- Share this article on Facebook
- Share this article on Twitter
- Share this article on Email
- Show additional share options
- Share this article on Print
- Share this article on Comment
- Share this article on Whatsapp
- Share this article on Linkedin
- Share this article on Reddit
- Share this article on Pinit
- Share this article on Tumblr
The full fallout from the surprise result of the late June referendum in favor of Britain’s exit from the European Union is only expected to become clearer over the coming years.
But the just-ended quarterly earnings season for media and entertainment companies yielded some commentary from CEOs and other sector executives about the effects of the so-called Brexit.
The referendum on June 23 came just a week before the end of the second quarter, but the value of the British pound immediately fell to a 30-plus-year low in what was seen as possibly having some longer-term impact on revenue generated in the U.K. that then gets translated into, now fewer, dollars. No surprise then that industry executives highlighted currency hedges on their earnings calls.
They also faced questions on the economic, consumer spending and advertising outlook in the U.K., with several companies highlighting some cautious behavior by marketers amid the Brexit vote.
But overall, there wasn’t any immediate major hit to results or financial forecasts this earnings season. “I don’t think it has been too bad,” Drexel Hamilton analyst Tony Wible said about his takeaway on the Brexit impact this earnings season.
Here is a closer look at key comments and forecasts on the impact of the Brexit from U.S. and British media and entertainment companies this earnings season.
As one of the big media and entertainment companies with the highest percentage of revenue coming from its international business, Discovery spent more time than others addressing the Brexit impact, with CFO Andrew Warren on the call saying this has been a “big question we’ve been getting.”
For context, he said that Discovery’s U.K. business represents about 5 percent of total company revenue and a slightly higher percentage of total company advertising revenue. “We’re working through all of the potential implications of Brexit on our business, but from a foreign-exchange perspective, we expect minimal near-term impact on our cash flows,” said Warren. “For 2016, our adjusted operating income before depreciation and amortization is fully hedged against the weaker pound sterling and 80 percent hedged against movements in the euro. For 2017, we have currently hedged about half of our euro denominated cash flow exposures as we have rolling 12- to 18-month foreign-exchange hedges already in place.”
But he also signaled that marketers have remained cautious with their spending in Britain. “From a business perspective, we have not yet seen the recovery in the U.K. ad market that we had expected had the Brexit vote gone the other way, but it’s still early days,” said Warren. “We’re continuing to monitor policy developments, but do fully expect the U.K. to remain a key market for us.”
Asked about the impact on third-quarter results, the CFO said: “We need to caution that the third quarter will be challenged. The Olympics, as they always do, suck advertising dollars out of the market, and Brexit will negatively impact our U.K. derived ad sales. Northern Europe was impacted by the U.K.’s lower ratings and softer demand due to uncertainty ahead of the Brexit vote. Given softer ratings and the fact that this uncertainty has not lifted post the decision to exit the EU and visibility remains limited, we expect an ad sales deceleration in the third quarter, which will also be impacted by the Olympics.”
Still, the company forecasts second-half international advertising growth to be in the mid- to high-single digit percentage range.
Since its acquisition of U.K. broadcaster Channel 5, the company has done major business in Britain.
Chairman and CEO Philippe Dauman told analysts that investments at Channel 5 are continuing to bear fruits.
“While we haven’t seen a significant impact from Brexit, we do anticipate that something might have some slowdown” in the future, Viacom senior vp investor relations James Bombassei said though. “And as that manifests itself, it could bring us a little bit of a slowdown, but we still think the growth is going to be very, very, very strong driven by ratings gains that we’ve had across our networks.”
Disney chairman and CEO Bob Iger on the company’s earnings call discussed international visitor trends to Disney’s U.S. theme parks. “Interestingly enough, Great Britain has been fairly strong, which given what’s gone on there, particularly the headlines and the Brexit issue, you’d expect otherwise,” he said. “And also, of course, the pound versus the dollar — but business is quite strong there.”
CFO Christine McCarthy added commentary about the Brexit in terms of whether it has had any foreign exchange impact: “It did not, because we were 100 percent hedged for the year. So changes during this year did not impact our foreign currency exposure. And when Brexit occurred, we were already 85 percent hedged for fiscal 2017. So the impact from those currency shifts post-Brexit were very muted for us.”
Scripps Networks Interactive
Scripps discussed the Brexit fallout during the Q&A portion of its call after an analyst question on Europe post-Brexit and how its UKTV joint venture in Britain and continental European operations are affected.
“UKTV just delivered the strongest results, I think, in history. So we’re not really seeing an impact post-Brexit,” said Scripps chairman, president and CEO Kenneth Lowe.
Jim Samples, president, international, added about the rest of Europe: “We’re not seeing much impact of it here. In the U.K., there’s some talk about potentially softening in advertising revenues, but we’ve not seen evidence of that happening yet. And we’ve also just had particularly strong ratings, so to the extent there’s any small reduction on the revenue side from demand, I think we’ll make up for that in the ratings.”
He also referenced the company’s 2015 acquisition of Polish TV giant TVN in discussing the European fallout. “The biggest revenue opportunity for us continues to be growth in the Polish market, which continues to be very strong and has not shown any drawback after Brexit,” he said.
The John Malone company behind QVC and other businesses said the Brexit could cost it up to 0.3 percent of its international profit in the second half of 2016.
“Our product margins in the U.K. will be pressured due to the rapid devaluation of the pound following the Brexit vote,” QVC CEO Mike George told analysts. “We will try to offset as much of this as possible through pricing and vendor negotiations. But the impact could be up to 30 basis points to the international segment in the second half.”
He added: “We also recognized that consumer sentiment in the U.K. has declined considerably and recession risks are increasing. However, our sales immediately after the vote held up nicely.”
Rupert Murdoch’s The Sun, part of News Corp, was among the British newspapers that spoke out in favor of the Brexit. News Corp CFO Bedi Singh said its Times of London in the latest quarter “saw high single-digits paid volume growth likely benefiting from Brexit coverage.”
CEO Robert Thomson also addressed the fallout: “Generally, we haven’t seen a particular impact of Brexit. There’s been a little bit of economic uncertainty. There’s been various stimulus measures promised by the Bank of England. We are seeing how the government responds. To be honest, the most important thing will be more generally the economic policy of the U.K. government. … Certainly, it’s our hope that the U.K. government will take advantage of the opportunity to introduce policies that are pro-growth. And if that’s the case, then we would expect all of our businesses to thrive and for us to be in a position to take advantage of that circumstance.”
John Malone’s international cable giant owns U.K. cable giant Virgin Media, leading CEO Mike Fries to address the Brexit referendum on the earnings call.
“We have been asked many times what it means to us,” he said. “And while we didn’t support Brexit on a corporate level or do, we respect the voters’ decision. And while we favor stability and regulatory certainty, we’re not actually that worried at all about the future here. We’ve seen no slowdown in our sales levels in U.K.”
Continued Fries: “Consumers are the ones that matter. Actually we’re up year-over-year. Across all of our markets, consumers are looking for fast, reliable, and seamless connectivity, and a wide range of high-quality content — U.K. is no different.”
Plus, he highlighted, “there is very little risk of currency fluctuations in the U.K. Of course, our borrowings are all hedged, and substantially all of our operating expenditures and capital expenditures [are] in sterling.”
Pan-European pay TV giant Sky, in which 21st Century Fox owns a 39 percent stake, had a similar take on the impact of the Brexit referendum.
“We really haven’t seen any effects yet, and I think if there are — the extent to which there are, it’s still too early to say,” said CEO Jeremy Darroch. “But I would say through all of our markets that the opportunity is really around market growth and growing penetration in each of the markets, in which we compete. And so it’s not particularly leveraged to the overall economic environment in any of our markets. And indeed if that was to turn down, say in the U.K. as we obviously saw in 2009 [during the recession], we did well then.”
He added: “We often see consumers return to the home and other elements of discretionary spend of course is a home-based service, the leading home-based service in all of our markets. I think relatively that puts us in a good position. So we’re obviously keeping very close tabs on it and staying flexible, and so far, [there has been] really no effect for our business.”
British TV giant ITV provided more Brexit commentary than most this earnings season. It had earlier this year said that advertisers had been more cautious ahead of the Brexit referendum. And on its late-July earnings call, CEO Adam Crozier said unchanged ad revenue for the first half of 2016 was driven by this uncertainty ahead of the referendum. Post-September, the impact of the Brexit vote is unclear, he said, explaining that the vote result itself didn’t seem to have provided another hit to ad trends.
“I don’t have a crystal ball to know how it will impact on behavior,” the ITV boss said. “But the underlying economy is reasonably strong. The view of agencies and advertisers is positive. And obviously what we look at is advertising across the year. And I know we say it every time, but we do try and encourage people not to look at any given month because advertisers tend to sit down, usually towards mid to end of the previous year, decide what they’re going to spend on marketing the following year and then lay that down in a way that works for them. Sometimes they move that money around a bit from month to month. But what matters is what they spend across the year and that we take an increasing share of that. And we’re confident that we can do that.”
But ITV also unveiled £25 million ($32.8 million) in cost cuts next year “against a backdrop of wider economic uncertainty following the EU referendum” in what the company called a plan “to allow us to meet the opportunities and challenges ahead.”
Crozier didn’t detail specifics of the planned cost cuts, but said, “They’ll come right across the board,” but will not affect programming costs. Asked if job cuts will be involved, he said that the measures “may involve some people as well.”
Asked about the impact of the drop in the British pound due to the Brexit vote, Crozier said ITV expects a roughly £74.0 million ($97.0 million) boost to revenue in 2016 due to currency exchange rates that mean higher pound results flowing in from the company’s U.S. businesses.
Sign up for THR news straight to your inbox every day