Modern Times Group hit by increasing programming costs

Modern Times Group’s third quarter results disappointed investment analysts, with higher churn among premium pay TV subscribers, a soft advertising market in the Nordic region and higher content and new business investment costs all hitting its bottom line.

The company said that the need to invest more in content would lead to expected full-year earnings before interest and taxation from Nordic pay TV activities of between 10-12%. MTG said it expected further declines in its premium DTH and IPTV base in the fourth quarter and for through 2013. OTT service Viaplay is expected to gain subscribers, but these pay less than premium DTH subs.

The company’s bottom line was also hit by increasing investments in Russian and Ukrainian pay TV operations, but the company said these services were expected to boost emerging markets pay TV revenue growth, leading to lower operating losses in the fourth quarter and through next year.
Free-to-air Nordic revenues were also down by 7.2% in the third quarter.

Investment analysts at Morgan Stanley said that MTG’s revised margin guidance for pay TV implied a potential downside of 20% to its full-year 2013 EBIT expectations, while “slowing momentum in Scandinavian TV advertising and the absence of any trend reversal in CEE are likely to limit near-term upside”. The bank gave MTG’s stock an equal-weight rating with a target price of SEK300.
MTG’s revenues for the third quarter were down 5% year-on-year at reported exchange rates, and down 1% at constant rates, to SEK2.94 billion, while operating income fell from SEK526 million to SEK422 million.

“All of our broadcasting segments continued to grow year on year in the quarter at constant exchange rates except our Scandinavian free-TV operations, which were impacted by a deterioration in the Danish advertising market and lower market shares in Sweden and Norway,” said Jørgen Madsen Lindemann, MTG’s new president and CEO. “Group operating expenses were up slightly year on year at constant exchange rates due to higher costs in our Nordic pay-TV business following investments in new channels, the further strengthening of our content offering, and the ongoing investments in our Viaplay service. Operating profits for the business as a whole were therefore down year on year.”