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ITV - falling advertising revenue weighs on performance

ITV reported a first-quarter net revenue decline of 7% to £776m.

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ITV reported a first-quarter net revenue decline of 7% to £776m. The drop was mainly due to lower advertising revenue, which fell 10% - though that was better than the broader market. Revenue from ITV Studios was flat at £457m, including a benefit from exchange rate moves.

ITVX continues to perform well, with digital revenue up 29% and total streaming hours up 49%.

Net debt at the period end was up from £623m to £668m.

The outlook for advertising revenue remains challenging, with a 12% drop expected in the second quarter. Within that, digital advertising revenue is expected to rise by over 20%. ITV Studios is forecast to deliver an underlying cash profit (EBITA) margin toward the lower end of the 13-15% medium-term target range, with mid-single-digit revenue growth.

The shares fell 4.1% in early trading.

View the latest ITV share price and how to deal

Our view

The market doesn't seem pleased with the idea that the second quarter's about to be tougher than the first. But we can't help but feel ITV's performance is robust in the face of a challenging economic backdrop and an ultra-competitive market. ITVX, the new streaming platform launched in the fourth quarter, has come out the blocks firing. A successful launch, and the momentum it gives, was vitally important for ITV's transition away from the declining audiences that traditional broadcast attracts.

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.

It's hard to knock initial progress from ITVX, but there's no getting away from the sheer scale of competition in this sector. The US giants have substantially deeper pockets to throw at growing market share too. We simply wonder if today's consumers will be convinced to sign up for yet another monthly subscription from ITV, regardless of price point.

Then we have the 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 a huge slate of produced global content. Studios was the sole reason revenue grew last year at the group level, and we think there are real growth opportunities here. Our new binge-watching cultures mean established streaming giants and other channels are desperate for high quality content.

But running a production company doesn't come cheap. Studios makes up only about 36% of annual group profit, despite the significant amount of revenue it generates. Profits are growing, but margins are unlikely to ever shoot the lights out. The likes of Netflix can attest to the cash-pit that content generation can be.

We also can't rule out a break-up of ITV. If this were to happen, we'd view it as a loss of some great assets.

ITV isn't exactly in bad financial shape. Underlying net debt isn't overly high, which adds a layer of flexibility. Cash flow's healthy too, which enables investment in streaming and payment of the 6.4% prospective dividend. Nothing's guaranteed.

Ultimately, ITV has come a long way. But the longer-term picture becomes muddied by concerns over digital competition and tough margin environment in Studios. Having the right idea is entirely different to being able to deliver the shift fast enough to offset the structural decline in broadcast advertising. ITV have enjoyed somewhat of a rally since last year, and the valuation looks about right to us.

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.

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: 11th May 2023