ANALYSIS – Foxtel’s Transformed Fortunes and What Happens Next

Foxtel has emerged from the obscurity of 18 months ago in the light of a world of streaming content, with options for the future.

The Foxtel team, including Chairman Siobhan McKenna and CEO Patrick Delany, received praise from News Corp CEO Robert Thomson when he released annual results last week.

Foxtel saw record growth in subscriber numbers with paid streaming subscribers reaching over 2 million, an increase of 155%. Revenue increased 33% to US $ 542 million in the June quarter.

The shift to streaming content from cable is playing a global trend. PwC predicts that video-on-demand streaming (SVOD) revenue will grow at a compound annual rate of 20.4% through 2025, becoming an industry of $ 81.3 billion globally and approximately 3.3 billion dollars. dollars in Australia.

Thomson: “This excellent performance has clearly given us a lot of options when we look to the future of Foxtel, which is certainly bright. “

This is a big change from 2020, when questions from analysts and the media were whether or not News was going to inject more capital into Foxtel, a 65% -owned entity, with the rest being held by Telstra. .

Now the focus is on value and how it can be recognized and improved, maybe extracted. During a New York analyst briefing, Thomson was asked what he meant by “optionality.”

Brian Han, Australian-based senior equity analyst at Morningstar: “Robert, you mentioned a number of times the option that’s opening up for Foxtel. Can you please explain what this means?

Thomson: “It’s very clear that what we have with Foxtel are options, and it’s a tribute to the team in Australia, who have clearly transformed the company and its fortunes.

“We have the main sports rights in the future. We have an absolutely contemporary and user-friendly network of streaming platforms and these systems are another way to monetize existing rights at no additional cost.

“We have a world class broadcast experience and it is now the village square for video in Australia.

“And we surely have price elasticity in a market where more and more people in Australia understand that you are paying extra for premium content.”

Nothing specific, but it’s clear News Corp is analyzing the numbers on what’s to come.

A report last month suggested Foxtel could be listed separately on the ASX, fully realizing the value of the company.

News Corp has reportedly spoken to investment bankers, including Citi.

AFR: “News Corp-controlled pay-TV operator Foxtel is back in reviewing an initial public offering, field-testing the structures and potential valuations of transactions with the aim of bringing shareholders to finally press the trigger of the float.

Granted, News Corp talked about Foxtel.

Thomson to market analysts: “Foxtel’s story is particularly positive, as our initial emphasis on streaming and securing long-term sports and entertainment rights put the company on a decidedly upward trajectory.

“Strong growth in the streaming business, which leverages existing rights and successfully monetizes them, manifested itself in the fourth quarter with total paid streaming subscribers 155% higher than for the year. last at the same time.

“We are obviously delighted with the exponential growth of Kayo, our sports streaming product, which owns the rights to Australia’s most popular sports, and of Binge, our entertainment streaming service, as they combine technology from World-class, intelligent, high-quality user interfaces. compelling content.

“It’s worth stopping for a moment to consider how Foxtel’s narrative has changed decisively and positively over the past 18 months.

“Then we were asked if we should invest additional funds in Foxtel. And now we have compelling options for a growing, decidedly contemporary business that has a tangible advantage. “

After the analyst briefing, Morningstar’s Brian Han, in a note to clients: “Revenue was higher than expected, supported by exceptional growth in streaming subscribers in the June quarter compared to the quarter. Of March.

“In fact, paying customers increased 24% to 1,054,000 for Kayo and 42% to 733,000 for Binge. This more than offset the continued decline in paid subscribers for traditional Foxtel (down 3% to 1,885,000) and Foxtel Now (down 4% to 219,000).

However, the costs were also higher, as the increase in sports rights and production to more standardized levels (compared to COVID-19 a year ago) exceeded our expectations.

“Management reiterated that the option is opening up for this unit, with the total number of streaming subscribers now exceeding Foxtel subscribers.

“If this means News is considering exiting this business, there is still a long way to go to stabilize Foxtel’s set-top-box-based pay TV business, particularly if its subscribers migrate to News’s own streaming products. “

Foxtel has also improved the data offering for advertisers and agencies, launching Foxtel Xplore late last year, a platform for media buyers with data from over 8 billion events from monthly viewing by Foxtel subscribers.

At the same time, Foxtel has embarked on a crusade to attract subscribers to its streaming platforms. The trick has been to increase the scale, offsetting the fact that each streaming content subscriber typically pays less than cable customers.

News Corp chief financial officer Susan Panuccio says streaming products now account for more than half of 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 affected by COVID-19 restrictions and lockdowns.

A key indicator of growth is the churn rate, or the speed at which new subscribers are added as old ones cancel.

“We’ve seen moderate churn rates over the past two quarters at 17.1%, but up from 13.2% the year before,” Panuccio said.

The focus is on high value subscribers and growing ARPU (Average Revenue Per User). ARPU rose 4% to $ 81 from a year ago, partially offsetting declines in broadcast / cable subscriber volume.

Sport has been a winner, but it also has costs. During the June quarter, Foxtel’s EBITDA (earnings before interest, taxes, depreciation and amortization) fell 37% to $ 66 million mainly due to $ 84 million in sports programming rights and costs of higher production.

Foxtel also had around $ 11 million in one-time costs, mostly from iQ3 and iQ4 promotional activities.

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About Aldrich Stanley

Aldrich Stanley

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