the up side is growing, page-2

Hi Montaya,

I would like to agree with you, as I have been a long time supporter of the Global Television business (even if not so much TMS itself - when VM was still around).

I took a printed out copy of the TMS Annual Report for 2003 (released today) with me to read during visiting hours at maternity.

What I have read so far is still of concern.

For example:
1)
Global TV revenue was marginally down compared to last year (ie: $51.5M vs $52.1M last year);
2)
Global EBITDA was down heavily on FY02 (ie: $8.9M vs $12.3M last year) - October 2002;
3)
the available finance facilities are between 85 -90% fully used;
4)
further sales of non-core assets have been flagged (but other than DubSat - 25% direct - and OmniLab - 50% direct, and which also holds 25% of DubSat, with AVV holding the remainder, I don't quite know what these are likely to be, or whether they can achieve much of a sale price); and
5)
the full year's loss, once tax adjusted was ~$35M meaning that it will be many years before TMS is again sufficiently profitable in order to pay dividends, let alone franked dividends.

A closer look at the numbers showed that the top line and the EBITDA line for Global heavily missed my estimates of October 2002 (ie: where I was expecting revenue in the higher $50s, and EBITDA up to $16 -18M).

Rather than being a year of opportunity for TMS, FY03 proved to be a highly distracting year of re-structuring, near term financial distress, and ongoing uncertainty as to its future.

TMS has now been stuck in this rut since March /April 2002. Its uncertainty as a going concern has again been questioned by the Auditors (but this does not mean that systemic failure of the business will occur). Rather, it means that TMS remains landlocked in its ability to build a growing future.

With SEV taking the knife to its production costs, it could well be that there is some opportunity for TMS in regards to SEV. But given the level of animosity between the 2 Kerry's and the one Nick, this remains doubtful for the time being. Indeed, if anything were going to occur on this front (short term), it should have been announced at the time of SEV's results being released on Wednesday.

In other words, if there is an opportunity of TMS working with SEV, then it remains more a medium term proposition for mid-CY04, or beyond.

That said, Global's revenue was heavily skewed towards TEN in FY03. During the year, TEN accounted for $16.9M of Global's revenue (ie: ~33% of the total), vs $13.3M in FY02 (or ~26% of the total).

Adjusting for the impact of FoxTel, Fox Footy and the Rugby, it would appear that NINE's contribution to the equation remained static, or down, for the year.

In FY02, NINE's contribution to Global's revenue was ~$12M.

Since the end of FY03, no significant events have occurred.

This, however, I find strange, as:
1)
I could find no mention (on quickly going through the Report) of the current status of the North Ryde re-zoning from a property development perspective - if rezoned, this could result in more $ to TMS; or
2)
the US exit co-payments from 2002, whereby TMS stood the opportunity of gaining profit shares in each of FY03 and in FY04 (and in FY05, for some cinemas).

Both of these items could have easily added $4 -10M to the final result. Therefore, an update on them would have been welcomed.

Conversely, the collapse in Global's EBITDA has not been fully explained. Rather than growing, EBITDA fell by >$3.4M, of which $2.4M was captured by the payment of rent and outgoings on North Ryde. But as for the remaining $1.0M, I have already found this difficult to reconcile against Global's revenue slippage of $600K, and its apparent increase in gross margin to $28.9M (ie: 56.1%), vs a gross margin of $28.0M in FY02 (or 54.1%).

In other words, whilst there has been some operational improvement at the top line, this has not flowed through into the bottom line. So, on an analysis basis, TMS's actual operating position has continued to deteriorate in circumstances where the Global business should be growing both gross margin, as well as EBITDA, EBIT and the like.

Last year, I argued that TMS should merge with ISIS. Instead, ISIS merged to create AVV which in a comparative sense has been going gang busters for much of this year. And that's despite Wentworth & Associates advising TMS and being a major shareholder in ISIS.

Now, for the figures on Global:

FY03:
Revenue = $51.5M
Gross Margin = $28.9M (56.1%)
Effective Costs = $20M (38.8% of revenue and 70% of gross margin)
EBITDA = $8.9M (17.3% RV, and 30% GM)

FY02:
Revenue = $52.1M
Gross Margin = $28.0M (54.1%)
Effective Costs = $15.7M (30% RV, and 56% GM)
EBITDA = $12.3M (23.6% RV, and 44% GM).

Gross Margin up 200 basis points whilst EBITDA fell 630 basis points. In other words, TMS (and Global Television) still have a cost control problem going forward.

That's all for now. Time to head back for evening visiting hours.