First half underlying revenue rose 8% to £1.7bn, reflecting better than expected growth across ITV Studios and Media & Entertainment.
Increased revenue was offset by increased investment in the new streaming project, ITVX. Underlying pre-tax profit was flat at £301m.
ITV is "mindful of macroeconomic and geopolitical uncertainty" and expects Total Advertising Revenue (TAR) to fall 9% in July and 18% in August compared to the previous year. This is broadly in-line with expectations and partly reflects tough comparisons with last year when the group broadcast the Euros.
The shares rose 2.4% following the announcement.
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Our view
ITV plans 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. 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 user growth. 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 the scale of the international streaming giants.
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 a 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.
But running a production company doesn't come cheap. Studios makes up only about 26% of annual 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's own content spending rise. We don't think this will be the last time ITV has misjudged its content budget.
Secondly, competition 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. That's reflected in a price to earnings ratio of about 6.0.
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.
Half Year Results
Media & Entertainment which includes the group's streaming and traditional broadcast business, saw revenue rise 4%. That included a 5% increase in ad revenue to £910m, while non-ad revenue dipped 4%. Advertising revenue was driven by digital advertising, with revenues here up 20%. ITV Hub streaming was up 8%. Underlying operating profit fell 16% to £194m as content spending rose £58m and data and technology investment increased by £20m.
Within ITV Studios revenue was up 16% to £927m, with high-end scripted hours up 82%, with revenue from streaming platforms now making up 19% of total divisional revenue. Cost savings meant underlying operating profit rose 31% to £124m, as the group looks to offset higher Covid-related health and safety costs by trimming its property portfolio and digitising its processes. ITV Studios is on track to exceed 2019 revenues over the full year.
Free cash flow after payments for interest, cash tax and pension funding was a deficit of £11m, compared to an inflow of £71m last year. The difference mostly reflected increased pension funding, including a one-off payment of £80m on the extension of the SDN pension funding partnership.
Group net debt was £615m as at the end of June, up from £467m a year earlier. ITV said it's well within the agreed terms set by its lenders.
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.
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