ITV First-Half Earnings, Ad Revenue Drop Amid Brexit Uncertainty

ITV CEO Carolyn McCall

The U.K. TV giant, led by CEO Carolyn McCall, will air two runs of 'Love Island' in 2020, while also planning additional cost savings.

U.K. TV giant ITV on Wednesday reported lower earnings and lower advertising revenue, due to Brexit uncertainty, for the first half of 2019, but said recent ratings momentum from the early June return of hit reality show Love Island left advertising slightly better than expected for the period.

Love Island provided "a strong finish to the half," the company said. "This was reflected in better-than-expected total advertising revenue." Based on its success, the company said it will add a second run of Love Island for the year 2020, while also unveiling additional cost savings amid Brexit uncertainty.

ITV's stock has fallen over the past year, but it rose on Wednesday following the better-than-expected ad performance. As of 9:15 a.m., ITV shares were up 6.3 percent. 

ITV, led by CEO Carolyn McCall, said adjusted earnings before interest, taxes and amortization (EBITA) fell 13 percent to £327 million ($407 million) for the first half of 2019, with earnings per share also down 13 percent. The ITV Studios production unit reported a 2 percent drop in EBITA for that period, while broadcast and online adjusted EBITA was down 18 percent. 

Total revenue fell 7 percent for the six-month period to £1.48 billion ($1.84 billion), with ITV Studios down 6 percent.

Advertising revenue for the first half dropped 5 percent, compared with previous guidance for a 6 percent decline, following a 7 percent decrease in the first quarter.  "The first half of the year will be impacted by the continuing economic and political uncertainty and its effect on the demand for advertising; the absence of the [soccer] World Cup," and other factors, ITV had said in early May.

“The economic and political environment remains uncertain, but we are very focused on delivering our strategy and creating a stronger, more diversified and structurally sound business to enable ITV to take advantage of evolving viewing and advertising opportunities," McCall said on Wednesday.

Wednesday's ITV earnings update came a year after the company unveiled a strategy refresh under the theme "More Than TV," including plans to grow its direct-to-consumer business. "We are making good progress in each area of our strategy as we become an increasingly digital entertainment company," McCall said on Wednesday. "BritBox is set to launch in the fourth quarter, as is our new programmatic addressable advertising platform, and we are accelerating our digital and data capabilities."

The CEO on Wednesday also unveiled additional cost savings. "We continue to deliver strongly on our cost savings where we are targeting, in addition to the original £35 million to £40 million ($44 million-$50 million), a further £5 million ($6 million) this year and £15 million ($19 million) between 2020 to 2022, totaling £55 million to £60 million ($68 million-$75 million) over 2019 to 2022," or 13 percent of the company's cost base, she said.

Touting Love Island, ITV said it will during 2020 air two seasons of the hit reality dating show on ITV2. "Love Island is the most-watched program of the year for adults aged 16-34, across any channel," it said. "The show has hit new heights in its fifth [season] this summer, breaking the 6 million viewers mark for the first time in terms of four-screen consolidated viewing."

But McCall on an earnings call on Wednesday emphasized though that ITV's performance "this is not just about Love Island" as "we have had some unbelievably successful programs" this year, including the top four dramas of the year in Britain. “It would be giving the wrong impression to make our financial performance about Love Island," she said.

She also shared that ITV made an incremental 8 million pounds ($10 million) on Love Island this year compared to last with partnership deals, “including launching a make-up brand.” Said McCall: "That’s the kind of thing we are now doing on Love Island, which we will be trying to emulate on other programs."

McCall on the call on answered a question about ITV's size and potential interest in deals, saying: "We have a lot of scale in the U.K." She also added that "we have a very strong global production business.” Asked about the firm's appetite for mergers or acquisitions, she added: "Scale for scale's sake will never create shareholder value. If you are talking about consolidation, it really has to be for the right reason.” 

Liberum Capital analyst Ian Whittaker recently upgraded his rating on ITV's stock from "hold" to "buy," saying: "We have not changed our forecasts or our target price, but with the shares now 25 percent below our target price and 40 percent below our ... valuation, we feel the correction has been too drastic especially as ITV’s secular position is better than the market thinks. Short-term, the first-half results should provide some relief, given Love Island and signs advertisers are shifting spending into ITV1."