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ITV - lockdowns hit advertising and studios revenue

Emilie Stevens, Equity Analyst | 6 August 2020 | A A A
ITV - lockdowns hit advertising and studios revenue

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ITV plc Ordinary 10p

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Group revenue fell 17% in the first half to £1.2bn, reflecting a 21% drop in advertising revenue to £671m, and a 17% drop in Studios revenue to £630m. Underlying operating profits of £156m were half of what they were last year.

After taking into account one off costs and write downs in the value of some assets, reported operating profit was £33m.

Most of the Studios' productions that were paused over lockdown have now resumed and ITV said advertising trends have improved in July and August - with total ad revenue down 23% in July.

ITV is not able to provide guidance for the rest of the year and will not pay an interim dividend.

The shares fell 3.9% in early trading.

View the latest ITV share price and how to deal

Our view

ITV was battling against a multitude of headwinds before the pandemic. But coronavirus has trumped the lot, temporarily wiping out the group's revenue earners - advertising and studio production. Together with a relatively fixed cost base, profits halved.

As lockdown restrictions ease there are early signs that things are improving. The Studios business is filming again and advertising spending has improved slightly, but remains resolutely below last year.

Advertising was already a tough market to be in, with marketers continuing to be tempted by digital ad slots on the likes of Facebook. And with the current disruption, advertising trends are likely to be subdued for some time. In economic downturns marketing budgets are one of the first things to get slashed.

With traditional TV ads feeling the current pain more, we'd like to see ITV capturing an increasing amount of online advertising revenue. We're pleased to see these areas continued to grow over the first half, but are still too small to turn the dial.

It's not been a good time for the Studios business either, with production grinding to a halt. But with production now back in motion and the demand for fresh content higher than ever, it's an important moment for the division and ITV to show it can be "more than TV" and diversify earnings away from advertising.

ITV has been able to offset some of the lost income with its back catalogue of existing content and that should continue with new releases in the second half of the year. The group's own streaming efforts, Britbox and ITV Hub, are also playing an increasing but still relatively insignificant role too. Although we're still not convinced if enough people can be convinced to sign up to another monthly subscription, and the likes of Netflix and Amazon have significantly deeper pockets.

With earnings still uncertain ITV's balance sheet provides an important source of resilience. The group has access to significant liquidity and for now net debt is under control. 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.

ITV continues to live with a lot of uncertainties and that's reflected in its current valuation. This is likely to remain the case so long as advertising revenues remain the biggest money maker, so it's important we see other revenue streams like Studios, become a bigger part of the story. This strategic shift will take some time. For now prosperity in the second half, and in the medium term, rests on an advertising recovery.

ITV key facts

  • 12m forward Price/Earnings ratio: 6.4
  • Ten year average 12m forward Price/Earnings ratio: 11.7
  • Prospective yield: ITV's dividend is currently suspended

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Broadcast and Online revenues were 17% lower at £824m, reflecting the decline in advertising revenues. Demand dropped "significantly" and ITV lowered prices by 50 - 60%. As expected total ad revenue was down 43% in Q2. However, spending is said to be recovering led by retail, FMCG, publishing, car and furnishings companies.

Broadcast revenues rose 8%, to £153m, thanks to an uplift in both viewing hours and viewers leading to higher direct to consumer revenues (e.g. live competitions) and more BritBox subscribers. The ITV Hub now has 32.2m registered users, 9% more than it did last year.

Total broadcast costs improved reflecting lower schedule costs due to the cancellation of programmes but the improvement was outweighed and underlying cash profits (EBITDA) for the Broadcast and Online division fell 41% to £126m.

The Studios saw 230 global productions disrupted or paused over lockdown. This fed into the drop in revenue, and underlying cash profits were down 47% to £62m. The steep decline is a result of the high fixed costs in the division, and ITV chose not to cut development spend. ITV said demand for content from streaming platforms is strong and demand for scripted productions is a high growth area they will continue to focus more on.

Despite lower profits free cash flow rose to £345m, benefitting from a deferred pension payment and a significant working capital inflow (as ITV was able to deliver programmes but not able to continue producing). However, this benefit is expected to unwind over the next 12 months.

Net debt was £783m, down from £893m at the start of the year and is equivalent to 1.3 times the level of cash profits. The group's total liquidity was£1.2bn as at the end of June, which includes £385m in cash and £630m in undrawn credit.

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