Seven West prints a clean first impression

It says something about the recessed state of advertising markets that even though its earnings effectively fell by about six per cent, Seven West Media's results were a little better than anticipated and resulted in a nice uptick in the group's share price within an otherwise weak sharemarket.

The December half was the first full six-month period for the group created by the merger of West Australian Newspapers and Seven Media Group last April, muddying comparisons.

On a pro forma basis, however, Seven West generated earnings before interest and tax of $309.7 million, six per cent lower than the notional $329.6 million the predecessor companies earned in the first half of the 2010-11 year and at the upper end of the range of guidance provided by the group late last year.

What's striking about the result is that the dominance of Seven Network in television, and the West Australian's near monopoly in the west, didn't translate into increased earnings despite exceptional cost control – costs were down 0.1 per cent on a pro forma basis.

Despite its increased dominance of the ratings – it won every week last year – and a consequent disproportionate revenue share of 38 per cent, television earnings before interest and tax were down 7 per cent after a revenue decline of one per cent.

Despite increased advertising rates and a 1.8 per cent increase in circulation the West Australian newspapers experienced a 1.6 per cent fall in revenue and a 7.6 per cent slide in EBIT.

The magazine division – the biggest in the country – held its EBIT fall to a modest 0.3 per cent, but only after slashing costs by 7 per cent to respond to a 6 per cent slump in revenue.

The interesting conclusion one can draw from the result is that it is likely to be the most impressive earnings performance produced by the major traditional media companies.

It is instructive that 'new media' group Seek announced a 26.5 per cent leap in first half earnings today while Carsales produced a 20 per cent first half gain last week. There are continual structural shifts occurring in revenue away from traditional media.

The context in which the Seven West result was produced, however, isn't just about the longer term structural changes occurring in the industry – the changes that caused the West Australian to embrace the concept of a reverse takeover by Kerry Stokes' Seven media – but more immediately is due to a steep downturn in the advertising market, a downturn that appears to have accelerated since the start of this year.

Consumer confidence is weak, retailers are under acute pressure and advertising budgets are being tightened. There was nothing in the Seven West presentation today to suggest that it expects any meaningful improvement in the near term – its focus in on costs and extracting synergies from the merger.

In some respects the resilience of the group is proof of the merger concept and the concern of the former West Australian Newspapers board that a pure newspaper group, even a dominant one in a growth economy, would eventually experience the same kind of structural issues that have confronted the east coast newspaper publishers.

The merger broadened the combined group's exposure to traditional advertising markets but diversified it in the process while creating an opportunity to pull out cost and revenue synergies that wouldn't otherwise have been available. Given the conditions, the combined group is off to a creditable start.