The real surprise from Seven West Media’s full-year earnings wasn’t the $70 million net loss the local media powerhouse reported.
That was to be expected given the $220 million impairment charges applied to the company’s Pacific Magazines division, which has seen significant revenue and profit declines in a magazine category which is facing an unusual identity crisis with advertisers and agencies.
And it wasn’t the 13 per cent revenue decline in the company’s newspaper division, a $45 million dip to $303 million, and earnings before interest, tax, depreciation and amortisation drop 25 per cent to $31 million from $86 million in 2012. Again, the challenges facing the newspaper category are well publicised.
The stand-out was the decline in both revenue and EBITDA in what Seven West Media calls its ‘other’ businesses – including its digital jewel Yahoo!7 as well as Quokka and some regional radio interests across Western Australia. ‘Other’ revenue was down 7.8 per cent to $54.9 million, resulting in EBITDA declining 4.9 per cent to $15.7 million.
On top of this, the group copped a $60 million impairment charge across its digital assets – predominantly around the Spreets asset – due a “deterioration of results”.
For all the talk of newspapers and magazines being dead-end media products, they are still delivering Seven West yearly EBITDA over $115 million. In contrast, the ‘other’ assets, of which digital is a significant part, deliver just over $15 million – only 13 per cent of that. As the digital advertising market matures and overseas competition heats up, local digital players are facing fierce competition from large scale, cashed up and rapidly growing international operations such as Facebook, LinkedIn, Twitter and Google.
Digital growth in both revenue and profit has been largely implied over the past five years for most media companies, and has helped not only plug the gaps created by falling print revenues, but in many cases exceed them. Seven West’s results, as well as Fairfax’s, reported yesterday, show that for local media companies the digital growth phenomenon is encountering serious headwinds (Fairfax still seeks romance in a digital world, August 22).
What this means for Seven West is its television operations are now more important than ever. For the past decade it has been the television leader and continues to maintain its position despite increased competition from Nine and the emerging Ten. Some would claim the Seven Network is the premier media operation in the country. It would be hard to argue with that logic – the Seven network has a 40.4 per cent market share and contributes $1.2 billion of revenue and $298 million of EBITDA. It is maintaining this market-leading position with very small cost increases. Its cost base for the television division increased by just 1.7 per cent.
For Seven West, television operations now account for 67 per cent of revenue, while ‘other’ – which includes digital – only accounts for 3 per cent. Still, when significant items are excluded, the group saw a profit after tax of $225 million, which was slightly above estimates. However Seven’s sole reliance on advertising revenue means it is significantly exposed to the volatility of marketing budgets across the country. Those budgets have resulted in a 2.2 per cent drop in the television advertising market, a 19.6 per cent drop in the newspaper advertising market and a 19.8 per cent drop in the magazine advertising market across the past 12 months.
Taking this into consideration, Seven West’s 10.8 per cent drop in magazine revenue and 13 per cent drop in newspaper revenue is a demonstration that the group is outperforming the wider market. However, questions remain about how its ‘other’ assets, inclusive of digital, have experienced a 7.8 per cent revenue drop in a digital advertising market the Interactive Advertising Bureau claims is climbing at a 14.6 per cent growth rate.
Stopping the decline in the Pacific Magazines segment will be an important task for Seven West. Declines in ad spend are significantly outpacing declines in circulation. For Pacific’s stable of magazines, circulation dropped by 6 per cent but advertising revenue dropped by over 20 per cent. This suggests the issue confronting the medium is less about consumer interest and more about a misunderstanding around the medium and the efficacy it can deliver amongst advertisers and agencies. Reversing this perception issue is key. In Nick Chan and Peter Zavecz, Pacific has two leaders definitely up to the challenge.