Seven’s Earnings Warning
On May 21, Australian’ largest diversified media business, Seven West Media (SWM), had issued a warning that earnings will fall by almost 11% this financial year.
The free-to-air television broadcaster blamed the revised financial year guidance on the “soft conditions and short market experienced across the advertising sector, and the economic uncertainty surrounding the Federal Election.” SWM was forced to increase its cost-cutting program for 2019 from $30 million to around $40 million.
The company expected underlying Group EBIT for this financial year is to be between $210 million to $220 million compared to $235.6 million in the prior year. The forecast was below the $230 million, which are some analysts were expecting. Consequently, the share price dropped by 1% to $0.50 around yesterday.
Seven West Media
Listed on the ASX, Seven West Media Limited has a leading market presence in broadcast television, newspaper publishing, radio, magazine publishing and online media. The company owns the Seven Network which is Australia’s largest commercial television network. The company is home to many of Australia’s leading media businesses including Seven, 7TWO and 7mate and some of the biggest content brands such as My Kitchen Rules and Australian Football League.
Last year, Seven acquired broadcasting rights for crickets at a $1.2 billion deal. Seven’s recent sale of its 50% stake in Yahoo7 marked “a huge milestone in the transformation of Seven”, according to the company. The launch of 7NEWS.com.au in April aligned with the company’s strategy; which was evident when the website had reached “larger daily online news audiences than when inside Yahoo7”. Likewise, several other websites owned by SWM were reaching record daily audience. In the long form content, SWM experienced a 51% annual increase in its audience, revenue growth was 49% across their product compared to last year.
Seven continued to increase its product offering and built its presence in the domestic and global markets. With a focus on exponential digital growth, SWM plans to penetrate the global market to prepare for the Tokyo 2020 Olympic.
Weak advertising sector
Seven already had a rocky start to 2019 with share price plummeting to as low as $0.48 in April. During its peak in 2018, the share price was trading as high as $1.06.
The downfall was largely attributed to the political instability and the outcome of the banking Royal Commission. After the Royal Commission, it became apparent that the revelation was a wake-up call to many of the banks and insurance. The result saw internal restructure in many financial institutions and as a result, numerous had cut back on the advertisement.
Several analysts believed the advertising market to be highly sensitive to changes in economic growth. SWM’s profit warning came after the Australian media company, Macquarie Media, also announced its shortfall in earnings forecasts. The expected EBITDA fell to $27-29 million against the previous forecast of $29-32 million. Furthermore, media giants Nine Entertainment Co. and Australian News Channel jointly cancelled their 24-hour business channel, Your Money, due to lack of advertisers.
The rise of streaming services such as Netflix, Stan and Amazon Prime is becoming a real threat to the existing media businesses. Relying mainly on advertising revenue, those companies will be under lots of earnings pressure as revenues are gradually been sucked dry by some of the prominent streaming services.
In the wake of the recent events, the weakened economy and market challenges meant that many television giants are under lots of financial challenges. These are becoming a worrying sign for the broader media industry.
Election aggravates falling earnings
The recent election was an indicative of the increasing uncertainty in the Australian economy. According to media analyst John Murray, he mentioned that large advertisers like banks and private health insurers were holding back in the media, given the policy shift proposed under the Labor. As a result, the falling advertising market hurt Seven’s revenue, as well as other companies in the same industry.
The media industry in the future
Digital technology will become a safe haven in the next generation. To become the dominant player in the media industry, the business needs to leverage the opportunities provided by modern tools and focus its strategies on digital growth. The proliferation of new technology will continue to drive costs down. It is important that digital technologies are utilised to the fullest extent to ensure the business does not fall behind in the market.
Amidst the rise of online streaming services, more audience will be attracted to the service. More and more audience will opt out of traditional streaming services on television as digital technologies advances in the future. Existing media businesses adopting traditional media channels will need to find ways to face pressuring challenges; focus on cheaper and wider-reaching alternative such as the transition towards the digital world.
By Jack Lee
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