No matter how hard the good people at Fairfax work to re-model the business into a digital dynamo, the suffocating hangover of the print era continues to drag it down.
Last week, the company announced yet another earnings guidance downgrade for the 2013 financial year as revenue continues to slide at a 10% clip and operating earnings cop a pasting.
[1]Fairfax said its revenue so far in the second half of this financial year is 9-10% below last year (similar to its February trading update) causing operating earnings (EBITDA) for the second half to be in the range of $129-135m.
First half EBITDA of $230.3 million included a $44.8 million contribution from TradeMe, which was sold in December 2012 for net proceeds of $606 million.
Hard road
The transition road from print to digital has been a long hard slog for Fairfax Media. Worse, it has been a painfully bad financial experience for investors.
Ford’s iconic family wagon has struggled against more nimble imported models, and the traditional newspaper has become like the big family wagon – a good people-mover but cumbersome and costly compared to today’s competition.
Fairfax Media held yet another strategy update day for investors outlining how it will take even more cost out of its business, how it is further realigning its products and brands and how it will entice more audience and advertisers to its evolving digital properties.
But amidst the admirable analysis of audience structure, preferences and changing use of technology, the inescapable truth is that Fairfax’s revenue and earnings are slipping away faster than it can add new ways of charging equivalent chunks of new revenue.
Despite the ongoing gouge into the cost line, Fairfax earnings still look like they are going backwards rather than forwards. The cost diet doesn’t seem to have caught up to the required playing weight yet.
On top of the expected $251 million of annual cost savings detailed so far, Fairfax has found another $60 million of nip and tuck taking annualised savings towards $310 million. That’s a big number but a necessary one. We doubt it will be the last.
New ideas
Fairfax is now re-thinking the range of products it produces and this is a sensible idea, if not an overdue one. As part of its next stage of becoming more lean and agile, the company will review all of its 431 publications, 337 websites, 7 radio stations and 100 apps. It’s more likely that the publications list will be the target for trimming, such as the closure of 7 community newspapers in Melbourne announced, but will not include the major mastheads which Fairfax claims are profitable.
Also on the agenda is the company’s new pricing and bundling of its digital subscriptions as well as the format for which each paywall is to be implemented. It appears as though some print editions are now acting as giveaways to entice subscriptions to the digital bundles. For example, a full suite of digital access (PC, mobile and tablet) will cost $25 per month but subscribers can add a weekend newspaper for no extra charge.
At this early stage, Fairfax’s paywall strategy is not radically different from either News Limited’s local version or other paywalls established overseas.
But it does seem to mark the beginning of the real paywall era in Australia and perhaps the beginning of the end of the free content era for premium quality news. The barn door is finally shutting.
Content sharing is another avenue for extracting costs with 39% of content being shared across mastheads (SMH and The Age) as at March this year. That will probably increase further.
For the first time, Fairfax revealed that its Domain brand generated $140m of revenue in FY12 and $44.6m EBITDA across both digital and print. The company sees real estate as a profitable core business and we do not disagree. But the same problem exists here with print revenue and earnings declining faster than digital revenue and earnings are growing.
In addition to the Domain revenue, Fairfax hauls in another $194m of revenue through other publications and joint ventures bringing its total real estate exposure to around $335m.
The sale of the remaining TradeMe stake has enabled net debt to fall to almost negligible levels ($113m as at 31 December 2012) giving the balance sheet some breathing space – but keep an eye on the possibility of even more goodwill writedowns at the end of year result due in August. Intangible assets still make up just over half of group assets.
Is Fairfax a buy?
The share price is implying a multiple of approximately 5x operating earnings based on the guidance for FY13 EBITDA which at first glance appears quite harsh. It probably doesn’t factor in the additional cost savings being in place but perhaps anticipates no near term lift in advertising revenue.
The contrast with the ‘new News’ Corporation is irresistible. Both companies have a strong presence in the Australian media landscape but that is where the similarities end. News Corp will begin its new separated life at the end of June with not only a global print business across newspapers, magazines, books, and coupons but will also have the cash generating power of its subscription television businesses and the financial information services of Dow Jones, plus the number 1 Australian online real estate business, REA Group.
There is no question that Fairfax is trying as hard as it can to improve its profitability based on its good brands and content, but the structural and cyclical headwinds are fierce indeed.
Fairfax Media’s incumbent brands will outlast the Ford Falcon, but the company is finding it hard to make money from its iconic brands.
We would avoid investing in Fairfax Media.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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