Hywood’s diet keeps Fairfax just floating

Almost across-the-board revenue declines, even in the previously resilient regions, has Fairfax reeling. Mercifully, chief executive Greg Hywood's cost cuts have bought time.

It is sobering to think of where Fairfax Media would have been had Greg Hywood not embarked on, and delivered, his traumatic cost-reduction and business restructuring program. Without that 'Fairfax of the Future' program the traditional core of Fairfax – its metropolitan mastheads – would almost certainly no longer exist.

The problem that has confronted Hywood, and indeed some of his predecessors, is that Fairfax’s revenues are declining faster than he can cut costs and that to the extent that he can replace diminishing print media revenue with digital revenues he is faced with the digital media reality of low margin revenues (Fairfax roams the pages for more cost clippingsJune 6).

Hywood isn’t, of course, alone. The same issues are being grappled with around the world and, of course, by Fairfax’s major competitor, News Corporation Australia*.

The impact on what was once a classified advertising-based broadsheet core, however, has been quite devastating and Fairfax would be getting nervous that the digital disease is now showing up in what were once regarded as its more resilient regional newspaper operations.

The headline numbers in today’s results tell the story. Revenues for the group’s continuing businesses were down 5.9 per cent, expenses were down 1.8 per cent and earnings were down 28.6 per cent even though it was a 53-week period. Hywood delivered $118 million of cost reductions but his revenues are falling faster than his costs.

So far the Fairfax of the Future program has taken an annualised $193 million out of the group’s cost base and, after Hywood added an additional $60 million to his target earlier this year, remains on track to achieve his $311 million of savings by the end of the 2014-15 year. This financial year the target is for between $100 million and $120 million of new savings.

At the moment, however, Fairfax is having to cut harder just to slow the rate at which its earnings are dwindling. Hywood said today that while there had been some moderation in the rate of revenue decline in the first six weeks of the current financial year, it was down 8 per cent on the same period last year.

There were some encouraging slivers within an otherwise very familiar result. Digital revenues did increase 14 per cent and, in the troubled metros, circulation revenue was up 17.4 per cent, or $32.8 million after some cover price rises and the culling of unprofitable circulation (Fairfax still seeks romance in a digital world, August 22). The Domain property business nearly offset a 33 per cent decline in print advertising revenue with a 16.3 per cent increase in digital revenues.

The problem is that advertising revenue was down 21 per cent, or $169 million. The earnings before interest and tax for the metro mastheads were down about 33 per cent, from $72.6 million to $48.8 million.

It’s a similar story in regional media, where Fairfax experienced a 10.4 per cent decline in revenue and, despite a solid reduction in its costs (down 8 per cent) experienced a 20.7 per cent decline in EBIT.

The revenue loss in its New Zealand operations was lower, at 4.7 per cent, but EBIT was still down 18.5 per cent. Only the broadcasting division swam against the tide, increasing revenue 8 per cent and EBIT 37 per cent.

The saving grace for Fairfax is that, largely due to the sale of its remaining interest in Trade Me, it has reduced net debt from $914 million to $154 million.

The Fairfax of the Future program Hywood is still implementing doesn’t buy the group salvation, only time. By itself, however, that is valuable.

The group’s digital revenue base is growing and the early response to the introduction of metered paywalls to its two main metro mastheads, The Sydney Morning Herald and The Age, is encouraging, with Hywood saying Fairfax had achieved half its 12-month target for paid subscribers within the first four weeks of their introduction. He said the group now had 68,000 paid digital subscriptions and 98,000 bundled print and digital subscriptions.

Digital subscriptions are, perhaps, an important element of a strategy for longer term viability but the total metro digital revenue, including Fairfax’s online classifieds and transaction businesses, was $260.8 million within a metro media revenue base of almost $1 billion. Costs within those metro media businesses were $917.6 million.

The confronting revenue/costs/margin equations Hywood and his peers are grappling with aren’t readily solvable, if indeed they can be solved. Buying time, at least, provides hope and an opportunity for a solution to emerge.

*News Corp Australia is the owner and publisher of Business Spectator.