Duncan Bridgeman: Can NZME keep up the momentum?


Momentum is a good word for media companies right now and New Zealand Media and Entertainment wasn’t shy about using it during its recent investor day presentation.

The question for investors is how solid that momentum is and is it all going in the right direction?

NZME, which counts the New Zealand Herald among its assets, has come out of the Covid-19 crisis much better than expected and is now looking to embed a three-year strategy to continue its digital transformation.

The company is shifting its strategic focus to three pillars – expanding the Herald, increasing radio dominance and accelerating real estate portal OneRoof’s growth trajectory.

“We are undergoing a digital transformation and we are expecting to return to growth from a revenue perspective while also increasing ebitda margins and therefore profitability,” chief executive Michael Boggs said following the presentation on Monday.

As part of its new strategy NZME intends to position the NZ Herald as New Zealand’s Herald through consolidating its position as the number one news brand in the country and expanding its national presence.

The company has already made a number of key appointments in Christchurch and Wellington and also has content-sharing agreements with RNZ and the Otago Daily Times.
There are some good reasons NZME says its business has momentum.

In August the Herald became the country’s most popular digital new provider, reaching 1.838m New Zealanders.

The successful launch of NZ Herald Premium has seen digital subscriptions increase beyond expectations and the company has seen strong growth in radio revenue and market share.

Earlier this month NZME upgraded its earnings guidance to $63m-$66m for the year to December 31 on the back of better-than-expected revenue recovery and closely managed cost reduction.

And NZME’s share price has climbed from a low of 18c in April to 76c for a market cap of $150m.

San Francisco-based Osmium Partners has built up a 13 per cent stake which founder and managing partner John Lewis says is a long-term holding.

“Management had been executing well in the company’s digital transition,” Lewis told the Herald, adding that OneRoof appeared to be getting a lot of traction.

NZME’s investor presentation outlined some aggressive growth targets for the Herald’s Premium digital subscription offering especially, with a goal of obtaining more than 210,000 subscribers by the end of 2023.

“Our aim is that over 15 per cent of New Zealand households will be New Zealand Herald subscribers in print or digital by 2025,” Boggs said.

Premium subscribers currently total more than 93,000, including 49,000 paid digital-only subscribers, marking a trend of continued growth since the April 2019 paywall launch.

Chief operating officer Matt Wilson told investors the company’s first priority with Premium was driving volume growth, while maintaining yield at around 50c a day per subscriber.

“Looking forward there are some opportunities to increase yield in the corporate space … and also in the print bundled space,” he said.

“Longer term there is an opportunity to introduce a yield management programme to our individual digital subscribers that will find an optimal pricewithout increasing our churn rates.”

While digital subscriptions generated just $2.4m revenue in the six months to June, the annualised run rate now works out at close to $10m per annum, up from about $7.5m calculated in August.

While print subscriber volumes have declined by 13 per cent since 2016, they had stabilised this year during Covid lockdowns while yield had increased by 11 per cent to partly offset the overall decline.

“The key difference at the moment on the print decline is coming from the retail customer base,” Boggs said. “That’s where the majority of the volume decline is and we are really using yield to be able to offset that from a revenue perspective.

“As the products transition to digital, they are actually higher margin. So, for example, as we have more digital subscribers and as we see more OneRoof digital revenues versus print revenues, that actually allows us to have some cost efficiencies at the same time as overall margin improvements.”

The presentation showed NZ Herald Digital average revenue per user is now $184m per year, while the figure for print is $511m.

In terms of advertising dollars, revenues for the fourth quarter are expected to be down 7 per cent year on year, a better forecast than previously signalled.

NZME’s online advertising is now worth more than print advertising, while print reader revenue overtook advertising revenue in 2018.

Print advertising is expected to partially recover but not expected to top reader revenue again.

The company trimmed $46m of costs out of the business in 2020 and has estimated permanent savings of $20m per annum.

Boggs told the Herald that Covid-19 had played a part in this but the programme was already in place before the pandemic hit.

“When you look back over the years, cost out has been a constant theme.

What Covid did was allow us to move quicker … the key now is growing revenue so we can re-allocate resources to the deliver the right outcomes.”

Chief financial officer David Mackrell indicated further cost reduction was probable.

“Looking forward we continue to look for opportunities to adjust the business and to ensure that we have got an efficient cost base. There is likely to be some restructuring costs but I wouldn’t expect it to be of the level of this year.”

Jarden analyst Arie Dekker, the only mainstream analyst to cover the company, said he was impressed with the level of detail NZME provided in its presentation.

In a subsequent research note Dekker highlighted several positive points about the business while retaining a “cautiously optimistic” view on the outlook over the next few years.

NZME’s scorecard for 2023 and 2025 “highlights an ongoing transition to digital with NZME doing a good job of supporting confidence in the transition with initiatives it has in place to optimise outcomes.

“But NZME is still stopping short of a calling a bottom for earnings and we retain that caution also recognising encouraging signs that stabilisation could be coming.

“We are still cautious about the impact ongoing structural challenges could have in the medium term but feel incrementally more comfortable in the immediate trajectory for overall reader revenues as well as display ad revenues.”

Dekker lifted his target price on the stock to 80c with a “neutral” rating.

He said while NZME is well placed to highlight the momentum building, there is still uncertainty on the horizon.

“NZME’s track record in sub and yield management in print and digital are impressive and we are attracted to its strategies to build on success there with potential to mitigate print circulation decline.”

However, the momentum in print ad and circulation revenue is still a source of uncertainty for investors, he added.

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