The honeymoon ends for Nine’s Mike Sneesby

Nine Entertainment Co's share price fell by half a billion dollars yesterday when new CEO Mike Sneesby unveiled his investment plans for Stan to the market. Unmade proprietor and Mumbrella's editor-at-large Tim Burrowes argues that the issue may not be about the strategy itself, but rather how effectively Sneesby made the case. This article is based on analysis that first appeared in the Unmade newsletter. 

Nine’s new boss Mike Sneesby learned yesterday how fickle the share market can be. Despite presenting a decent set of numbers, investors turned against him.

The market did not seem to approve of Sneesby’s first end of financial year appearance. The share price fell by 9.73%, taking the company back below the $5 billion market capitalisation he inherited from predecessor Hugh Marks.


Nine’s ASX performance yesterday | Source: Google Finance

Presiding over a loss of half a billion dollars in market capitalisation, with a share price fall from three dollars  to $2.69, was not the ideal way for Sneesby to begin, even if it’s not real money disappearing from the company’s bank account. It also does not necessarily mean he has the wrong strategy, but it does suggest that he failed to sell it to the investors who often take an extremely short term view.

The main thing I was looking for from yesterday’s announcement was a clue from Sneesby on how he intends to move on the strategy for Nine left for him by Marks. With interests in TV (in all its formats), talk radio, news publishing and real estate, Nine is a complex company In a nutshell, the strategy that came across from Sneesby was mainly more of the same, with additional investment in Stan.

Stan of course is Sneesby’s baby. He took the $100 million committed by Nine and Fairfax in 2014 and turned it into a streaming service that contributes about a billion dollars to the company’s valuation. It was the achievement that got Sneesby the top job at Nine.

In those early days, he correctly concluded that the only way to find success for what was then known as StreamCo, was to go big. Potential investor Seven West Media was too timid, which was why Sneesby’s boss at the time David Gyngell ended up inviting Fairfax to become Nine’s partner in the project.

That time round he was vindicated, with Seven and Foxtel’s less well funded rival venture Presto failing miserably.

Now Sneesby wants to go again. He will be investing in both Stan Sport and in Stan Originals content. Stan Sport launched earlier this year with rugby and tennis, and now soccer with the UEFA Champions League. It was backed by an additional price tier for subscribers. It brought in new customers and persuaded some existing customers to pay more.

There were subtle signals from the analysts during yesterday’s investor call that they had their doubts. But they were indeed only subtle – I’d speed read the annual report which had arrived a few minutes before, and then watched the whole call, and didn’t foresee the share price drop that followed when the market opened a few minutes later.

There were a handful of polite questions about the cost of the investment in Stan and how it would be repaid in subscriber revenue. Sneesby made the point that thanks to the tennis on Stan Sport, average revenue per subscriber had grown by $11. But he didn’t paint a big picture.

That sort of investor call is all a bit too genteel for actual doubts to be expressed. That happens more brutally through the trading of shares on the ASX instead. The problem with that is that the doubts were so politely expressed by the five or six investor questioners that Sneesby did not read between the lines and put their minds at rest, if that was indeed what was bothering them. (It could also have been the sluggish commercial performance of the radio division, but that seems too small to matter).

Where Nine’s revenue and profit comes from | Source: Nine annual report FY21

This speaks to the problem that Sneesby faces. Stan is the fastest growing part of the company, up 29 per cent in revenue for the financial year, to $311.8 million. That overtook the company’s majority owned real estate masthead Domain, which grew revenues by 7% to $286.6 million.

By contrast, the company’s biggest segment – broadcasting – grew by 10% to $1.2 billion in revenues. That includes advertising revenues from Nine’s analog TV offering and its ad supported video streaming offering. Radio is also now folded into this segment.

Meanwhile the digital and publishing arm actually saw revenues fall, to $505 million.

But to look beyond the revenues to the actual profits from each segment creates a different picture. Like they say, turnover is vanity and profit is sanity.

Broadcasting delivered $333 million in EBITDA profit. As a return on sale, that’s an impressive margin of 27%.

And the digital and publishing arm was impressive too. Although revenues were down, profit was up 28% , thanks to falling costs. The $117.2 million EBITDA profit for the segment represents a healthy margin of 23%. Who said newspapers were dying?

Actually, the Nine mastheads, which include The Sydney Morning Herald, The Age and The Australian Financial Review have found their way into a decent place. The downward spiral of news used to be that for every dollar in print advertising, they’d bring in perhaps five cents of digital ad revenue. As News Corp has also been finding, the new virtuous circle is that each digital subscriber is more profitable than a print subscriber because you haven’t got the cost of printing and distributing the newspaper. And digital subscribers are on the up.

Given that the money from the ACCC’s News Media Bargaining Code shakedown of Google and Facebook will only start to appear in Nine’s coffers in this financial year, outgoing publishing boss Chris Janz has left Sneesby and new publishing managing director James Chessell with a lot of runway in that division.

Domain’s profit of $101 million, meanwhile, provides for a healthy margin of 35%.

Which leaves Stan. Its $39.5 million profit amounts to a much slimmer margin of 12.7%. That’s not bad for something still in growth mode, and at least it is profitable. But Sneesby appears to be planning for that profit number to go backwards in the current financial year. Or rather, if he sees that differently, he did not spell it out yesterday.

Yet I’m not sure what other options Sneesby has if Stan is to grow further. And Nine needs it to grow further, as Stan is the future growth story that the stock market has approved of in recent years. A big reason that the market likes Nine better than rival Seven West Media is that the latter does not have a subscription streaming play.

But less and less US studio content will be available to Stan as the other streaming players multiply. So there is no low risk status quo option available. Sneesby appears to be embarking upon another round of investment. And although the market did not seem to like it, that does not mean it is the wrong option.

The economics of Stan Originals stack up better than he explained yesterday, by the way. The $30 million or $40 million of cost of creating a short series stands up well against the cost of licensing somebody else’s content, and can be sold on or co-funded out of other markets.

And sports rights are expensive, but that’s the cost of playing in the space.

Going back to Seven, we hit another milestone with yesterday’s results release from Nine.

When CEO James Warburton arrived, Seven West Media was widely acknowledged to be in quite serious trouble with its debt levels. But by cutting costs and selling off assets, Warburton began to get it under control. Earlier this month, SWM revealed an end of financial year net debt number of $240 million.

Nine’s net debt revealed yesterday, meanwhile, was $249.9 million.

It will be psychologically pleasing for Seven but is likely only temporary. The delayed Olympics pushed the rights costs of the Games into the current financial year, which probably means a $50 million hit to the bottom line that’s yet to show up. I’d be surprised if we finish this financial year with Nine still the more indebted of the pair. That, of course, is if Seven even finishes the financial year still on the ASX. At some point soon, all this anticipated mergers and acquisition activity may actually start rolling. Even Sneesby used the M&A buzzword “optionality” yesterday.

The ASX is a sentiment-fuelled rollercoaster anyhow. That lost half billion in value could well return in the next few days if investors conclude they’ve overreacted and the share price goes back up. The company doesn’t pay shareholders a massive dividend, but it’s better than Seven, which didn’t pay one at all.

And for now, the real profit driver for Nine remains broadcast television. Retaining chief sales officer Michael Stephenson who, like Chris Janz, missed out on the top job, is important. Stephenson’s $1.5 million remuneration last year might have helped with that.

The performance of Nine’s schedule for the rest of this year will be more relevant to the company’s short term profits than Stan’s performance. The current loss of momentum of The Block against Seven’s The Voice must be a concern.

Like Gyngell once said on stage at Mumbrella360: “Momentum is harder to get than it is to go away. It’s harder to get up the hill than it is to go down the other side. The punters have no remorse and no loyalty.”

I’m not sure it’s fair to say Sneesby has been enjoying a honeymoon. His April start coincided with the cyber attack. But if he was, then the honeymoon is now, unquestionably, definitely, without doubt, over.

The first time round, Sneesby’s aggressive investment plans for Stan were vindicated. Now, with a sceptical share market watching, we’ll see if he can be vindicated twice.

By Mumbrella editor-at-large Tim Burrowes, based on analysis that first appeared in his newsletter Unmade


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