Fairfax still seeks romance in a digital world

Signs for Fairfax’s digital prospects are mixed, and as Greg Hywood cuts closer to the bone questions remain about long-term growth in this area, including plans for Netus.

This morning, Fairfax chief executive officer Greg Hywood boldly declared that “Fairfax continues to lead the change in the media sector” while announcing a net loss of $16.4 million for the 2013 financial year.

While the notion of Fairfax being a company at the leading edge of media is open to individual interpretation, the group does provide a clear indication of the challenges that the majority of the media industry are continuing to grapple with – and of the virtual parallel universe companies like Fairfax and APN News & Media find themselves operating in, in comparison to the booming digital classified businesses like Seek and Carsales.

The key indicators shouldn’t be of much surprise to those who have watched the company over the past year. Revenue was down 8.2 per cent to $2.03 billion. EBITDA was down 27 per cent to $366 million and net profit was down 37.7 per cent to 128 million. This year’s net profit margin sits at 6.3 per cent, almost half of the 12 per cent profit the margin the business enjoyed only six years ago in 2007.

This margin erosion is symbolic of a challenge facing most traditional media businesses – a challenge compounded by decreasing circulation revenue and challenging advertising conditions. Hywood has been commendable in his devotion to cost containment: for the 2013 financial year expenses before impairment, depreciation and finance costs were down $105 million on the previous year once 2012 redundancy costs are excluded. However this $105 million win in terms of cost containment is dissolved once the $189 million reduction in revenue for the year is considered. There is no doubt Hywood has trimmed fat, but the revenue issues he is faced with don’t show much sign of being subdued, and how many cuts can the chief execute before he hits bone?

Debt reduction is one area Hywood has been committed to addressing. Currently, Fairfax has net debt levels of $154 million, down from $760 million the year prior and from $2.3 billion in 2008. However, given the continued falls in revenue, should investors be worried that the current net debt position is being improved potentially at the expense of the company’s longer-term prospects?

A key element of these longer-term prospects is digital, which for the full year showed mixed signs. Domain is a strong earner for Fairfax and is demonstrating solid sustained growth through improved product and marketing – resulting in digital EBITDA growth of 38 per cent and digital advertising revenue of $77.2 million for the year. Stayz, which is rumoured to be a possible sale target for Fairfax, grew 10 per cent year-on-year to $25.4 million in revenue. However the Metropolitan Media transactions divisional EBIT dropped 12.3 per cent to 22.1 million, driven by competitive pressures facing RSVP. Transactions has historically been a strong earner for Fairfax, with excellent margins, yet this shows signs of change.

Metro Media digital revenues as a whole represent a problem, with growth slowing significantly. Combined, the transactions, online classifieds and Australian media digital assets only grew revenue by 3.6 per cent for the year. At the same time print advertising across the metropolitan media assets dropped by over $100 million. The question needs to be answered – given the sluggish state of Fairfax’s digital assets aside Domain, where is future earnings growth within Fairfax going to come from?

This slowdown in digital growth prospects partially explains Fairfax’s $50 million purchase of Netus back in December of 2012. Looking at the full-year results this acquisition seems to have done little to impact the revenue of the business in the short term, which makes you wonder whether Hywood and the board have longer term plans for the value they will need to extract out of that purchase. At June 30 Fairfax had over $588 million in cash or cash equivalents, which when combined with its strong net debt position mean it is well positioned to look at larger, long-term purchases which can provide meaningful future earnings growth.

Netus’ Daniel Petre and Alison Deans were either both or individually involved in the development of the likes of ninemsn, eBay and Ticketek – all businesses generating considerable profit in Australia today. Hywood will be hoping the two can generate a similar success story or two for Fairfax in the not too distant future.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.

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