ITV profits fall but World Cup and strong studio slate give confidence

Adjusted operating profits were down 5% to £842m even as total external revenue rose 2% to £3.13bn, of which the ITV Studios production arm saw revenue up 13% to £1.58bn. Adjusted earnings per share fell 6% to 16.0p, which was above the 15.7p consensus.

Net advertising revenue was down 5% to £1.591bn "impacted by the uncertain economic environment" but is forecast to be positive in the first half of 2018, with the first quarter up 1% and growth in the second from the FIFA World Cup in Russia.

Confidence in the new year was reflected in a 10% hike to the final dividend to 5.28p, meaning the 7.8p total for the year was up 8%, with the previous year's special payout not repeated, partly amid McCall's strategic ponderings.

Within the total adjusted operating profits, ITV Studios was flat at £243m with strong underlying growth as the previous year was boosted by a strong contribution from the Chinese version of The Voice. Broadcast & Online profits were down 7% to £599m with a £81m decline in advertising partly offset by growth in high margin online and pay-TV plus cost savings.

Statutory profit before tax fell 10% to £500m and statutory EPS by 9% to 10.2p primarily due to the decline in earnings and higher amortisation and impairment of acquired assets.

McCall, who joined from Easyjet in January, insisted ITV's operational performance was strong in a challenging environment, with a 2% increase in share-of-viewing and 39% online and double-digit revenue growth in video on demand advertising and ITV Studios. "This gives us a solid foundation to build on for the next phase of ITV's development."

The strategic refresh "will enable us to define a clear strategy and priorities that will highlight the opportunities and address the challenges that we face in an increasingly competitive media landscape" and was said to be "well underway". She promised to report on the results of her strategy review at the interim results.

ITV has begun 2018 well, growing the viewing share and volume, at double-digits online, with a strong schedule as well as the World Cup, including Vanity Fair and Survival of the Fittest for ITV, Poldark, Bodyguard and Shetland for BBC, Living the Dream for Sky and internationally Love Island, The Voice, The Chase, Big Star's Little Star, Snowpiercer and Good Witch.

McCall said ITV Studios was seeing increasing demand for its formats and dramas, particularly in the UK and US, and has over 60% of this year's expected revenue already booked. Programming costs for 2018 will be slightly higher than expected at £1.06bn and 2019 at £1.1bn as ITV invests more in drama and due to the timing of sports rights.

REACTION & ANALYSIS

ITV shares were down almost 5% at 164.75p after two hours of trading on Wednesday, having earlier fallen below 160p, most likely due to the lack of special dividend and a rise the previous day on M&A hopes fuelled by the nascent bid battle for Sky.

Adjusted EPS beat the consensus and NAR looks down in line with market expectations, said analysts at Liberum, with Q1 advertising looking "better expected", especially as ITV usually gets impacted by weighting issues around summer sporting events.

On the higher than expected programming costs, Liberum said "this will not be the massive ramp up that some have feared" and speculated that the withholding of the special dividend will be used to acquire Scottish ITV1 licence holder STV.

"Overall, we think consensus advertising numbers may go up (we think consensus is flat to down, we have 3.6% growth) and adjusted EPS is 15.8p."

Analyst Mike van Dulken at Accendo Markets pointed to several potential reasons for the shares to be down, led by the programming costs being "much higher than consensus, meaning it could overpay for Sports/Drama to compete with pay TV/On-Demand rivals".

He felt the economic uncertainty affecting NAR was "difficult to see this evaporating any time soon" and the guidance looked "pedestrian" and "poor group margins" last year. "Having taken action to reduce overheads, uncertainty delivered a big dent to advertising strongly, and now the company has decided to spend more. A strategic refresh suggests urgent need for action to fight fierce competition but it also represents a risk of any decision failing to pay off or overspending."

"It’s difficult to see how what was a challenging 2017 environment can improve markedly in 2018, both form a sporting and political.If it all hinges on England’s football performance, don’t go looking at 2014’s performance. It topped the group in qualifying there too, but still finished last behind Costa Rica."