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Write-down pressure on board as Ten faces big loss

The Ten Network balances its 2011-12 financial year tonight, leaving it increasingly likely that it will report a loss for the year in mid-October when the results are announced. The loss will leave the board, including its bevy of billionaires, with the difficult decision of whether to write down the value of the company’s assets, especially the more than $1 billion of intangibles.

Ten earned an underlying net profit of $74.1 million in 2010-11. To at least match that it will have to boost second-half earnings sharply by about $60 million in the normally revenue/profit weakest part of the year. That would be more than the group’s $56.8 million TV EBITDA in the six months to February. Given the rating and revenue slide since then, plus the overall weakness of the ad market, doing that will be an impossible task.

There is also a very strong possibility that the loss for 2011-12 will be followed by a loss in the first half of the new financial year, starting tomorrow, such has been the financial damage done from the ratings and revenue slump in the past month.

Ten earned a net after-tax profit of $14.8 million in the six months to the end of February. That included a contribution from the now sold Eye Corp (the final details of the price Ten will get for the deal are still being nutted out, but it will be up to $120 million). The group made an operating profit (earnings before interest tax and depreciation and amortisation (EBITDA) of $56.8 million from its TV business, down 40% from the $95.0 million earned in the first half of the 2010-11 financial year and in turn down by nearly half on the $109 million earned back in 2009-10.

The result for the six months to February came on an 11% fall in TV revenue to $358.3 million, from $404 million in the same period of the previous year and $395 million in the first half of 2009-10. There’s a solid chance that Ten will see a second fall in TV ad revenues if this week’s full-year report from Ten’s regional affiliate, Southern Cross Austereo, is any guide. It showed an 8.2% fall in TV ad revenues for the full year, after a 5.5% drop had been reported for the first six months. Southern Cross’s regional markets have been stronger than the metro markets Ten operates in over the past year, so there’s every chance Ten’s performance will be worse.

But the big issue for the Ten board is whether the value of the company’s major asset, its $1.17 billion of intangibles (the value of licences) should be impaired, as Fairfax Media ($2.98 billion) and News Corp ($US2.8 billion) have done. Seven Group cut the value of its Seven West Media stake by $485 million because of the fall in the latter’s share price, not impairment of its TV and magazine assets.

Asset impairment tests have to be made every year and the Ten board and its advisers have to consider whether the assets have gained, retained or lost their ability to generate profits (or cash, the assets are known as “cash generating units” in accountingese). The board members won’t want to impair the assets, and will argue that they believe the network can recover from its catastrophic ratings collapse in the past month and the big revenue and profit slide since the middle of the 2010-11 financial year.

The betting is that there will be a lot of talk about a new start, new ideas, a new head programmer, which would be handy, and a renewed emphasis on cost control and maximising the network’s share in the 16-49 demographics. In other words, a repeat of what was promised by chairman Lachlan Murdoch and CEO James Warburton at the start of 2012 and during the year.

In view of the collapse in ratings since the Olympics ended, thanks to several programming failures, the words earlier in the year from Warburton have a particular resonance. While much of it remains true about the health of the TV ad market and the time it will take for Ten to rebuild itself, it has gone backwards since those words were printed in the interim profit statement.

In that statement, Warburton said: ”We have built a new executive leadership team in a short space of time. That team is now completely focused on improving the performance of Ten Holdings.” That team is now one short with the departure of head programmer David Mott a week ago.Warburton said the television advertising market remains “short”, with limited visibility in terms of forward ad bookings, but Ten Holdings is improving its competitive position. “A lot of hard work was done last year to reset Ten Holdings’ cost base and create a more sustainable business. Further investment in programming will be required,” he said. “While visibility remains limited, we expect to see less volatility in advertising markets over the next few months and the emergence of a more consistent trend.”

Warburton said recent initiatives such as introducing basic sales disciplines and new yield management initiatives, and establishing a new, in-house creative development unit were logical extensions of the operational and strategic review. “Implementing the strategy we have for Ten Holdings will require vision and patience,” he said. “A key element of that strategy is increasing our share of television revenue by focusing on selling excellence and building the CONNECT coalition, our cross-media marketing platform. Other key elements include producing more top-rating local television shows that we own, and reinforcing TEN’s unique brand principles,” Warburton said.

Nothing has changed except Ten’s ability to generate higher ad revenues and return to profits in the current 2012-13 financial year is now very much open to question. If anything the first half ended February 28, 2013 is a write-off after the losses that will be incurred from Saturday (September 1 onwards).

The last two quarters of each calendar year are the strongest in terms of ad revenues, in particular the December quarter. But this year has been hit by weak demand for ad spots (and Ten will also have plenty of make-goods for advertisers who supported flops such as Everybody Dance Now), there’s discounting and the usual impact of the Olympics will be felt (especially at Nine) with advertisers having used up a lot of their budgets for that mega event, meaning a smaller amount to be spent in the last four months of the calendar year.

Ten can’t even argue that it’s the cheap option for advertisers, such has been the slide in its viewers in the past month. For the third week in a row it will run fourth, behind the ABC in third spot. ABC TV is also weak and short of funds for new programming, but it has stuck with what works, not thrown the dice on a spate of new formats that turned out to be flops.

Part of Ten’s problems that it has tried to make programs based on what focus groups think and not on what experienced program makers and executives think. The hiring of David Castran (who used to run Audience Development Australia, which invented the ”Q Scores” to rank TV presenters, based on their appeal to viewers) has been a failure. He was hired by Warburton in May for the new Network Development Group).

Castran runs research with focus groups on how they feel about TV programs, actors and presenters. “David is the best television audience researcher in Australia,” Warburton said in a statement in May.  “He joins the Network Ten team at a time when we are undertaking a creative renewal of our content.” Warburton said Castran was ”the best television audience researcher in Australia … the agreement with David is further evidence of our commitment to providing viewers and advertisers with the most compelling and creative content now and into the future”.

By those words, the hire has been a failure, Everybody Dance Now, I Will Survive, Don’t Tell The Bride, Being Lara Bingle and The Shire are or have been flops. TV networks can’t outsource their programming decisions to focus groups. In the end someone has to say yea or nay based on their experience. That is now in very short supply at Ten.

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