Property and asset sales have led a Fairfax recovery, but it’s more precarious than it looks.
Despite the positive headline figure, there’s a lot of red to be found if you dig down into this morning’s full-year Fairfax Media results.
Print adrevenues, still hugely important to the company, fell 24%. The radio division was (modestly) down. Australian Community Media (all those local and regional papers) was down. New Zealand Media was up, but not by a lot and certainly not by enough to compensate for the losses elsewhere.
So how is it that Fairfax posted a healthy full-year profit this morning, healthily beating analysts expectations? It’s largely due to property, and asset sales. Domain’s digital property operations are pouring millions of dollars of revenue and much needed earnings into the company, just as REA Group is doing the same for rival News Corp. Add profits from the sale of Stayz (in December for $220 million) and Invest Smart (in August 2013 for $7 million), and the media company posted a $224.4 million full-year net profit. Strip out the $100 million in profits from those sales and the company said net profit was $154 million.
It’s a recovery from last year, when the company posted a $16.4 million loss. But the profit is precarious: asset sales only make you money once. And property businesses tend to go up and down with the property cycle. At the moment, as the results of REA Group and Domain show, the cycle is still very much on the upswing. Domain’s digital business has become increasingly central to Fairfax’s profitability. It’s boom times now, but what happens when the Reserve Bank raises interest rates?
Within Domain there was a telling contrast between its digital and print sides. In print, Domain advertising revenue fell 23.6% to $37.9 million. But in digital, it surged 40%, to $108.5 million. Take out the costs and that feeds nearly $60 million into Fairfax’s earnings before tax, interest, deprecation and amortisation (EBITDA). Domain’s digital revenues and profits will likely grow next year with the July 2014 acquisition of Allhomes, the leading real estate portal in Canberra (pending ACCC approval).
“Fairfax will probably raise the cost of digital subscriptions in the future. But unless they rise dramatically, it’s unlikely they’ll be anywhere near enough to sustain the journalism.”
All up, total revenue from property across all businesses (not just Domain and the papers) was $306 million. Total revenues were $1.97 billion (down 3%), so that gives you a feel for how crucial these are to the company.
It’s also worth contrasting these property revenues and profits to the paltry figures brought in by digital subscriptions, introduced in July 2013 for The Age and the Sydney Morning Herald. As of August 11, Fairfax said it had 140,00 digital subscribers. It also had another 111,000 dual print and digital subscribers. These are impressive figures. News Corp’s subscriptions in February were running a long way behind that, despite News Corp introducing digital subscriptions in 2011.
But despite the healthy numbers, subscriptions to the SMH and Age, as well as The Australian Financial Review brought in only $24 million in revenue (up $19.2 million on last year, when they presumably only counted the Fin’s digital subscriptions). That’s pocket-change. Divide it by the total number of digital subscribers, and it suggests each of them is paying just $96 a year (assuming most signed up towards the start of the financial year). The AFR costs an arm and a leg ($708 a year for digital only), which begs the question: how much are SMH and Age subscribers paying to get such a low average figure? Of course, Fairfax will probably raise the cost of digital subscriptions in the future. But unless they rise dramatically, it’s unlikely they’ll be anywhere near enough to sustain the journalism.
Mind you, no one’s ever sustained journalism through subscriptions alone. In Fairfax’s print metropolitan division, advertising still comprises the lion’s share of revenue. But it’s down 24% in a year to $280.7 million, while print circulation revenues held just about steady steady at $204 million (courtesy of paper price rises). In digital, however, advertising revenues in 2014 have hardly grown. They’ve moved from $169.9 million last year to $179.4 million this year — up 6% — but that’s not enough to make up the losses in print advertising. It’s not surprising — as audiences move online, they become far more difficult to monetise, whether through subscriptions or advertising.
And so, the future lies in cross-subsidisation, as it has in the past. While the much-hyped Fairfax events division has yet to deliver much to the bottom line, it does appear to be quickly growing. And property classifieds, through Domain, will probably bring even more money in next year. If everything holds steady, Fairfax has gained room to breathe. Net debt is down by $222 million and the company had net cash of $68 million (and total cash on hand of $452 million, down from $533 million a year earlier).
And unlike rival News Corp, Fairfax is paying a dividend of 4 cents a share for the year with a final of 2 cents a share. Shares in Fairfax jumped nearly 6% at the open.
Fairfax’s bosses have been rewarded for the improvement. Chief executive officer Greg Hywood’s pay is up substantially to $2.862 million in total from $1.982 million in 2012-13. Based on Crikey’s (possibly outdated) media CEO salary survey from September last year, that makes him the best-paid media CEO in the country.