Welcome to a Wednesday afternoon edition of Unmade. Today we explore yesterday’s end of financial year update from Seven West Media.

Before we get into that, a reminder that you’re welcome to support us by subscribing to our paid membership tier. Amongst other stuff like discounted access to our future events, you get the full Tuesdata archive. If you’re curious about how the global holding companies that dominate the communications agency world compare, then yesterday’s Tuesdata offered you an up-to-date answer, taking in their most recent filings.

Why didn’t the market like Seven’s results?

We don’t usually start a post with the Unmade Index.

But it’s relevant to do that today, given the starring role played by Seven West Media.

The index, as regular readers will know by now, charts the performance of our ASX-listed media and marketing companies. We started it at the beginning of the year, on a nominal 1000 points.

On Tuesday, it blipped downwards to 729 points. The Unmade Index been bouncing around the 700 level for the last fortnight or so, which represents a 30% decline since the start of the year. Media is still out of fashion with investors who fear an advertising downturn.

Most of Tuesday’s fall in the index was driven by Seven West Media. After updating the market on its full year results, the share price dropped by nearly 6%, before recovering somewhat as the day went on, to finish 3.85% down.

That’s not disastrous and there have been plenty of other days where that stock has moved that much, up or down, in synchrony with the wider share market. But the fact that SWM was the biggest mover of the day suggests the movement was indeed a reaction to the update.

Incidentally, for the year to date, SWM’s share price is down by about 20%. That’s bad for the shareholders, but it actually outperforms the company’s broadcast competitors. Nine (down 27%); Southern Cross Austereo (down 40%) and HT&E (down 36%) are all faring worse.

Let’s get to the three key numbers.

Seven West Media reported revenue of $1.5bn and EBITDA profits of $342m. Its net debt is now $256m.

Something we’ve been short of since the arrival of Covid is “normal” years to compare things to. Given that this was the first near-normal financial year, covering July 2021 to the end of June this year, an obvious thing to do is to compare it to SWM’s numbers for FY19. That was the last one without the negative (lost revenue across the market and the lack of sport content) and positive (Job Keeper, and cost savings on sports rights) distortions caused by the pandemic.

But Seven itself has changed a lot since then. It sold Pacific Magazines to Bauer (which is now Are Media) in 2020, so doesn’t get to count that revenue, and it completed the purchase of the TV stations of its regional affiliate Prime half way through the financial year we’re looking at, which improves revenue and profits going forward, but at a cost of $130m.

Plus Seven (finally) got to air the 2020 Olympics from Tokyo in July last year. That falls within the financial year results we’re looking at. Olympics rights boost revenue but are also expensive.

So with all the comparing-apples-with-oranges caveats outlined above, let’s take a long view and examine how Seven West Media has fared over the last decade.

In the table above, the red line represents profits, and corresponds to the numbers axis on the right. The green bars represent revenues, charted by the numbers on the left.

It’s a graph that tells the story of the decline in profitability of the broadcast television industry during the disruptive decade just gone. (I know a good book about that.) From nearly $2bn in revenues and half a billion in profits in Seven West Media’s first year, it’s been steady decline since then.

CEO James Warburton replaced Tim Worner at the helm three years ago this week, a couple of days before the company announced its dismal FY19 numbers.

A lot happened in the months that followed. By February 2020 the company looked like it was in trouble. As I wrote on Mumbrella back then, the company’s debt pile was dangerously high.

The company owed $541.5m - double its $253m profits for the previous financial year. Banks get nervous when debt is more than one times the profit level. Double starts looking near-terminal.

And then, having used up all his bad luck at the helm of Ten back in 2012, Warburton had the good luck to find himself in the middle of a pandemic.

In the new environment, the ACCC waved through the company’s $40m sale of Pacific Magazines which it had looked likely to block. SWM claimed $47m in JobKeeper, plus a slice from from the $50m Public Interest News Gathering Fund. It was able to get major savings from reduced obligations to AFL and Cricket Australia during sporting disruptions. The Olympics (and the associated expenses) was pushed back into the next financial year. The government gave broadcasters an extra $40m in tax concessions. Executives took pay cuts. Freelancers were culled as productions were postponed.

Then came the ongoing (for now) windfall to media companies of the Morrison government’s News Media Bargaining Code, forcing Google and Facebook to hand over millions of dollars via so-called content deals.

Nonetheless, FY 2020 was a disaster for all media companies, as that fourth April to June quarter was pretty much cancelled.

Having been brought in to rescue Seven, Warburton instead found himself reporting the worst revenue and profits in the company’s history since it was created by the merger of Kerry Stokes’ newspaper and TV interests back in 2011.

And then - mostly thanks to the low base he was working off, the following year saw Warburton became the first CEO in SWM’s history to deliver either increased revenue, or increased profit. He achieved both. And Tuesday’s numbers show that he has now done it two years in a row.

Yes, it was boosted by the Prime acquisition, but nonetheless, the company reported the most revenue since 2018, and the biggest profits since 2016. (Without Prime the profit number would have been a still impressive $326m instead of $342m.)

So why wasn’t the market more impressed?

In part it’s because the numbers were already priced in. The market is always interested in what comes next.

In the case of Seven, there’s also a sense that there’s a lot up in the air.

First there’s the AFL, crucial for winter ratings and reliable sponsorship, particularly with the betting companies. We’re perhaps a couple of weeks away from knowing whether Seven has retained all or some of its free to air AFL rights. Even if it does, a crucial question will be whether it gets its hands on the increasingly important streaming rights currently held by Foxtel.

The share market will punish Seven if it loses the rights, yet also do the same if it overpays. That’s a tightrope.

Then there’s cricket. Warburton believes his predecessor Tim Worner overpaid when the deal last came up in 2018 after Nine unexpectedly snatched the tennis. Seven is currently in court trying to terminate the five year deal early, and will then go after the tennis when Nine’s deal expires in 2024.

It’s also an obvious hole for Seven that it still has no horse in the subscription streaming race since the failure of its joint venture with Foxtel, Presto back in 2016.

Much of Nine’s higher market capitalisation comes from Stan, while Ten’s US-based owner Paramount owns Paramount+.

All Warburton had to say about subscription streaming options was that there are “ongoing discussions with content partners”. That’s been the situation for a while now.

The most obvious partner would be NBC Universal, owner of the Peacock streaming service which is yet to launch here. But there are no guarantees there. Nine currently holds the NBCU content rights, and Foxtel is courting the company too, the Australian Financial Review reported this week.

And there are more uncertainties. The rights to the next Olympics are currently in play. Having lost $50m on Tokyo, Seven’s the incumbent; the 2024 Paris Olympics and 2028 Los Angeles Olympics are not a great time zones.

The excellent audience share delivered to Seven from the Birmingham Commonwealth Games earlier this month are unlikely to have been matched in revenue terms.

Any Australian media CEO doing an Olympics deal will need to think more long term about the 2032 Brisbane Games which will be a gift for their successor.

Speaking of revenue share, that may be another reason for the slight stock price fall. I’m not sure the investment analysts accepted Warburton’s predictions about the share of the TV advertising market the company can achieve going forward.

In recent memory, the major scorecard on which TV sales directors are marked is their share of revenue from the metro advertising market. Sales bosses who deliver a higher percentage revenue than their percentage of audience look like geniuses, while those who fall below look like chumps. Those whose audience skews towards 25-54 (which isn’t Seven) have it easiest.

In Tuesday’s update, Seven tried to change the narrative, focusing on its national revenue share of 39%. That’s not a particularly level playing field. Nine’s integration of the WIN sales teams is a few months behind Seven’s Prime takeover. Ten doesn’t (yet) own its regional affiliates which are mainly Southern Cross Austereo stations.

Those curious about the metro number for Seven will need to go all the way to page 58 of the company’s annual report, which was also published yesterday

In fact, Seven West Media’s metro revenue share was 38%. Seven does better in the regions.

We won’t find out Nine’s number until its end of year numbers are released next Thursday.

There were only two or three questions in Seven’s investor call. The financial analysts are scrupulously polite to the CEOs during these calls. So it was noticeable that one of the questions was politely challenging the company’s claim that it will deliver that 39% share going forwards. There was a note of scepticism.

Going forward, the ratings will be tougher going for Seven, which has faded somewhat since the Commonwealth Games ended. Nine’s The Block has launched strongly, while the rebooted MKR has done less well.

While we’re on the subject of the annual report, it’s always worth a glance at its remuneration pages.

Warburton saw a fall - from $7.6m in the previous financial year to $3.4m this time round. Mainly that was because he benefited in the year before from the company coming back off its all time low share price. The fixed part of his pay rose slightly from $1.27m to $1.33m

The next best paid member of staff is chief revenue officer Kurt Burnette, whose total package was worth $1.9m, including fixed pay of $1.2m.

And the other notable thing about Tuesday’s update was the announcement of a share buyback scheme. The company said it was willing to buy back up to 10% of its stock as it comes onto the market.

That’s a strategy usually used by a company with spare cash, and lacking a better idea for what to do with it. It can also help shore up the share price. I wonder whether the signal backfired slightly. It doesn’t seem the sort of announcement that would be made if a transformative deal were in the offing.

It’s also worth noting that a day on, by lunchtime on Wednesday, SWM’s share price has improved a little more. Shortly before sending this email, the company was up 1%.

Leave a comment

That’s where we leave it for today.

As ever, we welcome your comments - do let us know what you think.

Toodlepip…

Tim Burrowes

Unmade