Fairfax's downward revenue race

The latest, albeit modest, downgrading of Fairfax Media's revenue guidance underscores the degree of difficulty facing Greg Hywood as he tries to manage a radical restructuring of the newspaper group in the midst of a deteriorating advertising environment.

Fairfax said today that, after warning in February that the year had started with revenue 7.5 per cent below the previous year's, second half revenue was now expected to be 8 per cent below last year's and underlying earnings before interest, tax, depreciation and amortisation, at about $500 million, 18 per cent below last year's $607.4 million.

Given that Ten Network and Seven West Media have recently revised their guidance downward there isn't anything particularly shocking about Fairfax's disclosure that it, too, is being impacted by the weak advertising markets.

If its new guidance is confirmed, however, it would mean Fairfax's revenue base will have shrunk for the fourth year in succession, highlighting the structural nature of the erosion occurring.

For Hywood, trying to reorient the group from its traditional print base to a digitally-focused future, the reality that he is trying to replace high-margin legacy revenues with low-margin digital revenues compounds the degree of difficulty of executing the transition.

The one thing he can control is costs and Fairfax does appear to be managing those down according to its plans, with Hywood saying today that the run-rate for cost savings was ahead of the targeted $40 million a year and was accelerating. Fairfax is expected to announce another major restructuring of its print business, and its metropolitan newspapers in particular, at any moment.

The problem is that Fairfax is losing revenue faster than it can cut costs. An 8 per cent fall in revenue in a half-year equates to about $100 million, much of which will drop directly through to the bottom line.

The weakness in its revenues and earnings is not a Fairfax-specific problem. All traditional media groups, here and offshore, are being adversely affected by the weak and volatile economic environment. And the print media, particularly general newspapers, are being most destabilised by the accelerating structural changes wrought by the digital technologies and the absence of any clearly successful blueprints for change.

For Fairfax, the battle to stabilise its revenue base isn't being helped by distractions at the board level, where Gina Rinehart is agitating aggressively for board representation for her 13 per cent shareholding and for some influence over editorial policies that, if granted, would further inflame tensions within the company over the direction and nature of the changes occurring.

So far Fairfax chairman Roger Corbett has kept Rinehart at bay, but without some signs that Fairfax can stabilise its financial position the pressure can only mount.

Fairfax is also being pressured by the market and has become increasingly vulnerable to some form of strategic play, whether from Rinehart, some other influence-seeker or a private equity-style player.

At its current share price of just under 60 cents Fairfax has a market capitalisation of only $1.4 billion and an enterprise value of about $2.5 billion. Its 66 per cent shareholding in the spun-off digital advertising business, Trade Me, is valued at $800 million, it has a sprawling and still-valuable regional media business in Australia and New Zealand and its radio network is probably worth several hundred million dollars. If the share price keeps sinking, someone will have a go at it.

Hywood's task would be considerably easier if external conditions were less hostile. An era of debt-funded consumption does, however, appear to be over and with households continuing to deleverage advertising markets, particularly those that traditional media has been dependent on, are unlikely to suddenly revert to pre-crisis levels. Fairfax has no option but to assume today's conditions will persist and try to build a business that can survive that assumption.