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New NFL TNF package gives Fox 'great monetization opportunities'

While NFL ratings declined for a second straight season, executives at 21st Century Fox Inc. believe the company’s recently signed five-year Thursday Night Football rights deal will hit pay dirt as it evolves into a new company.

Executive Chairman Lachlan Murdoch, speaking on the company's Feb. 7 earnings call with analysts, said live sports were integral to 21st Century Fox's strategy as it morphs into a new company via the pending sale of myriad assets to Walt Disney Co.

He said the new Thursday Night Football rights agreement joins with the Sunday afternoon package "to concentrate America's football on FOX (US). This concentration affords us great monetization opportunities, including through our new expanded digital rights and creates a clear runway to further grow the value of our broadcast business, all key goals as we think about setting up a New Fox for the future."

While he has said in the past that fragmentation of NFL programming — CBS (US) and NBC (US) spilt the previous "TNF" package — had contributed to audience erosion, 21st Century FOX CEO James Murdoch noted on the call that having the extra night on FOX's air is "a powerful platform for the network, both in terms of other promotions and promoting other nights and other programs. But in general, it's a scarcity value of large audiences coming together around national events continues to rise."

James Murdoch noted the package’s new digital rights provides flexibility and the opportunity to "bring the product to our customers in new ways, both on a direct-to-consumer basis and over-the-top and on new devices."

CFO John Nallen said the company’s bottom line was lifted by a $1.34 billion benefit, or 72 cents per share, from the re-measurement of its net deferred tax liabilities under the new U.S tax law.

Nallen noted that because 21st Century Fox operates on a June fiscal year, the impact of the U.S. tax act will blend in over two fiscal years. In the current fiscal 2018, its U.S. statutory rate will decline to a full-year average of 28%. And then, beginning with fiscal 2019, it will decline to the new 21% rate. At this point, he expects the normalized effective tax rate for fiscal 2019 to be in the mid-20% range.

The company continues to bolster its network portfolio via the growing number of virtual providers. "As of today, we are approaching 4 million digital MVPD subscribers even as we're still in the early early innings," said James Murdoch, who noted many of these services have yet to roll out distribution and marketing to important cities throughout the U.S. He added the growing contributions from these new entrants, reflecting sequential growth from the September to December quarters, offset declines within the traditional pay-TV ecosystem.

On the regulatory front, James Murdoch reiterated that the company anticipates approval of the proposed Sky plc transaction by the end of June. As to the $52.4 billion deal in which the company will sell myriad domestic and international assets to Disney, he said 21st Century Fox is currently engaged in the planning process for the separation of the businesses with a view toward the integration of our assets at Disney and the establishment of the New Fox.

21st Century Fox recorded a 4.7% increase in revenue during the second quarter of fiscal 2018 ended Dec. 31, to $8.04 billion from $7.68 billion.

The company’s cable unit registered an 11% gain in revenue to $4.41 billion, driven by higher affiliate, syndication and advertising, partially offset by a 15% increase in expenses, largely tied to sports rights.

Domestic affiliate revenue grew 12%, stemming from contractual rate increases across all of its brands. Domestic advertising revenue decreased 3% from the prior-year period, owing to lower general-entertainment ratings, primarily reflecting a lower volume of original series in the current quarter.

Segment operating income before depreciation and amortization, or OIBDA, improved 11% to $1.37 billion.

The television segment saw OIBDA fall 85% to $56.0 million, with revenue off 6% to $1.81 billion. Despite higher retransmission-consent revenue, the segment's top line declined in the face of lower ad revenues from the TV stations, which benefited from greater political ad dollars in the prior-year period, and on the national level from lower NFL and World Series ratings.

The filmed entertainment group registered a 66% decrease in OIBDA to $131 million, behind higher theatrical release costs tied to an expanded slate that included Oscar nominees "The Shape of Water" and "Three Billboards Outside Ebbing, Missouri." Segment revenue dipped 1% to $2.25 billion.

As noted earlier, results benefited by $1.34 billion from the recently enacted U.S. tax reform legislation. That led to a 113.8% jump in net income attributable to shareholders of $1.83 billion, or 99 cents per share, from net income of $856.0 million, or 46 cents per share, in the prior-year period.

The S&P Capital IQ EPS consensus estimate for the just-ended was 38 cents on both a normalized and GAAP basis.