ITV plc (ITV) Earnings Call Transcript

Good morning, everyone, and welcome to ITV's 2026 Interim Results. As always, I'm joined today by Chris Kennedy, our CFO and COO. Having spoken to you very recently following our announcement of the transaction with Sky, we will keep today's update relatively short, starting with a summary of the key messages from the first half, and then Chris will take you through our financial and operating performance in more detail. I'll then provide a strategic update on both businesses. ITV delivered a solid performance in H1, and we remain firmly on track to deliver our full year guidance of good growth in ITV Studios and strong profitable Digital revenue growth across M&E. As announced earlier this month, we have agreed the sale of our M&E business to Sky. And as we've said, this is a transformative moment for ITV. The transaction will create significant value for shareholders, enabling a GBP 950 million net cash return, excluding any contingent consideration. Crucially, it will also unlock the value of ITV Studios, which, as you know, is an attractive and growing global content business that will deliver long-term value to shareholders through its clear value creation strategy. The Board has declared an interim dividend of 1.7p per share, in line with last year. In addition, we are today announcing a GBP 100 million share buyback, which represents an early return of part of the previously announced GBP 950 million net cash return expected on completion of the sale of M&E. Turning to the first half performance. Both divisions delivered revenue growth. ITV Studios saw strong growth in the U.K. production sector and through global distribution revenues from our IP Library. And in M&E, the ratings and commercial success of the Men's Football World Cup drove a good performance, and there was continued strong growth in Digital revenue driven by ITVX. Group EBITDA was flat, reflecting the expected second half weighted Studios margin and profit. I'm now going to hand over to Chris to go through the numbers in a bit more detail.

Thank you, Carolyn, and good morning, everyone. Total Studios revenue grew 2% to GBP 912 million, 3% on an organic basis, which continues to outpace the global content market. EBITDA was down 9% to GBP 97 million with a margin of 11%. As previously guided, both sales and margin are weighted to the second half of the year and to Q4 in particular. We have a strong pipeline of big budget scripted dramas and unscripted formats scheduled for delivery in H2 and good visibility on revenue. Moving on to Media & Entertainment. We delivered GBP 850 million in total advertising revenue, up 3% year-on-year. Our Digital strategy continues to prove its value with Digital revenues growing 13% to GBP 307 million. ITVX viewing grew by 27% in the first half with June being our first month with over 20 million monthly active users. Both Digital and linear revenues were supported by the FIFA Men's World Cup, which delivered exceptional mass audiences. Cost discipline across both content and non-content remained strong. We've reduced overall content costs by 2% even with the World Cup. Noncontent costs are higher as a result of increased marketing for our new brand campaign and to support the launch of new content. Excluding marketing, non-content costs were up 3% with GBP 4 million of permanent savings delivered so far this year. EBITDA was up 37% to GBP 48 million. The balance sheet is strong. We ended the period with net debt of GBP 652 million and a leverage ratio of 1x. Our cash generation remains good with a profit to cash conversion of 63% as expected on a rolling 12-month basis. This is lower than our average, owing to a buildup of working capital, reflecting the H2 weighting of Studios revenues and the commissioning cycle and M&E. Over the full year, we expect this to partially reverse. You'll all be familiar with our capital allocation framework. In line with our commitment to provide cash returns to shareholders, we've declared an interim dividend and the start of a GBP 100 million buyback program. As we look ahead to the remainder of 2026, we are keeping our guidance unchanged. For Studios, we expect good total revenue growth for the full year with margins landing at the lower end of our 13% to 15% target range. Within M&E, we expect continued strong profitable Digital revenue growth. However, we are mindful of the macroeconomic climate and its potential impact on linear advertising budgets. Q3 TAR is expected to be down around 5%, which would mean TAR for the first 9 months being flat year-on-year. Whilst as usual, it's too early to give a view on Q4, it's worth noting that last year's tough performance reflected a notably challenging U.K. economic backdrop. We are managing what we can control and remain on track to deliver our target of GBP 20 million of cost savings over the full year, bringing our cumulative savings since 2019 to GBP 273 million. Our planning assumptions, which are set out in the appendix, have not changed other than exceptional costs. These now reflect a credit for a legal settlement in H1 in relation to a historic dispute over the use of one of ITV's formats in Spain and also the proportion of transaction and separation costs related to the sale of M&E that we will incur this year. Thank you, and I'll hand back to Carolyn.

Thanks, Chris. As we look ahead, we remain focused on the performance of both businesses to continue to drive profitable growth, strong cash generation and attractive shareholder returns while supporting the regulatory process and implementing separation of the business following our announced transaction with Sky. You'll be very familiar with our 3 strategic pillars, and they are part of our -- more than TV strategy. First, Expanding Studios; second, Supercharging Streaming; and thirdly, Optimizing Broadcast. And I'll just take each one in turn. Starting with expanding Studios. On the day we announced the transaction, Julia and David spoke with great passion about ITV Studios and its strategy. And I just want to recap why it has such a compelling value proposition and good track record for delivery. ITV Studios' leading position in the global content market is to reiterate, built upon 3 competitive advantages. It's world-class talent who are consistently producing some of the most successful shows and formats right around the world. Its global scale and diversification, which creates strong and a really strong and resilient platform for growth and its unique and valuable IP Library, which coupled with the Digital distribution capabilities of Zoo 55 maximizes the monetization of our IP globally. You will recognize this slide from our investor presentation just a couple of weeks ago. It shows ITV Studios' operating model as a creator, owner, producer and distributor of IP, which ensures that it captures the full value of the content life cycle. And this enables ITV Studios to consistently drive above-market growth and deliver industry-leading margins and strong cash generation. The core strength of the model is simple. A successful creative idea is rarely a one-off project. It drives multiyear, multi-market and multichannel revenue. Our confidence in ITV Studios performance is rooted in the quality of our pipeline of programs and our highly demanded IP Library for both new and established programs. For H2, this includes and look out for them, The Gentleman & The Woods for Netflix, Guilty Creatures for Apple TV+, a double season of Hell's Kitchen in the U.S. for Fox and the return of Line of Duty & Vigil for the BBC and of course, I'm a Celebrity for ITV. Diversifying revenues across markets, customers and genres ensures we capture opportunities wherever they emerge and provides a stable foundation of recurring revenues that delivers high-quality earnings. And that, combined with our premium content and disciplined cost management, delivers attractive EBITDA margins. This is further supported by a flexible, asset-light and low-risk production model. So looking ahead, ITV Studios priorities are very clear: continue to deliver profitable organic revenue growth ahead of the market, generate strong cash flow and allocate capital in a disciplined way in line with our clear value creation strategy. And the business remains fully committed to maintaining a robust investment-grade balance sheet while supporting attractive shareholder returns. We look forward to sharing much more detail on ITV Studios at the Capital Markets Day, which we expect to do in H1 2027. Turning now to Media & Entertainment, which includes the pillars of Supercharge Streaming and Optimise Broadcast. Sky has really valued this business highly because of the transformation of the business and the continued progress we are making. M&E is a commercial leader in the U.K. with its leading Digital platforms in ITVX and Planet V. It is trusted brand, which -- with a really compelling content offering, valued and loved by both viewers and advertisers, its deep relationships with advertisers and partners and a really strong record of tight cost management. This foundation ensures M&E remains well positioned to continue delivering profitable Digital growth and strong cash generation. ITVX has delivered really good growth in the first half, as Chris said. Of course, the Football World Cup drove amazing engagement on the platform alongside some standout performances from drama and entertainment, which I'll mention shortly. We continued to scale our targeted advertising offering through Planet V, our world-class addressable advertising platform using our extensive first-party data set and targeting options. Since launch, we've attracted over 1,700 new advertisers. Our strategic partnerships and commercial innovations are progressing well, expanding the demand for our targetable advertising and extending the reach of our content. For example, the strategic partnership with YouTube has increased our reach to younger viewers. And through our in-house sales team, we've now partnered with over 1,300 brands, up from 800 at the year-end. We've now launched Comcast Universal Ads in the U.K., which will accelerate the SME strategy through further simplifying access to premium TV advertising. Now to the third pillar, which is to optimize broadcast. ITV delivers, as you all know, mass cultural moments at scale. That's hugely valuable to advertisers in a really competitive and also fragmented market. This was really demonstrated most clearly by the World Cup. The quarter final match between England and Norway delivered the biggest commercial audience of the year so far with a peak audience of 18.4 million viewers. And we attracted around 200 advertisers to the tournament across multiple categories, 70 of which are new to football. But it hasn't all been about football. As I said, we've also seen excellent viewing across our portfolio for drama, entertainment and reality on linear and ITVX. Gone, the drama was the biggest new commercial drama of the year. The 1% Club remains the biggest quiz show on TV and the summer series of Love Island is the biggest commercial program of the year for 16 to 34s, excluding football. Just before I close, I wanted to give you an update on the regulatory process for the sale of M&E. The process is led by Sky, but we're working closely with them and with Ofcom, the CMA and DCMS to support their respective processes and provide all requested information. The process has already started and the CMA has launched its own review process. Based on the advice we have received, our own assessment and the strong procompetitive rationale for the transaction, we remain confident that it will be approved by the relevant decision-makers. Given that this is a media merger, we expect the Secretary of State to issue a public interest intervention notice in due course. The transaction may go to a Phase 2 CMA review. And if it does, then it's likely the transaction will complete in H2 '27. So to sum up, we've delivered a solid first half and are confident in our full year guidance with good visibility over our Studios pipeline for H2 and continued strong momentum in ITVX. The entire ITV senior leadership team remain fully focused on the performance of both businesses while ensuring a smooth regulatory process and implementation successfully of the separation of ITV. Throughout this period, we are completely also committed to motivating and supporting our colleagues who have worked so hard and are so proud of what we have achieved and continue to achieve. And of course, I want to say a massive thank you to them all for their continued support, dedication, focus and, of course, passion, which has set both divisions up for a highly successful future. Thank you. We're very happy now to take your questions.

[Operator Instructions] Our first question today comes from Adam Berlin with Goldman Sachs.

Three questions, if I could. First question on ITVX. You talked about viewership being up 27% and revenues up 13%. Can you just explain why the revenues don't grow in line with the viewership? Is there -- I mean one thing I read recently was that there may be too much kind of Digital video inventory with Netflix and Amazon, Disney all launching ads. So is any downward pressure on pricing? Do you have spare inventory? Can you just explain kind of how that works? That would be helpful. And second question is ITV Studios. Can you just -- you probably go into this more on the Capital Markets Day you just talked about for next year, but can you tell us a little bit about the kind of the growth algorithm for Studios? And how do you get that mid-single-digit growth? Is it volume? Is it mix? Is it price per hour? How does that work? And what do you think is going to drive the growth over the medium term? And then third question on the buyback. Can you just tell us about the timing, how long will it take you to complete that GBP 100 million buyback?

Right. Okay. Thanks, Adam. I'll probably take the first one on ITVX. We sell our addressable advertising at a fixed price, and then you can pay more for premium targeting. So on average, people do trade up from the base price. And if you go right back to the beginning with ITVX, the reason we launched it was because demand was exceeding supply of inventory and the ad load was getting too much. So the way we manage the business is we manage the ad load. If we've got great viewing and viewing is growing faster than demand, the ad load goes down and vice versa. So it varies over the year. You're absolutely right during the World Cup, we had huge audience uplift, and you've got a steady growth in the Digital revenue. I suspect you might see that move over the course of the year as viewing moves. But we manage it with the ad load is the short answer to your question.

And I think I'd just build on that by saying that we are fully in control of our yield. And we have always had not just fixed price, but also we've kept our yield very -- our CPM is high. And we have never really diminished that. We don't diminish the CPM. So you can buy lots and lots of cheap kind of [indiscernible] Inventory, but you can't buy ITVX in that way. And the only place you can buy ITVX inventory is through Planet V. And therefore, that allows us that control. And it's very important for us to keep that CPM high given what the transition will do eventually from TV, from linear, which to ITVX. It's very carefully managed kind of -- it's a very carefully managed balance. We're very acutely kind of focused on it.

Yes. And obviously, Adam, you know that the other benefit of Planet V is it's wholly owned, so there's no payaways in it.