Prosiebensat 1 Media SE

XETRA:PSM

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, welcome to the Q1 2019 Results Call of ProSiebenSat.1 Media SE. This conference is being recorded. Today's call is hosted by Ms. Rupp-Menedetter. Please go ahead, Ms. Rupp-Menedetter.

[Stefanie Rupp-Menedetter]

Good morning, everyone, and welcome to our Q1 press conference call. Our CEO, Max Conze; together with Deputy CFO, Ralf Gierig will lead you through the presentation today. For the first time, we today broadcast this quarterly call via web stream. [Operator Instructions] But now let's get started with this, and I hand over to Max.

[Max Conze, Chairman of Executive Board & CEO]

Good morning, and thank you for Joyn-ning us today, which is a bit of word play. And some of you may have seen and some may not have seen that yesterday, we announced the launch of our new streaming platform, Joyn, this summer. And I think it's a wonderful word play in combination because it combines the two sentiments we're after, which is for all of Germany to join us and to take joy out of the streaming experience we look to provide, and I will give you details on our planned launch later.On Slide 4. I just wanted to start off on a personal note in that, all in, I was quite pleased with our first quarter and that's really for two reasons. One, on revenues, we are making a positive start and growing about 4%. Not yet everything we want, but good momentum, and I think, importantly driven by really strong development of Red Arrow Studios with plus 38% and NuCom Group with plus 25%. Digital and smart advertising business also grew plus 14%, again, more acceleration needed, but I think quite encouraging.Two, we are winning with consumers and audiences, and I think that's very important because underlyingly, it's the entertainment and content we create and getting people to engage with what we are creating. We've had the best TV audience share since first quarter 2016. And importantly, total digital viewtime grew by 26%. And this really matters because the key conversation that I think we have in Cyprus even, but also we have outside with you, is how do we counter the decline in TV consumption. And the answer is by growing digital over proportionately fast. And while we're not completely there, I thought it was encouraging to see us delivering total video viewtime. So when you combine TV viewing consumption and digital viewing consumption to be almost flat. And that is really important because let me remind you what is our core growth thesis. Our core growth thesis is, number one that we can grow digital viewtime, overcompensating TV decline and thus, building total viewtime and reach; two, that we can translate that into more money because we can make advertising smarter and thus, address more of EUR 22 billion German advertising market; and three, that we can continue to use and build the advantages of having an entertainment and commerce ecosystem to deliver growth on both ends of the equation. I'll talk about Joyn a little bit later. And the last overarching comment I wanted to make is on team, culture and transformation, where I think we're well underway. Of course, not all done yet, but I'm feeling good about the progress we're making.Now moving to key financials for the first quarter on Page 5. If you look at group revenues, organic growth at 3%, reported at 4%.Let me comment on the segments and I'll do it from the bottom up. If you look at NuCom, very good organic growth at 14%, at the top end of our guidance, 25% reported. And Red Arrow Studios, actually well ahead of our guidance at plus 31% organic and plus 38% reported. On Entertainment, we're seeing about a 4% revenue decline, organic. That's 7% reported because remember, there's a deconsolidation effect of predominantly maxdome in this. And then if you look underlyingly, TV core advertising is about minus 4%, digital and smart advertising is about plus 14%. These numbers, give or take, would be the same organic and reported.We now have April actuals. And April was actually encouraging with both TV core advertising and total entertainment positive. And so if you look at our year-to-date position 4 months in and, remember, we discussed jointly that, that is probably the first marker for us to get a sense of how this year will perform in terms of advertising market. The entertainment ad revenues are about minus 2%.If you look at group adjusted EBITDA, that's minus 5% behind the investments that we're making into the future. And as I think we have comments in the past, we expect more accentuated EBITDA declines in quarter 2 and quarter 3, predominantly behind the investments that we're making in content, which will partially reverse out in Q4, and importantly, is not built on overly yet optimistic entertainment revenue assumptions. And I think with all that, we are quite comfortable, and Ralf will comment on this later with the guidance we have provided you with previously.If you go to Slide 6, let me talk in more detail about entertainment. And I think what I'm really pleased about is that we are gaining on total video viewtime. I think this reflects that plus 26% growth around all of our digital platforms, and that's before we're launching Joyn and indeed very strong TV audience share gains.It is quite interesting to note that Austria, while a relatively small part of our total business, is a bit of a testbed for us because it's small, because we already are organized as an all-in enter -- entertainment company. We're able to, I think, execute and operate more strongly. And it's quite encouraging to me that in that environment, we're able to deliver positive entertainment revenue growth despite seeing the same levels of TV ad market decline that we're seeing in Germany. And that is predominantly driven by faster focus on digital, around 30% growth. And by the way, in April, in Germany, we're also seeing above 30% growth on digital. So not all done yet, but I think at least some encouraging signs that we're going the right direction. All that, based on a very strong local content push with 43 new formats in Q1 and a slate of entertainment formats that are coming this summer that I am very excited about. I will talk about Joyn in a moment. Distribution continues to show solid revenue growth, and we are quite focused on building more new client business.If you look on Slide 7. Really quite successful slate of programs. And they are broad because I think sometimes there's a perception we are -- we're doing Germany's Next Topmodel and The Voice, but we have a very broad offering. Factual is really matters to us, and with Taff, with Red, with Galileo, with acht, we have the most successful lineup of magazine formats. They are performing more strongly than ever. And they are creating local relevancy, I think, in a way that for example, our global streaming competitors cannot. We're really winning on show and reality, whether that's with The Voice Kids, up 42% in digital video views, whether that's with Germany's Next Topmodel that is just having a smashing season indeed. We're winning with comedy, and Late Night Berlin is a good example, which is a format that we have stuck with, that we are developing and that I think is becoming a real anchor point in the German programming landscape. We're investing in fiction, where we have a number of thematic films around stalking, moral courage, sexual harassment that had very close to 10 million viewers. And indeed, we're doing more on sports.We also, I think, are taking our world to entertain and inform series, and because we are approaching European election season, we have a very big campaign where we're using our assets to encourage young people in Germany to participate and make their voice heard about the future in Europe, which I think is something that's very important and meaningful to all of us.If you look on Slide 8, Studio71 is creating hugely exciting content for young people at large scale. And by the way, we are generating 630 million monthly streaming views in Germany. So that is counting both TV content that we're making available as well as content that we're creating uniquely for these environments. And, if you will allow me, that is twice as many YouTube views as the following 6 competitors combined.Now on Slide 9, I did want to spend a moment and talk about macro and advertising environment because that is certainly something on our minds and I know very high on your minds. And without a doubt, the German environment, I think, it's both still volatile, bit difficult to predict. And as I've said before, I'm not smart enough to predict where advertising markets will be a year from now, let alone where they will be 3 months from now. But I think what is very interesting to see is that in that uncertain environment, we are seeing an improving trend.So if you look at ProSiebenSat.1 entertainment ad revenues, Q4 '18 was minus 8%, Q1 '19 was minus 4%, year-to-date April is minus 2%. And importantly, we are really focused on how we can leverage further monetization potentials. We're doing more work with direct clients, and you see the share of direct business climbing. We are investing more energy and really not just being a TV or reach inventory seller, but building 360-degree propositions. We just had a very successful H&M campaign around Voice Kids. We're expanding new client business, for example, MAC Cosmetics, again, integrated seamlessly around content. We're building out more smart reach, both in number of campaigns and we're continuing to work on the technology that is critically required for us to win with smart reach.Just yesterday, we completed very important technical work and an important step forward on addressable inventory, where we now are the first broadcaster, globally, that can launch ad TV spots on HbbTV 1.5 in every ad break. And what that means, to put in simple terms is, that we are increasing the amount of inventory that we can access with addressable dramatically. If you put together the amount of inventory addressable on TV, you cast your eye forward, and you think about how much we're building digital inventory, particularly as when Joyn comes on stream. Then really, that is the first most important move for us to make a bigger, more intelligent inventory of advertising available that we can then monetize better.Now with that, let me spend a few moments and talk about Joyn. First of all, on the planning roadmap, we are about to launch a better version. We -- I have it on my phone. By the way, if you have it, it becomes quite an inescapable habit. Because the one thing that people forget is that in Germany, there's still is not one app and one streaming service that is free, and not behind the pay wall, where you can access broadly the channels and the content that you want and love, and you can do that on every device. You have to jump from app to website, to this and that, or you have to pay big services to do that for you. And I think that's a unique window of opportunity for us because, don't forget that, where we come from is as a free-to-air broadcaster advertising-funded. And I think there's a huge opportunity for us to take that position and replicate it in the digital space. So we'll have better launch in May. We will then launch this broad and publicly in June, and we will have a subscription layer that integrates maxdome, Eurosport player and a few other things later in the year.What are we going to offer? On Slide 11, you can see that we think we'll have more than 50 live channels at launch. We have worked very closely with RRD. And I'm very pleased to say that I am confident that RRD will be ready to join us when we launch in summer. And indeed that means our channel lineup is pretty much complete across the German landscape with the exception of RTL channels. We will, on the channels we control, have 7 days pre-TV airing, 30 days catch-up. We'll have 40 TV previews. We'll have 5 exclusive/originals. We'll have about 20,000 episodes available in our library across 4,000 formats. And when we launch, we will use the unique strength we have. 25 million people engaged with our content every week, and we will have a very big campaign over the first 3 months to really invite all of Germany to join the journey.The other thing we'll do as we go through the better phase is really invite German users to work with us, how to make this the best streaming offer for them. Whether that's the 10-minute snackable news you want to see in the morning on the way to work; whether it's the 5-minute comedy that you watch after you come home from work; whether it's the, "It rains on Sunday" charming playlist; or whatever other ideas users have in Germany, we want to listen to them, invite them into that journey so that we can build the best product that everybody needs to have. And as you can see on Page 12, we think there is quite a unique, comprehensive offering that we have put together, relative to everything else that sits in the landscape.Now let me talk about Red Arrow Studios. As I've commented before, very strong start with plus 38% revenue growth. Where is this coming from? Well, we have really quite a superb 2019 content production slate. From The Weekly, which is New York Times first major foray into TV; to Vienna Blood that we're doing together with ZDF and ORF; to Jailbirds for Netflix; to another season of Bosch and I could go on and on.And indeed on Slide 14, we've put together just a high-level view of some of the very exciting pipeline and renewals that are coming on stream, and hopefully, all of us will get to enjoy.Slide 15. I did want to make a comment on Studio71 because I think sometimes, we're maybe not talking enough about it or people are not understanding enough what it is and how critical and important it is. Studio71, today, is the world's largest distributor and producer of social media, or if you want to call it short-form content. We have 10 billion views per month on YouTube, we have 450 million followers on Instagram, 1 billion plus Snaps, we're on TikTok, and we're everywhere. You look and that's so important for us because for us to create a winning, high-growth entertainment of the future. We need to be deeply connected to young audiences. And the wonderful team that we have at Studio71 is helping us do this in a leading way, both in Germany, but also in the U.S. and globally.Now on Slide 16, let me comment on NuCom Group. Overall, I think a pleasing first quarter at plus 14% organic, plus 25% reported. And you can see that across the 4 major verticals, there is really good progress and development. One or two comments, eharmony, I think the integration work is going really well. We're seeing positive registration and revenue growth for the first time in a very long time. We started to deploy our technology and marketing assets. And I'm really, really quite excited about what we can do with that business.The other example maybe I wanted to give you because it shows how we're creating synergies, is Jochen Schweizer and mydays Group. Because on Jochen Schweizer, we are working with him, and will launch later this year a Jochen Schweizer TV show called The Dream Job, where Jochen himself is looking for a new Managing Director for his company and in probably the most unusual and daring process. There's a number of candidates that have to take on various challenges around the world with Jochen. We are working on a separate venture that I won't comment on yet with Jochen Schweizer, that I think will come alive later in the year. And then of course, jointly, we're moving into the very important Christmas business. So I think that's a nice example of where -- what we can do in entertainment and what we can do in commerce is combining and coming alive.We're now early in the second year of NuCom existence as a company, and I think it is quite exciting that NuCom this year will become a EUR 1 billion-plus revenue business. And if you look at the growth rates we're projecting for the year, and if you were to benchmark that against listed Internet companies, we will be, if not the, certainly, one of the fastest growing Internet/digital companies in Germany.Now on Slide 17. Before I close, I just wanted to make a few remarks on where we are on our transformation agenda. Again, good progress, but much remains to be done. One, we've completed the top team with I think a very strong mix of ProSiebenSat.1 experience but also importantly needed fresh perspective. We fill critical capability gaps from tech to HR. Two, we're changing our culture to be much faster and nimbler, and we're very focused on execution because, at the end of the day, as I think many of you have commented, the game in winning media going forward isn't really one of strategy. It is one of execution. Can we deliver digitally? Can we deliver in streaming? Can we deliver on the synergies?We are structuring a future ProSiebenSat.1 entertainment company. I've commented on this previously. We're making really good experiences with NuCom. And the cleanliness of that setup, I think entertainment hasn't been set up that clean in the past. We've appointed 2 CEOs. And we're now structuring the team, and really making sure that we have an entertainment business that can operate and win day in, day out.We also are in the midst of looking at all investments, and I've asked the team to put together a proposal for us to divest nonstrategic minority stakes so that we can generate cash that we can use to reinvest into the critical strategic growth drivers. We are exercising very tight control on content, digital and tech investments and indeed are improving our cash position.And five, we're progressing on our technology roadmap with particular focus on smart reach. And the arrival of Nick as CTO, very imminently, I think, will help us further accelerate that agenda. And then as you know, we're working with our European Media Alliance partners, particularly on content coproduction and advertising technology solutions.Allow me to close on Slide 18 on valuation and share price. And this isn't for me to say where I think the share price needs to be. That is for our investors to decide. Our job is to execute on strategy and deliver. But if you look at valuations, I think it does strike, one, that relative to both the diversification that we have and the strategy we have going forward, there is very significant potential for us to correct the value equation going forward. And thus, I wanted to close and reiterate what is, "Our investment thesis." That more local relevant content delivered, more digitally can grow reach. That smart reach and 360-degree advertising approaches can unlock more of a EUR 22 billion German advertising market. And that entertainment and commerce are very synergistic and can feed and develop each other. A statement of the obvious, we're in the midst of transformation. Ad market is difficult to reach. Not everything we're doing is perfect by the longest stretch of imagination, but I am feeling good about momentum and progress. And I have a very unwavering conviction to win. And as you will have seen, I am putting my personal money where my conviction is.So with that, I'd like to pass on to Ralf.

[Ralf Peter Gierig]

Well, thank you, Max, and let me now continue with a few more details on the financial performance of the group and our 3 segments.So please turn to Page 20. In Q1 2019, we have achieved group revenue growth of about 4% on a reported and also about 3% on a portfolio and currency adjusted basis. Adjusted EBITDA for the group declined mainly due to lower advertising revenues as well as P&L investments in entertainment and to content, reach and monetization. Thanks to counterbalancing cost savings in the entertainment segment, the decline in adjusted EBITDA could be limited to 5%.Both the NuCom Group and Red Arrow Studios came in strong, both in terms of revenue and earnings contributions.With regards to group adjusted net income, we saw slight increase of 1%. This was primarily related to lower net interest expenses recorded.Net financial debt increased to about EUR 2.2 billion, which reflects M&A CapEx, including the acquisition of minorities of EUR 314 million in the past 12 months. In addition to that, the share buyback in the amount of EUR 50 million, a onetime tax charge of about EUR 40 million and restructuring expenses in the mid-double-digit million euro range has affected our net financial debt since Q1 2018. The financial leverage was 2.2x. Net debt to adjusted EBITDA enhanced within the targeted range of 1.5x to 2.5x.Please turn to the next page. Revenues for the entertainment segment declined 7% to EUR 579 million. The decline was primarily related to weaker advertising revenues as well as the deconsolidation of both maxdome and 7NXT, which have negatively affected external segment revenues by about 3 percentage points.Total advertising revenues in entertainment declined close to 4% from EUR 526 million to EUR 507 million due to a demanding market environment and the late Easter, which fell into April this year. Within the mix, TV core advertising revenues decreased by around 4% and digital and smart advertising revenues increased by around 14%.Distribution revenues yet again showed 11% revenue growth and, hence, very satisfying and reached EUR 38 million, supported by a continuing growth of subscriptions.Last but not least, other entertainment revenues declined by 47%, which were negatively affected by the deconsolidations as well as lower program sales. On the other hand, both our Ad Tech and 7sports business units grew nicely.Entertainment adjusted EBITDA thus declined by 11% to EUR 163 million from EUR 183 million, mainly reflecting the development of advertising revenues. Incremental P&L investments in the low double-digit million euros amount were offset by cost savings.Please turn to Page 22. As indicated at our full year 2018 results conference call in March, we will be reporting selected key operational KPIs from Q1 2019 onwards on a quarterly basis. But most of the entertainment KPIs on this Page 22 are self-explaining. And whilst Max has already elaborated on the most relevant KPI, total video viewtime, I just want to remind you that total video viewtime combines the traditional daily linear TV consumption of our channel, measured by the German TV panel and the digital content consumption on all of our digital platforms both linear and nonlinear. This is the foundation of our future advertising business as it takes all of our available advertising inventory into account.Now please turn to Page 23. In the Content Production & Global Sales segment, i.e., the Red Arrow Studios business, we saw a meaningful improvement of both revenues and adjusted EBITDA in the first quarter. Thanks to double-digit percentage growth of Red Arrow's production business as well as a continuing strong expansion of Studio71, external segment revenues increased by 38% to EUR 135 million. The production business in particular benefited from growth of the portfolio companies, Left/Right and Endor.In addition, Studio71's business grew dynamically in all of its key markets with overall revenue growth of 56% in Q1. Segment profitability increased along with growing revenues on the content production business as well as reduced losses at Studio71 due to positive operating leverage. Please turn to Page 24. As you can see on this slide, almost all operating KPIs of Red Arrow Studios show improvement. In terms of the production business of Red Arrow, the number of productions and number of hours produced are worth highlighting.With regards to Studio71's business, the increase of monthly video views by more than 20% to 10 billion, as well as a strong increase of YouTube subscribers and monthly minutes watched explained the strong performance of this division.Please now turn to Page 25. Page 25 shows the performance of our commerce segment, i.e., the NuCom Group business, with dynamic external revenue growth of 25% and an adjusted EBITDA increase by 44%. Portfolio and currency adjusted revenue growth was 14% and hence, at the upper end of our midterm revenue growth range of 10% to 15%. The positive development was driven by all verticals with a strong organic performance of consumer advice, experience and gift vouchers, and beauty and lifestyle, all driven by the particular lead assets, Verivox, Jochen Schweizer mydays and Flaconi.Matchmaking also grew in line with our expectations, and we are so far, very satisfied with the development of the recent acquired U.S. matchmaking business of eharmony. eharmony already saw improvement in terms of registrations, which is a good indicator for future revenue growth.Now please turn to Page 26. In terms of NuCom's operational KPIs, we saw an improvement in all 4 verticals with a pronounced increase in matchmaking and beauty and lifestyle. Please note that the strong increase in registrations in the matchmaking business mainly stems from the acquisition of eharmony, which was not included in the Q1 2018 numbers. This being said, also on a like-for-like basis, i.e., for Parship and ElitePartner, we could achieve an improvement compared to last year.Let me now conclude my part of the presentation with a confirmation of our financial targets for the full year 2019. Please turn to Page 27. Let me first recap our full year guidance. As already communicated, we target full year group revenue growth in the mid-single-digit percentage range and an adjusted EBITDA margin between 22% and 25%, respectively. These targets presumed a stable to only slightly declining development of the TV advertising market and the corresponding development of TV advertising revenues in the entertainment segment.In the first quarter, the overall came in on track with respect to achieving our goals for the full year. We delivered 4% group revenue growth, despite TV core and total entertainment advertising revenues coming in at around minus 4%.As announced, Q1 earnings were affected by first P&L investments in entertainment, supporting our digital transformation. However, adjusted EBITDA for the group, coming in at minus 5%, year-on-year on Q1, was also in line with respect to achieving our targets.For Q2, in terms of revenue performance, we are seeing a solid start in all segments. TV core and total entertainment advertising revenues in April have been positive, which has limited the decline of total entertainment advertising revenues in the first 4 months, i.e., year-to-date April, to minus 2%. For May and June, as in any post-soccer World Cup year, we expect a reversal of last year's soccer seasonality with this year's TV advertising revenues in May trending weak but with June we expected stronger.For the other 2 segments in Q2, Red Arrow Studios and NuCom Group, we are optimistic that both segments will continue to show dynamic revenue growth year-on-year.With respect to earnings, let me again emphasize that the P&L investments in the entertainment segment will have a pronounced impact on the group's profitability in Q2 and Q3. For the full year, we expect, as announced, that the decline in group adjusted EBITDA will be limited to a mid-double-digit million amount. To be clear, this is not built on overly optimistic revenue assumptions towards the end of the year, but a reflection of content investments in Q2 and Q3 and will partially reverse out in Q4.For the full year, with the advertising outlook remaining limited, we expect good progress with regards to tapping additional advertising monies in the TV and digital space through our monetization initiatives, enabling us to support our total entertainment advertising top line even in a potentially weaker ad environment.In addition, we are prepared to address any potential incremental weakness in market conditions beyond our ongoing assumptions by continued cost management efforts. This being said, and taking into account the performance of Red Arrow Studios and NuCom Group, we see ourselves on track to achieving our group financial targets for the full year.Overall, we will be working very hard to accelerate the performance of the business where we are already seeing a promising development to ensure the continuing transformation of the group.With this, we conclude our presentation and open up Q&A.

[Operator]

[Operator Instructions] The first question is from [ Johann ] [indiscernible] from Reuters.

[Unknown Analyst]

This is [ Johann ] [indiscernible] I have two questions to Mr. Conze. The first one is the launch of Joyn. You mentioned the full subscription-based offer will be launched later this year. In the presentation, it says in winter. So does this means this will be launched around Christmas at the beginning of winter? And my second question is on the divestments. Which parts of the company or which assets are you planning or could you imagine to divest?

[Max Conze, Chairman of Executive Board & CEO]

Yes. [Foreign Language]

[Unknown Analyst]

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[Max Conze, Chairman of Executive Board & CEO]

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[Unknown Analyst]

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[Max Conze, Chairman of Executive Board & CEO]

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[Operator]

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[Unknown Analyst]

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[Max Conze, Chairman of Executive Board & CEO]

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[Unknown Analyst]

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[Max Conze, Chairman of Executive Board & CEO]

[Foreign Language]

[Operator]

[Operator Instructions] [Foreign Language]

[Unknown Executive]

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[Operator]

And this concludes today's call. Thank you for your participation. You may now disconnect.