Interactive Investor

ITV is a tough watch after these Q1 results

11th May 2023 08:42

by Richard Hunter from interactive investor

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The ebb and flow of ITV's fortunes has certainly been a frustration for long-term shareholders, although a generous dividend is some consolation. Our head of markets explains what's happening in these latest results.

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ITV (LSE:ITV) remains a tough watch, with a decline in quarterly revenues partially offset by a promising launch of the ITVX streaming service.

The fall in overall revenues was much as expected, and driven largely by a 10% dip in Total Advertising Revenue (TAR). Given the current economic backdrop, advertising tends to be one of the first lines of expenditure which companies cut and, while the number was one which ITV had expected, it nonetheless has a large effect on overall profitability. The group is also forecasting a decline in TAR of 12% in the second quarter, although for the third quarter is rather more optimistic given the hopefully positive advertising effects resulting from the Rugby World Cup.

When initially announced in March of last year, the investment of £180 million into the free, ad-funded ITVX streaming service unsettled investors at a time of intense competition and pressure on general advertising revenues. However, the launch got off to a flying start and at the full-year results this March, ITV reported 1.5 million registrations and an increase of 69% to total streaming hours.

This momentum has continued into the new financial year, with streaming hours ahead by 49% and digital revenues spiking by 29%. The immense catalogue of content to which ITV has access is a clear draw to consumers, boosted most recently by the ongoing popularity of the likes of shows such as Love Island and with FA Cup fixtures also drawing in viewers.

Indeed, digital revenues are proving to be something of a bright spot, and are expected to grow by more than 20% in the second quarter, which should mitigate some of the general advertising revenue decline.

ITV has for some years had the strategic challenge of lessening its reliance on advertising revenues, and the Studios business has stepped in to pick up some of this slack, with overall revenues (if not profitability) now roughly an even split. The Studios business has had a stream of quality content which it has been able to distribute both within the UK and overseas, and is not limited to the ITV stable as it also makes programmes for other channels.

The Studios business is expected to deliver revenue growth for the year of around 5%, mainly weighted to the second half, and propelled by a strong pipeline of content and with committed revenues in place. As the quest for quality content intensifies, the track record of the Studios business could well provide an attractive opportunity for profit growth over the coming years.

At the same time, the group is also keeping a handle on costs, where the £15 million saving expected this year would contribute to the target of £50 million by 2026, and in addition to the £106 million already achieved between 2018 and 2022. Net debt is within the group’s comfort levels, with access to a strong line of liquidity also available if required. This has enabled the continuation of a progressive dividend policy, where the current yield of 6.5% is punchy enough to attract the attention of income-seeking investors.

The share price has faltered of late, having dropped by 14% over the last quarter, possibly as a result of as yet unsubstantiated rumours of a partial sale of the Studios business, which could totally alter the dynamic of the listed group.

Over the last year, however, the price has risen by 15% as compared to a decline of 1.9% for the wider FTSE250. The shares have had a chequered recent past, having been in and out of the FTSE100 as fortunes have wavered, and over the last five years the price remains down by 52%.

Despite the progress which is being made within ITVX and Studios, investors remain skittish on prospects, as evidenced by an initial share price reaction which reflects the broader and more obvious concerns around general advertising revenues. The market consensus of the shares as a 'cautious buy', however, perhaps offers some positive hope that the group can deliver its own strategic progress.

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