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ITV - studios dents Q1 but advertising likely to hit Q2

Emilie Stevens, Equity Analyst | 6 May 2020 | A A A
ITV - studios dents Q1 but advertising likely to hit Q2

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First quarter external revenues of £694m were 7% lower than last year. That reflects a 10% decline in Studios revenue to £346m at constant currency, where production has largely been on pause since Mid-March.

Broadcast remained steady rising 2% to £500m, with ITV total advertising up 2% as expected. However, since then ITV said it's seen a significant decline in advertising demand - 42% lower in April.

ITV said they were unable to give guidance for the next quarter and rest of the year, given the level of uncertainty.

The shares fell 1.7% in early trading.

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Our view

ITV continues to battle against a multitude of headwinds. Unfortunately coronavirus is now one of them, and advertising revenue and the Studios business are coming under strain.

The pandemic has come at what is already a difficult time for the advertising market. Wider economic and political uncertainty has put advertising budgets under pressure, and marketing chiefs are increasingly turning to the likes of Facebook and Google to get in front of potential customers. The majority of revenue and profit still comes from selling advertising space, so it's disconcerting to see trends weaken.

Of course we can't say what the overall fall out from coronavirus will be, but with a longer-term spell of economic uncertainty possible, it might make for ugly reading when we eventually find out.

The Studios business is feeling the pain too, with production grinding to a halt. That's a blow because this division - where ITV makes and sells programmes such as The Voice and Hell's Kitchen across the globe - now makes up just over a third of the business. It's an important pillar in the group's plan to become "more than TV", and to move it away from relying on those dwindling advertising revenues.

To its credit, ITV should be able to offset some of the lost income with its back catalogue of existing content. This can be sold to streaming partners or other channels, and is a useful extra revenue stream, although it's not a cure-all.

We also shouldn't forget the group's own streaming efforts. As the way we watch TV has changed ITV is taking on the competition by investing in the ITV Hub and launching Britbox, a joint venture with the BBC, and home to a catalogue of British content. Early signs are good but they're still small fry and we worry whether enough people can be convinced to sign up to another monthly subscription, and the likes of Netflix and Amazon have significantly deeper pockets.

The group's balance sheet is in decent health, and adjusted net debt was 1.5 times the level of cash profits at the end of 2019. But with earnings taking a hit this is something we're keeping a close eye on. Not just because interest payments can quickly become onerous but also that ITV's ability to borrow depends on it. £630m of ITV's £829m of credit is contingent on net debt staying below 3.5 times the level of cash profits.

ITV are living with a lot of uncertainties at the moment and unsurprisingly the group's not able to provide guidance just now. Until lockdown ends and its true cost to businesses becomes clearer, the outlook for the group and the all-important ad revenues remains hard to predict. There's a lot riding on the current disruption ending sooner rather than later.

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Q1 trading update

ITV's advertising revenue rose 2% to £426m while non advertising revenues fell 9% to £416m. The performance of ad revenues varied over the quarter dipping in 1% January, up 8% in February and flat in March. In April total advertising was down 42% impacted by COVID-19, driving total ad revenue down 9% for the first 4 months of 2020.

Total viewing hours were up 2% at 4.43bn hours, including strong growth in online viewing which was up 75%. However, ITV's share of viewing hours dropped 2% to 23.6%. The ITV Hub now has 32m registered users, 13% more than it did at the end of 2019.

Throughout the crisis ITV news and daytime teams have continued to offer around 10 hours of live TV every day. ITV is planning a phased approach to return to the office and return to production.

ITV's identified an additional £30m in cost savings for this year, on top of the £30m already announced through capital expenditure cuts. ITV have furloughed around 15% of its UK workforce, predominately from its Studios business. Internationally ITV are taking part in similar schemes where they can. Recruitment and salary freezes are in place, as well as actions to reduce executive remuneration.

In addition to not paying the 2019 final dividend, ITV's been allowed to delay at least £150m of pension payments in the second half of this year and next year. ITV now has a pension surplus of £285m compared to a £87m deficit at the end of last year, driven by changes in valuation.

ITV has access to £100m of cash and total undrawn credit of £829m. Restrictions associated with £630m of that, require ITV's net debt to stay below 3.5 times the level of cash profits, and interest payments to stay below a third of cash profits. The remaining £199m has no lending restrictions. On 31 March net debt was £851m up from £804m at the end of 2019.

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