ITV – Onus on content delivering the goods as NAR growth slows and audience share erodes

New management with a new veneer to the content strategy and a cyclical recovery in UK TV advertising have all encouraged markets to give ITV the benefit of the doubt that this time it can manage the transition from distribution monopolist to a more balanced content origination and distribution business, albeit in a considerably more fragmented and competitive environment.  As advertising comes off its QE and World Cup highs and content acquisitions bed down markets will need to review whether there is scope for structurally raising an already competitive operating margin of around 30% or whether the growth in demand for its originated content will be great enough to offset the prospective erosion in free to air audiences (NB 9 mth SOCI -6% YoY)and share of future advertising to support the current approx. GDP average growth rate implied by the operating free cash flow yield.  Acquisitions of content originators, such as Pawn Stars producer “Leftfield”, usually sound beguiling initially, but these are invariably bought at their peak and only justify the prices if they can continue to originate new hit series. Anyone remember “MTM”, “Reeves and Allen”, “All American” or “Grundy”? Nuff said!

Trading 9 month IMS:  Revenues reported up +8% including +6% for NAR (implies Q3 at +4% vs +4/5% target and +7% for H1) and +24% for online and +10% for Studios (all acquisition led). Notwithstanding the World Cup in the summer, viewing share remains disappointing with overall share (SOV) for all ITV channels down -5% from 23.0% to 21.8% and Share of Commercial Impacts (SOCI) -6% from 38.4% to 36.1%. Total ITV adult impacts declined by -9%, although long form video requests increased by 24%. Costs: Co reporting it is on track to deliver the planned FY14 savings of £15m.

Trading H1 FY14:  Revenues +7%/+£81m to £1,225m including NAR +7%/+£54m to £795m, online +20%/+£11m to £65m and Studios +6%/+14m to £240m (-10%/-£23m organic however).  EBITA advanced by +11%/+£31m to £322m, including +10%/+£22m to £250m for Broadcast & Online (o/w gross margin for broadcast increased by +14%/+£14m) and +14%/+£6m to £78m for Studios.  Including reductions in funding charges, adjusted PBT increased by +16% to £312m with EPS +15% to 6.1p and DPS +27% to 0.3p.

OUTLOOK:  FY14 NAR growth is forecast at +5% with Studios up by approx. £100m after absorbing around £30m of fx drag. For FY15 the group is predicting improved revenues based on a positive economic outlook, an additional 2 new channels and a return to organic growth for Studios and a focus on improving SOV from investments in new scripted content.  Well, that’s the plan! It does however suggest additional investment in origination (and deficit financing) which may provide a margin penalty. In itself that ought not to worry markets, but only if balanced by viewing improvements, otherwise we are back to where we were a few years ago, albeit with a less stressed balance sheet if one turns a blind eye to the increased pension deficit (from -£362m in June to  -£456m in September following reductions in discount rates).

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