REG - ITV PLC - ITV Final Year Results 2014 <Origin Href="QuoteRef">ITV.L</Origin> - Part 2

ITVAnnouncement

04/03/2015 07:00

- Part 2: For the preceding part double click  ID:nRSD4544Ga 

international successes delivered during the year included The Chase in
Norway, Keeping the Nation Alive in Norway and Denmark, and Big Star's Little Star in Finland. 
 
2015 and beyond 
 
We look ahead to 2015 with confidence as the production lead times give us good visibility of our upcoming deliveries. We
expect ITV Studios again to deliver around £100 million revenue growth on a constant currency basis reflecting a return to
good organic growth, helped by our investment in global scripted content and supported by a full year of our 2014
acquisitions. As ever, ITV's revenue growth will not be spread evenly throughout the year because of the phasing of the
delivery schedule required by our network and cable customers. 
 
New commissions to be delivered in 2015 will include dramas Jekyll and Hyde, Home Fires and the relaunch of Thunderbirds
Are Go in the UK, I'm a Celebrity... Get Me Out Of Here! in Australia and Saturday Night Takeaway in the US. While our
drama production has historically been focused on the UK market, we are growing our scripted presence in the US and have
three large scale dramas, Aquarius, Texas Rising and The Good Witch that will go straight to series in 2015. 
 
Longer term, leveraging our network relationships and global scale in production and distribution, our strategy is to have
an ongoing portfolio with six to ten international scripted series in production per annum. We will also look to accelerate
growth through further acquisitions while working to attract and retain key creative talent to ensure our creative pipeline
remains strong. 
 
Strategic Priority 3 
 
Build a global pay and distribution business 
 
As digital media and consumer viewing behaviour continue to evolve, our ability to create and distribute high value content
in new and efficient ways is of increasing significance. ITV is continually exploring, experimenting and developing our pay
services with broadcasters and platform owners while also seeking new opportunities to extend the reach of our content for
the consumer. 
 
Exploring new models for content creation 
 
As the way in which our viewers consume content changes, especially amongst the younger generation, we are growing our
exposure to new types of content including short form and younger-focused long form programming. In 2014 we agreed a deal
with YouTube to launch a number of short form channels including I'm A Celebrity... Get Me Out Of Here!, The Chase and our
soaps. 
 
We are also building a presence in international digital production. Our acquisition of US producer DiGa in the first half
of 2014 gave ITV exposure to digital formats. 
 
Following this, in 2014 we have made three further investments in the digital arena as we look to develop greater expertise
in monetising online audiences. In September 2014 we made small investments in Indigenous Media, a producer of scripted
digital content, and Believe Entertainment Group, a producer of digital-branded short form entertainment. Most recently, in
December 2014 ITV made an investment in Zealot, a digital content multi-platform network founded by Danny Zappin, former
CEO of YouTube multi-channel network Maker Studios. 
 
Generating new sources of pay revenue 
 
ITV earns revenue from pay television through licensing our channels and content. In 2014 Pay revenue grew by 63% as we
negotiated and renewed a number of deals. 
 
Most significantly, in January 2014 we announced a new four-year deal with Sky, which makes ITV content available through
Sky's range of connected platforms including Sky+HD, Sky Go, Now TV and Sky Store. This deal included our first ever pay
only channel, ITV Encore, which we launched in June. Additionally in 2014, we extended our deal with Virgin for another
year covering HD versions of ITV2, ITV3 and ITV4 as well as our new FTA channel ITVBe, and signed several other deals
including new deals with BT and TalkTalk. 
 
We are also looking to develop wider partnerships with on demand players as consumer demand for VOD continues to grow. For
example, in the year we made an investment in Cirkus, a UK-based subscription VOD service that offers the 'best of British'
television content to pay television platforms and their customers across the Nordic region. 
 
There remains scope to grow our UK pay revenue further through extensions of our existing propositions as we experiment
with new ways of monetising our content. Past initiatives have included: trialling pay opportunities on ITV Player for
episode premieres of programmes; our ad-free subscription ITV Player app on iOS which has been well received; and, most
recently we made the first series of the comedy Cockroaches available exclusively online one week ahead of its broadcast,
intended to enhance viewer awareness and engagement with the show's young audience. We will continue to trial new sources
of pay revenue as we further develop our pay strategy. 
 
A leading European distributor of television content 
 
ITV Studios, through Global Entertainment, has a substantial archive of over 40,000 hours of television and film that we
distribute to broadcasters around the world. This is predominantly ITV produced programming, with 2014 successes including
Hell's Kitchen US, Mr Selfridge and Lewis which have all been sold to over 150 countries. 
 
We are benefitting from the growth in our UK and international production businesses as well as deeper network
relationships as we build scale. In 2014 Global Entertainment increased revenue by 7% to £144 million (2013: £135
million). 
 
In addition to distributing ITV's own content, we are adding to our catalogue through the distribution of third party
content. In 2014 we acquired the third party distribution rights to a number of international dramas including Schitt's
Creek from Canada, Jordskott from Sweden and Poldark from Mammoth in the UK. 
 
Global Entertainment also continues to license ITV and third party formats successfully. The number of UK formats sold
internationally to three or more countries has increased from eight in 2013 to 12 in 2014 including I'm A Celebrity... Get
Me Out Of Here!, Saturday Night Takeaway, The Chase and Tricked. 
 
However, while Global Entertainment has a stable core of long-running series for international distribution, it takes time
for the creative pipeline of production to reach its full value potential. The business's available inventory naturally
expands as we produce and acquire new content and in 2015 we expect to see good growth in our distribution revenue from our
strong creative pipeline, our investment in scripted content, and further third party distribution agreements. 
 
2015 and beyond 
 
Overall, looking ahead we expect continued good growth in pay revenue as we develop further new ways to package and sell
our content to take advantage of demand in the UK and internationally. We will benefit from a full year of ITV Encore and
we will continue to explore new pay services and channels while growing our exposure to new types of content, including
digital. 
 
Global Entertainment remains well positioned for growth as we expand our inventory in 2015. In addition to our existing
programme and format archives, we will have new content available for distribution including our three new US dramas as
well as the benefit of Thunderbirds Are Go which has already sold to countries including the UK, Australia, New Zealand and
Israel. 
 
Lastly, to ensure we maximise the value of our investment in high quality content, we will continue to drive the debate
around the implementation of retransmission fees in the UK. In 2015 we will continue efforts to change the terms of UK and
EU policy debate around the issue and support our argument with strong evidence, such as the Nera report we commissioned on
the USA's retransmission consent scheme. We will build on existing support in both the House of Commons and the House of
Lords in the next Parliament and continue our conversations with the regulator, Ofcom, to make the case that we should be
fairly compensated by the major pay TV platforms in return for access to the content on the ITV main channel. 
 
Performance and Financials 
 
Financial and Performance Review 
 
Ian Griffiths 
 
Group Finance Director 
 
We have delivered another strong performance in 2014, with revenue growth in all parts of the business. Together with our
relentless focus on cash and costs, we are reporting our fifth consecutive year of double digit profit growth and end the
year with a strong balance sheet providing the flexibility to invest for further growth in 2015 and beyond. 
 
 Twelve months to 31 December  2014£m  2013£m  Change£m  Change%  
 NAR                           1,629   1,542   87        6        
 Total non-NAR                 1,327   1,211   116       10       
 Total revenue                 2,956   2,753   203       7        
 Internal supply               (366)   (364)   (2)       1        
 Total external supply         2,590   2,389   201       8        
 EBITA before exceptionals     730     620     110       18       
 Group EBITA margin            28%     26%                        
 Adjusted EPS                  13.8p   11.2p   2.6p      23       
 Adjusted diluted EPS          13.7p   10.8p   2.9p      27       
 Dividend per share            4.70p   3.50p   1.20p     34       
 Special dividend              6.25p   4.00p   2.25p     56       
 Year end net cash             41      164     (123)     (75)     
 
 
The profit before tax and EPS from the Consolidated Income Statement are as follows: 
 
 Twelve months to 31 December  2014£m  2013£m  Change£m  Change%  
 Profit before tax             605     435     170       39       
 EPS                           11.6p   8.3p    3.3p      40       
 Diluted EPS                   11.5p   8.1p    3.4p      42       
 
 
Total ITV revenue increased 7% in 2014 to £2,956 million (2013: £2,753 million), with external revenue up 8% at £2,590
million (2013: £2,389 million). This reflects 6% growth in NAR and another year of strong growth in non-NAR, up 10% to
£1,327 million (2013: £1,211 million) as we further rebalanced the business. Non-NAR now accounts for 45% (2013: 44%) of
total revenue. 
 
Together with our higher margin new revenue streams and disciplined cost control we delivered 18% growth in EBITA before
exceptionals to £730 million (2013: £620 million), corresponding to an improved EBITA margin of 28% (2013: 26%). Overall,
adjusted EPS was up 23% to 13.8p. 
 
Through our ongoing focus on cost control and working capital management, we delivered £15 million of cost savings while
remaining strongly cash generative. Our profit to cash conversion ratio remained strong at 91%, despite significant
investment in scripted programming. We also continued to take steps to improve balance sheet efficiency, and bought back a
further £62 million of debt in the year to reduce our financing costs. Even after three acquisitions, increased dividend
payments and our pension deficit contributions, we ended 2014 with net cash of £41 million (2013: £164 million). 
 
The Financial and Performance Review focuses on the adjusted results which, in management's view, reflect the underlying
performance of the business, providing a more meaningful comparison of how the business is managed and measured on a
day-to-day basis. The adjusted results are reconciled to the reported results in the EPS section that follows. 
 
Adjusted profit before tax and EPS remove the effect of items including acquisition related costs, impairment of intangible
assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments,
restructuring costs and other tax adjustments. 
 
Broadcast & Online 
 
 Twelve months to 31 December                             2014£m   2013£m  Change£m  Change%  
 NAR                                                      1,629    1,542   87        6        
 SDN external revenue                                     71       71      -         -        
 Online, Pay & Interactive                                153      118     35        30       
 Other commercial income                                  170      165     5         3        
 Broadcast & Online non-NAR revenue                       394      354     40        11       
 Total Broadcast & Online revenue                         2,023    1,896   127       7        
 Total schedule costs                                     (1,018)  (983)   (35)      4        
 Other costs                                              (437)    (426)   (11)      2        
 Total Broadcast & Online EBITA before exceptional items  568      487     81        17       
 EBITA margin                                             28%      26%                        
 
 
Broadcast & Online delivered another strong performance with revenue up £127 million to £2,023 million (2013: £1,896
million) driven by 6% growth in NAR and continued strong growth in Online, Pay & Interactive revenue. 
 
The advertising market showed continued improvement in 2014 with good growth across the major advertising categories.
Retail sales were again strong, driven by increased competition in the food retail sector as well as growth in furniture
and department stores. Entertainment & Leisure also performed well, with increased advertising and promotions around the
World Cup. Within Food there was good growth in the drinks, beverages and cooking product categories, while within
Airlines, Travel & Holiday there was growth from online travel agents. Telecommunications remained down in the year due to
lower new product launches following a strong year in 2013. 
 
Overall, we increased our share of broadcast to 45.9% (2013: 45.4%) and delivered our strongest outperformance of the UK
advertising market in five years, based on our estimate of the pure spot market. ITV NAR increased 6% compared to 5% growth
in the market, although it is increasingly difficult to measure the market as all broadcasters use different definitions,
which may include additional sources of revenue as well as pure spot advertising. Advertising growth was geared towards the
second quarter with increased spend around the World Cup and, while we expect to outperform the advertising market again in
2015 there will be fluctuations across the year driven by major events such as the Rugby World Cup and the timing of
Easter. 
 
ITV Family SOV declined 5% in 2014, following a strong year in 2013 when we were up 4%. This largely reflects a 4% decline
in the ITV main channel SOV. Although benefitting from the World Cup in June, the main channel delivered a lower audience
share against strong competition from the BBC. ITV2 also contributed to the decline, partly as a result of more competition
from new UK digital channels in the year, but also due to our repositioning of the channel to provide more targeted
audiences for our advertisers through the launch of ITVBe. We remain focused on improving viewing performance, both on
screen and online. 
 
Online, Pay & Interactive revenue increased 30% to £153 million (2013: £118 million), driven by £11 million growth in
Online and £20 million growth in Pay. In 2014 we further improved the quality, reliability and distribution of ITV Player,
now available on over 20 platforms, which supported continued strong growth in long form video requests, up 26%. We also
continued to develop our pay services, renewing a number of deals in 2014 as well as launching ITV Encore, our first pay
only channel. Interactive revenue was up £4 million due to higher income from competitions. 
 
SDN external revenue, which is generated from licence sales for DTT Multiplex A, was in line with 2013 at £71 million. In
2014 the full year benefit of the 13th video stream, which launched in 2013, was offset by lower renewal fees on existing
video streams, a trend likely to continue. 
 
Other commercial income increased 3% to £170 million (2013: £165 million), reflecting growth in sponsorship and brand
extensions as we build more value from our airtime for both advertisers and for ITV. For example, in 2014 we sold over
750,000 tickets for events including the Coronation Street set tour and the Saturday Night Takeaway live tour. 
 
Other commercial income also includes revenue from media sales, which relates to commission earned by ITV on sales of
airtime for the non-consolidated licensees, as well as minority revenue from these licensees for ITV content. Both
delivered revenue in line with last year. 
 
Schedule costs were up £35 million year on year to £1,018 million (2013: £983 million) as a result of the World Cup and
also increased programming spend relating to our new channels. In 2015 we will continue to focus on our schedule to improve
viewing share, investing in high quality content for our existing channels as well as a full year of programming for our
new channels. 
 
Other costs increased modestly, up 2% year on year, due to marketing costs around our new channels as well as online
investment. We continue to manage our overheads tightly to mitigate inflationary pressures and fund continued investment in
the business. 
 
Overall, reflecting the strong growth in higher margin Online, Pay & Interactive revenue, as well as good growth in our
highly geared advertising revenue, Broadcast & Online EBITA before exceptional items was up 17% at £568 million (2013: £487
million) while the EBITA margin increased 2% to 28%. 
 
ITV Studios 
 
 Twelve months to 31 December                  2014£m  2013£m  Change£m  Change%  
 Studios UK                                    459     456     3         1        
 Studios US                                    235     175     60        34       
 Studios RoW                                   95      91      4         4        
 Global Entertainment                          144     135     9         7        
 Total Studios revenue                         933     857     76        9        
 Total Studios costs                           (771)   (724)   (47)      6        
 Total Studios EBITA before exceptional items  162     133     29        22       
 Studios EBITA margin                          17%     16%                        
 
 
 Twelve months to 31 December                     2014£m  2013£m  Change£m  Change%  
 Sales from ITV Studios to Broadcasting & Online  366     364     2         1        
 External revenue                                 567     493     74        15       
 Total Studios revenue                            933     857     76        9        
 
 
In 2014 we again delivered strong revenue growth in ITV Studi