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Advertising slump hits ITV, but online trust crisis could boost future revenues

ITV Plc profits tumbled as U.K. economic and political uncertainty slashed marketing spend, but the commercial broadcaster said dwindling confidence in online advertising would benefit traditional TV revenues in 2018.

With cyclical factors fueling an ad slowdown in Britain, the group's net advertising revenue slid 5% to £1.59 billion, while pretax profits fell 6% to £800 million for the year ended Dec. 31, 2017.

ITV's share price was down 8.2% at 159 pence at 10:44 a.m. ET on Feb. 28.

Speaking during a Feb. 28 earnings call, CEO Dame Carolyn McCall moved to reassure investors over the "challenging" advertising market, noting linear TV had made some gains from the closer scrutiny of poor levels of transparency, brand safety and measurability associated with online ads.

In 2017, internet companies including Facebook Inc., Twitter Inc. and Alphabet Inc.'s YouTube came under fire for failing to tackle extremist material on their platforms. A number of brands including Jaguar Land Rover and L'Oréal pulled advertising from YouTube, for example, due to concerns over brand safety.

McCall added that live TV remains the "preferred" method of watching content, even for younger audiences.

As a result, the group expects net advertising revenues to be improved in the first half of 2018, with earnings up 1% in the first quarter, leading to double digit revenue growth for the full year.

"There are definitely more questions about online advertising, not simply the transparency and the trust ... [but also] where your advertising is seen ... what you are actually paying for, how much of it is driven by bots and how much is actually worth paying for," McCall said.

In contrast, she lauded TV's ability to provide a "safe, trusted and transparent environment" and the "highest return on investment of any media." Quoting recent research by analytics firm Ebiquity, for instance, she said that for every £1 spent, TV generates over £4 of profit compared to just over £2 for online video and less than £1 for online display.

Despite this, advertisers spent more on digital media than traditional TV last year. Digital ad spending reached $209 billion globally, up 17% and capturing a 41% share of the market in 2017, while TV brought in $178 billion, worth 35% of the market, according to research firm MAGNA.

"You want to plan media to be effective, and if it is not effective, then it does not matter what you are doing to be seen to be keeping up with the trend," she argued.

Driven by 11% growth outside advertising, ITV's total external revenue was up 2% to £3.13 billion. ITV Studios delivered a 13% hike in revenue to £1.58 billion, while viewing was up for the second year, growing 2%. Viewing on the ITV Hub, whose 21 million registered viewers include 75% of the U.K.'s 16–24-year-olds, was up 39%.

"It has clearly been in 2017 a challenging year for business generally, with continuing economic and political uncertainty, and for ITV, this has obviously impacted TV advertising spend," McCall concluded. But, despite the challenges, ITV's operational performance has actually been strong, she stressed.