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ITV - tough comparisons ahead

Total first quarter revenue rose 17% to 1.0billion, with double digit growth across Media and Entertainment and ITV Studios.

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Total first quarter revenue rose 17% to £1.0bn, with double digit growth across Media and Entertainment and ITV Studios. Second quarter total advertising revenue is expected to fall 6%, as ITV laps last year's Euro Football championships. The group also warned it's mindful of macroeconomic and geopolitical uncertainty.

ITV's on track to launch its free, ad-funded streaming service, ITVX, in the final quarter. The group expects this to generate at least £750m of revenue by 2026.

The shares rose 1.5% 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 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% at the full year- 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 close to 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, as Netflix's recent subscription-losses proved. 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.

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. Free cash flow predictions comfortably cover 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 5.2 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.

First Quarter Trading Statement

Media & Entertainment revenue rose 13% to £545m, with good growth in total advertising revenue (TAR) - especially digital advertising. Non-ad revenue fell slightly, reflecting declines in SDN and interactive revenues. Total streaming hours on ITV Hub, ITV Hub+ and BritBox UK were up 8%.

Revenue inITV Studios rose 23% £458m, as business from global streaming platforms grew. Development deals or commissions include Inganno and One Piece for Netflix, Love Island USA for Peacock and a Benjamin Franklin drama for AppleTV+. The division is performing in-line with expectations for the year.

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 2022