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ITV - profits slump on weak advertising and high spending on streaming

ITV’s full-year revenue has been dragged down by a weak advertising market, and profits have fallen at a faster clip.
ITV - digital strategy accelerates

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ITV reported a 2% fall in full-year revenue to £4.3bn, with positive performances in ITV Studios and digital revenues only enough to partially offset the 15% decline in TV advertising.

Underlying cash profit (EBITA) fell 32% to £489mn, reflecting the poor performance in traditional broadcasting and continued investment streaming.

Free cash flow rose 28.9% to £361mn reflecting reduced payments to the pension scheme. Year-end net debt was £553mn.

Medium-term guidance for ITV Studios remains intact, but delays from earlier strikes in America and a weak European advertising market are impacting current trading.

In Media & Entertainment advertising revenues should rise around 2% in the first quarter. However, non-advertising revenues are expected to be down over 2024.

The Board declared a final dividend of 3.3p, bringing the full-year total to 5.0p. A £235mn buyback has been launched funded by the proceeds of its disposal of BritBox International.

The shares were up 5.0% following the announcement.

Our view

ITV relies on companies paying to advertise on its traditional television channels. But given the structural decline of broadcast advertising, that makes moving ITV's top-line in the right direction a very difficult task.

One bright spot is digital advertising. ITVX, the streaming platform which debuted at the end of 2022, 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.

There's no getting away from the sheer scale of competition in this sector. The competition has substantially deeper pockets to throw at growing market share. It’s an expensive arena to play in and that’s been weighing on profits. Management claims investment here has peaked, but we’re mindful that a drop in spending could be at the expense of growth. With a roughly 50% increase in digital revenues targeted by 2026, that’s a risk.

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. Medium-term guidance of 5% average annual organic growth between 2021 and 2026 doesn’t look too demanding but if weak demand in Europe persists that picture could change.

Margins are also unlikely to ever shoot the lights out. The likes of Netflix can attest to the cash-pit that content generation can be. Meanwhile, a chunk of revenue is still tied to the less glamourous terrestrial TV side of things, and demand here is proving tricky.

Underlying net debt isn't overly high, which adds a layer of flexibility. Cash flows are reasonably healthy and support a generous dividend yield. A £235mn share buyback scheme is also underway as a means of distributing the net proceeds from the Britbox disposal in March 2023. Please remember no shareholder return is ever guaranteed, especially when the outlook remains rocky for the group.

ITV has come a long way. But concerns remain over digital competition and the economy. Having the right idea is entirely different to being able to move fast enough to offset the structural decline in broadcast advertising. That’s reflected in a valuation below the long-term average, and there could still be further challenges ahead.

ITV key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th March 2024