We are impressed by 21st Century Fox's (FOXA) fiscal third quarter. We were optimistic but cautious heading into it, as the company faced one of the most difficult comparisons possible (revenue generated from last year's Super Bowl), not to mention a daunting currency environment. In the face of those challenges, the company delivered, plain and simple. Its earnings beat by a wide margin and its quarterly revenue came in line.
The specific catalysts we outlined both in our initiation and earnings preview -- Regional Sports Networks (RSN) and the international growth (primarily India) -- drove the outperformance. While this may come as a surprise to many of the analysts (which tend to dismiss both factors and focus on its legacy businesses), we recognize that both are poised to elevate the company's growth prospects over the long term.
Looking more broadly, we would be remiss not to emphasize the impressive growth seen this quarter across FOXA's cable networks. The 15% increase in affiliate fees, combined with 9% growth in advertising, crushed even the most bullish analysts' expectations. The 20% domestic growth was driven by the aforementioned RSNs as well as the FX channel. On the international side, mid-teens constant currency growth was moderated by accelerating forex pressures in both Latin America and Europe, which took away 13 percentage points of growth.
On the cable front, advertising led the way with 29% constant currency growth, driven by the truly outstanding Cricket World Cup viewership on India's No. 1 STAR network. Domestic EBITDA was up 21% from higher contributions at Fox News and the company's bevy of sports channels.
Film managed to grow 8% as its outsized organic growth more than offset lower television production results and currency headwinds. Success at the box office was led by Kingsman and Taken 3, while home entertainment revenue was driven by Rio 2 and The Fault in Our Stars.
On capital allocation, management remained mum on its long-term targets but stated that it repurchased $2.1 billion of shares in the quarter and $5.2 billion to date. Guidance was generally maintained, albeit tweaked 1% to adjust for continued strength in the dollar.
Management also discussed the issue of bundling, and stated that its current ecosystem is strong, as consumers value choice and breadth in content. While it does not dismiss the "de-bundling" threat, it reaffirmed that it will continue to deliver the highest level of content that compels user demand across a broad audience. It also specified, separately, that its existing rights agreements are both strong and specific. In response to the digital threat, management indicated that it embraces the evolving landscape and is confident that quality content will be the ultimate beneficiary of growth as it relates to digital platforms. Within the content world, they believe must-have brands at scale (like their own) will emerge as the true leaders.
In an interesting aside, management outlined their five key brands: Fox, Fox News, FX, Fox Sports and National Geographic. On the sports side, RSNs are the pillar of strength and popularity; Fox News is No. 1; and FX is marked by quality, breadth and distinctiveness in programming, making it a premium channel.
Overall, we are encouraged by the results as the company has now overcome its (arguably) most daunting quarter. Going forward, we believe the company has many growth drivers (think India, RSNs) that are being overlooked. In the words of management, its "product has never seen such demand." Of course, it must continue to effectively monetize viewership in the digital world. Management recognizes this urgency and we have confidence they will deliver by leveraging the strength of their content. Our estimates are unchanged and we maintain our $45 target.
Regards,
Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long FOXA.