ITV plc (ITV) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for ITV's 2022 full year results. As always, Chris will update you on our operational and financial performance. I will then take you through the delivery of our modern TV strategy. And of course, we will then have plenty of time for questions. Before I run through our highlights, I wanted to share a short tape. This shows the quality of our global content slate last year and the brilliant programs we showed on our screens in 2022. Please play the tape. [Presentation]

2022 was a year of strong execution and significant progress for ITV, delivering what we set out this time last year. We entered 2023 with real momentum. When I look back to 2022, several key highlights of a successful year stand out. ITV Studios grew faster than the market with revenue up 19%, and it's an increasingly diversified business. M&E delivered the second highest ad revenue in its history, reflecting the unique role mass reach continues to play in the advertising mix for brands and for agencies. M&E grew digital revenues by 18%, with a significant increase in content, improved user experience and the successful launch of ITVX, which had a really good, strong first 2 months. So this is building a demonstrably more balanced business, which is ideally placed to take advantage of the growing demand for quality content from viewers, broadcasters and streamers, and to take a larger share of the online advertising market. As I'll go on to explain the launch of ITVX, combined with Planet V, our leading addressable advertising platform enables ITV to take continued market share gains in a rapidly growing targeted advertising market. Our balance sheet is robust, which enables us to invest to support our strategy while at the same time delivering returns to shareholders. In line with our dividend policy, the Board has proposed a final dividend of 3.3p, giving a full year dividend of 5p, which we expect to grow over time. Now I'm going to hand over to Chris to talk you through our operating and financial performance in some more detail.

Thanks, Carolyn. Good morning, everyone. ITV delivered strong top line growth with external revenue up 8%, driven by ITV Studios and M&E digital revenue. Group adjusted EBITDA was GBP 717 million. And within this, Studio's EBITA grew strongly. M&E EBITA declined, reflecting investments in content and technology to build ITV's streaming presence, culminating in the launch of ITVX in December. This investment will drive long-term growth and value for shareholders. In the year, we delivered GBP 23 million of cost savings across the group, ahead of our target. We've now delivered GBP 106 million of cumulative savings since 2018. Statutory operating profit was flat and statutory EPS rose to 10.7p, reflecting significantly lower exceptional items in the period. There was GBP 65 million of exceptional items in 2022, which was largely related to digital transformation projects and our move to White City, both of which will drive a permanent ongoing reduction in our cost base, and there are more details in the appendices. Going into Studios in a bit more detail. ITV Studios delivered an impressive performance with a strong slate of deliveries as we continue to focus on growing and further diversifying by genre, by geography and by customer. Total revenues were up 19%, including a GBP 56 million favorable FX movement, with good growth across all businesses, but particularly from the U.K. and the U.S. Total organic revenue at constant currency was up 14%. Looking through the COVID interruption, we've grown broadly in line with our 5% average growth target, with total revenue up 15% and external revenue up 18% in the 3 years from 2019. Adjusted EBITA was up 22% to GBP 259 million, with an adjusted EBITA margin of 12.4%, up from 12.1% in 2021. You've been familiar with our studio's KPIs, which we use to track progress against our priorities. Whilst maintaining margins, we intend to grow faster than the overall content margin by leveraging our existing strength in global unscripted formats and capturing an increasing share of the highest growth areas of the market, which are by genre, high-end scripted drama and by type of customer, local and global streaming platforms. Taking each of the KPIs in turn, revenue growth in 2022 was better than expected, driven by a particularly strong Q4. Margin was constrained by general inflation in the production sector, together with additional costs for productions which were delivered in 2022, but started at a time when COVID was still a significant factor. We remain committed to our adjusted EBITA margin target of 13% to 15% from 2023. Margin will be at the lower end of the range in the shorter term, but remains industry-leading. We made good progress in the faster-growing high-end scripted market, with a number of hours sold up 58% to 276. The number of formats sold in 3 or more countries, which we see as a measure of international success, increased from 15 to 19, formats that become truly global and more profitable and reinforce our strength in unscripted. And the percentage of total revenues from streaming platforms increased significantly, up 9 percentage points to 22%. Turning to Media and Entertainment. Total revenue declined 1%, driven by total advertising revenue, which was also down 1% as expected. Total digital revenues were up 18%, with 17% growth in digital advertising and a 29% increase in subscription revenue with both Hub+ and BritBox U.K. seeing growth. As previously guided, SDN's revenue was under pressure this year down 21% as older contracts were renewed at the new lower market price for DTT capacity. We expect this pressure to continue into next year as further contracts are renewed. Partnerships and other revenues decreased by 2% following very strong 2021 competition revenues. Content costs were up 5% with a return to a full schedule following the disruption caused last year by the knock-on effect of COVID, together with additional investments in ITVX content. Variable costs were up 2%, mainly driven by an increase in commercial payaways and bandwidth costs, which grew in line with increased viewing. These increases were partly offset by lower payaways on competition revenues. Infrastructure and overhead costs increased by 9%, mainly driven by investments in ITVX and data capability, as well as one-off costs such as the donation of proceeds from the Concert for Ukraine and cost of living payments to ITV colleagues. Overall, the investment in data, tech, content and launch of ITVX came in slightly under guidance, but we still expect investment to be as previously guided for the 2 years 2022 and 2023 taken together. The 2022 investment was partly funded by our continued cost saving program, which delivered GBP 16 million of M&A savings in the year. In total, adjusted EBITA was down 22%. Looking forward to 2023, while we continue to see strong growth in digital advertising revenue, up around 25% in Q1, the outlook for total advertising revenue is challenging. Our current estimate is that it will be down around 11%, which is in line with our budget assumptions. It's early days for April, but we expect total advertising revenue for the month to be down between 10% and 15%. Looking at 2022 total ad revenue in a little more detail. The categories with the largest year-on-year movements were airlines and travel, up 59%, following travel restrictions in the prior year; and telecommunications, up 21%, driven by device launches and World Cup-related spend. Cars and car dealers are down significantly as a result of their supply chain issues, and government and charities are down off the back of COVID-related spend last year. E-commerce companies, excluding gambling, decreased 17% in the period. Within this category, the largest declines were online retail and food delivery brands that spent heavily in 2021, and from energy comparison websites for obvious reasons. This was partly offset by growth in online travel brands. ITV's M&E division is primarily an ad-funded business, and advertisers value both volume, the number of times an ad has seen and reach the number of different people who see the ad. Our M&E KPIs reflect the needs of our advertisers and our strategy of growing digital revenues, those are the KPIs in yellow, and maintaining mass reach, those in teal. Starting with digital revenue drivers. Streaming hours, an indicator of the volume of our digital inventory, were up 9%. Importantly within this, viewing on our own services where we can serve ads and monetize was up 18%. This was driven by a combination of a strong live schedule, an increase in the number of hours available on ITV Hub and improved functionality in preparation for the launch of ITVX in December. This was offset by lower viewing on platforms such as Sky and Virgin, where we reduced the availability of pre-transmission drama drops and boxsets because we were not able to monetize the viewing. The number of monthly active users is a measure of the reach of our platform, which is so important for advertisers. They were up 6% at 10.5 million driven by the increase in content on the platform and new types of content, which has attracted a greater breadth of user. Total U.K. subscriptions were up 17%. By increasing streaming hours, monthly active users and subscribers, we grew our digital revenues this year by 18%. Whilst digital advertising is the fastest-growing segment, advertisers still place huge value on the ability to reach large live audiences. ITV's unique position as the largest commercial broadcaster enables us to satisfy this demand. The final 2 KPIs, share of top 1,000 programs and share of commercial viewing, demonstrates our continued strong performance. In addition, a quick word on BritBox International, which continues to perform strongly with 25% growth in subscribers to 3 million. It's now available in 8 countries, and we continue to look at opportunities to roll it out further. On to the balance sheet and cash flow. Profit to cash conversion was lower in 2022 at 75% due to both the growth in the Studios business and the timing of deliveries. It also reflects commissions for ITVX where we've taken delivery of programs but not yet made them available on the platform. In 2023, we estimate profit to cash conversion to be around 70% to 75%, which we expect to increase over time. Our net debt at the end of the period was GBP 623 million. Included in this is a 259 million euro bond maturing in December this year, which we expect to refinance. We're currently exploring medium- to long-term refinancing options, and in the meantime, have full availability of other loan facilities should we need to utilize them. Net debt to adjusted EBITDA is 0.8x, our covenant leverage is 0.7x and we have total liquidity of just under GBP 1.1 billion. The accounting surplus of our pension scheme is GBP 192 million compared to an GBP 8 million deficit at the end of 2021. The next triennial valuation is underway, and we aim to conclude it as quickly as possible. This year, we've had a number of draws on our cash. The dividend, pension contributions, which includes a one-off payment relating to the extension of our asset-backed scheme; and the acquisition of Plimsoll Productions. In addition, the euro bonds that matured in 2022 was redeemed using available cash, which improved the efficiency of the balance sheet and strengthens our credit metrics. Our closing cash balance at the end of the year was GBP 348 million. The Board keeps returns to shareholders continually under review, and I wanted to remind you of our approach to capital allocation. First, we will continue to invest in the business in line with our strategic priorities to create shareholder value. Second, we manage our balance sheet consistent with our commitment to investment-grade metrics over the medium term. Third, we want to sustain a regular dividend, which will grow over time. And we'll continue to set up value-creating M&A opportunities against strict financial and strategic criteria. We will always return any surface capital to shareholders. Here's a reminder of our full year planning assumptions. Content costs are expected to be around GBP 1.3 billion rather than GBP 1.35 billion, as previously guided. This is largely due to a reduction in content amortization driven by the windowing of content between streaming and linear, together with a more cautious approach to commissioning given the economic uncertainty. The current higher rates of inflation will impact non-content costs by around GBP 40 million, as previously guided, although we are looking carefully at further mitigation measures. Exceptional items are expected to reduce again to around GBP 40 million, and pension deficit funding returns to a more normal level of GBP 62 million. Now back to Carolyn.

Thanks very much, Chris. You will be familiar with this slide, which highlights the 3 key drivers of our business. ITV, as you know, is a world-leading producer and distributor of premium video content with 2 growth drivers: ITV Studios and M&E digital; and a resilient cash generator in the third in M&E's linear broadcasting. We have a clear vision to be a leader in U.K. streaming and an expanding force in U.K. and global content. Our strategy to deliver this is by expanding studios further, by supercharging streaming and by optimizing broadcast. Content is at the very heart of everything we do. And being a vertically integrated producer broadcaster and now streamer gives us real competitive advantages and more on that later. Let's take Studios first. ITV Studios is a scaled global producer in a large and growing international market. External forecasts estimate that the market will grow 2% to 3% per year to 2026. And within this, streamers will grow much faster at around 5%. ITV is the #1 producer in the U.K. and one of the largest independent producers in the world with over 60 production labels. We are one of the top 3 international producers in most of the markets that we operate in. And this and our global scale gives us access to key content buyers and top creator talent in the leading markets around the world. While growth continues at a global level, the trends within that vary over time, which is why diversification within Studios is such an important element of resilience and success. Additionally, in the battle to offer viewers a greater range of content, having a huge catalog of over 90,000 hours has given the ITV Studios distribution team their best year ever. ITV Studios is unique among production companies in the range of its diversification by genre, by geography and by customer, as demonstrated in this slide. This enables ITV Studios to respond to changing viewer and customer needs. The best content is, of course, made by the best creative talents, and ITV is a very attractive home for talent due to our label structure, our creative culture, and the vertical integration with media and entertainment. We added to our pool of talent in 2022 by acquiring Plimsoll Productions, as Chris mentioned, and Lingo Pictures, and securing the leading producer, Ben Stephenson, who has now launched Poison Pen Studios, his new transatlantic drama label. In previous presentations, we've talked about our talent deals with Nicola Shindler and Dominic Treadwell-Collins. They are now extremely well established at ITV and have very strong slates. In '22, between them they delivered 3 commissions: Nolly, Holding and You and Me. In 2023, 5 further commissions are expected to be delivered, and there are many more in the pipeline. Diversification also means maintaining a broad range of customers. ITV now sells to over 1,000 customers globally, and no external customer makes up more than 5% of its revenue. This slide shows our high-quality and growing scripted pipeline. This pipeline enables Studio to capture the increasing demand for drama, particularly from streamers. We thought we'd go into a bit more depth into how we maximize the value of our content with a case study, just to bring it to life. We've chosen Vigil the police procedural set on a nuclear submarine. As this slide illustrates, as the creator, owner and distributor, ITV Studios can optimize the windowing of its content across different distribution channels and customers. This allows ITV to extend and maximize the global value of its IP. For the initial commission, we are in a production fee. And through the sale of the international rights to the first window alone, we ensured that Vigil was profitable before it even went on air. Vigil has now sold to over 65 partners over 157 international territories. And the recommission of the program and subsequent launch of a second series will provide a new sales opportunity as well as driving renewed interest in the relicensing of Series 1. The unscripted market also remains strong, given the shorter production cycle and lower relative cost. Unscripted is particularly attractive to customers when there is pressure on content budgets. ITV Studios is one of the largest distributors of unscripted formats globally and has an incredibly strong track record, with not just creating them, but sustaining and growing unscripted formats that can be monetized over many years. We ask customers around the world shows that will gain and retain an audience and who will return every year. And ITV has sold over 60 different formats in '22. And like our dramas, there's a strong pipeline of programs to come. As you can see from this slide, ITV covers every single stage of the evolution of successful shows, from established brands like The Voice and I'm A Celebrity, to next-generation formats like Rat in the Kitchen and recent launches such as Loaded in Paradise. The successful execution of ITV Studios' strategy has resulted in consistent growth. From this strong position, we expect ITV Studios to continue to grow ahead of the market over the medium term and to continue to deliver the industry-leading margins as we rebuild profitability after COVID. ITV Studios is well on track to hit all of its 2026 KPI targets. Given the success we've had in growing revenues from streamers, we've also increased our target for them to 30% of total revenue from 25%. Now on to our M&E division. As you know, this encompasses both streaming and broadcast powered by a single content budget and a very established commercial team. This means viewers can access our contents however and whenever they want to watch it through live linear and on-demand streaming and on a multiplicity of devices. We now offer advertisers both mass reach and targeted advertising that they need in their marketing mix to be effective. First, let's look at broadcast. This slide highlights ITV's unique position as the U.K.'s largest commercial broadcaster with unrivaled audience and reach. Our scale and quality enables us to compete effectively for viewing and command a premium from advertisers. The first pie chart demonstrates our significant share of viewing amongst commercial broadcasters. The second chart shows our USP for delivering mass reach on broadcast TV, which is such -- in such a fragmented market is increasingly scarce and valuable to advertisers. And the final chart shows that despite the changes in viewing habits in the recent years and the significant growth of the streamers, ITV has around the same share of viewing in the U.K. as all of the streaming services combined. This has ensured that our linear revenues have remained resilient, declining just 1% over the last 5 years. And it demonstrates the unique role that mass reach plays for advertisers in building brands and driving commercial performance. Now this is backed by evidence from the U.S., where broadcasters have grown revenue through CPM inflation despite a decline in viewing. This small decline in linear revenues has been more than offset by the 26% growth in digital revenues over that period. As the next chart shows, the total advertising market has grown in the last decade, primarily driven by newer online forms of advertising, as shown in the pink. Other traditional advertising media has declined during the same period. However, TV advertising revenue, including broadcaster video on demand, which we call BVOD, has grown despite gradual declines in audiences. In the near term, whilst the current economic backdrop makes the whole U.K. ad market challenging, we expect the total market to continue growing, driven by online. And importantly, ITV is well positioned now to benefit from this growth in online advertising. This chart shows the online video and display advertising market, a subsector of the online and TV markets in the previous slide. In 2018, when ITV Hub was just a catch-up service, we were only able to compete in the smaller BVOD market. Today, with the launch of ITVX and the investments we've made in tech and data to support Planet V, we have the foundations in place to take greater share of this BVOD market and also to successfully compete for other online video budgets, including platforms such as YouTube. Therefore, our serviceable addressable market, or SAM, has now increased from GBP 400 million to almost GBP 6 billion. While some of the long tail of advertisers within the online video market may be too small for us given the size of their campaigns, it does demonstrate the significant opportunity we have. Our confidence that we can take share within this online advertising market is based on the fact that we have built a substantial streaming position in the U.K. now, spearheaded by ITVX. So here is a brief reminder of the ITVX proposition: It is ad-funded, free to watch; it has over 12,000 hours of high-quality content, including a weekly original exclusive, one of the largest free film libraries now in the U.K. 20 fast channels and all of ITV's linear channels; it also has a premium subscription tier, where consumers can watch all of ITVX content, ad free, including BritBox U.K. and this totals 19,000 hours. In addition, we've just agreed a partnership with Studio Canal for an additional 1,000 hours of films and TV series such as Paddington, Apocalypse Now and The Deer Hunter, and there will be other partnerships to come. So let's now look at how ITVX has performed in its first 2 months. It's been really positively received by viewers and advertisers and commentators alike. The quote on this slide from viewers refer to its great layout, ease of use, why they love the content and that they will be watching more. It is attracting more viewers. 1.5 million new registered users signed up in just the first 2 months. We've seen a 69% increase in viewing compared to the same period last year. Of course, we had the end of the World Cup and Love Island during this period. But by any measure, ITVX has made a very good start. One of ITVX's aims was to attract what we call main streamers. Now these are harder to reach viewers, or lighter viewers, who are particularly elusive and therefore attractive to advertisers, but they are familiar with ITV so they have come into ITV in the past. I'm pleased to say that we've seen a 94% increase in consumption by this group, and a 109% increase amongst 16 to 34 year olds. What's particularly encouraging is that our viewing data is showing that lighter viewers are coming in to watch our exclusive ITVX originals and then they're staying on to explore and discover and watch other content. Now this will be a continuing focus for us in 2023, and we are constantly saying internally that 2023 is a launch year. So pulling this all together, iTVX will continue to give us significant increases in addressable inventory and reach, which the commercial team will monetize. Now I'd just like to turn to ITV's competitive advantages. From an advertising perspective, we provide a brand-safe and measurable environment. Planet V provides pragmatic, targeted advertising, complemented by the deep relationships our commercial team have with brands and agencies. And I'm just going to go into that in a bit more detail in the next slides. From a viewer perspective, ITV has a track record for commissioning and producing content, which appeals to U.K. audiences, evidenced by over 95% prompted awareness for ITV amongst U.K. viewers. Being vertically integrated gives ITV access to a fantastic production slate from ITV Studios and provides advertisers with really innovative and quite impactful opportunities to integrate their brands into our shows. All of this is underpinned by 37 million registered users, one of the U.K.'s largest first-party data sets, which is available to be targeted by advertisers, which is very, very valuable in a world of increasing privacy legislation. Planet V underpins ITV's ability to take share in the growing online advertising market. And as you know, it's an end-to-end platform, which means we control our own sales and our pricing, and there is no value leakage to intermediaries. After Google, it is now the second largest video ad tech platform in the U.K. Planet V allows advertisers to match their data with ITV data and with third-party data to create even more precise audience segments to be targeted on ITVX. Over 90% of ITV's online inventory is booked through Planet V, and it's used by all the major agencies. While ITVX delivers the scale and breadth of eyeballs and an addressable audience, Planet V enables us to create and deliver unique and effective advertising products, which are really valuable for media agencies and advertisers. As this quote says, Planet V enables agencies to be better equipped and will further transform their processes by delivering a more streamlined approach to planning and buying. Its many benefits have attracted over 600 new advertisers and helped deliver over 60% growth in digital advertising since its launch in 2020. Our unrivaled competitive advantage is our ability to offer advertisers 3 powerful propositions: mass reach, targeted advertising and creative partnerships. It's a unique proposition in the ad industry. Many advertisers use all 3 to drive the most effective and impactful advertising, and a great example of this is the retailer Boots. Across 2022, Boots ran 14 different linear campaigns, increasing their spend year-on-year for products ranging from beauty, health care and summer sun care to promotions and Christmas, taking advantage of our unique ability to deliver mass reach to drive awareness and build consideration and positive sentiment for their brands. Using Planet V, Boots have also taken advantage of the full suite of targeting options on offer, as well as being a test partner for a number of our ITV AdLabs innovations such as data match and weather-based targeting, where their hay fever campaign only serve consumers when the pollen count hit the appropriate level, and their sun screen campaign served when the temperature hit a certain level. Across 2022, we've worked together to build a number of integrated creative partnerships. Boots continued to be a key Love Island partner taking on a full license agreement with the show that included 12 different Boots products placed in the biller resulting in a 50% uplift of sales as well as branded social content and in-store point-of-purchase activation. As our CMO said, we have a truly multifaceted partnership which is underpinned by relevance, creativity, value and innovation. I'm pleased to say that M&A is on track to deliver its 2026 KPIs, with 18% digital revenue growth this year and the successful launch of ITVX with our planned continuous enhancements in product, content and distribution, we remain confident in delivering at least GBP 750 million of digital revenues by 2026. Now I just wanted to remind you of a slide that we shared with you at the half year. To deliver GBP 750 million, we would expect to see CAGR growth in the mid-teens for digital advertising as we increase our share of the broadcast and online digital advertising market. In the mid-20s, the subscription revenues and in the mid-single digits for other revenues. Our digital revenue target represents a minimum threshold, as we've said. As you can see from the sensitivity analysis, if we delivered high-teen CAGR for digital advertising, we would grow our digital revenues to GBP 850 million by 2026. Now I hope we've shown you that being a vertically integrated producer, broadcaster and streamer gives us a unique set of competitive advantages for both studios and M&E as we've been talking to you throughout this presentation. It gives ITV group a number of advantages as well. Of course, it provides studios with the base of core commissions, a significant promotional engine for its content. For M&E, it secures great content for ITV's channels, and ITVX. And just a recent stat, nearly 2/3 of ITVX's original commissions in 2022 came from ITV Studios. It provides uniquely valuable partnership opportunities as we've shown for brands to integrate their marketing into our content. And you've seen with Boots and other examples include Ring with Saturday Night Takeaway, eBay, really successful with Love Island and Heineken Zero embedded in Emmerdale and Coronation Street. And in a highly competitive industry, it really does help attract and retain the best creative talent. For the group, it helps deliver growth in both M&A and Studios revenues and profits, and it delivers attractive economics. ITV has been a business historically dependent on linear advertising and therefore, exposed to the cyclicality of that advertising sector. While mass reach will continue to have an important role in the advertising mix, this slide shows the changing revenue profile of ITV since 2018 and what we expect over the next 4 years. By 2026, we expect around 2/3 of ITV revenues to come from our growth drivers: ITV Studios and M&E digital revenues. We expect to continue to grow the business over this period and beyond with growth in Studios and digital expected to offset any change in linear. As we've said earlier, the macro environment in the U.K. is uncertain, but our key value drivers and strong execution ensure we are very well positioned to deliver Phase 2 of our strategy. We expect group margins to continue to reflect investment but with an increasing offset from higher margin, high-growth digital revenues as well as profitable growth in ITV Studios. This will help drive increased profits from the inflection point in 2023. As we've said, we are well on track to deliver all of our KPI targets in 2026, and we will continue to invest to support the strategy and the long-term profitability of ITV while delivering returns to shareholders. We have great momentum and a highly, highly motivated team who have executed really well to date, and are very, very focused on the key drivers of value creation. Before we take your questions, we have another video highlighting some of the exciting slate of programs to come this year on ITV, ITVX and from ITV Studios. Please play the video. [Presentation]

Hi, everyone. I'm going to just hand over to the operator now to take your questions.

[Operator Instructions] Our first question comes from Tom Singlehurst from Citi.

Tom here from Citi. The first question I had was, I suppose, a little conceptual in the sense that, I mean, obviously, the push into digital advertising, in particular, is proceeding the pace. Historically, we on the sell side and investors talk to media buyers who were just trying to get a sense of how sort of net advertising revenue trends are developing. I'm just wondering, as a starting point, how valuable we think that process will be going forward? And then specifically, when you talk about the outlook for the 1Q and April, how do you actually capture growth on digital channels? Because I presume some of that revenue growth is going to be down to volumes of consumption and streaming out. So I would love -- just some help with that. Second question briefly on scheduling costs. You've brought the number down, which makes sense. In the event that advertising ends up better, should we just have in the back of our minds about scheduling cost guidance might reverse and it might be back up again? And those are the 2 questions.

Okay. Tom, there's a bit of an echo. And I think your first question related to -- I think I've got this right, that you're saying is the process by which you glean data on digital advertising, the right process. Is that correct? Or are you asking something more about us?

Apologies about that. I was asking how do you factor -- I was going to say, how do you factor in the variance in streaming hours into your -- on the outlook for advertising?

What do you think?

Yes. So I think the -- so as we said in the presentation, the whole purpose of X is to increase the inventory that's available for targeting. So that involves increase the number of streaming hours by increasing dwell time. And that gives us the volume and then increasing the number of MAUs, which gives us the reach. With that inventory, it's the commercial team's job then to maximize that for advertisers and for ITV. So there can be quite a complex relationship because certain demographics are much more valuable than others. And also, with the beauty of Planet V and the sophistication of that platform, Kelly and team can layer in increasingly valuable ad products for advertisers like the weather targeting, like the Datamatch product. So it's not a simple linear sort of view from volume to [indiscernible].

And ad load comes into that as well. So we have made a very conscious and concerted effort to reduce the ad load on ITVX because the user experience is better. And we have to get that balance right because obviously, the ad load decides how much advertising you're going to take and how much money you're going to take. So it's a fine balance between multiple factors that we take into account. Does that answer your question? Tom?

Yes. That's great. Yes. Yes, that's perfect. And on the schedule costs, any risk at that back up in the event of that advertising?

No, it's not really -- I mean, Chris will say, I mean, and I will say most of that GBP 50 million is amortization. And so therefore, we wouldn't see it as a recurring something that would recur this year. So it would be -- it's a captured cost.

Yes. The schedule is pretty fixed. It will move around the edges, particularly with some sports and particularly dramas depending on when they get dropped on linear following scheduling on X. But I think you could say take the 1.3 as a fixed number for the year regardless of where advertising lands for now.

And Tom, you did mention the outlook, the advertising outlook for Q1 in April. And what I would say on that is it's broadly in line with the TV market. So we're not out of sync at all in that. I think the whole TV market has seen the same kind of minus figures. And that's just worth noting because we've -- it's relevant to us, obviously.

And again, as we said in the presentation, it's exactly where we thought it would be when we were setting budgets at the back end of last year.

Our next question comes from Richard Eary from UBS.

couple of questions from myself. Firstly, just I think, Chris, on the call, you mentioned something about guidance for the variable costs and the infrastructure costs with inside M&A. Was I correct that we should see if we fund those together, we're adding GBP 40 million in from inflation and then minusing GBP 15 million for the cost synergies? So that's the first question. The second thing is on Studios. Obviously, we've had the acquisition of Plimsoll coming through. How does that impact '23 Studios growth? And how should we think Studio's growth grows in '23 versus the long-term guidance of 5%? And then just lastly, going back to sort of Tom's question on schedule costs. Obviously, I understand that those are now locked in for '23. But how do we think about FY '24 in the view where the ad market -- that the ad market still remains pretty weak, will we see that number change as we go into FY '24 to reflect the change in the ad market?

Okay, I'll take the last one first, if that's all right, Richard, and I'll bring Chris in for the cost questions. I think on full year 2024, it's too early really to tell. And one of the things we can do without damaging ourselves is we'll be very careful about content costs. Because as I keep saying, content is at the very heart of how we monetize everything that we do. So we'll be very careful about that. But it is a flexible. It is flexible and that we are able to defer, we're able to -- we're able to do things that doesn't mean we necessarily take the cost completely out. We might spend cost. So it really all depends on 2024. It does give us some flexibility, though, on the bottom line. So I think too early yet to give you any guidance on that.

Yes. And then, Richard, on the cost front, absolutely, inflation of GBP 40 million sort of pay and energy being the big components of that, which we haven't been able to offset. But we have the GBP 15 million coming from the rolling cost saving program. So if you recall, we set a target of GBP 100 million of savings between 2018 and 2022. We've delivered GBP 106 million against that. We're now scheduling another GBP 50 million of efficiencies through to 2026, of which GBP 15 million will come through next year. So that's on the cost. And then on Plimsoll, yes, we will get a bit of a tailwind in terms of revenue and profit from Plimsoll. We had half a year of results last year. We've got a full year next year. It's around the edges in terms of the overall growth, but it is a positive for us. And that long-term guidance target of 5% is organic growth. So that if there's inorganic, then you'd expect that to be on top. And remember that is average growth over the period to 2026. And we had really good growth in 2022, obviously.

Chris, can I just ask a follow-up? Just on that? And how should we think about FY '23 Studio growth? So we still got tailwind effects? And I presume that you've got a lot -- a decent line of sight of visibility on that number. So is this a 7%, 8% number? Or I don't know whether you can comment on that.

Well, as you know, we don't give specific guidance on Studios' growth. But remember that in Q4, we have outperformed where we thought we would be. So -- whilst the absolute value of Studios' sales is going to be a significant move ahead in next year, in '23, sorry, obviously the percentage is influenced by the fact that it's off a much higher base in 2022 from when we gave the guidance.

Yes, because we took a lot of Q4 deliveries -- they all came into Q4. So -- and there's a whole range of them that we could name, and that made a much higher base to work off this year. And it's a strong year.

Yes, exactly.

I mean, Julian is here, so he can answer any further questions on how strongly Studios is having this year.

But yes, we're still expecting really good growth off the back of amazing growth in 2022, and we've got a good line of sight on to it as well. I mean I think it's important to say there's been a lot of kind of speculation in the market about streamers slowing their spend and so on. But really, I mean -- that market is still very vibrant, as you can see from our 2022 numbers and '23 numbers.

Yes. And on that streamer's point, actually, streamers are still spending a lot of money. And there's still -- many of them are still spending more year-on-year and Netflix is maintaining its GBP 17 billion budget. So you hear a lot of noise around streamers, but actually, Apple and Amazon are increasing their budgets year-on-year. So there's a great market. In fact, we're so confident about our pipeline to streamers that we've moved our target up to 30% of revenue from streamers. So that just gives you an idea of how strong we think this year is.

Our next question comes from Julien Roch from Barclays.

Three questions. Following up on the questions we had on content cost. I mean, when will you unveil your ITVX strategy? You said content cost will be GBP 1.35 billion. You're saying GBP 1.3 billion because of amortization. But when asked about next year, you said that you'd be careful with content cost, you have flexibility. It's too early to say. So does that mean that we should forget altogether that GBP 1.35 billion and the new base is GBP 1.3 billion? That's my first question. The second one is total viewing...

Go on.

No. Go ahead. Go ahead. If you want to answer now. That's fine.

Well, no, I think you should take the GBP 1.35 billion as the baseline, because that's what we've said.

Okay. All right. Second question is total viewing hours has declined 2.7% a year since 2015, the first year you gave us the numbers. So from 16.7 billion hours to 13.8 billion hours. Can we get the trends in the first 2 months of full year '23? And why is that not one of your media entertainment KPI, because I would think that your revenue is driven by the overall number, which is a mix of linear and on demand, not only on demand that's my second question. And then the third one is, thank you very much for all the KPIs you've given, the 22% from streamers for ITV Studios is really useful. And you also told us it was 13% internal and 9% external. So can we get an indication of the splits between internal and external for the 30% full year '26 target?

Okay. So content costs, as Carolyn said, take the GBP 1.35 billion. The reason there's a small impact of amortization this year is because we're ramping up content throughout the year. So in future years, you'll have the same falling into the year as is falling out in terms of amortization. In terms of total viewing of that 13.8 billion hours, when you look at the most recently available information, which is to around mid-Feb for this year, ITV is -- those trends are improving and ITV is actually performing better than every other broadcaster, and indeed Netflix in terms of total viewing. So very pleased with the performance this year. In terms of the sort of the detail of the mix of streamers between internal and external, frankly we don't look at it at that level of detail. The whole thing with Studios is it's a portfolio of customers, of genres, of labels. So big picture, we've got a direction of travel, which is to increase the number of scripted hours, retain our amazing position in unscripted and then to increase our proportion of viewing from streamers. So the mix between internal and external, I think, will depend on as the market evolving over the next 3 years.

Our next question comes from Matthew Walker from Crédit Suisse.

Yes, I've got a few, please. The first is -- I know it's a long way away, but maybe if you could sort of think about or quantify the impact of the World Cup in Q4? And when we're thinking about our model, should we be planning, do you think, for part to be up in Q4 or still slightly -- slightly down? I know it depends on the macro, but just if you could sort of think about the World Cup impact there. The second thing is, you've had a really, really strong growth in Studios. To get to the margin of 13%, what do you need to do with your -- with your cost base? Because in '22, you saw the margin increase by about 0.3%, you have to get higher than that in '23. So maybe some color around the margin to 13%, if that's okay. And the last question would be on subscriptions. You've deliberately taken a view that you want to push the advertising because that's the primary target for ITVX. But in your plan, you do have some subscription as well. So when can we anticipate a bigger push on subscriptions? and then any final comments on how is Netflix and Disney doing advertising had any impact on the ad market?

Okay. Let's just take -- we'll take this in order then, Matthew, because the -- I think on the impact of the Rugby World Cup, I mean, I'd like to bring Kelly in here. I mean, first, we're not going to guide you on Q4 -- so we can't -- we just can't do that because there's a number of other things going on in Q4, including the macro, but also we just wouldn't be able to do that. But we would say that we would expect the Rugby World Cup is a big event for us, and it always does well, and it does particularly well. I think just to remind you, it does particularly well amongst certain very valuable advertiser demographic. So actually, it's affluent -- it's usually affluent men of a certain age who have high disposable income. So that we would expect it to do well for us. Kelly, do you want to add some color on kind of how well the advertising base has taken to that?

For the World Cup?

For the Rugby World Cup, yes.

Yes, it's FIFA World Cup last year versus Rugby World Cup.

Yes, that's the problem.

I'll start, yes. So the FIFA World Cup, if we start with that was probably one of the most successful World Cups we've had commercially in its own right. It's up within quite a challenging market. So the rest of the TV market was relatively challenging. But the World Cup within it was really, really strong. So we were very, very significantly ahead of the market across November and December. And I guess the difference between the football World Cup and the Rugby World Cup is we have it exclusively. So we have every live game. It's slightly earlier in the year across September, October. We've already sold the sponsorship to Land Rover Defender, and we are in the process of selling packages of airtime for the Rugby World Cup at the moment. So we've got very, very high hopes that September and October will be strong months. And you probably, probably remember that they are against relatively easy comparables year-on-year. So there'll be a shift in phasing, should we say, across the second half of the year between the 2 quarters.

Yes. Thanks, Kelly. Chris, studio margin?

Yes. I mean the Studios team are brilliant at innovating and getting efficiencies around production costs. So that will be the first place we'll look. So the team are looking -- well, have created these production hubs where we can do several versions of the formats. There's a hub for Love Island, there's a hub for I'm A Celebrity. So it reduces the overall production cost because you've got that fixed cost of the location that we can amortize over more shows. You talked about the fact that we've gone forward 0.3 percentage points in 2022, and we need to do more than that in 2023. I think we'll also be helped by some of the margin issues last year where, as I said in the presentation, were caused by productions that, believe it or not, they started in COVID. So they still have those extra COVID protocol costs in there. Increasingly, production is delivered in 2023 will have a much smaller proportion, if any, COVID impact in them. And just with scale, you do get the economies of scale from the business as well. And also GD, I think...

GDNG merging. I think we've announced that haven't we? So we can say that, yes.

Yes. So we've merged our -- the unit that delivers finished shows and sells those around the world and we've merged that with the team who sell the formats around the world. They're talking to the same customer. They're now going -- it's 2 sales team, both going with both -- the finished takers as we call it, and the formats in the bag and they can sell them both to the same cost.

Yes. So we've merged the teams effectively. So we'll get quite a little of efficiencies out of that and actually it's just more productive to work that way. It's going to be much, much, much leaner but better. So the Studios' team are incredibly focused on the margin, and they have a clear plan with milestones to get to 13%. We've said we think we'll be at the lower end of that 13% to 15% in '23. But we're determined to get to 13%. On subs, you're absolutely right, Matthew. We have really, really, really concentrated on a successful launch for ITVX. It's gone really, really well. The team have delivered such a great -- such a great thing really in quite a short space of time, relatively speaking. And we focus very much on the things like user experience and all of that, personalization, quite a lot more of that design. And also, as I said, about how advertising works with the product team. So we've been really, really pushing the AVOD side, as you said. But we haven't ignored subscriptions because as you say, we have a very clear target by 2026 to double subscriptions to 2.5 million. and that's in the U.K. alone. It's actually going quite well. So we're actually at the moment static because we're transitioning BritBox subscribers into ITVX premium. So BritBox is still there. But we are -- we've merged the 2. So you pay GBP 5.99, you get all of BritBox and you get all of ITVX premium, which means you get everything on ITVX ad-free. We've just signed a deal with Studio Canal about 1,000 hours of amazing films, actually, really, really strong films, just adding to our #1 position. I mean we've got the largest base of films now in the country, which is fantastic. Because viewers like watching films when they come in for something, they'll browse around and then they'll watch films. So it's a really brilliant thing. So we've already started on that push you mentioned on subscriptions. But our key thing will be to upsell people when we know they're more valuable to us than subscription tier, than they are in AVOD tier. So because of the amount of data we now have in ITVX, we're able to do that in a really, really informed way. It's not at all random. And so we can say these customers actually find where they are in AVOD because they actually watch a lot and they're very good for advertising. But actually, these people are perhaps lighter viewers of certain shows, and we might want to upgrade them to ad free. So you'll also see, I think, other partnerships coming through in the pipeline for that premium tier. On Netflix then, [ ad light ], very -- look, I think I can just use Barb data at the moment because they're on Barb now. What we know from Barb is that the ad light tier has been taken by 600,000 Netflix homes, which is very, very low penetration of Netflix. So if you think they're in 16.8 million households. So it's very low. So they're finding, I think, very difficult to fulfill even the smallest campaign that they've got, and they've actually announced that, and they're giving money back. So it's a low reach, high CPM sell. Totally different to what we do. Totally, totally different. It's just a completely different proposition and a different sell. And our proposition is very compelling to advertisers. We've got these major things that we can do for clients and agencies. One is mass reach, obviously, you know our shows. I mean even Vera, which has been a continuing series, I don't know, Kevin will say, I think it's 12 years, 9 years, 12 years, is still getting 7 million, 7.5 million viewers. And all of the dramas have done really well for us. So we've got that mass reach is the only place you can get that is ITV. And now we've got this highly targeted ability on ITVX with Planet V underpinning that. And that is -- we've got scale on that. So all our shows, even on ITVX, will get hundreds and hundreds of thousands of viewers. And we'll often reach 1 million, 1.5 million, 2 million and more million, which is very, very different to what the streamers do. And so our ability to target and deliver audiences of scale, relevant scale is really strong. And then the third thing we do, which is extremely compelling is creative partnerships. So because of the vertically integrated model, we can do 2 lots of those. One is that people can get -- advertisers get involved right at the start at inception of programs, or right at the beginning of productions where they can really work with us as to how they are going to partner with us. eBay is a great example on Love Island, really brilliant example of how we've worked with them for the last 2 years. But we can also just go and get sponsorship for our programs from advertisers. So we just don't do the same thing as Netflix really. And I think we're very, very strong in the ad market for that reason.

Our next question comes from Omar Sheikh from Morgan Stanley.

I've got 3, if I could. Maybe first on ITVX. You've given us an average MAU number for the year. Could you maybe give us an end of year MAU number for December 31? And maybe compare that to what it was or what the MAU count was pre ITVX launch, so 8th of December. And then do you have a current number. I don't know whether it's end Feb, early Feb, that would also be helpful. Secondly on advertising, you've given guidance for Q1. But could you give us a sense of what the -- what you think the market might do in Q1? So whether you're performing above or below the market in the quarter? And is there a comp effect in April? I don't know whether you can just give us what the comp was last year for total advertising revenue in April. And then lastly, I mean there were a couple of press articles in the last few months about ITV Studios. Could you maybe just give us the current thinking on whether it would ever make sense for structural separation or sell a minority?

Okay. I mean we won't really give you -- we're not -- we won't give you the MAU figures for the full year. But just be assured that it will be an increase, and we know exactly what the target is. And you'll know that when we do the full year results next year. So I mean, we will -- we're not shy of that. It's just that it's a sensitive number because our competitors can work out quite a lot of information from our MAUs. That's the only reason we don't give a full year MAU. On advertising, yes, on the market, we would say we are, as I mentioned a bit earlier, I think that we are -- broadly we are exactly the same as the TV market. Everyone's had -- but what I say -- everyone's had a weak market in the TV market, as I said, broadly in line. But I would just stress that this is not something surprising to us. We are bang on where we thought we would be for Q1 and for April. So it's not surprised us in any way. Our whole full year is not, it isn't kind of dislocated as a result of what we've reported in Q1. Do you want to add to that in any way, the ad things?

No, no.

No? April comp?

So April, looking at it, I'm doing it in my head. But it looks like up 9% last year, so '22 on '21. So a relatively strong comp to go against.

And then Studios, I think what we are very -- we've said very clearly that front of mind for us is shareholder value creation, and that the Board regularly review strategic options and we will continue to do so. We've also been very clear that ITV Studios is not for sale. So I think that -- I hope that answers your question, Omar. Does it?

Our next question comes from Nizla Naizer from Deutsche Bank.

I have 2 questions from my end. Firstly, on the sentiments of the advertisers that you're having conversations with now, and you've given us the Q1 outlook and the April outlook. But -- is the sentiment changing on sort of the macroeconomic climate, our advertisers ready to sort of come back and advertise within the market? Some color you could give, that would be fantastic. And secondly, on the cannibalization point that we sometimes asked about. Could you give us some color as you think of the ITVX sort of growth in the last couple of months. How much of that has come from linear advertising shifting to your digital channel versus maybe totally new budgets that have come from sort of online video ad budgets by your clients. Some color there would be great -- for customers rather.

Okay. Thanks. I will just bring Kelly on the sentiments as well because he talks to advertisers every day. I would just say when we've done together some CMO and CEO dinners, they are definitely profit. Protecting for this quarter because they would have laid down their budgets Q3, Q4 for TV last year. But we are definitely hearing more optimism because the economic indicators are better than they were in Q3, Q4. So if you remember the news flow last year was very, very gloomy. And TV takes -- you have to lay it down. And I would just say, I think there's a real cross, because WPP reported very recently, and I know a lot of you follow WPP. It was interesting to hear the comment that they know that -- they have said that TV spend will come back to the pre-pandemic level this year. And they've said the reason for that for TV is its effectiveness in satisfying reach and frequency goals for clients. And I thought it was quite interesting, the one of -- they're obviously right up there in the top 3 of our biggest advertisers in terms of agencies. So Kelly, would you just add some color to some of the client comments?

Well, I'd just reiterate what you said in that we expected Q1 to feel like it does at the moment, because the economic narrative was so negative at the back end of last year. But we are definitely sensing as the -- as the economic narrative improves. As you said, we're definitely starting to sense that advertisers are starting to think more seriously about their investment. I would say they did the minimum of what they needed to do in Q1, and they're now starting to think much more positive. We're getting much more briefs through the door from advertisers from May onwards in particular. So yes, it feels like we thought it would do, that we had very tough comps Q1 and a very negative economic outlook at the end of last year. And we're definitely seeing an improvement. And just in terms of the question about ITVX revenue, it's really -- it's always -- with working so many advertisers, it's really difficult to see who's moved from linear to digital. But I would say that -- driven by Planet V. We've seen something -- like last year, we saw 400 advertisers come on to our digital platform who don't spend anything with us on TV. So we're definitely starting to see us make headwinds, making progress in attracting the kind of long tail of advertisers that sit in digital. But equally, major advertisers are moving more towards, they call it CTV or VOD advertising, because that's where -- that's the engine growth of TV at the moment.

Yes. I mean there's the advertising. And I think if you look at the slide in your packs, which were the -- is about the serviceable addressable market for ITV, as a result of ITVX and the inventory and the underpinning of Planet V, which allows it to do so much, we're able to play in a very different market. We were only able to do BVOD. I don't know if the slide can be actually put up, but it would be quite helpful because in 2018, we had a tiny sliver really, where we could go and get VOD advertising, which was BVOD, is about GBP 400 million. I can't see because, I have my glasses off. And now the market that we are able to go after is about GBP 5.8 billion, nearly GBP 6 billion. And so I think we just put it up I think from an advertising point of view, we're expanding our ability to get more revenue. I think from a viewing point of view, I'll bring Chris in here. But big picture, it's really important to remember this, linear viewing is eroding gradually actually, very gradually. We're still in equivalent share larger as ITV than all the streamers put together. And when you think of the competition that we've got in the market for viewing, we include gaming in competing for attention. We feel we're really holding our own. But the big picture point is that it's really not about cannibalization. It's really about retaining our viewers and attracting lighter viewers into ITVX who have perhaps gone off to experiment to try to see what else is out there because there's a lot else out there. So by having ITVX, it gives us a much, much better chance to attract viewers in, to retain viewers. Because if you're watching ITV, you're going to watch ITVX. But also to get those light viewers who are much more elusive -- and what -- you've seen the numbers. We've done very, very well on light viewers already, and that's just going to -- we're going to aim. We're really focused on building that. And the way we market has changed quite dramatically on light viewers. I mean we're just doing a whole range of different things. So for instance, we're on Fortnite at the moment as ITVX. That's because we know that there are a lot of people that wouldn't normally view -- they would come in for ITV for sport, for instance, but they wouldn't normally come in and browse. That's had a good effect. We wrapped the IMAX. That got a huge amount of publicity. We've just done a whole load of things. We're using influencers in a way that we've never done before. So we're using a couple of influencers like Ali-A and [ Vixa ], you probably haven't heard of them, but they've got millions and millions of subscribers. And that's not a place that we would never -- we would never have been partnering with that before. That's all about getting light viewers into ITVX. So I just think you have to take a big picture of this. Cannibalization, we have to really monitor that from a revenue point of view. But actually, the CPMs stand up very well on ITVX.

Yes, I mean -- and that's absolutely right. I think there has been too much focus on cannibalization historically. The whole experience from the U.S. is that the networks have absolutely maintained their revenue, even as audiences have declined actually more precipitously because it's a pay environment there, not a free to air. So Europe hasn't experienced the same. And what we've seen is that CPMs for mass reach do inflate because it's so incredibly valuable. And as it grows more scarce, advertisers will be -- pay a reasonable amount more each year. So linear will remain really resilient in terms of revenue, and we can add all of the targeting from the light viewers and the incredible reach of ITVX. And what I find really exciting is that the more ways that you can watch ITV viewing. For instance, now ITVX is on Sky Q, as consumer behavior changes, people who wouldn't normally have PVR that have recorded their shows and then watch them back later, we can't monetize that. We don't get paid for the ads in that. Those viewers, as they change habits, will go to ITVX for their on-demand viewing. That means we can serve ads to those people. That's 5 million or 6 million households where all of the catch-up TV over time will be coming into X. So there's just so much opportunity. Same on Virgin, there was a catch-up service on Virgin. Now you can only watch a catch-up for ITV, via ITVX on Virgin. So that's another 3 million households that are exploring ITVX. So I think there's a huge opportunity. And going back to the slide that we showed, that Slide 33. You're going from GBP 800 million market that we're playing in to a GBP 5.8 billion market. It's a massive opportunity for us.

Our final question is a follow-up question from Julien Roch from Barclays.

You've restated the accounting of Studio to remove the unrealized profit in stock adjustment, and has gone from plus 2 in '21 to minus 6 in '22. When you say you're going to get to 13% margin in '23, is that -- does that include the unrealized profit in stock adjustment, i.e., that's the lower number? Or you're looking at adjusted EBITA pre the unrealized profit. And if it is the higher number, can we have an idea of how much unrealized profit in stock adjustment will be in '23? Because we only have 2 years and plus 2, minus 6 means it was a good forecast.

Yes. So the short answer is the Studios margin that we declared is before that unrealized profit adjustment, that arises on consolidation of the 2 businesses. So the true margin within Studios, you're looking -- you're seeing a true picture of Studios as a standalone business. That number bounces around. Sometimes it's profit, sometimes it's loss. It purely depends on the timing of deliveries, both coming into the year, so as you exit the previous year and as you exit the year that you're in. So we don't forecast it because it does bounce around. Historically, it's been 1 or 2. This year, it happens to be 6, but there's no particular reason other than the timing of the deliveries.

Okay. So central assumption is mostly flat and therefore, doesn't make that much difference?

Because you need to at it at the group level.

Yes. Do you want to repeat that?

Yes. So just look at it -- it's a group adjustment. It's not a Studios adjustment.

Okay. Thank you all very much for your questions, and see you all soon.