Underlying revenue rose 6% to £2.5bn in the first nine months of the year, which was entirely driven by Studios. Studios revenue's on track to beat 2019 levels in the current financial year.
Total advertising revenue in the Media & Entertainment division fell 2%, as expected. Digital advertising revenue rose 13%, but this still makes up a small proportion of the whole.
ITV's mindful of current economic uncertainty and warned inflation would impact costs in the next financial year. The group said it's on track for its medium-term targets, including delivering at least £750m of digital revenues in Media & Entertainment by 2026.
The shares fell 5.3% following the announcement.
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Our view
ITV plans to double digital revenue by 2026. Part of that rests on the grand plans for 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. But there's no getting away from the sheer scale of competition in this sector. Netflix's subscription-losses earlier this year 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.
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 around 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.
We also can't rule out a break-up of ITV, with rumours swirling about a partial sale of Studios. If this 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 0.3 times cash profit at the last count, 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 under 7.
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.
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