ITV plc (ITV) Ordinary 10p

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ITV’s revenue fell 8% in the first nine months of the year to £2.7bn, driven by a 20% decline at ITV Studios. Here the lingering impact of last year’s US writers’ and actors’ strike weighed on revenues in the third quarter.

A busy content slate in the fourth quarter is expected to limit the full-year revenue decline in Studios to a mid-single digit range. This uplift in content as well as cost cuts, means Studios is “on track” to deliver record underlying cash profit (EBITA) over the full year.

Media and Entertainment revenue was up 4%, with Total Advertising Revenue (TAR) growth of 6% being helped by strong progress in digital as streaming hours were up 14%. As expected however, things slowed over the third quarter, where TAR was flat.

ITV said the absence of the Rugby World Cup and weak bookings ahead of the UK budget held back fourth quarter activity. As such full-year TAR is expected to grow by just 2.5%.

The shares fell 7.9% early trading.

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, has continued its strong run of growth. This is vitally important for ITV's transition away from the declining audiences that traditional broadcast attracts. Advertising revenue here is growing at pace, and we’re pleased with the continued momentum. But its digital offerings don't yet have enough scale to carry the weight of weakness in the free-to-air side of things.

The roughly 50% increase in digital revenues targeted by 2026 looks achievable. The group’s access to a huge slate of produced global content, as well as homegrown favourites like Love Island, should help drive growth in the viewer base, which is key to meeting this target.

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 a ramp-up in production has weighed on cash flows in the first half.

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.

2023’s writers’ and actors’ strike has really weighed down this year’s performance. But with a busy content schedule lined up for the final quarter, revenue is expected to pick up slightly and help deliver a record year for Studio profits.

That said, 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.

Net debt was moving in the right direction last we heard, which adds a layer of flexibility and there’s a generous 7.1% dividend yield on offer. A £235mn share buyback scheme is also ongoing 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.

Environmental, social and governance (ESG) risk

The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.

According to Sustainalytics, ITV’s management of ESG risk is strong.

Its environmental policy is adequate and executive remuneration is explicitly linked to sustainability performance targets. However, its overall ESG reporting falls short of best practice.

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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