MediaWorks earnings tumble on flat revenue

MediaWorks has revealed a sharp drop in underlying earnings amid challenging market conditions and says it may seek further support from private equity owner Oaktree to fund growth opportunities.

The media company released its latest financial statements to media today, showing earnings before interest, tax, depreciation and amortisation (ebitda) fell from $41.8 million in the 10.8 months to September 2014 to $33.5 million in the 15 months to December 31, 2015.

This represents a decline of 40% when adjusted to a 12-month equivalent period.

Group revenue was $347.9 million, down 1.5% when adjusted to a 12-month equivalent reporting period and down 3% for the calendar year.

“This is broadly in line with our competitors across that period,” acting chief executive David Chalmers says. “It’s been a challenging ad market – no question about that.”

Mr Chalmers was promoted from chief financial officer to the top job in May when former chief executive Mark Weldon resigned but the company is on the lookout for a permanent replacement.

MediaWorks changed the way it reports its financial statements from a September reporting date to a calendar year cycle last year.

Radio revenue rose from $120.3 milllion to $177.9 million while television dropped to a total of $157 million. Digital revenue reached $10.3 million, up from $8.8 million in 2014.

Seasonal adjustments
While the revenue drop appears comparatively small, media commentator Martin Gillman notes the most recent 15 month reporting period includes two of the highest advertising revenue generating periods – September to December – while the 2014 statements contain only one.

“The 15 months included two Novembers, which could make a huge difference. The figures are probably not as good as they look when adjusted for seasonal factors,” he says.

“Regardless, it’s a better result than I would’ve expected given there’s a three to six-month lag in television revenue relative to audience performance,” he says, referring to the audience hit TV3 faced when John Campbell departed last year.

Costs increase
MediaWorks content and production costs increased from $96.1 million in the previous 10.8 month period to $153.2 million in the most recent 15 month period, while total costs increased from $205.1 million to $314.4 million.

“This is different to what we have seen from our competitors who have been taking their costs down. Costs have gone up for two reasons. There’s the factor of not having that single central cost focus because each separate business was doing its own thing – we had a lot of duplication across areas,” Mr Chalmers says.

MediaWorks also expanded the reach of some of its radio stations and invested significantly into local television content in 2015, he says.

“We were pleased with the programmes - the ratings were solid – but the performance of that in a soft ad market didn’t generate the returns we wanted. That’s why our costs have gone up over that period.”

Mr Gillman says the network’s focus on local content is wise as it is the only thing that can differentiate it from international players.

“Local content is the only solution. If you look at the list of the highest rating shows, they’re nearly all local content. If they don’t invest in local content, we may as well just all tune into Netflix,” he says.

Goodwill flatlines
In what can only be described as a tumultuous year, MediaWorks reported identical goodwill figures for both reporting periods of $166.7 million.

“Fairfax and NZME have been writing down those sorts of intangibles for many years. The brand does have value but in reality in today’s market you’ve got to keep that to a minimum,” Mr Gillman says.

“They should really be writing that down further. If you take into account the goodwill factor that Mark Weldon brought to the company, that is probably a negative.”

Oaktree’s long-term view
MediaWorks invested $20 million into the business in 2015 and is looking to invest about $25 million in 2016. It has enough capital to get through the year, Mr Chalmers says.

“We do have enough cash but we’re continually planning. If we see opportunities out there in the market and we want to execute those opportunities, we will put the case back to [100% equity owners] Oaktree. I don’t want to give a definitive answer because it depends on the opportunities that arise,” he says.

Although Oaktree is the company's 100% owner, it's also the largest senior debt owner.

Senior bank borrowings fell from $90 million to $72 million but a working capital facility of $17 million means overall bank debt remains unchanged.

Asked about the prospects of a trade sale or initial public offering, Mr Chalmers says Oaktree is taking a long-term view.

“There has never been a prescribed view on whether it’s a float or a trade sale. Oaktree is making investments that will pay off in the medium to long term, it’s not managing MediaWorks in a short term way,” he says.

“How they eventually realise and exit over time we’ll see at the time. I certainly don’t think they are fixated on one path or another.”

The media company’s books were audited by PWC.

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