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ITV - higher investment eats into profits, ITVX launch goes well

ITV reported full year underlying revenue up 8% to £3.7bn.

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ITV reported full year underlying revenue up 8% to £3.7bn. Growth was entirely driven by the Studios business which posted a record fourth quarter. Media & Entertainment (M&E) revenue fell 1%, driven by 1% decline in total advertising revenue (TAR), as expected.

In the first two months, ITVX attracted 1.5m new registrations and saw total streaming hours grow 69% compared to ITV's old streaming platforms the prior year.

Underlying cash profit (EBITA) fell 12% to £717m, reflecting planned investment in M&E which was partly offset by cost savings. Free cash flow fell from £407m to £280m and net debt rose from £414m to £623m.

Management warned that the near term was "very challenging" and expect TAR to drop around 11% over the first quarter of 2023. In the medium term, the group is "well on track" to deliver 2026 targets, which includes delivering Studios revenue growth of at least 5% a year.

The board has proposed a final dividend of 3.3p, taking the total for the year up to 5.0p (2021: 3.3p).

The shares fell 2.4% in early trading.

View the latest ITV share price and how to deal

Our view

ITV continues to put in robust performance 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, with rumours swirling about a partial sale of Studios. 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 was equal to 0.8 times underlying cash profit at the last count, which gives the group flexibility. Cash flow's healthy too, which enables investment in streaming and payment of the 5.6% 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 in recent months, 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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 2nd March 2023