ITV teams up with BBC for streaming service, ad sales wobble
ITV is close to concluding talks with the BBC over a strategic partnership to launch a video-on-demand service called Britbox, but said profits fell last year and TV advertising sales will fall in the first four months of 2019.
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ITV and the Beeb, which have been successfully running the Britbox in the US, have agreed a joint vision for the service and are now working on a formal agreement before concluding, expecting other broadcasters will join the service in due course.
For the past year, total external revenues rose 3% to £3.2bn, largely as analysts expected, as advertising sales rose 1% to £1.8bn and were surpasses by non-ad revenues climbing 5% to just under £2bn, including 6% growth in the ITV Studios production arm to £1.7bn. Growth of 36% from online advertising more than offsetting the decline in spot TV ads.
Adjusted operating profits fell 4% to £810m as broadcast & online adjusted profits dropped 7% to £555m due to increased programming spend.
Adjusted earnings per share declined 4% to 15.4p, beating the consensus analyst forecast of 15p, while statutory EPS were up 15% at 11.7p. Net debt was cut 15% to £927m and the total dividend was lifted 3% to 8.0p.
Chief executive Carolyn McCall felt the operational performance in 2018 was "strong despite the uncertain economic and political environment", pointing to a 3% growth in total viewing figures.
"We have started 2019 with strong onscreen and online viewing. However, the economic and political headwinds for the UK will have an effect on the advertising market and while ITV is increasingly diversified, we remain sensitive to this."
Total advertising is forecast to be down 3% to 4% for the first four months of 2019, with first-half revenues and profits also be impacted by tough comparatives against the revenues of last year's World Cup in Russia, plus investments being made and ITV Studios weighted to the second half.
On the Britbox subscription video-on-demand deal, she said: "We are in the concluding phase of talks with the BBC to establish a strategic partnership to bring BritBox, an exciting new SVOD service, to UK audiences. This will provide an unrivalled collection of British boxsets and original series in one place.
"We have agreed a joint vision for the service and are now working on a formal agreement. We anticipate that other partners will be added to BritBox and we will both speak to regulators and the wider industry about our proposals."
Up to £25m will be invested in Britbox in 2019, rising to around £40m in 2020 and declining thereafter.
MARKET REACTION & ANALYSIS
ITV shares fell almost 2% in early trade on Wednesday to 129.05p.
Broker Liberum said the results were a slight beat versus consensus forecasts.
"Our overall view is that, despite the extra SVOD investment (which most people would have assumed was coming, if not knowing the quantum), the slight beat, better than expected start to the year and also hopes that a no-deal Brexit will be averted, may give ITV a much-needed sentiment/ratings boost", analyst Ian Whittaker said.
With January ad sales up 1%, February seen down 4%, March down 17% and April up 6-10%, Whittaker said it was "probably better than what the market was thinking, with the April number taken as a plus (helped by Easter) and March not down as much as feared".
Neil Wilson, chief market analyst for Markets.com, noted that as diversified as ITV is with its growing content revenues, margins still declined from 27% to 25%. "Its dependence on highly cyclical ad revenues remain high and income from Studios is not as profitable nor as reliable. You always have to find the next Love Island (please don’t)."
He added: "ITV faces cyclical headwinds – management can point to a decline in ad spending amid the Brexit uncertainty, whilst softer growth in Europe is not helping either. These should pick up in time.
"But the company faces deeper, far more worrying structural problems as consumers shift away from terrestrial TV towards on-demand services like Netflix et al. The drive to produce more content is essential but can the likes of ITV compete when Netflix is throwing billions every year at producing films and shows?"
Barclays said the fact that Britbox is a joint effort is "positive, the investments less so".
Analysts highlighted the fact that ITV’s audience was up, suggesting free-to-air television was seeming to hold up better than the majority of the market believes.
"With most of the market believing that free-to-air is a dying business model, we would point out that ITV actual viewing across all devices is actually up 3% to 17.1bn hours. We do not have a lot of history for this metrics (ITV only started disclosing it last year) but the market bearish view is based mostly on declining consumption especially among young adults. This is not happening yet."
On the share valuation, Barclays pithily said that "when there are medium term questions, investors usually follow short-term trends and they are not positive for ITV".
Steve Liechti at Numis said the BritBox service "looks logical though we see execution risk given big platform competition and costs".
He said the results are all above forecast with EPS 5% better but the outlook suggests the tough first half implies underlying downgrades.