Nine Entertainment shares slumped 20% yesterday after it revealed a sharp fall in March quarter revenues and all but said the 2015-16 profit would be lower.
In a surprise announcement to the ASX, Nine blamed a “subdued” advertising market in March and finally owned up to its weak ratings effort. That saw the shares plunge 29% before steadying hesitantly and ending the day down 23.7% at $1.16.
Shares in rival Seven West Media, which has dominated the ratings so far this year, crushing Nine, saw its shares dip 2.2% to 97.7 cents early on, and then whacked later in the day to be down more than 10.5% at 89.5 cents.
That was something of a surprise given the way Seven has dominated TV ratings so far in 2016, but investors think Seven might be hit by Nine’s disease.
But much of the factors behind the profit are specific to Nine – the absence of the cricket World Cup and fewer playing days in the March quarter and the weak start to ratings which will cost its revenue and profits from advertising ‘make goods’ to advertisers over the slump in Australia’s Got Talent and Reno Rumble.
But you can’t rule out the overall weakness in the TV ad marketing infecting all players – and that includes Ten (which is due to report its first half results in the next 10 days), Southern Cross and Prime.
Shares in Ten fell 1.5% to 98 cents (which is equal to 9.8 cents before last year’s 10 for one share consolidation).
The news is an admission that Nine has stuffed up the 2016 ratings battle, which in turn has exposed it to the still slowing TV ad market.
It means this year in ratings is a write-off, as is the financial result which will fall for a second year in a row. It also means any mergers and acquisition activity will be off.
The focus is on cost cutting, as Nine told the ASX yesterday:
"The advertising market in the March quarter remained subdued. Nine’s ratings during the period were softer than anticipated, which has impacted FTA revenue share.
"In particular, Nine’s Summer of Cricket was adversely impacted both by the weather and the standard of the competition, with c30% of scheduled play days lost.
"For the quarter, Nine’s Television revenues were down c11%, against Q3 FY15. This was also impacted by the earlier timing of Easter this year and the absence of the Cricket World Cup event.
"The Free-To-Air advertising market is now expected to record a low single digit decline for FY16, versus our previous guidance of `flat to down marginally’. Reflecting the disappointing ratings start to 2016, Nine’s share is now expected to be c37% for the year.
"Given the revenue environment, the Company continues to focus on all cost lines, with reported TV costs expected to be at least 4% lower across the year, notwithstanding higher-than-expected legal expenses incurred during H2.
"The trends experienced in Digital in the first half, have continued in the second half. The Company’s full year results will be released on August 25 2016.”
But a TV business can’t cost-cut its way to ratings success – it has to continue to invest in new programming which has to rate – which is what Nine hasn’t been doing.
The comparison with the previous summer’s cricket is one explanation, but TV networks make most of their money from official ratings periods in prime time and that’s where Nine has lost considerable ground to Seven this year.
So no actual phrase “earnings downgrade” but a TV network cannot make up for a 11% slide in TV revenues in a quarter when the next quarter is tipped to be no better. Group profit after tax fell 2.9% in 2014-15 to $144.1 million. It will be lower again in 2015-16.
The news means Nine will be more unlikely to engage in takeover activity (despite its 9.9% stake in Southern Cross) and the 14.9% (and a bit more) held in Nine by Bruce Gordon and his WIN regional TV group.
It cannot escape the same pressures Nine referred to in its stake seeing it is Nine’s regional broadcast affiliate.
Nine’s problems are Gordon’s problems and he is facing a whacking loss on his stake which was bought well above $1.50 a share.
A credit watch rating warning from Moody’s S&P or Fitch can’t be too far away.
