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Twenty-First Century Fox Inc.(NASDAQ:FOXA)

Q4 2014 Earnings Conference Call

August 6, 2014 4:30 PM ET


H. Reed Nolte – Senior Vice President of Investor Relations

Rupert Murdoch – Chairman and Chief Executive Officer

Chase Carey – President and Chief Operating Officer

James Murdoch – Co-Chief Operating Officer

John Nallen – Chief Financial Officer


Benjamin Swinburne – Morgan Stanley

Anthony J. DiClemente – Nomura Securities Co. Ltd.

David Bank – RBC Capital Markets

Jessica Reif Cohen – Bank of America, Merrill Lynch

David Bank – RBC Capital Markets

Todd Juenger – Sanford C. Bernstein & Co.

Michael B. Nathanson – MoffettNathanson LLC

John Janedis – Jefferies & Co.

Michael C. Morris – Guggenheim Securities LLC


Ladies and gentlemen, thank you for standing by. Welcome to the Twenty-First Century Fox Fourth Quarter 2014 Earnings Release Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Reed Nolte, Senior Vice President, Investor Relations.

H. Reed Nolte

Thank you very much Ryan. Hello, everyone and welcome to our fourth quarter fiscal 2014 earnings conference call. On the call today we have Rupert Murdoch, Chairman and Chief Executive Officer; Chase Carey, President and Chief Operating Officer and James Murdoch Co-Chief Operating Officer; and John Nallen, our Chief Financial Officer. First, we’ll give you some prepared remarks, and then we'll be happy to take questions from the investment community.

This call may include certain forward-looking information with respect to 21st Century Fox's business and strategy. Actual results could differ materially from what is said. The Company's Form 10-K for the 12-months ended June 30, 2014 identifies risks and uncertainties that could cause actual results to differ and these statements are qualified by the cautionary statements contained in such filings. Additionally, this call will include certain non-GAAP financial measurements, the definition of and a reconciliation of such measures can be found in our earnings release and our 10-K filing.

Please note that certain financial measures used in this call such as segment operating income before depreciation and amortization, often referred to as EBITDA, and adjusted earnings per share are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release. Also note that the historical results for periods prior to June 28, 2013 described in the press release and on this call have been adjusted to reflect the separation that was completed at the end of fiscal 2013.

And with that, I'm pleased to turn it over to Rupert.

Rupert Murdoch

Thank you, Reed. Good afternoon, everyone. And thank you very much for joining us today. I would like to start with some of the remarks and turn it over to John to review our financial performance. After that, Chase will provide an operational update before we move on to questions and answers.

Let me take a moment to highlight what we have achieved since introducing Twenty-First Century Fox to you at our August 2013 Investor Day. That day we provided a road map for how we intended to achieve industry-leading performance in the first fiscal year since our separation. We executed well against this plan, tackled challenges and continue to be focused on the strategic objectives we presented to you a year ago.

Financially, we just concluded this past fiscal year with the strongest quarter of the year. Our earnings growth this year has been broad-based. It has been driven by the themes you know well by now. Strong affiliate revenue momentum domestically and abroad, continued growth of retransmission fees, and increased content monetization.

Taken together, we found this quarter's confidence in our ability to achieve our fiscal 2015 and 2016, even as we continue to invest in our long-term growth. We are committed to delivering value for our shareholders, not only through earnings growth, but also through robust capital returns.

In that regard, yesterday, our Board authorized a new $6 billion share buyback program. It is effective immediately and will be completed within 12-months. Just as we have completed the $4 billion share buyback program authorized last August. We believe buying are own stock when it is underpriced represents a unique opportunity to maximize shareholder value over the long-term. And at these levels, we believe our stock is severely undervalued.

We have had a busy year considering and executing many strategic transactions. Transactions that will further about our ability to drive long-term value for all of our shareholders. We could not be more pleased with our recent agreement to combine our European satellite television holdings to create Europe's leading pay television business. With this transaction, Sky Europe will be poised for a new level of growth. With our 39% ownership stake, we will enjoy the benefits along with all shareholders.

Let me briefly address the topic of Time Warner. We made a formal proposal to acquire Time Warner because we viewed it as a unique opportunity with clear strategic benefits. Having been refused Time Warner's Management and Board to engage with us to explore this compelling offer, coupled with the reaction in our share price that undervalued our stock, resulted in our conclusion but this transaction was no longer attractive to Fox shareholders. As you know, yesterday we walked away. This is our resolute decision which is why we formally withdrew our acquisition offer.

Twenty-First Century Fox is an amazing company and our future has never been brighter. I am deeply proud of our businesses and confident and our ability to create growing value for our shareholders. Over the year, our team of outstanding executives, animated by our culture of entrepreneurialism, commercial acumen, and creative audacity has delivered outstanding operational performance and earnings growth, resulting in superior shareholder returns.

We look forward to building on that track record, while we remain opportunistic and nimble; we are a strategically complete company and have a clear sense of where we are going. To tell you more about our progress towards our goals.

I will now turn it over to John Nallen.

John Nallen

Thanks Rupert and good afternoon. As you will see in today's earnings release, we finished the year by delivering our strongest quarterly financial performance, which sets up very well to achieve our growth targets in fiscal 2015 and 2016. First, I will make a few comments related to our fiscal year results, then a more detailed review on the fourth quarter, and finally, on our outlook.

For the full-year, total revenues were $31.9 billion, up 15% over year ago levels led by double-digit revenue growth of the cable network and film segments and the effect of the full year consolidation of Sky Deutschland.

Total segment EBITDA for the year was $6.72 billion, 7% higher than the prior-year. This growth was driven by higher contributions from all of the company's segments with more than half of this growth generated by our cable networks. Our EBITDA growth was achieved, despite absorbing the 17% increase in total company expenses including our investment spending in the new cable sports networks and FXX, as well as the impact of the full year consolidation of Sky D.

Reported net income from continuing operations this year was $3.8 billion or $1.67 per share. And this included $174 million of income reported in other net. This largely reflects gains on the sales and investments, partially offset by the impact of the exchange revaluation in Venezuela.

Additionally, our full year results include gains of $134 million from participating in BSkyB's buyback program. Excluding the net income effects of these and comparable items in both years, adjusted earnings per share from continuing operations was $1.55 compared to the adjusted year-ago result of $1.36 of 14% improvement year-on-year.

So now let me turn and focus on the fourth quarter results. As expected, the fourth quarter was our strongest quarter of the year, with 19% EBITDA growth driven by a 17% increase in revenues. On the revenue side, the increase by $1.2 billion to $8.4 billion in the quarter led by a 38% increase at the film segment and double-digit growth at the cable network and DBS segments.

Total segment EBITDA for the fourth quarter was $1.77 billion a $278 million increase over a year ago. This improvement was lead by record film segment contributions and double digit growth at our cable networks and this was partially offset by lower television segment contributions. Overall unfavorable foreign exchange movements reduced our EBITDA growth rate in the quarter by approximately 2%.

This year’s fourth quarter reflected the recognition of various tax benefits which reduced our overall effective tax rate in the quarter and the full year to approximately 25% as we previously indicated going forward we expect that our annual effective tax rate will be around the low 30% range.

From a bottom line perspective, income from continuing operations was $966 million this quarter or $0.43 a share. Making comparable adjustments to both years as we just did for the full year results, fourth quarter adjusted EPS was $0.42 this year versus $0.32 in the prior year an increase of 35%.

So now let me provide some additional context on a few of our businesses as it relates to their fourth quarter performance. Let’s start with the cable network. Total revenues in the fourth quarter increased 13% from last year, highlighted by a 16% increase in affiliate revenues and 9% advertising growth.

On the affiliate side, domestic affiliate fees increased 19%, primarily from higher average rates led by the RSNs, FX and Fox News as well as with the benefit form the conversion and launch of our new channels FS1 and FXX. The consolidation of the YES Network also contributed to this increase.

Our reported international affiliate fees were up 8% reflecting strong underlying local currency growth of about 18%. Fourth quarter advertising revenue growth at the cable segments reflects domestic advertising increases of 12% lead by the RSNs and FX Networks. At the international channels, reported advertising revenue increased 5%, however, local currency ad revenues were up 15%.

Total cable segment EBITDA in the fourth quarter of $1.2 billion was up 11% over prior year levels. Our domestic channels results were up 17% reflecting continued strong underlying EBITDA growth at the RSNs as well as the impact of consolidating the YES Network.

Contributions form the FX Networks were below last year, but this was expected due to higher investments into FXX and the timing shift and expansion of original programming such as Fargo and Tyrant into this fourth quarter versus the third quarter a year ago. International channel EBITDA contributions were up 12% on a local currency basis, led by a higher FIC and STAR Entertainment contributions.

On a reported basis the international results were slightly below prior year, but this is due to the negative impact of foreign currencies. At our television segment, fourth quarter EBITDA was $145 million, as compared to $213 million in the prior year. This decrease largely reflects a 11% lower advertising revenues due to declines in general entertainment ratings, particularly, on American Idol.

Turning to our film segment, we reported record fourth quarter results with EBITDA of $339 million, nearly triple the $117 million contribution reported a year ago. This quarter’s results several successful theatrical releases including X-Men Days of future of Future Past, Rio 2 and The Fault in Our Stars. Quarterly results also include increased contributions from our television production businesses led by the syndication of Modern Family.

Our DBS segment reported EBITDA of $### million in the quarter, down slightly from last year as growth at Sky D offset the expected lower contributions at Sky Italia, from Sky Italia is higher-costs related to the broadcast of the FIFA World Cup. Year-end subscribers at Sky Italia of 4.725 million declined 30,000 from year ago levels. Sky D reported 3.81 million subs at the end of June, reflecting the addition of 360,000 net subscribers over the last year.

Now, before I turn the guidance, let me make a couple of comments on our cash flow and capital structure. We ended the fiscal year with $5.4 billion in cash and approximately $19 billion in debt. In fiscal 2014, we made a considerable investment on to our balance sheet for working capital and support of our growth. And we are expecting a similar investment level in fiscal 2015 after which we expect our working capital investment to normalize.

Subsequent to year-end, we announced the Sky transaction, which will have the impact of increasing our available balance sheet liquidity by approximately $5.5 billion and that’s after factoring in the net cash to be received and the removal of the Sky D debt, partially offset by the reduced leverage capacity from the elimination of the DBS contributions. A portion of this increased liquidity is being used toward our new buyback program.

With regards to the buyback program that we announced a year ago, we've now fully executed that program and bought back $4 billion of the company's shares within the last 12-months. Similarly, as Rupert referred to earlier, we expect to complete our news $6 billion Fox A buyback authorization within the next 12-months.

So finally, let me address our guidance for fiscal 2015 total segment EBITDA growth and our outlook for 2016. The recently announced Sky transaction is expected to close during this calendar fourth quarter, after which these DBS businesses will no longer be reflected in our reported EBITDA.

Therefore, to eliminate any confusion, as we provide our EBITDA guidance for fiscal 2015 and our outlook for fiscal 2016, we are removing the impact of Sky Italia and Sky D for the entirety of each year in 2014 through 2016. As a result, recasting the reported EBITDA for fiscal 2014, the year we just completed, to remove the Sky contributions results in a base EBITDA of $6.29 billion.

As we indicated a year ago during our Investor Day, our growth in fiscal 2015 will be impacted by the continuation of several strategic initiatives. Most notably, the continued planned investments into our new sports and entertainment networks here in the U.S. and internationally, particularly in India.

Additionally, based on current rates, we are expecting adverse currency effects to impact 2015's growth, principally from Latin American currencies. The combined impact of these cable network investments and currencies will impact our fiscal 2015 growth rate by approximately 4%. However, the consolidation of the YES Network for a full year will mostly offset these impacts.

Considering these items and based on all of the assumptions inherent in our projections, we are anticipating total segment EBITDA percentage growth rate for fiscal 2015 to be in the high single-digit range, above the $6.29 billion base level for fiscal 2014. Again, this growth rate completely excludes the results of Sky Italia and Sky D and both 2014 and 2015.

The overall growth in fiscal 2015 will be driven by our cable segment, which excluding our DBS business represented 70% of our EBITDA this past year. This segment is forecast to post high-single to low double-digit EBITDA growth in fiscal 2015, led by contributions at the RSNs, Fox News and FIC.

This growth rates takes into account that cable segment expense increases in fiscal 2015 will be slightly higher than the 17% we reported in fiscal 2014. These planned expense step-ups are led our new sports channels. Most notably, from increased event costs at the unusually heavy cricket calendar STAR Sports in India, and the full year effect of consolidating the YES network.

Despite absence of the Super Bowl on Fox, we're expecting the television segment to post higher profit contributions in 2015, underpinned by continued increases in retransmission consent revenues and higher political advertising from the mid-term elections. And at the films entertainment segment, we're expecting fiscal 2015 results to be similar to the very successful 2014 levels.

So overall, our company is well-positioned to continue our planned growth trajectory in fiscal 2015 and to also achieve the fiscal 2016 target we presented to year ago. In our last earning calls we confirm that we are on track to deliver the $9 billion in fiscal 2016 EBITDA target. However now as we adjusted for fiscal 2014 and 2015 we need to recast that target solely to remove the impact of the DBS businesses. At our Investor Day, we forecasted at least a doubling of the DBS segment's EBITDA over the 2013 levels by fiscal 2016.

So removing that $850 million to $900 million of estimated EBITDA relating to the DBS business from the $9 billion target, yields our recasted target of around $8.1 billion at a growth rate over fiscal 2015 in the high teen percentage range. The acceleration in the EBITDA growth rate in fiscal 2016 will be lead by cable segments growth, including the return on the investments we have made into the new channels.

In fiscal 2016, cable segment revenue growth will be led by affiliate fee gains and expense growth at the new channels will decelerate since our new stepped up U.S. rights deals will be in their second year and there will be lower right costs at STAR Sports, due to fewer marquee cricket events. At our other segments we remain comfortable with our films entertainment outlook and our 2016 target reflects a realistic goal for improvement at the network and prices foreign currency earnings current rates.

So in summary, we had a strong finish of fiscal 2014 and we have good visibility into our most significant growth drivers which give us confidence in our growth plan to fiscal 2016 and beyond.

And now I’ll turn it over to Chase for his comments.

Chase Carey

Okay. Thanks, John. As is evidenced in the financial review John just took you through, we feel great about the future of Twenty-First Century Fox as it is today. But before I get into addressing the progress we've made, I want to add a few comments to what Rupert had to say about Time Warner.

First let me be clear we are done. We pursued this potential combination to achieve one overarching goal, to create value for our shareholders. It became increasingly clear that the combination of the drop in our share price and the highly defensive nature of Time Warner’s actions is going to lead to a transaction where too much of the value created in success went to Time Warner shareholders.

Second, this initiative was one of opportunity, not necessity or defensive concerns. We feel great about the future of Twenty-First Century Fox. We have a great combination of industry-leading franchises, emerging growth businesses, and international leadership. We are confident we can successfully prosper in a consolidating distribution world because our powerful content and brands will continue to be the sweet spot in our industry. Our confidence in our future made the thought of issuing our stock anywhere near it's current price simply untenable.

Third, we have no plans to pursue any other third-party content company as an alternative to Time Warner. We've created shareholder value at Fox by being an industry leader in building businesses, realigning franchises and establishing leadership positions in brands and contents around the world.

One the most important traits that distinguishes us from our peers is that we are a growth company, we build new businesses, we are market leaders in areas of opportunity like the international markets. Our story is one that balances growth with appropriate return of capital to shareholders. We are already lean so we can grow profits by pursuing exciting opportunities. There are many opportunities for us to continue to build on that strategy. And that will be our priority.

Finally, we hope this decision will reaffirm our commitment to building value for our shareholders. Our decisions in recent years regarding splitting the Company, exemplifying the Company through both sales and acquisitions, realigning key businesses, as we recently did with the Sky entities, and our increased return of capital to shareholders are all driven by the singular goal of increasing shareholder value.

Now, a few comments on our operations. Let me begin by adding a bit of insight to the 2015 and 2016 guidance that John just outlined. We recognize that our projected earnings have a bit of a hockey stick curve to them. This curve is largely due to our domestic and international new channel initiatives, particularly Fox Sports 1, FXX and STAR Sports, which require investments in 2015, then turnaround to be a tailwind to growth in 2016.

The underlying growth of our core business, if we exclude these new channel initiatives is actually both stable and strong. Excluding these new channels, we would have solid low-to-mid level double-digit growth in both 2015 and 2015. In fact, that solid double-digit growth would carry through into 2017 too.

Importantly, as these new channels continue to grow, it will provide us the long-term growth and profits that really distinguishes us from our peers. We made good progress with these channels both in terms of distribution and advertising growth and expect viewership to grow heading into fiscal 2015, as key content like the Major League Baseball Playoffs, U.S. Open Golf championships, FIFA Woman's World Cup and Sprint NASCAR cup races, premiere on Fox Sports 1, and the iconic Simpsons within excess of 500 episodes begins its run on FXX with an expanded slate of original content.

At STAR Sports we launched our new Kabaddi league last week to great success with an audience 10 times the recent World Cup and we have a lot more to come. At our established U.S. cable businesses, we continue to build on our leadership positions. For example, this season 12 MLB teams on our RSNs have ranked at the top PrimeTime programing in their respective markets.

At Fox News we continue to see new shows like The Kelly File and The Five, grow to complement our established franchises and become market leaders in their own right. The network shows continue to dominate that cable news competition with The O'Reilly Factor, Special Report and Fox and Friends, all remaining number one in their respective time slots for over 100 consecutive months.

At FX, we continue to lead the way with high quality diverse programming and like Fargo, The Strain and Tyrant, which truly put FX in a class by itself. Further underscoring our U.S. channel strength, we successfully completed affiliate renewals during fiscal 2014 at or above target. At this point nearly 95% of fiscal 2015 and 70% of fiscal 2016, U.S. affiliate revenues are underpinned by agreements in place with the balance representing an opportunity to accelerate.

At our international channels, FIC continues to perform well, despite the currency efforts John discussed, expanding, in particular, the sports business across all three major regions. Our ongoing strong growth at STAR India enabled us to finish the year with our highest ever share at over 20%, driven by Hindi entertainment and our regional language portfolio.

At our broadcasting group we continue to be opportunistic in key markets as illustrated by our recent strategic station swap, picking up to San Francisco stations, including the market leader in exchange for ones in Boston and Memphis, further optimizing our ability to monetize retransmission revenues and our NFL rights.

At the entertainment network, we obviously have some challenges to this year but we feel very good about the future. We advanced key strategic initiatives like year-round development and event series and have a promising slate of new fall series, including Gotham, Red Band Society, Empire, Utopia, and Gracepoint.

More importantly, we are excited about the recent appointment of Dana Walden and Gary Newman as Chairmen of our new Fox Television Group. As creative executives, Gary and Dana are simply unmatched in the industry. Moreover, the closer alignment of our network and studio will enable us to maximize opportunities for those businesses to work together, while continuing to pursue business with third-parties.

Business at the recently completed up fronts would best be described as cautious. We hit our targets in terms of pricing but overall volume was down. Many have asked to what extent this result was driven by advertising moving to digital platform. Now, clearly digital ad spend is growing, particularly in mobile platforms. However, television effectiveness standing up pretty well to the competition.

The primary factor leading to lower upfront volume was the lackluster economy, leading advertisers to make the decision to rely more on the scatter market and keep dollars in their pocket at the upfront. Consequently, if our programming delivers on its ratings potential to scatter market is an area of opportunity. Longer term, we need to better monetize the expanding viewership on digital platforms. The move to seven day measurement and improved VOD experiences is a step, but we have a long way to go to better monetize this viewership.

We're also thrilled by the recent success in the theatrical side. The outsized performance of small budget films like Grand Budapest Hotel and Fault In Our Stars served as perfect complements to our global franchise films like Rio 2, X-Men Days of Future Past, and most recently, Dawn of the Planet of the Apes. We believe the feature film business has exciting growth potential and we look forward to upcoming releases like Gone Girl, Exodus, and our next installment of Night at the Museum.

Finally, as you know, we successfully reached an agreement with BSkyB to combine our European satellite platform to create the continent's leading pay television platform. Each of these businesses is performing well. In Germany, we continue to add subscribers and add new subscriber experiences. In Italy, we successfully renewed Series A Soccer with expanded exclusivity, while continuing to achieve improved efficiencies and improving and adding to the overall consumer offering.

Nonetheless, we recognize there was an opportunity to take these platforms to another level by putting them under one roof hence the Sky transaction. We are quite pleased with our 39% ownership in this platform and have no plans today to change that position. Our focus will be on helping the platform achieve its full potential.

In summary, we are immensely proud of what we achieved over the past year and even more excited about the opportunity we have over the next two to three years to take our business to a whole new level. Our sole focus will be achieving that goal and ensuring shareholder value grows with it.

Now I would now like to open the call to Q&A or turn it back to Reed for that purpose.

H. Reed Nolte

Thank you Chase. Ryan we would be happy now to take question from the investment community.



(Operator Instructions) Our first question will come from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Benjamin Swinburne – Morgan Stanley

Thank you. It is a two part question on the same topic. Thank you for addressing the Time Warner situation clearly. I think it would be helpful for your shareholders to hear what it was about Time Warner that made it compelling to you from an acquisition or merger perspective and why now. Just to get a sense of your thought process. Related to that, use of cash, John, you guys laid out last summer leverage goals for the end of FY16 and with Sky deal you almost made it harder for yourself to reach those. Could you give us understanding how you think about those targets now? And a multi-year framework for thinking about either buybacks or capital returns to address that? Thank you.

John P. Nallen

Sure I guess in the first – and I don't want to get too far into it, again, I want to be clear. We have moved on. So I don't want to be dwelling on sort of a transaction that we moved on from but I'm happy to provide a little clarity. I think at its core, there were a handful of things that were compelling and it really was the unique opportunity which is why you know wanted to be clear this isn’t the case where we move on to another target. We like our business, and we like our future and where we are at.

But I think what made Time Warner unique in the benefits that come out of it for a couple of things. I think first, I guess it sort of highlights three. One, clarity in scale this matter. We have got enough scale and we got a unique enough brands and content to navigate the world we are in, but I think there were opportunities to sort of you know to further emphasize that by having putting together the breadth, brand and content and certainly it would have been more with them in place.

I think second there is real optionality that came out of the ability to mix match the assets and then what we've done – some of that – we created to Fox Soccer to pick up speed, we turned them into a broad-based general entertainment channel and a broad-based sports channel. I think as we looked that the array of content and network opportunities, whether it’s in sports or kids or general entertainment, news, non-fiction there are array of places to mix and match content networks that we would have had across that portfolio that we thought really gave us opportunity to build on that.

And I think important all this probably would have been particularly true internationally where clearly the markets are not as developed. I think probably third is a little bit longer term that there is no question this business continue evolve at all these digital platforms as the emerge again here in the U.S. and overseas. The manners and options in which content is going to get packets, people access it, that content gets monetized for advertizing alike is all clearly gone above and grow and I think the breadth of what we would have had would have given us what it provided a unique opportunity to really create those next-generation of experience is a business is off the back of it.

You know I think hand-in-hand with that was the fact we thought these businesses were pretty good mirrors of each other. This wasn’t a tech Company buying a content company or two companies were familiar with each other. In many ways businesses look pretty similar. I think it gave us confidence and the ability to manage and navigate it. And really enable us to create skill in almost every place, whether its TV studio, Film studio, say the entertainment networks, sports, kids, news, non-fiction that they really were pretty good mirrors of each other and therefore really created scale advance and again I want it clear, we are very – we have a leadership position in scale that just obviously took it to another level.

So I think it was those combination of things, but you know it really, they don’t make sense, I want to go to it and pursue it on terms that enabled us to crate value for our shareholders, we like the hand we've got and really intuitive you know this was enhancing value for shareholders.

And obviously, as we said, we made the judgment that wasn't going to be possible. So we thought the right deal of right things pursue and focus on the opportunities. We obviously have been focused the last month we got the Sky transaction done we made some senior management changes. So it’s now like we have and continue to build the businesses that we've got in hand and that’s always going to be priority one for us. Was the question?

Rupert Murdoch

Yes, just on the balance sheet and where we stand?

John Nallen

And I guess in terms – it’s a little bit I guess it’s going to be a little bit like back we were two years ago. And I guess, I think probably the guidance we gave back then isn't that different in terms of what we think is property returns leverage cash and the balance sheet and the like. I think use of capital or no different and I think where we can invest in organic growth or sort of opportunities that fit within our portfolio was Rupert said I think will be ourselves strategically complete.

And I think in that certainly return on capital it’s an important part it. We maybe $6 billion – and we recognize at $6 billion buyback does not and to itself get us to the balance sheet we’ve talked about and so it’s a – on going working progress and we will continue to address it as we go forward, but sort of guidelines we have before really still largely the guidelines and we will certainly work and focus on trying to drive ourselves to that place, but this does obviously great excess liquidity on the balance sheet we note that.

Benjamin Swinburne – Morgan Stanley

Thank you very much.

Rupert Murdoch

Thank, Ben. Next question please.


Comes in the line of Anthony DiClemente with Nomura. Please go ahead.

Anthony J. DiClemente – Nomura Securities Co. Ltd.

Thanks a lot. I think, John in your remarks about the guidance, you talked about despite the absence of the Super Bowl, you expect television segment to post higher profit levels in 2015. Just wondering, what gives you the conviction that the television segment can turn it around? What types of ratings performance does that imply for the broadcast network? What gives you confidence that Dana and Gary Newman can achieve those types of ratings requirements to get there? Thanks.

John Nallen

I guess, I’ll address I mean first in the entertainment network is not driven by growth in the entertainment profitability if the entertainment network. We have – Gerry and Dana but obviously there – this is – this business as you build over years not months. We are excited about the year and we feel great about the shares we gone place, because that we launch the number of initiatives, but we are not expecting anything dramatic in terms of turnaround, this year profitability perspective, everything I think our profitability entertainment sectors actually in probably down a touch what its driven by, clearly, political spending of soft that some of the Super Bowl upside and probably first and foremost retransmission continues to be up, an increasing important underpinning approach for the broadcast business overall.

Anthony J. DiClemente – Nomura Securities Co. Ltd.

Thanks. And then just if I may, one quick follow-up on housekeeping. If you can give us in the quarter at the cable segment, domestic advertising and affiliate ex the impact of consolidation of YES? Sorry if you did -- but that will be great..

Rupert Murdoch

I did, Anthony, if you look at it that way, the affiliate growth we reported at 19% domestic would be in the low-double digits excess and the ad growth that we reported to 12% would be in the mid-to-high singles.

Anthony J. DiClemente – Nomura Securities Co. Ltd.,

Thanks a lot.

H. Reed Nolte

Thank you, Anthony. Ryan next question please.


Comes from the line of David bank with RBC capital. Please go ahead.

H. Reed Nolte

David, you’re out.

David Bank – RBC Capital Markets

Sorry about that. A little mute button.

Rupert Murdoch

It is that hi-tech stuff.

H. Reed Nolte

David, you may still be on mute.

Rupert Murdoch

Maybe we come back to him later. Try someone else?

H. Reed Nolte

Operator are you there.


Okay, sir we had a technical difficulty. One moment for the next question.

H. Reed Nolte



Our next question comes from the line of Jessica Reif Cohen with Bank of America, Merrill Lynch. Please go ahead.

Jessica Reif Cohen – Bank of America, Merrill Lynch

Thanks. I guess following up some of the prepared remarks. Your approach on the Fox side as opposed to News Corp has essentially been build rev then buy. And totally hear what you said about Time Warner being a unique opportunity. But it does beg the question -- is then indicated, what you do with the excess liquidity because you know that you will always from here on the constant speculation that Fox is a buyer of anything that could be for sale. So I was just hoping you could address, if you were interested in buying other assets, would the focus beyond more content? Do you think there is a chance to consolidate midsize players? Or is the focus really just to build internally?

Chase Carey

We build ourselves. You look all of our best businesses we have started them ourselves. And we are very happy with that. We are not, you said buying anything around. We are not going to buy anything around at all, if there was something very unique, but small, I don’t know, I would say never, but we have no plans to go out on the acquisition trail.

Rupert Murdoch

I mean I guess I really would disagree with your premise. We had as much liquidity, if not a bit more a few years ago and I think docked at ourselves pretty consistently. We believed this was a unique opportunity. To end up saying, to look at it as a final set of broader strategy I just think flat out wrong. We think was a one time opportunity unlike anything else I think our actions over the last few years when we have had this liquidity speak to how we conduct ourselves.

I think the fact that we felt there was potentially something here and in some ways like this obviously a big acquisition, but in many ways I think the level of the core this was building. What you are going to have with this content was really a scale and a branded content that let you build the next-generation of similar experiences in business is on these digital platforms and there isn’t anything else like that.

So I think I am not saying we wouldn’t find the Bolton on every time, they built on things that get within our portfolio we have some opportunistic things that we looked up they bid inside what we do and that’s how we operated the business and that’s how we expect to continue to operate the business and I think that the fact that this one transaction we got presented to you. we think opportunities doesn’t really shouldn’t anyway shape or form be taken as any sign of that shift in how we are going to drive these businesses, mange these businesses and operate these businesses. I would last three years were or a better sign of what we are planning to do.

Jessica Reif Cohen – Bank of America, Merrill Lynch

Thank you. That's very clear. And just completely separately, you highlighted the RSNs as a big driver throughout the call. Can you tell us what length of your sports contracts are now? And the outlook for RSNs for the next year or so?

Chase Carey

I'm when you think on average they sort of average about five or six, five actually John was saying seven I was going to say five or six that’s a little longer. I mean there are always a couple coming up, we are actually pretty good renewing, we just extended that cavilers.

H. Reed Nolte

The LeBron.

Chase Carey

After the LeBron arrived we've got a couple we’re well engaged in now, obviously we recognize complexities in navigating the space. There are places we will decide as it makes sense for us as we did with the Dodgers in LA. They are pretty long-term. I think we feel pretty good about where we are with those agreement in aggregate.

H. Reed Nolte

Thank you Jessica. Ryan can we have the next question please?


And we will go back to the line of Data Bank with RBC capital. Please go ahead.

David Bank – RBC Capital Markets

All right. Let's try this again. Are you there?

Chase Carey

Yes, we are here.

David Bank – RBC Capital Markets

Good. Got the hard part done. First question, more specifically for Chase, could you talk about how the dialogue with respect to reverse comp has evolved over the last year or two? Could you give us a sense of where you think things our shaking out and where they have come from? Secondly, for all of you, how do you think about -- it's been a year since you've recapitalized Hulu with your partners. You've gotten a lot more traction on the programming front, I think, since the recap domestically. What is the international strategy for Hulu? How do you think about how you're going to use that asset internationally? Thanks.

Chase Carey

I think in terms of – I mean on a reverse comp, I don’t want to get too deep into the sort of really what our discussions that we have with our affiliates, the basic premise is pretty simple, in the world we are in today and we've said it before, we believe you know you need to do a revenue stream and its actually we need to get build revenue stream for every household we deliver our content to and our most valuable content is the network content.

When we have an O&O we can get to build revenue streams directly through our owned and operated stations, when its going through an affiliate there is the affiliates between us and them and the payments of that subscription side of the revenue stream. So we negotiate with the affiliates up front what we think is appropriate share a fair share for us to receive for the programming we provide to them that they in turn go on and negotiate with distributors to characterize for it.

And in this world the type of unique content certainly led by the sports content we provide those affiliates, have an increasingly disproportionate value which is why we said retransmission and reverse compensation, probably continue to be the most under valued of any of the content that is distributed in the marketplace. So it’s an ongoing process to try to move that closer to what is fair value. Obviously we are nowhere near; they don’t want competitive basis fair value for it.

In terms of Hulu, I would say our focus in Hulu are not domestic, I mean its – they realistically – I mean down the road you know maybe but Hulu went though [indiscernible] really good job putting a new team in place with him, I think he has really started to make an impact in the market. He seems to be more active in the last set of months, but I think his priority is and focus is to build scale at Hulu in the domestic marketplace and from there we will see where it goes from there, but that is the priority of it.

H. Reed Nolte

Thank you Dave.

David Bank – RBC Capital Markets

Thanks very much.

H. Reed Nolte

Ryan next question please.


And that comes form the line Todd Juenger with Sanford Bernstein. Please go ahead.

Todd Juenger – Sanford C. Bernstein & Co.

Hi thanks, I'll refrain from the urge to ask you about liquidity and buyback for the 20th time. Let me instead – start on something you've hit a couple of times, which is notion of long-term digital opportunities in the changing consumption environment. You have mentioned on your own you have a lot of assets to bring to bear. You just made a huge investment in The Simpsons. You have this growing platform of FX Now.

You just talked a little about Hulu, which is a little bit separate. Would love to hear your thoughts -- with your own assets, how does that get monetized in the near term? How does that come together in the long term? What is the pace of investment versus pace of growth? Now that you have dismissed the Time Warner aspect of that, how do you look at that from your standpoint going forward? Thanks.

Rupert Murdoch

Well, I think simplistically its point clearly in working progress and digital platforms are going to be tremendously important part of our future, particularly the mobile ones and I guess everybody talk about almost like competing with us and realistically the content we – the content brands we have probably the context in the brand that are most in demand on these platform.

So I think there in a ways we will explode it some of that is through complementary experiences that complement or core establish business in FX now that complement but FX exist in places they can move to be it some up more independent, certainly Hulu which we have – obviously much more independent and autonomous we obviously participate in it licensing product to other.

So you know its not only wholly-owned in operated certainly we have deep relationships with Hulu, Netflix, Amazon and the like I think we do those things with care to make sure all of those businesses can exist, but I think we see growth opportunities in each and everyone of those from ones that are extensions, ones that are or more new platforms, platforms that we owned part of and third-party platforms that are all part of the mix.

And I think added on top of that which is really part of this whole digital experience his how do we then – how do we really starts up monetizes viewership not just monetizes – not just sort through payment strains but you know the question, the viewership already talked about sort of what’s happening viewership going and many of people are watching is much of products – watch again more and more places and we got to catch up with sort of the ability to figure how do we monetizes and capture the value inherent in that viewership and some of that to measurement, some of that’s true technologies like targeting, some of that’s being smarter of advertising that makes an entertaining khanate of advertising and the like.

And all of these things, we're clearly just at the start of. I think it is all going too evolved and we need to realistically compete and develop those opportunities, both in terms of the content packaging, the content experiences, the types of content extension that come off of it, as well as monetizing all of that viewership at every level. It is all important.

Todd Juenger – Sanford C. Bernstein & Co.

Got it. I will reserve my follow-up for another time. Save it for somebody else. I know we are late in the day. Thanks.

H. Reed Nolte

Thank you, Todd. Ryan, next question please?


Comes from the line of Michael Nathanson with MoffettNathanson. Please go ahead.

Michael B. Nathanson – MoffettNathanson LLC

Thanks. I will just do one. This is to Chase, James or Rupert. I would argue, and I think you'll agree, that last year you guys had scale and before you guys had scale. What has changed now you think need more scale? Is it consolidation of cable, the rise of SVOD? Given strength of your business what made you search out greater scale?

Chase Carey

Let me make it very clear and I thought and I said, we don’t need more scale. I mean I think it doesn’t mean – there are opportunities created by having more scale, but we have industry-leading scale in terms of brands and content. This was an opportunity to add a unique portfolio of the brands and content what we have, but we do not need given very successful navigating it realistically. We continue to be highly confident in the ability to do so.

Michael B. Nathanson – MoffettNathanson LLC

Okay, FS1, there was some concern on FS1's first year and you cited all the new sports right you would bring up next year. I would you rate the FS1 launch and at what point should we evaluate it? Do we have to wait a couple more years make a judgment on it?

Chase Carey

Yes, I think going in I mean I think we said from the get-go, so it’s not new. You’ve got a measure these new channels. They are hard to build. Things will go right, things will go wrong. It takes two or three years to sort of build the channel. Particularly even something like sportswear and a variety of core properties that will be sort of the foundation have not even launched yet on FXX, we haven’t even launch Simpson yet, we are still ramping up in terms of originals. It’s all of what takes time. I mean, like everybody, I think forgets where Fox News was two years and our FX was five years and sort of…

Rupert Murdoch

I’ll just add to that it took seven years for Fox News to turn a profit. And, today its making $100 billion is it. These things take time.

Chase Carey

I think we feel – I think we have been thoroughly before and I think we are pretty sanguine about challenges are doing and I think we feel good about where we are, but I think we were realistic going in, where we probably would be. And, as I said building a channel its hard work we don't delude ourselves. But, we've made a lot of headway, we built critical foundation in terms of affiliate agreements and continue to refine the programming. So, we are really where, essentially, where we thought we would be and we feel good about the track we are on.

Michael B. Nathanson – MoffettNathanson LLC

Thank you

H. Reed Nolte

Thank you Michael, Ryan, can we have the next question please?


Comes from the line of John Janedis with Jefferies. Please go head.

John Janedis – Jefferies & Co.

Thank you. Chase, you gave some color on the ad market. How different is the environment between say domestic cable the Fox Network and TV station advertising, from a demand perspective? Are you seeing any relative improvement between the three?

Chase Carey

Yes there its always little I mean there were some different I mean and I wouldn’t say no, in sort of the high level I would say not say I mean – I would not do the ad markets certainly robust at any level. In the summer you're always a bit of summer doldrums so it’s a little tough to sort of get it to really too fine tuned on the ad markets when you are sitting in the summer. I think as you get into the fall, you will have a much better sense of it.

I think I'll clearly cable and broadcast from a volume perspective had people keeping money in their pockets. I think locally and obviously don’t have that the upfront dynamic in the same way I think the local market is probably right now for the quarter is tracking to be down at touch for the September quarter couple of the local sectors that I think is important, telcoms and autos probably look a bit soft for the quarter, but its it like to be a bit stronger but its okay. I think, overall, you find it certainly a place for everybody and use more cautious and I think that probably truly I mean in the local you got a little bit more sort of day-to-day activity with people the upfront creating little bit longer dynamic in the national market for broadcast and cable.

H. Reed Nolte

Thanks John. Ryan I think we have time for one more question please.


And that comes from the line of Michael Morris with Guggenheim Securities. Please go ahead

Michael C. Morris – Guggenheim Securities LLC

Thank you. Good afternoon, guys. Two questions with respect to what you would have acquired had the Time Warner transaction taken place. I think that HBO and some national sports rights, both of which were unique. You addressed this a little bit before about digital rights. HBO clearly is very unique in that it is a premium network and also really probably has the potential to be in the over the top platform as well. Do you see yourself investing or building organically a similar product now?

In addition to what you have something that’s a premium product and something that could be a global over the top platform that s unique. And then in secondly the national sport right, obviously, the NBA comes it would been something that the perhaps you would been in is part of this deal does it change your approach perhaps being more aggressive in bidding for the NBA. Thanks.

Chase Carey

And I guess in the first in terms of unique content, I think the right way I guess to respond is in two ways. I mean in some ways as they talk about digital “hey look we have a great portfolio of content brands and I think these digital platforms will evolve and will be part of it just from I think how do you continue to package and offer product, I mean in some ways people have said to what degree is Netflix a different version of – you know the version of HBO without the linear channel.

You know Hulu as it evolves is it offering an array of premium original content without a linear channel and I think these digital platforms will provide an array of opportunity to package products. I don’t think – it doesn’t mean we are talking about goals that can create – HBO but I think there are opportunities to take unique products I mean in many ways look FX, you know I think probably is second and on in terms of creating unique distinct product and I think a real established brand in the marketplace.

And I think we will have opportunities and we will continue to develop and explore them is how do you take advantage of these emerging platforms here and abroad, obviously we have just some unique strengths overseas and some unique businesses overseas to get it built on Asia, Europe and alike. That will give us opportunities to develop and expand and build on new things.

I think in terms of sports, I mean sports, we've got the portfolio, I mean right now we've have got the rights in place to build FX – you know build Fox Sports 1 and develop it along the plan we laid out. You know we have the rights we need to be successful, I think we will look at, you know I think as we should we will look at it whatever rights come up and if there is better rights we think that fits and we could reach agreement on that would increase the value of FX1, we’ll engage on it, but we have a sports portfolio that lets us fulfill the plans we had for FS1 so I think anything we add to it would be sort of opportunistic to take it to a further level.

Unidentified Analyst

Great thank you.

H. Reed Nolte

Thank you very much Mike. At this time we are out of time, thank you everybody for joining today's call. If you have any further questions, please feel free to call me or Joe Dorrego. Thank you.


Ladies and gentlemen that does conclude today's conference. As I mentioned earlier today's conference was recorded and is available for replay starting at 6 PM Eastern today and going through August 20th of midnight. You may access the AT&T replay system by dialing 1-800-475-6701 and entering the access code 331516. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701, international 320-365-3844, with the access code 331516. That does conclude your conference. Thank you for your participation. You may now disconnect.

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