REG - ITV PLC - ITV Preliminary Results 2016 <Origin Href="QuoteRef">ITV.L</Origin> - Part 2
01/03/2017 07:06
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our brands
ITV is also focused on maximising the value of its airtime and driving new revenue streams through sponsorship,
interactivity and branded content. ITV utilises the core assets of its strong brand and reputation, unique commercial
relationships and quality production capability to deliver a wide variety of marketing solutions. We have developed many
innovative sponsorship and licensing deals including: Aunt Bessies for I'm A Celebrity… Get Me Out Of Here!; Domino's Pizza
for The Voice and William Hill for ITV Racing. We have also produced branded content solutions with our new service ITV
AdVentures for a number of customers, including Suzuki in Saturday Night Takeaway, Matalan and I Am TeamGB.
Developing ITV's digital broadcast assets
Live television continues to demonstrate a growing relevance as viewers increasingly connect through social media. To drive
viewing and enhance engagement with our content, we are further developing our social media assets across our international
portfolio of programmes. We have 147 YouTube branded channels delivering over 14 billion views, 32 million Facebook
followers, 22 million Twitter followers and 28 programme apps including Love Island, Dance, Dance, Dance, I'm A
Celebrity... Get Me Out Of Here!, horse racing and The Voice. Our digital engagement has grown significantly and in 2016 we
received around 100 million votes across our entertainment shows, primarily via our programme apps.
2017 and beyond
We remain committed to our integrated producer broadcast model, and key to that is maintaining the strength and scale of
our Broadcast & Online business. We have started the year well with main channel SOV up 4% and ITV family SOV up 3% for the
first six weeks of 2017.
As the viewing and advertising landscape continues to fragment, the scale of our linear audiences become increasingly
valuable and we will also continue to drive significant and growing value from our digital assets, most significantly the
ITV Hub.
We expect ITV NAR to be down 6% over the first four months of 2017, impacted by the current economic uncertainty, although
over the full year we expect to again outperform our estimate of the television advertising market.
Strategic Priority 2
Grow an international content business
Growing a scaled international content business is also central to our strategy as an integrated producer broadcaster. As
ITV creates and owns more content, our channels provide a platform to showcase our programmes before distributing them
across multiple platforms in the UK and internationally.
Growing global demand for content
The strong global demand for content from broadcasters and platform owners provides a significant opportunity for ITV
Studios. We estimate that the global content market is growing at about 5% per annum, with some genres such as drama
growing more rapidly than others. To capitalise on this, our strategy remains to develop, own and manage content rights in
genres that return and travel internationally - namely drama, entertainment and factual entertainment.
As well as strong demand from broadcasters, we are seeing significant demand from a variety of OTT platforms who want
library and close-to-broadcast content rights as well as 'digital first' content.
Fast growing, international producer of scale
Since 2010 we have almost doubled the number of hours of content we produce. In 2016 we produced around 7,800 hours of
content, through our 60 labels, supplying over 234 channels in 10 countries. ITV is becoming an increasingly scaled and
international business: we are the number one commercial producer in the UK and a leading producer in Europe and the US,
with 50% of total Studios revenues coming from outside the UK.
In 2016 ITV Studios total revenues grew 13% to £1,395 million (2015: £1,237 million) and adjusted EBITA increased 18% to
£243 million (2015: £206 million), driven by the acquisitions we have made.
ITV Studios has three production divisions - ITV Studios UK, ITV America and ITV Rest of World (RoW) and across these
businesses, ITV agreed 228 new commissions and 188 recommissions in 2016.
The US and UK are the dominant creative markets, with the US the largest exporter of scripted content and the UK the world
leader for exported formats. Over the last few years we have built scale in these key markets, organically and through
acquisitions, and we now have a significant portfolio of successful series and formats that travel.
ITV Studios UK performed strongly with overall revenues up 14% at £626 million (2015: £547 million) and with good growth in
sales to ITV and to other UK Broadcasters. Our off-ITV revenues have grown by 20% as we have continued to strengthen and
grow the business. Our deliveries to other UK broadcasters included Poldark, NW and Witness for the Prosecution for the
BBC, The Jump and Come Dine with Me for Channel 4, Hotel Inspector for Channel 5 and Agatha Raisin for Sky.
Overall, we have seen 13% growth in revenues to ITV with programmes such as Victoria, Cold Feet, Tutankhamun, Saturday
Night Take Away, The Chase, The Next Great Magician and I'm A Celebrity…Get Me Out Of Here! all delivered in 2016. We have
again grown ITV Studios UK's share of original content commissions on ITV main channel to 63%.
ITV America's revenue was down year-on-year by 27% to £235 million (2015: £320 million), predominantly as a result of three
shows we had in 2015 which have not returned in 2016.
They are Hell's Kitchen, which has been commissioned for two series in 2017 and Texas Rising and Best Time Ever, which are
not returning. We delivered the second series of two US dramas, The Good Witch and Aquarius. We have also benefited from
the delivery of a high volume of programmes from our stable portfolio of unscripted series, including Pawn Stars, American
Restoration, Alone, Rich Kids of Beverly Hills and First 48 and new commissions, including American Grit, Killing Fields
and Millionaire Matchmaker.
Across ITV RoW, we have seen very significant growth with revenues up 67% to £355 million (2015: £213 million) driven by
Talpa Media. Our production bases in Australia, Germany, France, the Netherlands and the Nordics produce original content
as well as local versions of ITV Studios formats. We now produce 14 different formats in three or more of our production
territories, for example; Come Dine With Me, The Chase, The Voice from Talpa Media and Love Island.
Talpa Media is performing well and continues to develop many new formats including Dance, Dance, Dance, CannonBall and 5
Gold Rings which are all selling well. It has also had the benefit of a four-year licensing agreement for The Voice of
China.
Across ITV RoW, we have delivered a number of new and returning commissions including The Voice in the UK and USA, The
Chase in Australia, I'm A Celebrity… Get Me Out Of Here! in Australia and Germany, Come Dine With Me in Denmark, Sweden and
Germany and The Price of Beauty in Denmark and Sweden. In Norway ITV has delivered its first drama, Aber Bergen, with the
second series already commissioned. In Australia, ITV has had a particularly successful year with a new management team in
place and now produces for all the major television channels.
Investing in content with international appeal
To continue growing internationally we must keep expanding our portfolio of successful series and formats that return and
can be distributed globally. We have a strong mix of programmes across genres and also across their content life cycle,
which balances our risk and financial exposure. Since 2010 our total hours produced has increased by 90%, our drama hours
have increased by 370%, entertainment hours by 109% and factual hours by 189%.
Demand for drama is growing strongly, as standout, original content becomes brand defining for both broadcasters and OTT
players. To capitalise on this, we are looking to expand our global scripted business and develop a strong portfolio of
international and returning drama, particularly in the US. We are strengthening our development and creative capabilities
internally and have invested in a number of producer development relationships - we now have around 20 projects in
development in the US with broadcast networks, cable networks and OTT platforms.
Recent successes include a number of US drama commissions which will deliver in 2017 - a ten part drama Somewhere Between,
for ABC, Sun Records for TNT and a pilot for ABC, Snowpiercer, through Tomorrow Studios.
With the acquisition of Talpa Media we have significantly strengthened our capability in entertainment and formats. Across
our businesses we have grown a solid portfolio of high volume and high margin formats that travel internationally and which
we produce in many of our production bases. These include The Voice, The Voice Kids, Pawn Stars, Come Dine with Me, I'm A
Celebrity… Get Me Out Of Here!, Hell's Kitchen, Keeping the Nation Alive, The Chase, 5 Gold Rings, This Time Next Year, Big
Star's Little Star and Love Island.
Investing in our digital content capabilities
Through building our digital assets and content we are increasingly able to engage with younger audiences.
While demand from traditional broadcasters continues to be strong we are also seeing an increasing demand from OTT
platforms for original long-form content, secondary rights and short form digital content.
We are distributing more content to OTT players through Global Entertainment as well as co-producing and jointly
commissioning a number of programmes with OTT platforms. We currently have over 200 programme supply agreements in place
with the major OTT platforms, including co-producing Robozuna, an original kids cartoon for Netflix and Harlots, which we
are co-producing for Hulu in the US and ITV Encore in the UK.
To further expand our digital assets we are increasing our exposure to new types of content, particularly youth focused
programming, and new types of distribution. In 2016 we made an investment with Sky in Ginx TV, an eSports channel for the
UK and international markets. We also agreed a partnership with global youth content company AwesomenessTV and made
minority investments in two 'digital first' youth content studios in the US, New Form and RocketJump, all of which helps to
improve ITV Studios content capability as well as provide new programming for the ITV Hub.This is as well as our existing
investments in US digital content companies Believe Entertainment Group and Indigenous Media.
2017 and beyond
We have a strong international pipeline of new and returning programmes and brands. Our UK and US pipeline of scripted
programmes has never been stronger and we have a very good slate of new entertainment shows coming through this year. This
gives us confidence that in 2017 we will deliver good organic revenue growth and we have already secured over £150 million
more revenue than at this point last year. However, with increased investment, particularly in US scripted and the reversal
of the one-off benefit of the The Voice of China in 2016, ITV Studios profits in 2017 are likely to be broadly in line with
2016.
ITV is now a global business and going forward we aim to use our scale to grow our market share and expand the number of
networks and OTT players we work with, particularly in the US. We will further strengthen our creative capability, both
organically and through partnerships and acquisitions, as we continue to reduce our reliance on the UK market.
Strategic Priority 3
Build a global pay and distribution business
The environment in which we operate is constantly evolving and we are seeing significant changes in digital media and
consumer behaviour. ITV, as a creator, owner and distributor of sought after content, is well positioned to take advantage
of the opportunities that arise from these changes as we seek to further monetise our content.
ITV continues to explore and trial new ways, both free and pay, to distribute content to broadcasters and platform owners
as well as directly to consumers.
Building our pay offering in the UK and internationally
As we look to build our pay offerings we are developing a range of SVOD services to target direct to consumer pay revenues.
We have recently announced the creation of a joint venture with the BBC, through BBC Worldwide, to create BritBox US, an
ad-free SVOD service offering unrivalled content from both broadcasters. ITV already has a strong advertising VOD
proposition in the ITV Hub but the launch of BritBox gives us access to the fast growing SVOD market in the US.
BritBox US, which is a direct to consumer service, will launch in the first half of 2017, with the most comprehensive SVOD
collection of British content available in the US. The service will feature drama premieres never seen before in the US, a
selection of soaps and series that will be available 24 hours after their UK broadcast, and a collection of British
classics. ITV and BBC each have a 40.5% voting share, while US cable network AMC has a 19% non-voting minority interest.
Over the last few years we have also established a number of smaller pay propositions. We now own a controlling stake in
Cirkus, a best of British SVOD service in Sweden, Norway, Finland and Iceland which will shortly launch in Germany on
Amazon. Cirkus has developed a second SVOD service, Curio, due to launch in Norway in 2017, which is focused on
high-quality documentaries. We have also set up ITV Essentials, an online service for expats available in 13 countries and
ITV Choice, a general entertainment channel for emerging markets available in 100 countries.
We are continuing to develop ITV Hub+, our ad-free subscription version of ITV Hub. In 2017 we will roll out ITV Hub+ onto
more platforms and we have already added new functionality, such as download on iOS devices for off-line viewing.
Looking ahead it is our intention to roll out our best of British SVOD services internationally through BritBox and our
other SVOD services, taking advantage of the significant global demand for UK content and changing viewing habits.
Further developing our pay revenues
ITV's pay revenues again grew strongly as we continue to earn revenue from pay television through licensing our channels
and content across multiple platforms.
In the UK our pay business includes deals with Sky and Virgin for our HD digital channels and catch-up VOD, ITV Encore for
Sky and a deal to make ITV's content available through Sky's connected platforms. We also agreed a new deal with Vodafone
to carry ITV's free-to-air (FTA) channels and VOD for their customers, as well as with TV Player to carry ITV's FTA
channels.
Expanding our global distribution network
Global Entertainment, the distribution arm within ITV Studios, delivered revenue growth of 14% to £179 million in 2016
(2015: £157 million) as we continue to drive value from the investment we have made in creating and owning rights to
quality content with international appeal. Excluding the benefit of foreign exchange, Global Entertainment grew 6% to £166
million.
ITV's distribution business has over 40,000 hours of television and film content that we distribute globally to over 3,500
broadcasters and platforms. In 2016 we continued to enhance our distribution network, benefiting from ITV Studios'
continued growth, increased rights ownership both within ITV Studios and with third parties and strong network
relationships, selling to around 190 countries around the world.
Through our ongoing investment in ITV Studios, we are building an extensive and balanced portfolio of scripted and
unscripted programmes in the key genres of drama, entertainment and factual entertainment. We are using our strong cash
flows not only to fund and create new content from ITV Studios, but also to invest in third-party producers and their
content from all over the world, such as Harlots and Schitt's Creek.
Our scripted programmes such as Victoria, Poldark, Endeavour, Vera and The Good Witch, are all selling to over 150
countries. Our entertainment and factual entertainment programmes also continue to sell well, including titles such as Come
Dine With Me, The Voice, The Voice Kids, The Chase, Hell's Kitchen, Autopsy and River Monsters.
In 2016 we sold 80 different formats around the world, 24 of which were produced by ourselves or other producers in three
or more countries.
We are increasingly doing multi-year and multi territory deals with OTT platforms including Netflix, Amazon, Hulu and a
range of smaller platforms. As well as library deals, we are distributing close-to-broadcast or first broadcast rights to
these OTT platforms across territories. We currently have over 200 content supply agreements in place, including
Thunderbirds Are Go! series one and two for Amazon in the UK, US, Germany and India, as well as The Good Witch, Mr
Selfridge and Poldark for Netflix.
We are also co-producing and jointly commissioning a number of programmes with OTT platforms, including Robozuna for
Netflix and Harlots for Hulu.
Retransmission fees
We are continuing to drive the debate around the implementation of retransmission fees in the UK to ensure that we are
fairly compensated for our investment in content for the main channel when it is carried on pay TV platforms. We see the
publication of the Digital Economy Bill proposing the repeal of Section 73 as an important step forward in achieving
retransmission fees.
2017 and beyond
As we continue to rebalance ITV and diversify our revenue streams, we are further developing our pay and distribution
business to drive more value from our investment in content and reflecting the changes in the way people are consuming
content. We are exploring new ways to package and sell our content to take advantage of demand for quality content in the
UK and internationally from consumers, broadcasters and platform owners.
A particular focus for 2017 will be the launch of BritBox US and in time we will look to further roll out our SVOD services
internationally as we continue to explore even more ways to drive value from our content.
Alternative Performance Measures
The Strategic Report includes both statutory and adjusted measures, the latter of which, in management's view, reflects the
underlying performance of the business and provides a more meaningful comparison of how the business is managed and
measured on a day-to-day basis.
Our APMs and KPIs are aligned to our strategy and together are used to measure the performance of our business and form the
basis of the performance measures for remuneration.
Adjusted results exclude certain items because if included, these items could distort the understanding of our performance
for the year and the comparability between periods.
Key adjustments for Adjusted EBITA, profit before tax and EPS
Adjusted EBITA is calculated by adding back exceptional items and high end production tax credits to EBITA. Further
adjustments, which include amortisation of intangible assets acquired through business combinations and net financing
costs, are made to remove their effect from adjusted profit before tax and EPS. The tax effect of all these adjustments is
reflected to calculate an adjusted tax charge. These adjustments are detailed below.
Production tax credits
The ability to access tax credits, which are rebates based on production spend, is fundamental to our Studios business when
assessing the viability of investment in green-lighting decisions, especially with regards to high-end drama. ITV reports
tax credits generated in the US and other countries (e.g. Ireland, Hungary, Canada and South Africa) within cost of sales,
whereas in the UK tax credits for high-end drama must be classified as a corporation tax item. However, in our view all tax
credits relate directly to the production of programmes. Therefore to align treatment, regardless of production location,
and to reflect the way the business is managed and measured on a day-to-day basis, these are recognised in adjusted EBITA.
Exceptional items
This includes acquisition related costs (further detail below), reorganisation and restructuring costs, non-recurring legal
costs, gains or losses on disposal of non-core assets and impairment of intangible assets. These items are excluded to
reflect performance in a consistent manner and are in line with how the business is managed and measured on a day-to-day
basis. They are typically gains or losses arising from events that are not considered part of the core operations of the
business or are considered to be one-off in nature. We also adjust for the tax effect of these items. Note 2.2 includes
further detail on exceptional items.
Acquisition related costs
We structure our acquisitions with earnouts or put and call options, to allow part of the consideration to be based on the
future performance of the business as well as lock in creative talent. Where consideration paid or contingent consideration
payable in the future is employment linked, it is treated as an expense (under accounting rules) and therefore on a
statutory basis is part of our reported results. However, we exclude all consideration of this type from adjusted profit
after tax and adjusted EPS as, in our view, these items are part of the capital transaction. The Financial and Performance
Review explains this further.
Restructuring and reorganisation costs
These arise from Group-wide initiatives to reduce the ongoing cost base and improve efficiency in the business. They are
non-recurring costs and because of their size and nature, are excluded from our adjusted measures.
Amortisation and impairment of intangible assets
Amortisation and impairment of intangible assets acquired through business combinations is not included within adjusted
earnings. As these costs are acquisition-related, and in line with our treatment of other acquisition-related costs, we
consider them to be capital in nature and they do not reflect the underlying trading performance of the Group. Amortisation
of software licences and development is included within our adjusted results as management consider these assets to be core
to supporting the operations of the business.
Net financing costs
Net financing costs are adjusted to reflect the underlying cash cost of interest for the business providing a more
meaningful comparison of how the business is managed and funded on a day-to-day basis. The adjustments made remove the
impact of mark-to-market on swaps and foreign exchange, imputed pension interest and other financial gains and losses,
which do not reflect the relevant interest cash cost to the business.
A full reconciliation between our adjusted and statutory results is provided below.
Reconciliation between statutory and adjusted results
EBITA1 857 28 885 842 23 865
Exceptional items (operating)2 (164) 164 - (109) 109 -
Amortisation and impairment of intangible assets3 (89) 77 (12) (67) 58 (9)
Operating profit 604 269 873 666 190 856
Net financing costs4 (51) 25 (26) (31) 18 (13)
Gain on sale of non-current assets and subsidiaries - - - 6 (6) -
(non-operating exceptional items)
Profit before tax 553 294 847 641 202 843
Tax5 (100) (60) (160) (139) (38) (177)
Profit after tax 453 234 687 502 164 666
Non-controlling interests (4) - (4) (7) - (7)
Loss from discontinuing operations (net of tax) (1) 1 - - - -
Earnings 448 235 683 495 164 659
Shares (million), weighted average 4,010 - 4,010 4,006 - 4,006
EPS (p) 11.2p 17.0p 12 .4p 16.5p
4,006
EPS (p)
11.2p
17.0p
12 .4p
16.5p
1. £28 million adjustment relates to production tax credits which we consider to be a contribution to production costs and
working capital in nature rather than a corporate tax item.
2. Exceptional items largely relate to acquisition costs, primarily employment linked consideration, as well as
restructuring costs and pension curtailment cost.
3. £77 million adjustment relates to amortisation on acquisition related intangible assets. We include only amortisation on
purchased intangibles such as software within adjusted PBT.
4. £25 million adjustment is primarily for non-cash interest cost. This provides a more meaningful comparison of how the
business is managed and funded on a day-to-day basis.
5. Tax adjustments are the tax effects of the adjustments made to reconcile PBT and adjusted PBT.
Other alternative Performance Measures
Total revenue
As an integrated producer broadcaster, we look at the total revenue generated in the business which includes internal
revenue, which is the sale of ITV Studios programmes to Broadcast & Online. Our broadcast channels are a significant
customer for ITV Studios and selling programmes to Broadcast & Online is an important part of our strategy as it ensures we
own all the rights.
A reconciliation between external revenue and total revenue is provided below.
External revenue (Reported) 3,064 2,972
Internal supply 463 411 463 411
Total revenue (Adjusted) 3,527 3,383
Total revenue (Adjusted)
3,527
3,383
Adjusted net debt
Net debt (as defined in Note 4.1) is adjusted for all our financial commitments. This better reflects how credit rating
agencies look at our balance sheet. A reconciliation between net debt and adjusted net debt is provided below.
Net debt (637) (319)
Expected contingent payments on acquisitions (328) (303)
Net pension deficit (328) (176)
Operating leases (344) (346)
Adjusted net debt (1,637) (1,144)
Adjusted net debt to adjusted EBITDA 1.8x 1.3x
Reported net debt to adjusted EBITDA 0.7x 0.4x
Reported net debt to adjusted EBITDA
0.7x
0.4x
Net pension deficit
This is our defined benefit pension deficit under IAS 19 adjusted for other pension assets, mainly gilts, over which the
pension scheme holds a charge, held by the Group as security for future unfunded pension payments of four former Granada
executives.
A full reconciliation is included within Note 3.7.
Profit to cash conversion
This is our measure of cash generation used for working capital management. It is calculated as adjusted cash flow as a
proportion of adjusted EBITA. Profit to cash conversion is based on adjusted measures to reflect the cash generation of our
underlying business after operating capex, excluding the effect of exceptional items, non-cash expenses such as
depreciation and share based payments.
Key Performance Indicators
We have defined our KPIs to align our performance and accountability to our strategy.
These KPIs are the key measures of success and cover all three strategic priorities. Our KPIs have not changed over the
year.
Financial
Adjusted EBITA
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Definition
This is the key profitability measure used across the whole business. Earnings before interest, tax and amortisation
(EBITA) is before exceptional items and has been adjusted to include the benefit of production tax credits. It reflects our
performance in a consistent manner and in line with how the business is managed and measured on a day-to-day basis.
Performance
In 2016 adjusted EBITA increased by £20 million or 2% as a result of a 3% increase in total external revenue and our
continued focus on costs. Revenue growth was primarily a result of a 23% increase in high margin Online, Pay & Interactive
revenues and a 13% increase in ITV Studios revenue driven by acquisitions, the UK business and Global Entertainment. This
was partially offset by a decline in NAR of 3%.
Group EBITA margin remained flat at 29%.
Adjusted EPS
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Definition
Adjusted EPS represents the adjusted profit for the year attributable to equity shareholders. Adjusted profit is defined as
profit for the year attributable to equity shareholders before exceptional items, impairment of intangible assets,
amortisation of intangible assets acquired through business combinations, net financing cost adjustments and tax
adjustments relating to these items. It reflects the business performance of the Group in a consistent manner and in line
with how the business is managed and measured on a day-to-day basis.
Performance
Adjusted EPS increased by 3% from 16.5p to 17.0p. This is higher than the corresponding increase in adjusted EBITA of 2% as
a result of a lower adjusted effective tax rate in the year of 19% (2015: 21%).
Profit to cash conversion
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Definition
Profit to cash conversion represents the proportion of adjusted EBITA converted into a measure of adjusted cash flow
(defined as cash generated from operations before exceptional items less cash related to the acquisition of operating
property, plant and equipment and intangible assets).
This primarily reflects the effectiveness of our working capital management and capital expenditure control. Our aim is to
keep profit to cash conversion as high as possible.
Performance
Profit to cash has increased in the year to 97% and reflects our continued tight management of working capital balances and
our disciplined approach to cash and costs.
Non-NAR revenue
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Definition
Non-NAR reflects all ITV revenue, both internal and external, except NAR (spot advertising revenues). Online, Pay,
Interactive, Sponsorship, SDN and ITV Studios revenues are all included within Non-NAR, with the key drivers of growth
being Online, Pay and ITV Studios.
Growing non-NAR is key to the strategy as we aim to rebalance the business away from our reliance on television advertising
revenue.
Performance
Non-NAR revenue increased by 11% in 2016 as we continue to rebalance the business away from a reliance on NAR. We delivered
strong growth in ITV Studios revenues and in Online and Pay revenues. Non-NAR revenues were 53% of total revenue which has
increased significantly since 2009 when it was 40%.
Non-Financial
Employee engagement
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Grow an international content business
• Build a global pay and distribution business
Definition
Continuing to develop a creative, commercial and global organisation requires high-quality employees who are engaged in the
work that they do, and are committed to the strategy.
Employee engagement measures pride in the work we do, pride in working for ITV and also what we say about our programmes
and services.
Performance
Employee engagement was once again high at 90% which is above the benchmark score for companies of a similar size and
nature to ours of 83%. The participation rate was 80%.
Strategy
ITV Family Share of viewing
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
Definition
To help deliver Strategic Priority 1 through maintaining a strong and healthy Broadcast & Online business, ITV Family SOV
is a key indicator of this. ITV Family SOV is the total viewing audience over the year achieved by ITV's Family of channels
as a proportion of total television viewing, including the BBC Family. ITV aims at least to maintain the ITV Family SOV.
Performance
ITV Family SOV grew 1% in 2016 to 21.4%. Within this, the ITV main channel saw an increase of 3% benefiting from the Six
Nations Rugby Championships and the European Football Championships along with strong performances in Drama, Entertainment
and Daytime. The digital channels were down 4% in the year mainly across ITV3 and ITV4. ITV2 viewing amongst 16-34s
continues to grow, up 25% in the year and it remains the most popular digital channel in the UK based on SOV.
ITV also continues to deliver mass audiences and in 2016 delivered 99% of all commercial audiences over five million and
95% over three million.
ITV Family Share of commercial impacts
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
Definition
Part of delivering Strategic Priority 1 and maintaining our position as a leading commercial broadcaster is to have a
strong ITV Family share of commercial impacts (SOCI) . SOCI is the trading currency in the television advertising market,
and since it only covers commercial television it does not include the BBC. This is the share of total UK television
commercial impacts which is delivered by ITV's family of channels. An impact is one viewer watching one 30 second
commercial. We aim to maximise our SOCI. SOCI provides an overall measure of viewing performance, however because
advertisers are buying scale and breadth of audience, SOCI is not necessarily a direct indicator of advertising
performance.
Performance
ITV Family SOCI declined by 1%, with the main channel up 3%. The digital channels SOCI was down 6% and was impacted by the
launch of a number of new free-to-air digital channels at the end of 2015 and first half of 2016. In addition, ITV2 is now
more targeted towards younger viewers with SOCI amongst 16-34s up 24% in the year.
ITV Family Share of broadcast
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
Definition
ITV's share of UK television spot advertising revenue is known as its share of broadcast. To maximise revenue from our
free-to-air business, which is a key component of Strategic Priority 1, we aim to continue to maximise our share of
broadcast and to outperform the UK television advertising market.
It is increasingly difficult to measure the total television advertising market as all broadcasters have different
definitions and include other sources of revenue, such as sponsorship and VOD in their estimates of television advertising.
Our SOB has always been based on our estimate of the pure spot advertising market, excluding sponsorship, VOD and for 2016
going forward, we also exclude all broadcaster's self promotion revenues on their own channels because this year has seen a
significant increase which further distorts the external spot market.
Performance
In 2016 we gained market share again, increasing our share of broadcast to 47.4% which includes UTV and excludes self
promotion by all broadcasters. 2015 share of broadcast, excluding self promotion, would have been 46.8% rather than 46.1%.
We have again gained share as a result of our unique ability to deliver mass audiences across the key demographics to our
advertisers and more targeted demographics on our digital channels, as well as the benefit of UTV.
Total long-form video requests
Our strategic priorities
• Maximise audience and revenue share from free-to-air broadcast and VOD business
• Build a global pay and distribution business
Definition
A key part of our strategy is to maximise audience share from our free-to-air broadcast and increasingly from our VOD
business.
Long-form video requests is a measure of the total number of our videos viewed across all platforms on which the ITV Hub is
available and therefore provides a key measure of how much of our content is being viewed online. A long-form video is a
programme that has been broadcast on television and is available to watch online and on demand in its entirety.
Performance
Long-form video requests were up 24% in 2016 to 1,025 million views supported by our continued investment and focus on the
ITV Hub, mobile apps and simulcast offering. Online consumption, which is the measure of how long viewers are spending
online, is an important indicator of online performance and this increased by 42% in 2016.
Number of new commissions for ITV Studios
Our strategic priorities
• Grow an international content business
• Build a global pay and distribution business
Definition
To deliver Strategic Priority 2 tracking the performance of the creative renewal pipeline and the number of new commissions
won is a key indicator. This figure includes programmes shown both on ITV and on other broadcasters, and both in the UK and
internationally.
Performance
There was strong growth in the number of new commissions for ITV Studios in 2016, up 37% to 228. 102 of these new
commissions have come from the UK business, with the remaining 126 coming from our international businesses.
We continue to invest in our creative pipeline building on our existing portfolio of programmes and formats. We are
particularly focused on the genres that can return and travel, namely drama, entertainment and factual entertainment.
Percentage of ITV output from ITV Studios (ITV main channel only)
Our strategic priorities
• Grow an international content business
Definition
As an integrated producer broadcaster, part of our strategy is to use our broadcast channels as a platform for ITV Studios
content where we aim to make them famous and then sell them around the world.
The proportion of the total spend on original commissions on ITV transmitted in the year, delivered by ITV Studios
demonstrates this and our aim is to increase ITV Studios' supply of programmes to ITV to allow us to deliver against all
three of our Strategic Priorities.
Performance
The percentage of ITV output from ITV Studios increased to 63% in 2016 driven by new dramas in the year. Many of these ITV
Studios programmes broadcast in 2016 have now been distributed around the world including Victoria, Cold Feet, Thunderbirds
Are Go!, The Chase and I'm A Celebrity... Get Me Out Of Here!
Financial and Performance Review
The benefit of rebalancing the business is evident in these results with growth in non-NAR revenue delivering a good
performance and making ITV a more resilient business.
The strategy we set out a number of years ago was to rebalance the business and reduce our reliance on spot advertising.
This strategy is the right strategy for ITV and the progress we have made is clearly evident in our performance for 2016,
delivering 3% external revenue growth and 3% increase in adjusted EPS, in a year where spot advertising revenue declined
3%. We continue to be highly cash generative which, together with our ongoing focus on costs, places us in a strong
position to continue to invest in opportunities to grow the business and deliver returns to shareholders.
NAR 1,672 1,719 (47) (3)
Total non-NAR 1,855 1,664 191 11
Total revenue 3,527 3,383 144 4
Internal supply (463) (411) 52 13
Group external revenue 3,064 2,972 92 3
Adjusted EBITA 885 865 20 2
Group adjusted EBITA margin 29% 29%
Adjusted EPS 17.0p 16.5p 0.5p 3
Adjusted diluted EPS 17.0p 16.3p 0.7p 4
Dividend per share 7.2p 6.0p 1.2p 20
Special dividend 5p 10p - -
Net debt as at 31 December (637) (319) (318) -
Net debt as at 31 December
(637)
(319)
(318)
-
The statutory profit before tax and EPS from the Consolidated Income Statement is below. A full reconciliation between our
statutory and reported results is included in the Alternative Performance Measures section.
Profit before tax 553 641 (88) (14)
EPS 11.2p 12.4p (1.2)p (10)
Diluted EPS 11.1p 12.3p (1.2)p (10)
Diluted EPS
11.1p
12.3p
(1.2)p
(10)
Total ITV revenue increased 4% to £3,527 million (2015: £3,383 million), with external revenue up 3% at £3,064 million
(2015: £2,972 million). NAR declined by 3% to £1,672 million (2015: £1,719 million) offset by a 11% growth in non-NAR
revenue to £1,855 million (2015: £1,664 million). Non-NAR now accounts for 53% (2015: 49%) of total revenue.
Growth in high margin Online, Pay & Interactive revenue combined with the growth in ITV Studios and our continued focus on
costs, delivered a 2% increase in adjusted EBITA to £885 million (2015: £865 million) with the adjusted EBITA margin
maintained at 29%. Adjusted EPS grew 3% to 17.0p (2015: 16.5p) while statutory EPS declined by 10% to 11.2p (2015: 12.4p).
Statutory EPS declined due to higher exceptional costs, principally employment linked consideration for our acquisitions
(primarily Talpa Media) which is included within reported earnings. In addition there were higher restructuring costs
associated with our 2017 cost savings and higher amortisation of acquired intangible assets as a result of owning Talpa
Media for a full 12 months. These adjustments are explained over the following pages.
We remain focused on balance sheet efficiency and working capital management. Our profit to cash ratio remained strong at
97% and we ended the period with net debt of £637 million (31 December 2015: net debt of £319 million) after the
acquisition of UTV, the ordinary and special dividend payments and pension deficit contributions. Increasing net debt is in
line with our objective of gradually increasing our balance sheet leverage over time whilst maintaining the financial
flexibility to continue to invest in the business.
Cost management remains a key priority and we are on track to deliver the previously announced £25 million reduction in
overheads in 2017 across the business. This together with our strong balance sheet, our clear strategy and a more balanced
business gives us the flexibility to meet the opportunities and challenges ahead.
Broadcast & Online
NAR 1,672 1,719 (47) (3)
Online, Pay & Interactive revenue 231 188 43 23
SDN external revenue 67 64 3 5
Other commercial income 162 175 (13) (7)
Broadcast & Online non-NAR revenue 460 427 33 8
Total Broadcast & Online revenue 2,132 2,146 (14) (1)
Total schedule costs (1,050) (1,045) (5) -
Other costs (440) (442) 2 -
Total Broadcast & Online adjusted EBITA 642 659 (17) (3)
Adjusted EBITA margin 30% 31%
(3)
Adjusted EBITA margin
30%
31%
Broadcast & Online revenue declined by 1% to £2,132 million (2015: £2,146 million) with the decrease in NAR largely offset
by strong growth in Online, Pay & Interactive.
Against a backdrop of uncertainty created by the EU referendum, ITV Family NAR decreased by 3% to £1,672 million (including
UTV) (2015: 1,719 million). This decline was less than the decline in our estimate of the television advertising market
which excludes broadcaster's self-promotion, sponsorship and VOD revenue, and therefore we again took market share to
increase our SOB to 47.4%. Despite the overall fall in NAR we have seen a number of categories hold or increase spend
year-on-year, such as Entertainment & Leisure, with increased bookmakers spend around the European Football Championship,
Cars, Cosmetics and Toiletries, and Publishing and Broadcasting. Digital brands continue to spend on television to build
brand awareness. Retail, Finance and Food have seen declines with supermarkets and traditional banking decreasing spend
across the year. Excluding supermarkets, Retail was up 4% year-on-year.
As expected, the phasing of NAR was different in 2016 reflecting the timing of major sporting events and a backdrop of
uncertainty driven by the EU referendum. The first and second quarter were both flat with strong comparatives in Q1 2015,
with a weaker April and May being offset by a strong June as a result of the Euro Football Championships. The third quarter
was down 4% impacted by the Rugby World Cup comparatives in 2015 with the fourth quarter down 6% as increased political and
economic uncertainty caused advertisers to behave more cautiously.
Looking to 2017 we expect the first four months to the end of April to be down around 6% and as ever the phasing of NAR
will be different across the year. Over the full year we again expect to outperform the television advertising market.
On-screen we performed strongly with ITV Family SOV up 1% and a 3% increase in ITV main channel SOV. Going forward we
remain focused on our viewing performance and continuing to deliver both mass audiences and key demographics which are
highly demanded by advertisers.
Online, Pay & Interactive revenue continued to show strong growth, up 23% to £231 million (2015: £188 million) reflecting
further growth in both our online advertising and pay businesses. Audience demand for VOD remains strong as does the demand
for online advertising, which supported by our strong on-screen proposition, helped drive a 24% increase in long-form video
requests and a 42% increase in consumption on our OTT service the ITV Hub. Interactive revenue was broadly flat, with
daytime competitions and entertainment programmes performing well.
As we continue to build our digital business we will be launching our SVOD service BritBox in the US in the first half of
2017. The service is a joint venture with the BBC to provide the Best of British content to subscribers. BritBox US is
expected to break even within a couple of years. ITV's share of total joint venture losses/profits will be recognised
within results from JVs and Associates.
SDN external revenue, which is generated from licence sales for DTT Multiplex A, increased 5% to £67 million (2015: £64
million). This was driven by the full year impact of the 15th stream which was launched in August 2015 and the 16th stream
launched in May 2016.
Other commercial income includes revenue from programme sponsorship, media sales, which relates to commission earned by ITV
on sales of airtime for the non-consolidated licensees (UTV until acquisition and STV), as well as revenue from these
licensees for ITV content. Other commercial income was down year-on-year at £162 million (2015: £175 million) as a result
of a reduction in airtime sales commission and minority revenue from UTV following ITV's acquisition of the business in
February 2016.
Schedule costs were broadly flat year-on-year at £1,050 million (2015: £1,045 million) with higher spend on drama offset by
lower spend on sports rights with the absence of the Champions League. Looking into 2017 we expect our total annual
programming budget to be around £1,025 million which includes the previously announced £25m reduction as there is no major
sporting event. We expect the programme budget to be weighted to the first half of 2017 driven by the timing of spend on
entertainment and drama programmes and will be broadly flat year-on-year for the first half.
Other costs in Broadcast were flat year-on-year as we continue to maintain a tight control on costs across the business.
Overall Broadcast & Online adjusted EBITA was down 3% at £642 million (2015: £659 million) with the strong growth in
Online, Pay & Interactive more than offset by the decline in the advertising market. This has led to a 1% reduction in the
adjusted EBITA margin to 30% (2015: 31%).
ITV Studios
Studios UK 626 547 79 14
ITV America 235 320 (85) (27)
Studios RoW 355 213 142 67
Global Entertainment 179 157 22 14
Total Studios revenue 1,395 1,237 158 13
Total Studios costs (1,152) (1,031) (121) (12)
Total Studios adjusted EBITA* 243 206 37 18
Studios adjusted EBITA margin 17% 17%
18
Studios adjusted EBITA margin
17%
17%
* Includes the benefit of production tax credits.
Sales from ITV Studios to Broadcast & Online 463 411 52 13
External revenue 932 826 106 13
Total Studios revenue 1,395 1,237 158 13
Total Studios revenue
1,395
1,237
158
13
ITV Studios total revenue grew strongly up 13% to £1,395 million (2015: £1,237 million) driven by Studios UK, Global
Entertainment and our acquisitions, as we continue to build scale in creative content markets and strengthen our
international portfolio of programmes that return and travel. Total organic revenue, which excludes our current and prior
year acquisitions, was down 3%, and excluding foreign exchange movements as well, it was down 7%. This was primarily due to
ITV America being impacted by two large shows not returning and the timing of one of our key shows. Good performances by
the UK and Global Entertainment helped offset some of this organic decline. Our results include a full 12 months of our
prior year acquisitions, Twofour Group, Mammoth Screen and Talpa Media all of which have delivered key programmes during
the year.
It is in the nature of our business that not all programmes will return for another series and the timing of programme
deliveries will vary. However, since 2010 ITV Studios has shown good organic growth (excluding all currency and all
acquisitions) at 4% compound annual growth rate.
Reflecting our growth and increasing scale in key production markets in Europe and the US, 50% of ITV Studios total revenue
in 2016 was generated outside the UK. As our Studios business grows internationally, foreign currency movements have an
increasing impact on our results. On a constant currency basis, which assumes exchange rates remained consistent with 2015,
ITV Studios revenue for 2016 would have been £75 million lower and adjusted EBITA would have been £12 million lower as a
result of a stronger US dollar and euro during the year.
Total Studios UK revenue was up 14% to £626 million (2015: £547 million) with 13% growth in internal revenue and 20%
increase in external revenue driven by organic growth of 6% and the acquisition of Twofour Group and Mammoth Screen in
2015. Programming sales to ITV Broadcast benefited from new drama deliveries including Victoria, Cold Feet and Tutankhamun
along with returning entertainment programmes Saturday Night Takeaway, Love Island and I'm A Celebrity… Get Me Out Here!
Off-ITV revenue grew strongly with successful deliveries including The Jump, The Job Interview and Raised by Wolves all for
Channel 4, Poldark, Moorside and Witness for the Prosecution for BBC and Agatha Raisin for Sky.
ITV America's total revenue declined 27% to £235 million (2015: £320 million) with organic revenue, excluding acquisitions
and foreign exchange, down 35%. This decline was predominantly driven by three shows - Texas Rising and Best Time Ever not
returning and the phasing of Hell's Kitchen which did not deliver in 2016 but will return for two series in 2017. Our
acquisitions continue to deliver new and returning programmes, including Alone, Killing Fields, Pawn Stars and Fixer Upper.
Other successful non-scripted deliveries within ITV America during the year included American Grit, Tiny House Nation and
The Real Housewives of New Jersey. Our returning scripted dramas, The Good Witch and Aquarius also aired during 2016 with
The Good Witch already recommissioned for a third series in 2017. Aquarius has not been recommissioned for 2017, but we are
confident we can replace it with our upcoming slate of new programmes, including three dramas; Sun Records, Somewhere
Between and a pilot of Snowpiercer, as we build our US scripted business.
Studios RoW total revenue was up 67% to £355 million (2015: £213 million), with organic revenue down 1%. We benefited from
12 months of Talpa Media, which was acquired on 30 April 2015 and has significantly strengthened our position as a leading
international producer and distributor. Talpa Media performed strongly in 2016 and also benefited from a four-year
licensing agreement for The Voice of China. We also saw good growth in Australia and Denmark from producing UK formats.
2016 deliveries included I'm A Celebrity… Get Me Out Of Here! and The Chase in Australia and Germany and The Voice Kids and
Come Dine With Me in Denmark. We have a strong pipeline of new and returning formats, many of which have been produced by
our acquisitions Talpa Media and Twofour Group, which we will be producing in a number of our key production territories
including; The Voice, This Time Next Year, Love Island, 5 Gold Rings and Big Star's Little Star.
Global Entertainment revenue increased 14% in the period to £179 million (2015: £157 million), with revenue excluding
foreign exchange up 6% as we continued to grow our portfolio of programmes and formats to distribute internationally.
Revenue growth was supported by our strong programme slate including Victoria, Poldark, Mr Selfridge, Coronation Street,
Thunderbirds Are Go!, Aquarius, Hell's Kitchen and The Chase. We have 10 programmes sold to over 100 countries and 80
different formats we sell internationally. We have also increased distribution of our content to OTT providers including
Amazon, Netflix and Hulu both in the UK and internationally.
Reflecting the strong revenue growth in ITV Studios, adjusted EBITA increased 18% to £243 million (2015: £206 million). The
adjusted EBITA margin remains unchanged at 17%. In 2016 we invested £160 million in scripted content, which is a similar
level to 2015. We finance our larger-scale scripted projects through our strong underlying cashflows. The production cost
is partly funded by the initial sale of the series to a broadcaster, while the deficit (the difference between the cost and
what the broadcaster pays), is recovered through distribution revenue from selling the finished product globally to other
broadcasters and platforms. We balance our financial exposure through building a portfolio of programmes, with successful
international dramas offsetting the risk that we will not recover the full deficit on every show.
Overall, ITV Studios continued to deliver many creative successes in the year. The ongoing investment we are making in our
creative pipeline will build upon our existing strong portfolio of programmes and formats and help manage the fluctuations
we experience because of the phasing of deliveries. 2017 will see the delivery of many new and returning entertainment and
drama programmes and as a result we expect to return to good organic revenue growth over the full year, although the first
half will be impacted the timing of deliveries. ITV Studios currently has over £150 million more revenue secured for 2017
than it did this time last year. Adjusted EBITA will be broadly flat year-on-year due to our ongoing investment in scripted
content and the reversal of the one-off benefit of The Voice of China in 2016.
Acquisitions
On 29 February 2016 the Group acquired a 100% controlling interest in UTV Limited, which owns the television assets of the
former UTV Media PLC, for £100 million. This further strengthens ITV's free-to-air business and, as we have integrated it
into ITV it enables us to run a more efficient network. On 30 November 2016, ITV completed the E10 million sale of UTV
Ireland to Virgin Media Limited.
We continue to look at potential acquisitions and partnerships as we further build scale in our international content
business. Since 2012 we have acquired a number of content businesses in the UK, US and creative locations across Europe,
developing a strong portfolio of programmes that return and travel. As we have grown in size and expanded our network
relationships and distribution capability, this has helped to strengthen our creative talent and build our reputation as a
leading European producer and distributor and leading unscripted independent production company in the US.
We have strict criteria for evaluating potential acquisitions. Financially, we assess ownership of intellectual property,
earnings growth and valuation based on return on capital employed and discounted cash flow. Strategically, we ensure an
acquisition target has a strong creative track record and pipeline in content genres that return and travel, namely drama,
entertainment and factual entertainment, as well as succession planning for key individuals in the business.
We generally structure our deals with earnouts or with put and call options in place for the remainder of the equity,
capping the maximum consideration payable. By basing a significant part of the consideration on future performance in this
way, not only can we lock in creative talent and ensure our incentives are aligned, but we also reduce our risk by only
paying for the actual, not expected, performance delivered over time. We believe this is the right way to structure our
deals as we should not pay upfront for future performance and should incentivise and reward delivery by the business over
time.
The majority of earnouts or put and call options are dependent on the seller remaining within the business, the most
significant of which is for Talpa Media whereby the total maximum consideration, including the initial payment, is up to
E1.1 billion which is contingent on Talpa Media continuing to deliver significant profit growth to 2022 as well as John de
Mol's continued commitment to the business during this time. Under the deal structure, because all future payments and E150
million of the initial consideration are directly related to John de Mol remaining with the business, these payments are
treated as employment costs and therefore on a statutory basis are part of our reported results. However, we exclude them
from adjusted profits and adjusted EPS as an exceptional item, as in our view for the reasons set out
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