U.K.'s ITV First-Half Earnings Rise as Production Arm Grows, Ad Revenue Drops

International TV: What's Driving the Buying Spree

"The market in Israel is becoming a real creative hotbed, particularly for exports," said ITV CEO Adam Crozier, "and we see the Nordics as an important driver of our future performance."

UPDATED: CEO Adam Crozier highlights that the company is now a top 5 indie producer in the U.S. and lauds its continued acquisitions of TV producers, but shrugs off suggestions that ITV could look at a big deal in Scandinavia.

LONDON – U.K. broadcaster ITV on Tuesday reported improved results for the first half of the year as its ITV Studios production arm, which has continued an acquisition spree, once again provided a big boost.

The TV company also said its TV advertising revenue was down as of mid-year as expected. But it projected that for the nine months to the end of September, ad revenue would be "broadly flat" following a good third quarter that should see 9 percent growth.

STORY: ITV Touts Progress, Success of ITV Studios

The company, whose flagship ITV network airs such shows as Downton Abbey, recorded a 16 percent increase in adjusted profit before taxes to $414 million (£270 million) for the six months that ended on June 30. Earnings before interest, taxes and amortization rose 11 percent to $446 million (£291 million), driven by a 26 percent improvement at ITV Studios to $97 million (63 million) and 7 percent growth in broadcast and online. External revenue rose 1 percent to $1.75 billion (£1.14 billion).

Advertising revenue for the ITV family declined 3 percent for the first half of 2013. Advertising was up 6 percent in the first quarter, but down in the double digit percentages in the second quarter amid tough year-ago comparisons when the Euro 2012 soccer tournament boosted results.

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ITV Studios, which has been acquiring U.S. and European production companies, such as Britain's Shaun of the Dead producer Big Talk on Friday, once again was a key growth driver, as its revenue jumped 11 percent to $606 million (£395 million). Under management's five-year transformation plan, it has been looking to boost its production revenue to reduce its reliance on TV ads. Total non-advertising revenue increased 11 percent to $871 million (£568 million), driven by ITV Studios, online, pay and interactive businesses.

“We’re making good progress with our strategy of growing and rebalancing the business as we build new revenue streams and improve margins," said ITV CEO Adam Crozier. "We’re showing real momentum in our strategy of creating a robust international content business and in building substantial strength and scale in the U.S. market."

ITV Studios' recent acquisitions have included such U.S. companies as Cake Boss producer High Noon Entertainment, Duck Dynasty maker Gurney Productions and Hatfields & McCoys producer Thinkfactory Media. They have helped boost profit margins at ITV Studios from 14 percent to 16 percent, Crozier said. Over the first half, the company saw 12 percent growth at its U.K. studios operations and 16 percent internationally.

"We're creating real momentum and scale in the U.S.," Crozier said during a conference call, highlighting that ITV is now one of the top five independent studios in the U.S. The company's deals made so far in 2013 will add around $153 million (£100 million) of revenue for the full year, including around $107 million (£70 million) in the U.S.

Discussing ITV's acquisitions of TV producers, Crozier said "they have been good value deals," explaining: "We don't put all the money down up front. We're aligning ourselves and the management team behind performance over several years." He also said that ITV can be "very selective" amid good organic growth of around 5 percent, including 4 percent in the U.S., and has clear criteria for deals. They include a focus on studios in markets that produce strong content that travels well.

Crozier said Tuesday that ITV Studios is currently not looking at any more acquisitions in the Nordics, a signal that it will not bid for Finland's Nice Entertainment Group, for which it was considered a possible suitor. The company previously acquired Norway’s Mediacircus and Finland's Tarinatalo to push its production presence into Scandinavia.

Could ITV do a very large transformative deal to boost its production business even more significantly? "We're the number one commercial producer in the U.K. and now a top five independent producer in the U.S.," Crozier said. "What is much more important to me is the quality of the companies rather than the scale." He later reiterated: "Scale is less important. It's all about the quality."

Asked if ITV sees itself more as a broadcaster or content producer, Crozier said: "We see ourselves as an integrated producer-broadcaster."

Returning to the U.S. TV production market, he said ITV today has 64 shows, up from 12 in 2010. Its TV show hours have risen to 899 from 119 over that period, he said. "We are also beginning to use the U.S. as a base into Latin America," he said.

Asked about how ITV Studios is positioned compared to such production giants as RTL Group's FremantleMedia, Crozier said that company is focused on its Got Talent, X Factor and Idol formats. It has "much lower margins," because Fremantle doesn't own its own intellectual property, he argued, highlighting that ITV also has high-margin dramas.

As of mid-year, ITV was running behind the broader U.K. ad market, but it is now catching up as July has seen 12 percent year-over-year growth so far, and August is seeing 20 percent growth, with September flat. For the full year, Crozier said he still expects ITV to come in ahead of the broader market.

UBS analyst Tamsin Garrity lauded the financials as "good results." She also predicted that the results could lead to analyst "upgrades to consensus from advertising and studios."

Asked if ITV will again bid for rights to the Champions League soccer tournament of Europe's best clubs, Crozier said ITV hopes to keep broadcast rights, with pay TV firms likely to go after the broader pay TV rights. "We expect BT and BSkyB will bid for the Champions League -- as will we," he said.

Asked about the impact of the planned merger of advertising agency giants Omnicom and Publicis on ITV, the CEO predicted it would be "probably relatively neutral." Said Crozier: "The media buying side is relatively consolidated anyway."

E-mail: Georg.Szalai@THR.com
Twitter: @georgszalai