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Using Calcbench to Dig Into Hulu
Monday, August 15, 2016

We swear, this all started only because we picked up the latest earnings report from 21st Century Fox at random.

Little did we know, looking that quarterly filing would lead us to look at a raft of other filings, from some of the biggest names in the entertainment business—all to uncover the financial picture of yet another entertainment company, which reports no financial data at all: Hulu.

So if you want an example of how Calcbench can help you understand the financial health even of private businesses, read on.

We picked up the Fox quarterly report, submitted Aug. 10, and looked at the dashboard view. Near the top of the list of disclosures is “Commitment and Contingencies.” Hmmm, we thought, let’s look there—mostly to see whether the company had set aside cash to cover sexual harassment litigation against its former CEO, but contingencies are just a good place to find juicy financial details generally.

And then we saw it: a $115 million contingency named “the Hulu indemnity.” What was that?

As Note 15 went on to explain, Fox has guaranteed $115 million of a $338 million, five-year term loan Hulu took out several years ago. The note says the indemnity might come due two to three years from now, so we assume Hulu is halfway through the term. The fair value of the guarantee was determined by “Level 3” inputs, which is GAAP-speak for saying Fox has no hard, market-driven evidence to determine the value of the guarantee; Level 3 inputs come from model-driven estimates. Usually that esoteric method of determining value is harmless, although some investors in credit default swaps circa 2008 might beg to differ.

What really caught our eye, however, was the next paragraph in the note.

On Aug. 1, the note said, Hulu sold a 10 percent equity stake to a new investor. Previously Hulu had three owners: Fox, Disney, and Comcast, who each owned 33 percent of the company. Last week Hulu gave a 10 percent interest to Time Warner, which means Fox, Disney, and Comcast had their holdings diluted down to 30 percent each.

A hotshot entertainment startup like Hulu, owned by four other titans in the entertainment sector, also means that the Justice Department might start asking antitrust questions—and therefore, the note said, “under certain limited circumstances arising from regulatory review,” Time Warner also has the right to sell back its shares to Hulu for the next three years. If Hulu has to buy those shares at a loss, Fox has agreed to contribute as much as $300 million to cover the difference.

That was the Fox disclosure about its investment in Hulu. So we wondered, what do Comcast, Disney, and Time Warner have to say about all this?

More Disclosure Leads to More Data

Disney’s second-quarter filing arrived on Aug. 9. It, too, had news of the Time Warner investment in Hulu. Unlike Fox, Disney identified Time Warner as the new investor (which was old news on Wall Street by then anyway), and also said Time Warner had paid $583 million for its 10 percent stake—which implies that Hulu’s total valuation is $5.8 billion.

Also like Fox, Disney disclosed that it could be on the hook for a $300 million payment if the deal goes south and Hulu buys back the Time Warner shares at a loss. Disney had no mention of any loan guarantee like Fox.

We found more Hulu information tucked away in the Disney filing. In the Management Discussion & Analysis on Page 27, Disney says its equity income from investees (such as Hulu) dropped $58 million in the second quarter. Partly that’s due to the A&E network earning less profit, and partly it’s due to Hulu losing more money because of higher programming, marketing, and labor costs—although, Disney added, Hulu’s subscription and advertising revenue are up.

But how much of that $58 million drop is due to widening losses at Hulu, versus shrinking profits at A&E? We don’t know.

Comcast’s second-quarter report is where the data got much more interesting. Comcast filed its report on July 27, several days before Hulu announced the deal with Time-Warner—so we have no mention of that deal or the $300 million buyback guarantee that Comcast presumably made along with Fox and Disney. The company did, however, disclose that it recognized $65 million in losses from Hulu for the first half of 2016, up from $24 million in losses for the first half of 2015.

If we extrapolate those numbers (first multiply them by three to get total losses for the first half of the year, then double that number to arrive at full-year losses) that means Hulu lost $144 million in 2015, and is on pace to lose $390 million in 2016.

We can’t be sure that’s accurate; for all we know, Hulu is starting to rack up new subscription and advertising revenue to close the gap. But from what Hulu’s owners have disclosed so far, the numbers do suggest a classic technology startup—lots of growth, and lots of losses.

Time Warner filed its second-quarter report a few days after its investment, and only disclosed the deal as a subsequent event. So we’ll need to see how things get reported next quarter. Put this one on your watch list.


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