of last year. If Fox used $500 million of its cash to slash debt, leverage would drop to 2.4x. Furthermore, Fox has plenty of cash, as it ended the third quarter with $5.8 billion, which is well above what it needs to run the business. Fox spent $1.1 billion on acquisitions in fiscal 2020, including Tubi, Credible, and three TV stations. However, the company has spent less than $100 million on deals this year. We expect some modest transactions over the next few years but nothing too aggressive, especially considering its conservative financial management. We like the outlook for steady revenue growth, stable margins, excellent free cash flow and most importantly, low leverage. We maintain our buy recommendation, with the 2030 notes trading at a spread of +79. © 2021 Gimme Credit LLC. All Rights Reserved Gimme Credit LLC Analyst's Data Sheet ($ in millions) Fox Corporation Dave Novosel, CFA Date Produced: June 17, 2021 fiscal year ends June 30th Y/Y 2021E 2020 Change 2019 2018 Sales 12,749 12,303 3.6% 11,389 10,153 Adjusted Gross Profit 4,800 4,496 6.8% 4,062 3,648 Adjusted EBITDA 3,003 2,755 9.0% 2,643 2,439 Adjusted Operating Income 2,717 2,497 8.8% 2,431 2,268 Interest Expense 396 369 7.3% 203 43 Capital Spending (433) (359) 20.6% (235) Dividends (182) (335) -45.7% (6,688) Cash 5,610 4,645 3,234 2,500 Total Debt 7,950 7,946 6,751 0 Net Debt 2,340 3,301 3,517 (2,500) Shareowners' Equity 11,084 10,111 9,958 9,594 Book Leverage 42% 44% 40% 0% Net Leverage 17% 25% 26% -35% Ratios and Margins: Debt/EBITDA 2.6 2.9 2.6 0.0 EBITDA/Interest 7.6 7.5 13.0 56.7 Gross Margin 37.7% 36.5% 35.7% 35.9% EBITDA Margin 23.6% 22.4% 23.2% 24.0% Operating Margin 21.3% 20.3% 21.3% 22.3% ©2021 Gimme Credit LLC.