“Fairfax Media well positioned for recovery in advertising markets”, said the headline on the company’s release today to help us poor souls with our interpretation of what were pretty rotten figures.

It was all about spin, not discussion and explanation for what was a very, very bad six month to June 30 for the company and the the media in this country.

And how much spin was there? Well the release contained a lot of comment, but not the table of revenue and earnings that appeared on page two of the interim statement in February. It was in the presentation to analysts and the market (as it was in the interim), but not in the one to the media.

Fairfax management and the board do have a good story to tell about how they and the company were all slammed by a runaway truck, but it’s as though they are in denial and can’t bring themselves to lay out to shareholders and employees just what a destructive period it was.

For example, The Age and The Sydney Morning Herald second revenues fell by 25% in the six months to December, and operating profit plunged from $88 million in the June half of 2008, to $26.9 million for the June half of this year.

Put it another way, the two publishing groups went from earning about $3.3 million a week in the June half of last year, to just $1 million a week in the six months to last June: that’s a catastrophic fall of more than 66%.

Another core business is the specialist publications, which include The Australian Financial Review and BRW, plus other publications, had a terrible second half. Operating earnings fell by about 37% to just $23 million in the half, from almost $38 million a year ago. Overall, for the full year, operating earnings were down almost 25% at $64 million.

While it’s known that media industry conditions have been tough, with the likes of Ten Network and APN News and Media, revealing falls in revenues and earnings for their latest period, did anyone seriously think that Australia’s leading media group would experience a near life-threatening 25% plunge in second-half revenues?

That is just over $400 million in total, or about $15 million a week, or more than $2 million a day. No wonder Fairfax has cut, then suspended dividends to shareholders, no wonder it is cutting staff and costs where it can, no wonder it raised new capital earlier in the year: the company must have been very, very close to collapse if that money hadn’t arrived.

Remember most of this happened after Fairfax raised a life-saving $600 million or so in fresh capital at the start of 2009, which kept the banks at bay.

The reality from the company’s release and the accounts issued today, is that Fairfax fell into a black hole in the six months and (like News Ltd and the free-to-air TV networks), remains there, with no clue how to escape, except to sit and wait for “things to get better”.

Much of the concentration on Fairfax and other media groups has been on the falling profits or the emergence of losses, but they are a function of what is called in the US a “secular change” in ad markets.

Unlike American papers, which are also losing circulation faster as well as the revenue slump, Australian papers sales have held up pretty well in the past couple of years. It’s just the revenue from ad sales has dropped alarmingly. Unlike those US groups, Fairfax and News have big stakes in the online world, but that hasn’t protected them from the impact of the credit crunch and the recession, it has merely made them more exposed.

And, more so than many Australian media companies, Fairfax’s sharp, second-half slump in revenues, comes the closest to matching the terrible positions of the likes of The New York Times and other US newspaper groups, which have had revenues collapse by 25% and more in the six months to June.

In its report and release, the company talked a lot about the bad second half of the year, suggested much had changed at the company to condition it to the new way of life, but it was reluctant to look further than the current quarter where it sees a “bottoming” in the slump in revenue, but no signs of a “material” improvement in advertising.

The net loss was already on the cards after the asset impairment charges at the time of the interim report in February; it was only the quantum and the impact of an expected slide in revenue in the second half on operating profits that were the unknowns.

But did anyone seriously at Fairfax ever think they’d see a 25% collapse in second-half revenues?

The Sydney Morning Herald and The Age saw revenues fall $93 million or 25% in the second half to $300 million from $393 million a year earlier. The company’s regional and rural papers were better: revenue fell by about 13% to $307 million in the second half, from $355 million.

In terms of operating earnings, the SMH and The Age earned just $29.9 million in the second half (and $97.9 million in the full year) after earning $88 million in the second half of 2008 and $179 million for all of the 2007-08 year.

Costs were cut 4.3% over the full year (and revenue was down 10.6%), about 13% in the second half, but that wasn’t enough to match the black hole developing on the revenue side in the six months to June.

Given that revenue was up .5% for the first six months, and that the fall in ad revenues has “bottomed” in this quarter, but not yet improved, Fairfax is now looking at a second six months of huge losses in revenue simply because the December 2008 half year was so strong in comparison.

Overall, Fairfax had 2008 December-half revenues of of $1.446 billion and total revenues of $2.609 billion for the 2009 June year. That left second-half revenues of $1.163 billion. But in 2007-09, the company had revenues of $2.903 billion and second-half revenues (for the June 2008 period ) of $1.564 billion. The difference between the two second halves was $401 million, a terrible loss.

The company did describe the business environment as “unprecedented in its long history” with total revenue down 10.6% to $2.60 billion; total costs of $2 billion, down 4.3%; EBITDA of $605 million, down 27.2%. and net profit after tax of $226.7 million, down 40%. This was all before the impairment charges of more than $660 million before tax, which left the net loss after impairments, significant items and tax of $380 million, compared to a profit of $386.9 million in 2008.

It had total staff costs for the year of $939.35 million ($951.9 million in 2008) and redundancy costs of $79.7 million (11.4 million).

Peter Fray

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