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ITV - digital strategy accelerates

Full year underlying revenue rose 24% to £3.5bn, reflecting double digit increases across both advertising and ITV Studios.

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Full year underlying revenue rose 24% to £3.5bn, reflecting double digit increases across both advertising and ITV Studios. Underlying operating profit rose from £554m to £793m.

The group's launching the next stage of its digital strategy. It plans to double digital revenues to £750m by 2026, helped by the recent launch of ITVX. ITVX is based on a subscription model, offering premium ad-free versions. ITV will premiere much of its new content on this site, it will also offer third party content. Total group content spending for the new year is expected to be higher than planned.

ITV announced a final dividend of 3.3p, in line with previous guidance. Looking forward, ITV intends to pay a full year ordinary dividend of at least 5p.

The shares fell 15.1% following the announcement.

View the latest ITV share price and how to deal

Our view

ITV is accelerating its digital strategy. The plan is to double digital revenue to £750m by 2026. Part of that rests on the upcoming launch of ITVX - a subscription based streaming service that will offer ad and ad-free versions.

The shift makes a lot of sense. ITV has long depended on broadcast advertising revenue, and as viewers are swapping to on-demand options, so too are marketing budgets.

ITV has tens of thousands of hours of popular content to beef up an on-demand streaming catalogue, thanks to hits like Love Island, Coronation Street and I'm a Celebrity. There's also a host of other popular shows across its family of channels including ITV2 and ITVBe.

We can't knock monthly active user (MAU) growth of 19% - rapidly approaching the 10m mark. That's thanks to strength across BritBox (the joint streaming venture with the BBC) and ITVHub, although the group has some mountain to climb when you consider Netflix is currently sitting on 222m subscribers.

ITV also has a Studios business, which makes and distributes shows in the UK and abroad. Some of these are sold back to ITV's Media & Entertainment business, but other blockbusters like Line of Duty are made for others. ITV retains the rights to huge slate of produced global content. Studios makes up just over half of total revenue, and we think there're real growth opportunities. Our new binge-watching cultures mean established streaming giants and other channels are desperate for high quality content. Being a go-to provider of this has its benefits.

But we do have some concerns. Running a production company doesn't come cheap. Studios makes up only about 26% of group profit, despite the significant amount of revenue it generates. Margins are unlikely to ever shoot the lights out. The likes of Netflix can attest to the cash-pit that content generation can be. To that end it was disappointing, but not surprising to see ITV up its own content spending expectations. We don't think this will be the last time ITV has misjudged its content budget.

Secondly, competition in the streaming space is fierce. The likes of Netflix and Amazon have substantially deeper pockets to throw at growing market share. We simply wonder if today's consumers will be convinced to shell out for yet another monthly subscription from ITV.

But speaking of pockets, ITV isn't exactly in bad shape there. Underlying net debt is equal to 0.3 times cash profit, which gives the group flexibility. Next year's free cash flow comfortably covers the suggested dividend of 5p per share. Remember no dividend is ever guaranteed.

Ultimately, ITV has come a long way. But the longer-term picture becomes muddied by concerns over digital competition and margin compression in Studios. Having the right idea is an entirely different question to being able to deliver the shift fast enough to offset the structural decline in broadcast advertising. The price to earnings ratio of 7.3 is much lower than the long-term average, reflecting these concerns. Of course, this could re-rate substantially if ITV can come good on its plans.

ITV key facts

All ratios are sourced from Refinitiv. 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.

Full year results

Advertising revenue in the core Media & Entertainment division rose a record 24% to £2.0bn, feeding into a 21% increase in overall revenue to £2.3bn. Video on demand (VOD) ad revenue rose 41%. Digital revenue, which includes revenue from Available on Demand (AVOD), digital sponsorship and subscription services, was up 40% to £347m.

Streaming viewing hours were up 22%, with monthly active users (MAUs) up 19% to 9.6m. ITV's Family Share of viewing, which includes traditional TV, was broadly flat, and was boosted by the likes of the Euros and Love Island.

Content costs rose 18% to £1.2bn, reflecting the lower spending when productions were delayed during the pandemic. Underlying profits rose to £598m from £421m.

For the new financial year, total content costs will be about £1.23bn, higher than guidance for £1.16bn. Total advertising revenue (TAR) is expected to be up around 16% in the first quarter.

ITV Studios revenue rose 28% to £1.8bn, on an organic basis and ignoring the effect of exchange rates, this was up 31%. Underlying profit rose 41% to £215m. Strength in the US and other markets means 57% of revenue was generated outside the UK. Performance was boosted by a higher number of internal sales, where Studios produces and sells shows like This Morning, Coronation Street and I'm a Celebrity back to the Media & Entertainment business.

Operating margins are currently 12%, as social distancing and health and safety guidelines are still making sets more expensive to run.

ITV Studios has around 500 programmes currently in production in the UK and internationally.

Free cash flow fell 32.7% to £407m, largely reflecting the timing of tax payments. Net debt fell to £414m from £545m.

Looking ahead, ITV said: "We are on track to deliver previously announced £100 million of annualised permanent overhead cost savings by 2022 (from 2019). We are targeting an additional £50 million of permanent cost savings in 2026 and beyond, which will be delivered from 2023 but will be back-end weighted".

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 3rd March 2022