Fox Corporation (FOXA) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fox Corporation Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Chief Investor Relations Officer and Executive Vice President of Corporate Initiatives, Mr. Joe Dorrego. Please go ahead, sir.

Thank you very much, operator. Hello, everyone, and welcome to our fourth quarter fiscal 2019 earnings conference call. Joining me on the call today are Lachlan Murdoch, Executive Chairman and Chief Executive Officer; John Nallen, Chief Operating Officer; and Steve Tomsic, our CFO. First, Lachlan and Steve will give some prepared remarks on the most recent quarter and fiscal year, and then we'll be happy to take questions from the investment community. Please note that this call may include forward-looking statements regarding Fox' financial performance, operating results, strategy, among other things. These statements are based on management's current expectations, and actual results could differ materially from what is stated as a result of certain factors identified on today's call in the company's SEC filings, including the company's registration statement on Form 10 and subsequent quarterly reports on Form 10-Q. Additionally, this call will include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our SEC filings, which are available in the Investor Relations section of our website. With that, I'll turn the call over to Lachlan.

Thanks, Joe. Good afternoon, and thank you all for joining us today on Fox Corporation's year-end earnings call. While we are ending a fiscal year, we're also just starting our growth trajectory and are hitting key milestones at a good pace. Specifically, we just reported strong financial results. We recently concluded a very successful advertising upfront, very successful. We're making good progress on our distribution renewals. And we are having a compelling content lineup across our linear and digital channels, all of which positions us well as we commence our first full fiscal year 2020. For fiscal 2019, we delivered exceptional financial results, achieving 12% revenue growth and 8% EBITDA growth. Our revenue growth was led by double-digit gains in both affiliate and advertising revenues. As you all know, about half of our annual revenue comes from affiliate revenue. And despite continued subscriber declines, we achieved 12% affiliate revenue growth in fiscal 2019. Renewing distribution arrangements with our partners is a normal course activity for us, and we have accomplished these renewals without much clamor over many cycles. This past fiscal year was no exception. We were able to reset affiliate rates, particularly in the Television segment, successfully renewing numerous distribution agreements. Today, the remainder of our annual revenue principally comes from advertising. In fiscal 2019, we achieved 10% growth, led by the addition of Thursday Night Football and record gross political revenues of more than $185 million at the FOX Stations Group, surpassing by almost 50% the previous record set in fiscal 2013 during the Obama-Romney election. A particularly noteworthy facet of this year's growth was a 24% increase in digital advertising revenues, led by 46% growth at FoxNews.com alone. Our advertising partners are clearly supportive of our ongoing programming strategy. This year's advertising upfront was one of the strongest we have seen in many years, yielding higher pricing across entertainment, sports and news. Specifically for Fox, this strength reflects advertisers' recognition of our unique capacity to deliver highly engaged audiences at scale. Across our concentrated portfolio, we were rewarded for our continuing content investments. On the entertainment front, we were able to achieve top-of-market, low-teen CPM increases and mid- to high-single-digit volume increases. In addition, we were able to command mid- to high-single-digit pricing increases in sports and news. In addition, even at this early date, we're very encouraged by both the volume and pricing we are seeing for the Super Bowl. We are in a strong television advertising market right now, which is due in part to an especially renewed interest by marketers in prime time and sports programming, which is clearly to our great advantage. As you know, a significant amount of the company's revenue is tied to the FOX broadcast network, which is supported by key sports and entertainment content as well as by local programming delivered every day across America. Our network commands premium advertising and retransmission revenue rates because it delivers a complete schedule of diverse content genres that engage wide audiences. From the NFL to The Simpsons, the network is defined by its programming breadth and not by a vertical concentration that is the hallmark of cable channels. And it is this breadth of programming that makes the FOX broadcast network 1 of the top 4 channels across the country, week in and week out, and such a strategic asset for Fox. While the power of sports is undeniable, we are not looking to turn Fox into a pure-play sports channel. We have a few of those already. Rather, keeping the FOX Network vibrant and connected to our audiences is what we are constantly focused on. It is why we are investing in entertainment originality at the network at a time when broadcast originality and the scarcity value of reaching large audiences attracts a market premium across our revenue streams as was demonstrated by advertisers in the recent upfront. To that end, we are pursuing a strategy to expand our portfolio of owned content to generate long-term asset value for Fox. We are being strategic and judicious, building smartly and deliberately around our strengths. As part of this strategy, we are pursuing a new program coproduction model that gives us an equity interest in nearly all new shows aired on the network. We are enhancing our internal content-creation capabilities through the launch of SideCar, which is already providing third-party platforms, like Quibi, with content and also, through the acquisition we announced yesterday of Bento Box, the animation company that produces Bob's Burgers as well as 2 new Fox series, Duncanville and The Great North. Bento Box gives FOX access to the next generation of animators and the ability to originate owned IP to drive long-term value for the company. You need only to look at our Sunday broadcast schedule, where we have launched more animated hits than anyone, to know that animation has been the most stable network programming on FOX bar none, creating leverage, loyalty and youthful audiences across linear and digital properties. Beyond the network, we are also focused on our direct-to-consumer initiatives. FOX News continues to build a significant multi-platform presence well beyond the linear channel and has a strong position in direct-to-consumer news offerings. The FOX News digital properties attract over 100 million unique users per month and leads news engagement with over 3 billion page views per month. We are expanding our D2C news capabilities by offering a more immersive video-on-demand service in the form of Fox Nation, which was launched just this past November. On the sports front, we launched pay-per-view boxing with the Spence-Garcia bout in March. We followed that with the Pacquiao-Thurman match just a few weeks ago and were encouraged by the results as total purchases increased by more than 30% and direct purchases on the FOX Sports digital properties nearly doubled from the first pay-per-view event. In aggregate, the Fox portfolio of digital properties generates a monthly audience of over 200 million unique people and nearly 10 billion minutes of content consumption. But our progress does not stop there. During the past few months and consistent with the strategy we outlined at our Investor Day, we've made key investments to expand the reach of our brands beyond their traditional linear business models and deliver new and innovative products to our most valuable asset, our massive and massively engaged audience. Most notably, in May, Fox and the Stars Group announced plans to launch Fox Bet, a national media and sports wagering partnership in the United States. We are on track to launch the Fox Bet product in the upcoming football season -- or I should say, before the upcoming football season. And we see the opportunity in sports wagering as a long-term value contributor to Fox. Earlier this week, we announced the entry into a definitive agreement to the proposed acquisition of 67% of Credible Labs, a leading direct-to-consumer personal finance marketplace in the United States, at a price that we believe is full, fair and attractive on all relevant metrics, including our commitment to provide up to $75 million of growth capital over the next few years. The merger resulted from extensive discussions and negotiations with the special committee of independent directors on Credible's Board, which has unanimously recommended the transaction. Through this prudent and disciplined investment, we will assess an adjacency to our enormous national and local news audiences and tap into a high-growth market. Just like our investment in the Stars Group for our Fox Bet offering through FOX Sports, the Credible marketplace is comfortably adjacent to and enhances our core Fox digital properties, specifically those at FOX News media and our local television stations. Upon the approval of the Credible deal, you will see us activate the Credible marketplace across FOXBusiness.com, which we will be refreshing later this year, and across the fast-growing digital footprint of our FOX TV Stations. Over time, we expect to activate the marketplace across our wider digital network. We believe that giving Credible access to our highly engaged digital audience will accelerate the company's growth. It's also important to note that we plan to ensure that Credible can continue to operate under its founder, Stephen Dash, enabling it to continue to pursue the widest growth opportunity in the personal finance marketplace category. From an operational standpoint, we're entering fiscal 2020 with great momentum. The FOX News channel dominates the cable news landscape marking 17 consecutive years as the #1 cable news network and maintaining its position as the #1 cable network in both primetime and total debuting this past year. FOX Sports led the industry in fiscal 2019 in the consumption of live sports events, measured by minutes viewed, beating second-best CBS by 10%, ESPN by 13% and beating the combined viewing of ABC and NBC. With our Thursday night and Sunday afternoon broadcast of the NFL, we are football's most significant broadcast partner. We have a great schedule for the upcoming season, and we're confident we can build on last year's solid ratings growth. Our FOX Television Stations will continue their multiyear expansion of local news coverage and will collectively produce nearly 1,000 hours a week of news. This focus on local programming has led the Stations Group to become #1 in the locally programmed and high-profitable daytime daypart in our owned-and-operated markets. We're also looking forward to the addition of 50 weeks of WWE SmackDown starting on October 4, a reinvigorated entertainment schedule built around the return of 2 seasons of The Masked Singer, our Own the Fall sports lineup across the network and our sports channels and of course, the broadcast of Super Bowl LIV on Fox. In support of our growth and as we noted during our Investor Day, we will continue to invest in our platforms in fiscal 2020 as we plan to deploy approximately $200 million to $250 million of EBITDA to launch -- to the launch of the WWE, the FOX Entertainment programming initiatives and to our digital properties, most notably at FOX News and FOX Business. We are confident that these investments will serve to drive future growth and value in the long term. We are excited by the growth trajectory that we have set for our businesses and are pleased with the progress we are making. We believe that Fox is uniquely positioned to harness the opportunities created by this changing industry with a dynamic portfolio of leadership brands and compelling content that audiences are most passionate about. But before I turn over to Steve, let me comment on the legal claim that we, along with the other broadcast networks, filed against Locast last week. Simply put, Locast is a rogue streaming service violating the copyright laws for commercial gain, nothing more. Locast's claim to be a nonprofit that is not offering for any direct or indirect commercial advantage is absurd. It operates for the clear commercial benefit of the corporations that support it. I commented earlier on the importance to the company of our FOX Network and our owned and affiliated Stations Group. We're confident in the merit of our claim against Locast. The Locast theft is, of course, a validation of the irreplaceable value of our brands and the content that they carry. Now I will turn the call over to Steve to provide more detail on our financial results.

Thanks, Lachlan. Good afternoon. We are pleased with our first full fiscal quarter as a stand-alone company. As Lachlan mentioned, we delivered both healthy top line and EBITDA growth, with this financial momentum setting us up very well for fiscal 2020. Let me now take you through our financial results for the fiscal year as well as the fourth quarter, along with providing some financial markers for the future. Our full year results saw total revenues grow 12% to $11.4 billion. Our revenue growth was broad-based, with affiliate revenues increasing 12%, led by retransmission revenue growth of the Television segment. Advertising revenue was up 10% on the back of our inaugural season of Thursday Night Football, which added 5 percentage points of advertising revenue growth, coupled with the record year of political advertising at our Television Stations. Within this advertising revenue growth, we were also encouraged with our digital progress, with digital advertising representing close to $500 million or 10% of total company advertising revenue. Finally, we delivered strong growth in content revenue, which we record as part of our other revenue line, supported by the digital licensing of network entertainment programming. Total full year segment EBITDA was $2.7 billion, an increase of 8% from last year, reflecting 8% growth at the Cable segment and 24% growth at the Television segment. At this point, it is worth remembering that when looking at our full year fiscal 2018 numbers as well as the first 3 quarters of our fiscal 2019 results, that these results have been prepared on a so-called carve-out basis. As such, they include allocations of 21st Century Fox overhead and shared service costs in accordance with SEC guidance, which as we have said in the past, understate the costs required to support Fox as a stand-alone business. We estimate that the total recurring costs beyond the amounts formulaically allocated to our published financial statements should range between $225 million and $250 million on an annual basis. Illustratively, if we took 75% of these incremental costs into account, they would have reduced our fiscal 2019 EBITDA by approximately $180 million. Net income attributable to stockholders was $1.6 billion this year or $2.57 a share, while adjusted EPS was $2.63 versus $2.50 last year. Again, both of these absolute values and the year-on-year comparison are influenced by the differences in allocated shared services and overhead costs. Turning to the fourth quarter. Total company reported revenues were $2.5 billion, up 5% over last year, reflecting revenue growth across all operating segments. Total segment EBITDA was $709 million, an 11% increase over the $640 million generated a year ago, led by higher contributions from the Television and Cable segments. This growth was partially offset by higher corporate expenses reported in the other segment, which now more properly reflect the full cost of operating as a stand-alone public company. From a bottom line perspective, net income attributable to stockholders of $450 million or $0.73 a share was lower than the $0.76 per share in the prior year quarter, while adjusted EPS of $0.62 was down 7% over last year. These reductions principally reflect increased interest in income tax expenses from our operating as a stand-alone public company. Our effective tax rate for the quarter was a touch above the more normalized mid-20% range we expect to have going forward. So now turning to the performance of our operating segments for the quarter, where Cable Network's EBITDA of $602 million was up 4% on revenue growth of 2%. The revenue increase was led by affiliate fee growth of 3%, supported by higher average rates across all our brands, partially offset by a net decrease in pay television subscribers. Ad revenues decreased slightly by 1%, reflecting lower contributions from the Women's FIFA World Cup in the current year as compared to the men's tournament in the prior year. The ad revenue decrease at the national sports networks was partially offset by the continued strength of FOX News, led by digital and advertising growth. EBITDA at our Cable segment increased 4% over the prior year, reflecting the higher revenues and a stable cost base as digital investments at FOX News were offset by lower sports rights expenses related to the FIFA World Cup and the absence of UFC programming in the current year quarter. At the Television segment, EBITDA was $214 million, an increase of $103 million from the prior year quarter, reflecting revenue growth of 5% and expense declines of 4%. The revenue growth was led by an 18% increase in affiliate revenue growth, which in turn was driven by programming fee growth from nonowned station affiliates. This growth is consistent with the overall TV affiliate revenue trajectory we laid out at our Investor Day in May, where we expect to deliver revenues of approximately $2.65 billion by calendar year 2022. In line with our expectations, advertising revenues in the quarter were down by 8%, reflecting difficult comparisons to the quarter a year ago, which included political revenues at the local stations related to the 2018 midterm elections and more FIFA World Cup matches. When viewing the segment as a whole, the advertising revenue decline was substantially offset by increased digital content licensing revenues. The decrease in expenses reflects lower sports rights resulting from fewer FIFA World Cup matches and NASCAR races in the quarter as well as lower entertainment programming costs due to fewer hours of original programming in the current quarter. The strong overall P&L results generated free cash flow, which we calculate as net cash provided by operating activities, less cash invested in property, plant and equipment of over $800 million in this quarter and $2.3 billion for the year, representing a 115% and 85% conversion of EBITDA to free cash flow, respectively. And finally, from an overall balance sheet perspective, we ended the quarter with $3.2 billion in cash and $6.8 billion in debt. Looking ahead into fiscal 2020, there are a few key items I would draw your attention to, many of which we had previously outlined at our Investor Day. Firstly, Lachlan has already outlined the targeted set of initiatives that will impact EBITDA in fiscal 2020. In addition, it is also worth remembering the changes in our major broadcast events that will affect year-on-year comparability, the single largest being our broadcast of Super Bowl LIV in February, which from a year-over-year EBITDA perspective will largely be neutralized by the combined effects of other cyclical events, such as an off-cycle political year, one less NFC divisional playoff game and the absence of the FIFA World Cup. As we look at the cadence of fiscal 2020, we would note that our Q2 P&L results this coming year will be impacted by higher sports expenses at the network, reflecting the contractual annual escalators on the NFL and college football contracts, and the addition of WWE rights as well as lower political advertising revenue at our local television stations when compared to the prior year. Looking across our group-wide other revenue category. We expect to post solid revenue growth in our Cable and other segments, supported by the increasing Fox Nation subscription revenues, the expansion of our pay-per-view boxing business, growth in content revenues and a full year of revenues associated with operating our L.A. op. Meanwhile, these gains will be at least partially offset by reductions in other revenue in our Television segment. As we have previously disclosed, we expect shared services and corporate expenses reported in the other segment to increase significantly as we will be operating as a stand-alone public company for the full year as compared to only 1 quarter in fiscal 2019. On a full fiscal year basis, we expect the other segment to be a net EBITDA cost in the mid- to high-$300 million range. This includes a little over $50 million of stock-based compensation expense associated with the initial shareholder alignment plan award, which will temporarily impact our P&L in fiscal 2020 and 2021. From a cash flow standpoint, we expect very robust conversion of EBITDA to free cash flow. Here, we expect very low working capital usage and cash tax savings of approximately $370 million resulting from the tax basis step-up obtained as a result of the Fox Corp. spin, while our capital expenditure will increase to fund the build of our new broadcast center in Phoenix. Before concluding, I'd like to reiterate that we remain committed to a balanced capital allocation strategy, balancing between organic investments, strategic M&A and shareholder returns of capital. As part of this strategy, you will have seen that we just declared our second semiannual dividend of $0.23 a share and continue to expect to have a share buyback authorization in place in advance of our Annual Shareholder Meeting in November. And with that, I'll turn the call back to Joe.

Thanks, Steve. Now operator, we'd be happy to take questions from the investment community.

[Operator Instructions] We first turn to the line of Michael Nathanson with MoffettNathanson.

I'll ask one to John or Steve. So the first question, when you look at the cadence of affiliate fee growth at Cable, it decelerated from 13 to 11 to 4 to 3. And the question people have with new companies, what drove that deceleration, and when you look ahead to the new fiscal year, what's the cadence of the 38% of the new deals coming due to maybe reaccelerate that growth? So that's one. And then, Lachlan, for you, is I get the Bento Box acquisition, but why is Credible a good fit for you? Like what expertise do you bring to it that perhaps we're missing from the outside?

Right. I'll even answer it now -- we'll start with Steve on the deceleration of cadence.

Yes. So Michael, on Cable, I think, as we mentioned at the Investor Day, the way we see affiliate, we see it in the [ rounds ]. So the split between Cable and Television, the -- is less relevant to us because we negotiate all the contracts in one bulk group. And so we would -- we finished Q4 versus Q4 with a plus 7% growth rate across the whole estate, and so we would anticipate that sort of growth rate at that level or above into fiscal 2020. The reason why Cable had sort of reduced sequentially over the quarter through the fiscal year is just comps just lapping deal maturities. And so as we go into new deals, the focus obviously will be in getting a greater share of fair value on our retrans. So you'll see a disproportionate level of the forward growth still being with -- in the Television segment as opposed to the Cable segment.

Great. And then on Credible, and I'm happy to talk about it, we, as a management team, are very excited, extraordinarily excited about the opportunity that Credible affords us. We look at it, and I think we've talked about this at the Investor Day and since, our key asset is not a skill set necessarily in selling advertising or selling affiliate revenue, although our teams are extraordinarily good at that and those are businesses that, as you've seen in these results, are performing extraordinarily well. But really, our key asset, our key resource is the deep engagement that we have in news and in sport and in entertainment with our audiences. And as we grow our digital platforms out, we are seeing that engagement really importantly and critically extend from a linear, analog environment, to a direct digital environment, which affords us the ability to demonetize that engagement in new models. So that really led us earlier this year to the Stars Group, where we decided with sports obviously entering the sports gaming market was a tremendous -- we see as a huge long-term opportunity for us, and the correlation between, obviously, the sports audience and this is -- should be obvious to most people between the sports audience and the sports-betting audience, is extraordinarily high correlation. And so you could say getting into the sports betting arena is a no-brainer. Well, it's equally a no-brainer with Credible in the news category. If you look, and we've done a huge amount of research and due diligence on this over the last couple of months, if you look at our news audience, and I'm not just talking cable news, but importantly, the nearly 1,000 hours of local news that we produce each week, if you look at that audience, it correlates incredibly highly with Credible's target audience for their financial marketplace. Our audience in news, which is natural, skews slightly older. It skews towards homeowners, and it skews towards an educated audience. And these are all factors that people searching for mortgages, in particular, and refinancing loans skew heavily towards. And so when we saw Credible, and we could see that by combining their service with our audience and our digital platforms, first, with FOX Business and then later through our other news platforms, we see a tremendous opportunity for it going forward.

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Lachlan, I wanted to come back to the comment you made around digital advertising at $500 million growing healthily. Can you give us a little more color on what is that business? How much of it may be video versus display? How sustainable do you see that growth rate being, especially as you head into what will be a political -- an elevated political year next year because, obviously, that helps sort of insulate the overall ad business to grow across the company? And I just wanted to ask if you had any update for us on the process in evaluating the buyback plans. And as you know, that's a big focus for investors, particularly on the back of some of the acquisitions you've announced.

On the digital advertising front, we're very pleased with its growth. We think we can aggressively push it even further. If you look at -- that's over 200 million unique users of our digital products and as I mentioned, sort of 10 billion views. If I take, for instance, just at FoxNews.com, we are now offering -- doing over 100 million page views per day. I mean yesterday, we did 90 million page views in a day, which was a slow day for us, Ben. But we certainly think we can monetize those page views. We built out the sites and the content more aggressively and faster than we built out our monetization of those views. So we expect to push them further.

And Ben, just to pick up on that, it's a pretty good spread where we get our digital advertising revenue from across FOX News, the entertainment side of things, both directly, and by Hulu digital video views as well as FSGO. So it's a good spread from where we get it from, but we think that sort of the tip of the spear in terms of growth will continue to be FOX News going forward.

And Ben, it's John. On the question on the buyback, the -- as we said at the Investor Day, the independents are spending time with their advisers. We expect, as we did then, that there will be a conclusion and an announcement around the buyback framework just around the time of our Annual General Meeting. There's been no change to that timetable.

Next, we turn to the line of Jessica Reif Ehrlich with Bank of America.

So on advertising, Lachlan, it was very helpful to get that color on how you did in the upfront. It's so strong. What are the drivers besides lack of ratings in the industry in general? And can you talk a little bit about how you're selling differently with everything under Marianne's umbrella? Is everything cross-platform now? And then on the gaming, can you give us some color or factors to consider on how this will ramp? Is it all dependent on state-by-state legislation? What else will drive it? How quickly can you ramp?

Thank you, Jessica. So on advertising, look, we estimate this is the strongest advertising upfront in 17 years. So it's extraordinarily robust, our result we've had, certainly in both pricing and in volume. Pleasingly, the scatter market, since the upfront, has been even stronger, and we are in scatter doing double-digits pricing premiums to what we sold in the upfront. So -- which means, if you do the math, we are in the low 20s pricing in scatter over last year. So -- and this is driven really across categories, so it's not one category that's driving it. We're seeing obviously the streaming platforms, where it started to take their advertising digital platforms. Pharmaceutical continues to be strong. They had a short pause as they worked out some regulatory demands around their advertising so that they weren't initially -- they were slow in the upfront and then came back in and strong, and they're particularly strong in scatter now, pharmaceutical. Finance has been strong. And even now, locally, and this goes partially to your second question, on a state-by-state basis in a couple of our local stations, notably New York and Philadelphia, we're seeing some of this gaming revenue begin to appear in a fairly significant way. So we think, from a gaming point of view, as more states legalize online gambling, that we have a tremendous revenue stream to us outside of the TSG partnership from just a local advertising point of view. Also, obviously, in the Super Bowl, we started to sell the Super Bowl, and we're very pleased with the Super Bowl, both from a pricing point of view in terms of where we are versus our last Super Bowl a few years ago. Then your second question, Jessica, was on gaming and the TSG partnership? Steve, do you wanted to...

Yes. And just I think that the ramp of it, Jessica, really is dependent on the state-by-state legislation and having that open up or liberalize. And so that really drives the actual sort of operationalization of that within the joint venture in terms of opening up that state access. But in the meantime, we obviously have a partnership with brand royalty and all the rest, that will have a modest positive impact on our P&L through the course of this year.

I should say, one of the things we're going to do is, as mentioned before, the football season begins, we'll be launching a national free-to-play game and which is legal across the country in every state. But certainly, we hope to put the brand out there and to begin to establish the business.

And next, we turn to the line of Doug Mitchelson with Crédit Suisse.

Steve, you mentioned very robust free cash flow and you also mentioned 85% conversion for the full year last year. Should we take that 85% to be consistent with very robust? And then, Lachlan or John, Fox Nation has come up a few times on this call, and I think it was mentioned that growth in subscriptions was a driver. Any context you can give us around sort of size and scale of that business, where you think you can get it to? And then subscription subscribers, is that the right metrics we should be looking at?

Thanks, Doug. So on free cash flow is, I think, 85%, probably a bit toppy from what we expect to convert this -- in the current fiscal year we're in. And the thing that will be a bit of a drag versus where we have been over the last quarter has been essentially the buildout of the Phoenix broadcast center, which I think I've said at the Investor Day, we expect CapEx to be sort of low to mid-single-digits of the revenue, and this will put us at sort of the higher end of that.

On the -- on Fox Nation, Fox Nation is performing really very, very well. It is still early days, having launched only this past November. But as a subscription video-on-demand service, certainly subscription is the first part of that name, and then so it's clearly a metric, subscribers, that we are watching closely. We haven't really spent any external marketing dollars on it. And the assumption that we will spend an appropriate amount of external marketing is within the EBITDA investment that Steve has spoken about earlier, and that will begin in the fall. The pleasing thing is, is that the conversion rate to trialist to paid subscribers is extraordinarily high, and if we can maintain that conversion rate while widening the funnel of our trialists in the fall, it will be an extremely successful business.

And next, we turn to the line of Marci Ryvicker with Wolfe Research.

I have 2 questions. Lachlan, you brought up Locast, so I just want to ask you, can you walk us through the time line? Now that this is filed, what's next? And then I understand a permanent injunction was requested, not a temporary one. So just curious as to why that was. And then, second, for Steve, with your capital allocation policy, is there a certain percent of free cash flow that you're sort of setting aside each year to specifically allocate to M&A? Or is what you are investing in truly just opportunistic as things come up?

Thank you very much, Marci, and I'll turn over to Steve for the -- for your second question. On Locast, I am -- I fleshed out as much as I could do what I could say in my kind of prepared comments, and I hope I was punchy enough. I tried to be. But on legal advice and seeing if this case is now sort of before the courts, I'm better off not to add anything to those comments. But, Steve?

And Marci, just on capital allocation. We're going to stay flexible. We will be balanced, but we're not going to have a strict percentage of free cash flow that's dedicated to M&A. We'll be looking at, let's say, just opportunities across organic M&A and also best use of capital in terms of returning an amount to shareholders and sort of review that periodically. The notion that we would dedicate x percent of our free cash flow is not the way we'd operate.

And our final question comes from the line of Alexia Quadrani with JPMorgan.

Lachlan, if you could maybe talk generally about the soft ratings that we've seen in the news network business really in the last couple of months, not just obviously Fox, but just across the industry, what you attribute it to. Is it news fatigue, and I guess how quickly do you think it can turn around? And then on the subscriber side, I'm sorry if I missed it, but could you give us the sub decline number and maybe a little color on how different these negotiations are now that you don't have the RSNs?

I'll answer the last part first, which is they're easier. But let me just -- but starting from the beginning. News ratings are softer when can you compare them year-on-year. Historically, though, I think they are still incredibly high. We are in an extraordinary news cycle. And so FOX News has lost less ratings or less audience relative to our competitors. And so we continue to be obviously #1 and expect to continue that run for quite some time. I do think, though, there probably is some news fatigue, but you ought to remember, this time last year, we were also in an extraordinary news cycle. We are incredibly pleased that the hard work of the people at FOX News has continued to keep their -- not only their prime time lineup, but their all-day ratings in the position that they are, even despite having some talent shakeup. So we are really pleased with the performance of FOX News. In terms of sub declines, overall, we're seeing about a 1% aggregate sub decline. So that includes our kind of growing sort of smaller networks, such as Fox Sports 2 and BTN. So we're down in aggregate numbers of subscribers just about 1%. But if we look at the market and we have to sort of make estimates, if we look at the subscriber universe inclusive of the growth of the digital MVPDs, we think the market is down around closer to 3%.

At this point, we're out of time. I thank everybody for joining today's call. If you have any further questions, please give Dan Carey or me a call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for using AT&T Executive TeleConference. You may now disconnect.