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ITV - tough advertising market expected to continue

ITV's third quarter revenue rose 1% to £3.0bn.

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ITV's third quarter revenue rose 1% to £3.0bn. Total advertising revenue (TAR) fell 7% as the advertising market's being affected by the "challenging" macro environment. Within that, digital advertising revenues rose double digit, but were offset by declining traditional advertising. There was a 7% decline in Media & Entertainment revenue to £1.5bn.

The Studios business saw revenue rise 9% to £1.5bn. ITV said that demand for content from free-to-air TV has been affected by the tough economic conditions. The US writers' and actors' strike is also seeing some revenue deferred to next year.

Difficult conditions mean ITV will push £10m of content spend into next year and it continues to review the cost base. TAR's expected to fall 8% for the full year.

The shares fell 6.3% following the announcement.

View the latest ITV share price and how to deal

Our view

ITV relies on companies paying to advertise on its traditional television channels. Companies are snapping marketing purses shut as they buckle down for the unknown over the coming months, and that makes moving ITV's top-line in the right direction a very difficult task. The structural decline in broadcast advertising isn't exactly a new bulletin, but the extent of the challenges are becoming more pronounced.

One bright spot is digital advertising, which is growing much faster. ITVX, the new streaming platform launched at the end of last year, 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. While momentum is positive, ITV's digital offerings don't yet have enough scale to carry the weight of weakness in the free-to-air side of things.

Getting to that point won't be straightforward either. 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.

The Studios business 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 is the only thing driving revenue upwards for the group. 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. Margins are unlikely to ever shoot the lights out. The likes of Netflix can attest to the cash-pit that content generation can be. At the same time, a chunk of revenue in this business is still tied to the less glamourous terrestrial TV side of things, and demand for content here is proving tricky.

Underlying net debt isn't overly high, which adds a layer of flexibility. Cash flow's reasonably healthy but is something we'll be keeping an eye on. The prospective yield is higher than average, which partly reflects the challenges levelled at ITV's valuation in recent times and please remember no dividend is ever guaranteed, especially when the outlook remains so rocky for the group.

Ultimately, ITV has come a long way. But the longer-term picture becomes muddied by concerns over digital competition and the economic environment. Having the right idea is entirely different to being able to deliver the shift fast enough to offset the structural decline in broadcast advertising. We think there could be further challenges ahead.

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: 8th November 2023