Nine's got a ticket to revenue growth

Nine Entertainment Company’s results announcement this morning told a similar story to Seven West Media’s announcement just over a week ago. TV continues to defy the doubters, while digital remains challenging in an increasingly competitive environment.

Nine Entertainment Co’s pro-forma numbers told an overall positive story. Group revenue was up 9.3 per cent for the 2014 first half, from $773 million to $845 million, leading to a 16 per cent increase in earnings before interest, taxes, depreciation and amortisation to $188 million and a 24 per cent increase in net profit to $95.2 million for the period.

The main driver was the television division, which experienced a $29 million year-on-year revenue increase from $620 million to $649 million, which translated to a $29 million increase in EBITDA due to flat costs. TV is still the core driver of the business: the division for NEC accounts for 77 per cent of revenue and 79 per cent of EBITDA. As expected in the TV market, revenue follows ratings. Nine made significant ground throughout 2013 in terms of share, which has naturally translated into revenue.

The events division was the other growth driver for NEC. Buoyed by strong ticket and sponsorship sales for tours by One Direction and Ricky Martin, the events division – which includes Ticketek, Allphones Arena and Nine Live – saw revenue increase 80.7 per cent for the December half from $74.5 million to $134.6 million. Nine Events is the strongest margin business for the group at 29.8 per cent, which drove EBITDA for the half of $40 million – an increase of 55 per cent.

Nine Events is a unique asset for NEC and has been identified by many as the key driver to its growth. Nine is uniquely positioned to play in this space as its TV, ticketing and venue assets give it a competitive advantage compared to local players such as Dainty Group and Frontier, as well as international competitors such as Live Nation and AEG.

The largest chunk of events revenue growth came from live concerts, which is generally a lower margin business than tickets or transactions (and reflected in the events division margin dropping from 34.8 per cent to 29.8 per cent). However, all areas of the events division experienced growth, with Ticketek and Allphones Arena both up over 10 per cent year on year.

Digital is not without its challenges for NEC. Towards the end of 2013, NEC purchased the 50 per cent stake of the ninemsn/mi9 business that was owned by Microsoft, signalling its intent to take full control of its digital destiny. After over a decade of strong digital growth and share, mi9 finds itself in a competitive market with effectively zero entry barriers for cashed up international upstarts.

Unlike so-called ‘heritage media’ such as TV, radio, newspapers and outdoor, the costs for an international digital business to enter the Australian market are minimal. This is leading to an influx of competition and an equal influx of inventory. mi9’s underlying revenue for the December half was only marginally up, just 1 per cent, to $79.4 million. Underlying EBITDA was down 35 per cent to $13.7 million and margins dropped significantly from 27 per cent to 17.3 per cent.

NEC is certainly not sitting on its hands within digital. It has launched the localised version of the UK’s Daily Mail, and acquired Cricket Australia’s digital rights as part of the overarching NEC-Cricket Australia broadcast rights agreement through 2018. Data, automation and addressibility are key themes under mi9 CEO Mark Britt. These three trends echo where the market is heading, but will take time to yield.

The reality is the market environment mi9 finds itself in is radically different to just five years ago, which has caused significant digital growth challenges that are also reflected in recent results announcements from Seven West, APN and Fairfax. The next 12 months are crucial in reflecting how mi9 is transitioning into this new normal.

NEC reported they are on track to deliver on earnings guidance as per provided in their IPO prospectus, with Q3 tracking as expected but a short market giving limited visibility on Q4.

With a free cash flow of $151 million and the Nine Events division showing substantial gains, it might be time for NEC to use some of this free cash and acquire a large-scale event promoter in Australia – such as a Chugg Entertainment, Dainty Group or Frontier – in order to really supercharge revenue and opportunity in this area. An acquisition of this scale could add $100 million of ticket sales revenue to the business, as well as $15-20 million in higher margin sponsorship and advertising revenue. Nine’s existing ticketing infrastructure and advertising reach would also create efficiencies that other competitors would find tough to match.

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