Profits: Media, The Black Hole Grows Deeper

The Australian media industry has become a black hole that shows no sign of disappearing, judging by the flow of weak interim and full year figures this week for groups from Fairfax Media to Foxtel, Seven West Media and Network Ten.

Weak revenues (in many cases, sharp falls), falling profits, cost problems and debt burdens continue to bedevil the sector as the online world cherry picks its best customers, picks their pockets and makes off with the goodies.

Consumer caution is playing a big part. Weak sales for the likes of department stores (as David Jones confirmed yesterday) means lower ad revenues.

Consumer electronics retailers (JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN) have all seen sharp sales falls) are in a similar position and weak demand for housing and home loans have also played a big part in undermining revenue and earnings for media companies.

But it's not just that consumers have become more cautious; as the Reserve Bank has demonstrated, consumers are redirecting their spending into services and away from traditional areas of consumption.

Car sales remain solid, as does basic food retailing, but the growth has been in cafes, food services and restaurants (while housing is taking more disposable income because the homes cost more).

Services are taking more disposable dollars, and people are travelling more offshore and shopping on the internet.

Cool weather, the floods in Queensland, Victoria and NSW in the past 14 months have also had a significant impact, especially in Queensland.

The Pay TV businesses, Foxtel and Austar (which want to merge) have been the strongest performing media companies in the past couple of years, but in the second half of 2011, they also hit the wall as consumers cut their spending (or redirected it).

Foxtel didn't add any subscribers over the December half and Austar lost more than 8,000 over the year, with most dropping out in the second half.

Online companies such as iiNet, Wotif, Seek, Carsales and REA Group which didn't rate five years ago, are now growing rapidly in areas where the established media once ruled: classified ads, real estate, cars, travel and jobs.

And, none of the media companies reporting this week have been game to issue guidance or make forecasts about the rest of this financial year or calendar year.

In PR speak 'visibility is limited', with 'significant headwinds' and an 'uncertain business environment'.

No company has been damaged as much as Fairfax Media (ASX: FXJ) which had more bad news for investors yesterday with a 44% slide in first half profit to $96.7 million from $172.3 million earned in the year-earlier six month period.

There was a 14.6% fall in underlying in earnings before interest, tax, depreciation and amortisation for the half, on a 5.2% drop in sales in the half year to $1.232 billion.

Advertising revenue fell by 3% in the September quarter and by 8% in the December quarter.

Conditions remained tough into January, when revenues were 7.5% lower than a year earlier, as finance, real estate and retail industries - all major advertisers - saw weak sales and layoffs.

Fairfax shares fell 3c, or 3.6%, to 79.5c, before finishing at 82c, down half a cent on the day.

The company lifted interim dividend to 2c a share (or half a cent a share extra).

That dividend increase is useless except as a sop to some investors. The company is slowly self-liquidating.

"While the results are disappointing, over the last six months Fairfax Media has driven change through the business and we have done it in the midst of a severe cyclical downturn in our major markets," said chief executive and managing director Greg Hywood.

Fairfax now expects to double its cost savings over a three-year period to $170 million.

The doubling of the cost savings "is an extension of processes we have talked about before and have now intensified and accelerated", Mr Hywood said yesterday.

Mr Hywood said the company set a clear three-year strategy last August designed to reshape the business and reset the company's cost base.

Dubbed the "Fairfax of the Future" plan, it builds on the changes already underway in the company's Metro division, which operates the major metropolitan newspapers including The Sydney Morning Herald and The Age, said Mr Hywood.

"Fairfax of the Future recognises that many parts of our business were built at a time when the newspaper was king and print classified advertising was the biggest driver of our business success.

"Large parts of our current operating model are still geared to supporting the old business model," Mr Hywood added.

Gina Rinehart, the iron ore billionaire, owns 12.6% of Fairfax. She also owns a stake of near 10% in the Ten network. Both won't be making her a lot of money in the next year or so.

The regional newspaper and outdoor advertising group, APN News and Media (ASX: APN) was another to suffer, this time in the 2011 year ending December 31.

APN revealed a loss of $45.1 million for the year, down from $93.7 million in 2010 after the group wrote down the value of assets by around $159 million (which had been previously announced).

Ignoring these one-off items, APN said it had an underlying profit of $78 million, which was still 24% lower than a year earlier.

Revenue rose by just 1% in the year to $1.07 billion from $1.059 billion, an increase of $11 million, as the impact of the floods in Queensland, the slow retail environment, the Christchurch earthquake a year ago and the impact of online competition, bled the company of much needed sales growth.

APN declared a final dividend of 5c, partly franked, that's down from 7c paid for the second half of 2010.

The total for last year was 8.5c, down from 12c paid for all of 2010.

That's a good enough indicator of the very cautious outlook this company has about its future.

At least Fairfax found the will to lift its admittedly small dividend for the December half year.

On its outdoor advertising joint venture with Quadrant Private Equity to expand its outdoor advertising business in Australia, New Zealand and Asia, APN said the new business would retain the name APN Outdoor.

It will incorporate all of APN's wholly-owned outdoor advertising businesses in Australia and New Zealand as well as its 50% stake in Rainbow Premium Outdoor in Indonesia.

The transaction valued APN Outdoor at $272 million and was expected to generate gross cash proceeds of about $190 million for APN upon completion, the company said.

"But APN's 50% stake in the Adshel street furniture business and Buspak and Cody in Hong Kong are not included in the joint venture.

APN's share price rose 1.5c to 83.5c on the confirmation of the outdoor business deal.

Network Ten is a disaster area, judging by the slide in first half profit revealed in this week's surprise guidance.

Ten is facing a 40% drop in TV earnings, on a 12% plunge in revenue for the best period of TV, the Christmas period when money is supposed to be rolling in the door.

In fact Christmas didn't come for Ten with the company saying yesterday the final quarter of 2011 was weak. That is on top of the disaster called The Renovators.

A 40% drop in TV earnings before tax and interest means profit will be around $57 million, down from the $94.9 million for the first half of the previous year and $109.6 million for the year before that.

Group earnings before interest, tax, depreciation and amortisation (EBITDA) would fall to $64 million for the six months to February 29, from $106 million for the six months to February 28, 2011.

And the interim dividend has been axed, as Ten joins the likes of Goodman Fielder, Qantas and Specialty Fashion in inflicting financial pain on shareholders following managerial mistakes or failures.

Ten's share price dropped 9% or 8c to 78 cents on Wednesday. Yesterday it rose 2c to 80c.

That's bad news for James Packer, Lachie Murdoch and Gina Rinehart, all of whom bought Ten shares at around $1.20. Ms Rinehart holds 10% of Ten, with Mr Packer and Mr Murdoch owning a stake of 8.9% each.

They have again proved that you don't have to be rich, or even in the business, to lose money investing in the Australian media.

Seven West Media (ASX: SWN) made a net profit of $193 million in its maiden first half, and will pay a dividend of 19c a share.

Seven West Media said that its major asset, the Seven Network, had earnings before interest and tax of $205.7 million for the December half year on revenues of $655.8 million.

That was 6.5% down on the 2010 first half EBIT of $220 million. Revenue fell 1% from the $664 million in 2010.

The shares rose 9c to $3.88, continuing the strong recovery.

And earlier this month Pay TV group Foxtel recorded earnings before interest, tax, depreciation and amortisation (EBITDA) for the 6 months to 31 December 2011 of $280 million.

Foxtel didn't add any subscribers to its own base in the December half year.

Earnings for the December half were only up $2 million for the December half year, but they were up, unlike Ten, and Seven.

Consolidated Media (ASX: CMJ), controlled by James Packer and Kerry Stokes, saw net profit for the six months to December 31 drop 7% to $42.1 million as distributions from Foxtel didn't happen in the half.

The company said operating net profit after tax - its preferred measure of financial performance - fell 2% to $44.3 million.

"The retail environment continues to be extremely challenging, and the trends we saw last year in respect of subdued consumer spending and general negative sentiment were present again this half," ConsMedia executive chairman John Alexander said in a statement.

ConsMedia owns 25% of Foxtel and 50% of Premier Media Group, which produces the Fox Sports and other channels.

It also holds an interest in SEEKAsia, an overseas jobs website business in South-East Asia, alongside Macquarie Capital, Tiger Global and SEEK.

ConsMedia's biggest shareholders are James Packer's Consolidated Press Holdings and Kerry Stokes's Seven Group Holdings.

Mr Alexander said ConsMedia did not receive a cash distribution from Foxtel in the first half, but did get a $15 million distribution in January of this year and he expected further cash distributions by June 30.

(That means News Corp received $15 million for its 25% of Foxtel and Telstra received $30 million.)

ConsMedia also received a $20 million distribution from Premier Media Group, in line with the prior corresponding half. News Ltd received $20 million for its 50% share.

Cons Media shares dipped 4c to $2.75. It will pay an interim dividend of 10.5c a share.

And finally, regional pay television operator Austar's full-year net profit rose in 2011, despite a fall in the number of subscribers.

Austar said yesterday it earned a net profit $120.1 million for its 2011 financial year, up 20.5% from $99.65 million in 2010.

Revenue in 2011 was flat compared to 2010 at $712.8 million, due to the impact of natural disasters in regional areas and a fall in subscriber numbers, Austar said.

There was an 8,845 fall in subscriber numbers in 2011, taking total subscribers to 755,374 at December 31.

But the average spend per user rose, and in the fourth quarter of the 2011 it was up 5% on the previous corresponding period to $88.64.

Austar said its programming and communications costs fell by $9.2 million in 2011.

No dividend will be paid because of the possible deal with Foxtel.

The shares rose 1.5c to $1.225.

The company didn't give any update on the Foxtel deal because the decision is in the hands of the competition regulator, the ACCC.

Austar has been marking time waiting for the decision, which was due late last year.

Austar said earlier this month it was moving the shareholder meeting to consider the Foxtel offer to a new, unknown date which would be named once the ACCC decision was known.

Because of the impending Foxtel deal, the group has cut spending (detailed above) and hasn't run a sustained marketing campaign to try and keep subscribers from dropping out.