Hywood cuts some Fairfax slack

While Greg Hywood did have something of a self-congratulatory tone when he announced that Fairfax had recorded its first year-on-year increase in underlying earnings before interest, tax, depreciation and amortisation for three-and-a-half years, he stopped short of a declaration of victory.

For the past five years and more Fairfax has been fighting an increasingly desperate battle for stability, indeed survival. Since Hywood took the helm at the end of 2010 the pace of the continuous restructuring, cost-cutting and asset sales has kept accelerating.

The challenge for Hywood has been, and continues to be, that Fairfax’s revenue base has kept shrinking at an alarming and destabilising rate, partly because of the weak post-financial crisis advertising environment but largely because of the fundamental changes occurring within the print media as audiences and revenues shift inexorably into a low-yielding online environment.

The Fairfax December half numbers, and Hywood’s comments about the start of the second half, show that the group’s revenue base is still shrinking, with total revenue from continuing businesses down 7.4 per cent.

Even adjusting for an extra week’s trading in the previous corresponding half, they were down 5.5 per cent and, while the rate of decline might have slowed slightly in the first five weeks of the June half, are still 3 per cent below the same period last year.

What’s saved Fairfax and what led to that stabilisation of EBITDA has been the cost-cutting. Hywood’s Fairfax of the Future program has lowered Fairfax’s cost base (on an annualised basis) by about $260 million, with further reductions to come.

The $4 million increase in EBITDA relative to the same half of last year was achieved because the reduction in costs was marginally greater than the losses of revenue. While small, that outcome is no small achievement and one shudders to think where Fairfax would be if Hywood hadn’t presided over the radical and traumatic downsizing of the group over the past three years.

With the weekend broadsheets about to follow the weekday papers in Sydney and Melbourne and go tabloid, and the shift out of the metros’ Chullora and Tullamarine printing facilities scheduled this year, the restructurings continue.

The big reduction in the metros’ costs -- they were down from $436.5 million to $361.9 million in the half – more than offset the 9.8 per cent ($46.5 million) decline in their revenues and enabled Fairfax to report a 51.8 per cent lift in their EBITDA to $68.8 million.

The composition of the revenue declines, however, points to the scale of the residual challenge Fairfax still faces in its old core.

Print advertising revenues were down from $210 million to $157.9 million while digital revenues rose only modestly from $86.8 million to $92.3 million. Fairfax held its print circulation revenue around the $102 million level but, while there was a big percentage increase in digital circulation revenues, it was from a meagre $1.9 million to a modest $9.7 million.

The fact that total metro print revenues, while falling, are still more than twice Fairfax’s digital revenue base underscores how daunting the transition from a print environment to an inevitable eventual all-digital environment remains.

The challenge for Hywood isn’t just in the metros. Fairfax’s community and regional media division is, at a lagging interval, following the same trajectory as the metros, with revenue down 18.5 per cent in the half and EBITDA down 23 per cent, or more than $19 million, despite a 16.9 per cent reduction in costs. The woes within the mining industry and drought haven’t helped.

New Zealand was a better story, with EBITDA flat and an 8 per cent reduction in costs offsetting a 6.6 per cent decline in revenue.

The good news story was in Domain where, despite a 30 per cent decline in print revenues, EBITDA grew 33 per cent as digital advertising revenue rose 29 per cent and digital EBITDA almost 50 per cent.

The pressures on Fairfax and, indeed, most of the traditional media -- but particularly print media -- are relentless and even a slowing of the rate of decline in advertising revenue won’t enable Hywood to ease up on the cost-cutting, which Fairfax says will amount to about $120 million this year.

While Fairfax has had success beyond its own expectations in attracting digital subscriptions, it is still forced to keep shrinking its cost base at least in line with the rate of revenue decline while hoping that either the traditional advertising environment stabilises or the now widespread introduction of subscriptions for digital mastheads and the continuing growth in digital advertising accelerates the rate of change in the economics of digital publishing.

Fairfax, after its asset sales, is now in a net cash position ($80 million of net cash) which reduces one source of external risk. There is, however, an eventual limit to the extent to which it can continuously reduce costs and its ultimate fate is still dependent on its uncertain eventual ability to stabilise and grow its revenues.