Fairfax hits targets in the great transition

In summing up Fairfax's interim first half results, chief executive Greg Hywood offered the blunt assessment that "we are where we expected to be at this stage of our transformation” and that within the advertising markets "a significant cyclical upswing is unlikely in the short term".

Despite stating that "no one cuts to greatness”, much of Fairfax's positive momentum in the first half has been due to solid cost management across all divisions. Overall net profit rose to $386.3 million for the half, however when businesses sold off during the period are excluded net profit was $83 million, compared to $135.7 million in the first half of 2012.

Hywood and his team have certainly been diligent in their focus to reduce debt and position the company in a sound financial state for the future. Net debt is now below $200 million, a dramatic reduction from a net debt position 12 months ago of over $1 billion. Fairfax also reported cash on hand of $477 million, fuelling some analysts to ponder whether the company would use these funds to acquire new assets, particularly within the digital space.

A troubled advertising market and slowing digital revenue remain significant challenges for Fairfax management. Group digital revenue for the half was $150 million, up only 5.6 per cent year-on-year. For the same period in 2012, digital revenues were up 18.3 per cent. Overall ad revenue across metro news and print was down 16.2 per cent, with Australian Financial Review ad revenue down 8.2 per cent and regional media ad revenue down 9.5 per cent. New Zealand media continues to decrease, advertising revenue down 4.7 per cent.

Transactions and Australian radio provided some positives. Overall transactions revenue was up 5.2 per cent, however due to traffic acquisition activity, costs increased 16.2 per cent. Most of the positive news within transactions comes from the continued growth of the Stayz business, with Hywood explaining that Stayz year-on-year was up 13 per cent. Hywood was less positive about the struggling Drive and MyCareer operations – both continuing to decline – "(they) are not making an appropriate contribution to the group".
Radio was flat in a down market, which is positive after a period of decline in revenue. For the half, radio contributed $50.9 million of revenue (up 0.5 per cent) and $10.2 million of EBITDA (up 5.1 per cent). Hywood was positive on the earnings call about the prospects of radio – outlining that a focus for the group was on a broadening of the audience.

Regional media, despite continued advertising revenue decreases, remains a solid contributor financially to the group. Even with a 9.6 per cent drop in ad revenue, the business contributed $75.5 million of EBITDA (down 15.2 per cent). Hywood was bullish about the future prospects of this area and its ability to continue to generate strong results for the group beyond pure cost cutting or containment. Hywood talked about the ability to transform the regional/rural assets in a similar way to what had been undertaken within metro – predominantly, to position them for a digital future. There is certainly opportunity to offer a localised, valuable digital platform for regional communities – an area that has so far been shortchanged by the digital revolution.

One area Hywood didn't seem to want to delve into much detail on was Fairfax's plans within digital. In December Fairfax paid $50 million for Daniel Petre and Alison Deans' Netus business, in doing so also acquiring the Allure Media business and a share of The Video Network. Hywood twice mentioned the companies increase in what he dubbed "digital firepower” with Petre and Deans, but was coy on where they would be looking to bolster the group's digital assets. Digital is undoubtedly an important piece of the future Fairfax puzzle, but if faces some significant challenges.

Revenue wise, digital accounts for 14 per cent of overall group revenue, but its top-line growth is slowing. The digital ad market is maturing, with Hywood citing Interactive Advertising Bureau figures which show that for the first quarter the online display market only increased 1.3 per cent.

Within transactions, the forecast is mixed. Stayz is on a tear, yet the RSVP business is facing the challenge of stimulating growth in a crowded and flat category with aggressive competition from the likes of eHarmony. Hywood outlined that RSVP had undertaken a large scale above-the-line marketing campaign across January and February to boost traffic.

With this in mind, it is unclear within the current portfolio where significant future digital revenue growth will come from without Fairfax looking to utilise some of its $477 million cash on hand to acquire strong performing digital assets, particularly within the area of transactions. It would be unlikely, in the present advertising environment, for Fairfax to look to add any content-led ad funded digital brands. However, it wouldn't be a surprise to see the company look further at the role it could play with automated advertising exchange models – in particular real time bidding – given the moves within digital advertising towards automation.

What happens with the MyCareer and Drive businesses is also an area to watch closely. Hywood expressed his disappointment in both businesses in a classifieds sense, yet remained more optimistic about their contribution to display advertising revenue. Both are sluggish performers in monopolised markets – raising the question of whether Fairfax would consider a sale of the assets and, more importantly, whether anyone would be interested in taking them on.

Another area to keep an eye on is circulation revenue in the second half. Metro media had significant circulation revenue gains in the first half, up 24 per cent. However, it is unclear how this will be impacted as The Sydney Morning Herald and The Age move to their new formats. It is possible Fairfax may see continued circulation revenue increases if the format resonates with consumers.

The circulation figure also outlines that one of the major challenges facing any newspaper publisher now isn't necessarily that consumers have lost interest in the format, but rather that advertisers and ad agencies are increasingly less convinced about the effectiveness of press in comparison to other channels.