Foxtel has emerged from the darkness of 18 months ago into the light of a streaming content world, with options for the future.
The team at Foxtel, including chair Siobhan McKenna and CEO Patrick Delany, came in for praise from News Corp CEO Robert Thomson when he released annual results last week.
Foxtel posted record subscriber growth with paid streaming subscribers reaching more than 2 million, a rise of 155%. Revenue was up 33% to $US542 million in the June quarter.
The switch to streaming content from cable plays to a global trend. PwC forecasts streaming video on demand (SVOD) revenues to grow at an annual compound rate of 20.4% through to 2025, becoming a US$81.3 billion industry globally and an estimated $3.3 billion in Australia.
Thomson: “That sterling performance has clearly given us much optionality as we consider Foxtel’s future, which is certainly bright.”
This is a big change from 2020 when the questions from analysts and the media were about whether or not News was going to inject more capital into Foxtel, a 65% owned entity, with the rest held by Telstra.
Now the focus is on value and how that can be recognised and enhanced, perhaps extracted. In a briefing of analysts from New York, Thomson was asked what he meant by “optionality”.
Brian Han, Australian-based senior equities analyst at Morningstar: “Robert, you mentioned several times the optionality that's opening up for Foxtel. Can you please elaborate on what that means?”
Thomson: “It's very clear that what we have with Foxtel are options, and that's a tribute to the team in Australia, who patently transformed the business and its fortunes.
“We've got the key sports rights long into the future. We have an absolutely contemporary customer-friendly streaming platform network and those systems are another means of monetising existing rights at no extra cost.
“We have a broadcast experience that is world-class and is now the village square for video in Australia.
“And we surely have price elasticity in a market where an ever larger number of people in Australia understand that you pay a premium for premium content.”
Nothing specific but clearly News Corp is running the numbers on what comes next.
A report last month suggested Foxtel could be listed separately on the ASX, thus fully realising the value of the business.
News Corp reportedly was talking to investment bankers, including Citi.
AFR: “News Corp-controlled pay TV operator Foxtel is back considering an initial public offering, road-testing potential deal structures and valuations in an effort to get shareholders to finally pull the trigger on the float.”
Certainly News Corp has been talking Foxtel up.
Thomson to the market analysts: “The Foxtel narrative is particularly positive as our early emphasis on streaming and on securing long-term valuable sports and entertainment rights has put the company on a decidedly upward trajectory.
“The strong growth in the streaming business, which is taking advantage of and successfully monetising existing rights, was evident in the fourth quarter with the number of total paying streaming subscribers 155% higher than at the same time last year.
“We are obviously pleased with the exponential evolution of both Kayo, our sports streaming product, which has rights to Australia's most popular sports, and Binge, our entertainment streaming service, as they combine world-class technology, clever user interfaces and high-quality compelling content.
“It is worth pausing for a moment to consider how the Foxtel narrative has changed decisively and positively over the past 18 months.
“Then we were being asked whether we would need to put extra funds into Foxtel. And now we have attractive options for a growing, thoroughly contemporary business that has a tangible upside.”
After the analysts briefing, Morningstar’s Brian Han, in a note to clients: ““Revenue was higher than expected, buoyed by bumper growth in streaming subscribers in the June quarter from the March quarter.
“In fact, paying customers grew 24% to 1,054,000 for Kayo, and 42% to 733,000 for Binge. This more than offset the continuing paying subscriber declines for traditional Foxtel (down 3% to 1,885,000) and Foxtel Now (down 4% to 219,000).
“However, costs were also higher, as the uplift in sports rights and production to more normalised levels (from COVID-19-impacted year ago) exceeded our expectations.
“Management reiterated optionality is opening up for this unit, with aggregate streaming subscribers now exceeding Foxtel subscribers.
“If this means News is contemplating an exit from this business, there is still much to do to stabilise Foxtel’s set-top-box-based pay-TV business, particularly if its subscribers are migrating to News’ own streaming products.”
Foxtel has also been improving the data offering for advertisers and agencies, late last year launching Foxtel Xplore, a platform for media buyers with data from more than 8 billion viewing events per month by Foxtel subscribers.
At the same time, Foxtel has been on a crusade to bring on subscribers for its streaming platforms. The trick has been to increase scale, making up for the fact that each streaming content subscriber generally pays less than cable customers.
News Corp CFO Susan Panuccio says streaming products now represent more than half Foxtel's total paid subscribers.
Residential broadcast subscribers fell to less than 1.7 million and commercial subscribers -- such as hotels and clubs -- continued to be impacted by COVID-19 restrictions and lockdowns.
A key indicator of growth is churn, or how fast new subscribers are added as old ones cancel.
“We saw broadcast churn moderate from the past two quarters to 17.1%, but up from 13.2% in the prior year,” says Panuccio.
The focus is high-value subscribers and driving ARPU (average revenue per user) growth. ARPU increased 4% to $A81 from the prior year, partially offsetting broadcast subscriber/cable volume falls.
Sports has been a winner but it also has costs. In the June quarter, Foxtel EBITDA (earnings before interest, taxes, depreciation, and amortization) fell 37% to $66 million mainly because of $84 million in higher sports programming rights and production costs.
Foxtel also had about $11 million of one-off costs, mainly iQ3 and iQ4 promotional activity.
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