A recent report by PwC states that to succeed in the future, global entertainment and media companies must re-envision every aspect of what they do and how they do it. It’s about having, or having access to, the right technology and excellent content, which is delivered in a cost-effective manner to an engaged audience that trusts the brand. For those able to execute successfully, the opportunities are legion.
Below are five companies we believe are at the forefront of this disruption, and are in strong position when it comes to technology, content and distribution.
Netflix (NASDAQ: NFLX)
Netflix’s 3Q18 results and 4Q18 guidance came in well above expectations. Currency adjusted revenue growth was 38% (same as in 2Q), and GAAP operating margin of 12% expanded 500bps year-on-year. This was the eighth straight quarter of 125bps or better year-on-year operating margin expansion.
Marketing spend, which was elevated in the last three quarters, came in well below forecasts. Recent price increases continue to benefit average revenue per user (ARPU) (+8% year-on-year domestic and +11% international) and overall growth. Free cash flow burn remained high however, as the company continues to increase and fund its mix of original content. Management guided calendar year free cash flow burn will likely be comparable to 2018.
Analysts have commented that the company’s 4Q operating income guidance could prove too conservative given global penetration of only 22% (incl. <15% outside the U.S.) and decent pricing power.
Netflix returned +58.78% (AUD) in the year to 1 December 2018.
Discovery (NASDAQ: DISCA)
Discovery 3Q18 earnings report showed good underlying growth and guidance was positive for ad growth. Revenues rose 57% thanks to acquisitions of Scripps Networks Interactive, Motor Trend Group and the Oprah Winfrey Network; excluding those (and forex fluctuations), revenues were up 1%.
Adjusted Operating income before depreciation and amortisation (OIBDA) rose 82% to US$1.044B, topping an expected US$973.5M. Adjusting for the transactions and forex, OIBDA rose 9% (international up 21%, U.S. networks up 6%).
On the earnings call, the company guided to U.S. advertising growth of about 3-5% for Q4; international advertising is expected to be flat, as are U.S. and international affiliate revenues.
For the full year, the company sees U.S. affiliate growth up mid-single digits and pro forma OIBDA growth of at least 7%. The company also reiterated its forecast of US$600M in synergies from the Scripps deal by March 2020.
Discovery returned +46.52% (AUD) in the year to 1 December 2018.
Madison Square Garden (NYSE: MSGN)
On 1 November, MSG Networks reported better than expected quarterly revenue of US$164.5m and adjusted operating income (AOI) of $84.6m. Affiliate revenue growth was above consensus at +US$6.5m year-on-year while advertising was in-line at -$0.1m.
On the earnings call, management stated that subscriptions were down overall with the rate of decline increasing compared to the previous quarter, though improved from the same period last year. The decline was also second lowest over the prior three-year period.
MSGN paid down $93.75m of its term loan in the quarter, including a $75m voluntary payment, bringing its net leverage to 2.7x.
Madison Square Garden A returned +26.75% (AUD) in the year to 1 December 2018.
Eros (NYSE: EROS)
Eros reported 2Q FY19 earnings on 30 October and they were solid. Adjusted EBITDA of USD25m was 23% above consensus estimates, and up 44% year-on-year as “Eros Now*” digital revenues increased significantly on the back of a 246% year-on-year increase in paid subscriptions.
1H digital revenue was 43% of the total, up from 33% last year. The 1H19 adjusted EBITDA margin rose to 41% from 27% a year ago thanks to rising high-margin Eros Now revenue.
In 2H FY19, Eros International should benefit as it is on track to reach its 16 million subscriber target for Eros Now, underpinned by new original shows and a strong pipeline of small to mid-budget movies.
(* Eros Now is a subscription based over the top, video on-demand South Asian entertainment and media platform, launched in 2012 and owned by Eros International).
Eros International returned -24.5% (AUD) in the year to 1 December 2018.
Spotify (NYSE: SPOT)
Spotify also recently reported solid results for its FY3Q although 4Q guidance was reduced slightly given the investment ramp up in 2019 (not unusual in fast growing technology companies). For the most part, SPOT’s 3Q results were good with subscribers, revenue, gross margin and operating losses all either above or in-line with consensus expectations. Spotify is now trading near its April 2018 IPO price of US$132 and off its high of US$192.
Analysts project total MAU (monthly active user) growth in excess of 25% in 2018/2019 and estimate that Spotify could have 400M+ users, including 200M+ premium subscriptions by 2022.
Spotify returned -21.13% (AUD) in the year to 1 December 2018.
You can invest in these companies directly through Macrovue’s Entertainment Vue.
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