Good morning, ladies and gentlemen. Welcome to the Q3 Nine Months 2019 Results Call of ProSiebenSat. One Media SE. This conference is being recorded. Today's call is hosted by Mr.
Ralf Gyrich. Please go ahead, sir.
Good morning, ladies and gentlemen, also from my side. Good morning to our Q3 nine months twenty nineteen results call. Today's call is hosted by Max Konzel, our CEO and Rainer Bonjour, our CFO. Before we start with the presentation, we will have for those of you who follow our webcast, a short video featuring our current hit format Joker in class versus Proseben. For those of you who are connected to the telephone line, those will listen to music during the course of the trailer, so please stay tuned.
Post the trailer, Max and Rainer will first lead you through our presentation. Web links, dial ins, and presentation materials were made available via our email invitation sent out this morning. The presentation, as always, will be followed by a q and a session. With this, we start with the trailer.
Jockel and Klas, they gave each other one unforgettable duel after the other. They tortured and insulted each other, and then they went crazy in a big way. They challenged their employer, us, ProSieben, a TV channel with countless stars.
Yeah. That's that's the zoo for Zieben.
Surprise, A live fine time slot where they get to do whatever they like. Yoko and Klaus against pro Zivin succeeded in a big way. More than 4,000,000 viewers on average per episode. Even after the show, the audience couldn't get enough. Up to 20.2% market share as Yoko and Klas redeemed their bets the next day live on TV.
In one of their fifteen minute specials, they gave their screen time to people that really have something important to say. With 3,500,000 views within the first forty eight hours, the reaction was overwhelming. This is on that's hard. We love to entertain. Now the show goes even bigger.
We're selling beat the channel all over the world, and we still don't have enough. We just successfully finished finished the second season and are thinking even bigger for season three. Yoko and Klas against Procedures.
Good morning, and thank you for joining us. I hope you enjoyed the trailer. Joko and Klask, or what we in English call, Beat the Channel, is a signature show for us with more than 4,000,000 viewers per episode and 19,000,000 video viewers across the season. It's also a great example of how live TV can surprise and make a difference and how we create IP. It's just been rated the number one show at the European pitch event and I'm sure will travel globally.
Now if you go to Slide four, we're making good progress on our transformation agenda with investments in the future of the group gaining traction. Joyn was about four months in, is now at 4,900,000 app downloads, 5,000,000 monthly active users. DForce, our joint venture with RTL, is live. And digital and smart advertising grew plus 37% in Q3. NuCom, where we're investing in accelerated growth in Flaconi, and that is working well and showing plus 59% in Q3.
On local content, just a few example, we've just launched two months ago a digital first news platform called Pulse24 in Austria, has 500,000 plus app downloads. And if you consider that Germany is 10x the size of Austria, you get an appreciation of how well that's working for us. This week, we've just announced the launch of a locus scripted content production company with the faces in front of and behind Jerks, our most iconic comedy format. And as you well know, we're exploring strategic options for our Red Arrow Studio International part. So on the one hand, we're strengthening our local content creation grid and at the same point in time are looking what is the right future for that business and we're finding very strong interest.
And I look forward to lots of exciting new formats still between now and Christmas, amongst those Queen of Drags and others. And we're doing all of this focused on creating an organization that we can win with in the future. We have done a lot of work to upgrade and strengthen management positions in NuCom and across the group. We're creating an end to end entertainment company and a leaner holding structure. And indeed, we're increasing efficiency on a number of areas, not least by taking out 20% of management layers.
On to Page five and numbers. Group revenues for the quarter are up 4%, 3% organic and indeed the same for the first nine months. On Entertainment, we are seeing strong growth on digital and smart advertising that is tempering the impact of a structurally challenged TV advertising business, which leads to entertainment revenues about minus 3% for the quarter and indeed minus 2% for year to date. Both Red Arrow Studio and NuCom are showing strong growth for the year and for the quarter. If you look at our mix, 56% of ProSiebenSat.
Nine's business is now non TV ads, largely digital, growing plus 13% for the quarter and the year. TV ads face structural headwinds, but 4% revenue growth for the group compares favorably to our European peers, which I think are somewhere around 0%. And as you know, we're accepting earnings declines this year to invest in the future of the group. And with that, I hand over to Rainer to provide more financial details.
Thank you, Max. Let me now continue with a few more details on the financial performance of the group and our three segments in the third quarter as well as the first nine months. Please turn with me to Page number seven. Our Q3 results were about in line with the financial performance of the first half as well as our indications provided in the Q2 results conference call. Group revenues grew plus 4% on a reported and plus 3% on an organic basis.
As expected, adjusted EBITDA for the group declined due to the investments in our Entertainment business and the NuCom Group. In addition, the decline in advertising revenues also had an impact on the group's profitability. Both the reported and adjusted net income have mirrored this development accordingly. Please note that the more pronounced decline of the reported net income in Q3 twenty nineteen is largely due to a high comparable figure in Q3 twenty eighteen resulting from valuation effects. Please turn with me to Page number eight.
Revenues of the Entertainment segment declined by minus 4% to €525,000,000 on a reported basis and by minus 3% organically. This decline has primarily been driven by lower TV core advertising revenues, which fell minus 6% in Q3. In addition, the deconsolidation of Maxdome and 7NEXT affected the revenue development on a reported basis. At the same time, we achieved a very promising development in our digital and smart advertising business, which grew plus 37%, supported by the launch of Joyn as well as the broader commercial launch of the addressable TV spot business. The Distribution business also showed a solid performance with revenue growth of plus 12%, helped by an increase in HD subscribers to 9,900,000.
The adjusted EBITDA reduction to €108,000,000 in Q3 mainly reflects the already indicated higher level of investments, especially in local content. Besides that, the decline of advertising revenues by minus €50,000,000 also had a negative impact. As you would expect, the development of the TV advertising business is highly correlated with the macroeconomic environment, which can be seen on Page nine. On the left hand side of the slide, we compared the development of the German TV advertising business and a customized German macro indicator comprising business climate, PMI and consumer confidence. As you can see, there is a high correlation between the two in the past seven years.
From our point of view, the weaker macro environment has been one of the main reasons for the TV advertising revenue decline since 02/2007. On the right hand side of the slide, we looked at the TV advertising spend of our customers, which are listed as the stock exchange and compared this to the analyst condenser's expectations in terms of the revenue development in 2019. As can be seen, customers, which are expected to grow this year on average kept their TV advertising spend about stable. On the other hand, customers for whom analysts expect a decline of sales this year have reduced their TV advertising spend by on average minus 10% in the first nine months. This result is certainly not surprising, but it shows that the recent weakness in our TV advertising business is to a large extent related to a currently weaker business climate in Germany.
Let me continue on Page 10 with the performance of Red Arrow Studios. Red Arrow Studios continued their positive development of the first half and again achieved strong revenue growth of plus 21% in the third quarter twenty nineteen. Currency adjusted revenue growth was plus 15%. Revenue growth of the production business was driven by a good performance of The U. S.
Production companies Half Yard, forty four Blue and LeftRight. Studio71 also continued its dynamic growth of plus 41% based on a good performance in its key territories U. S, Germany and The UK. The number of Studio71's YouTube subscribers globally increased strongly by plus 29% in Q3 from €1,100,000,000 to €1,400,000,000 The good segment revenue performance also resulted in an increase of adjusted EBITDA by plus 46% to €9,000,000 in Q3 twenty nineteen. As you know, we have started a strategic review of our international content production and global sales business and are evaluating all different kinds of scenarios, including potential sale or business combination with a partner.
In any case, our German production asset, RED7 Entertainment, as well as the digital studio, Studio71 are not part of the discussion. Once we have decided, we will inform the market accordingly. Please turn with me to Page 11 for a closer look at the performance of NuCom. NuCom's revenues grew by plus 13% on a reported basis and plus 10% organically in Q3 twenty nineteen. Reported revenues benefited from consolidation effects primarily related to Around Home and Consumer Advice and eHarmony and Matchmaking, respectively.
Both acquisitions have more than offset deconsolidation effects in the amount of €30,000,000 resulting from the sale of the online tour operator Tropo in Q3 last year. On an organic basis, we have seen a strong development of our experience as well as our Beauty and Lifestyle business. Here, especially Flaconi and Amoroli contributed to the plus 27% revenue growth and more than compensated a revenue decline of Veriwax, which was again related to a demanding market environment following the insolvency of a German energy provider. As already indicated in our Q2 conference call, we have stepped up the investments in Flaconi to stimulate growth in the German speaking markets. In addition to that, we have launched Placoni in Poland in Q3.
Adjusted EBITDA development reflected these incremental investments and hence declined by minus EUR 4,000,000 compared to the previous year. Let me now finish my part of the presentation with comments about our financial outlook on Page number 12. We continue to target mid single digit percent group revenue growth and, as already mentioned in our Q2 results conference call, an adjusted EBITDA margin at the lower end of the targeted range of 22% to 25%. Although the first nine months have developed about in line with our targets, the achievement of the 2019 financial outlook meaningfully depends on the economic environment and, in particular, the development of TV ad revenues at the end of this year. Since we have seen swings of TV advertising revenues in the fourth quarter from minus EUR 60,000,000 to plus €40,000,000 only in the past two years, the range of possible outcomes in terms of group revenues and profits is wide.
Although easier comparable figures and potential advertising share gains suggest a normal and solid TV advertising business at year end, the further weakened German macroeconomic environment increases the risk of potential significant budget cuts of our advertising customers. As a result, we believe it is prudent to highlight the financial impact of a potential negative scenario with a potential high single digit percent TV advertising revenue decline in Q4. Also in such a scenario, we would maintain a high level of investment. A potential TV advertising revenue shortfall of up to minus EUR60 million would in this negative scenario affect adjusted EBITDA by a similar amount. Applying this number to the adjusted EBITDA of the last twelve months of EUR913 million would result in a 2019 group adjusted EBITDA of about €850,000,000 This figure assumes an about flat adjusted EBITDA contribution of NuCom and Red Arrow combined in Q4 twenty nineteen compared to last year.
Having said this, I would like to reassure you that we are working very hard to avoid such a scenario and to achieve a solid result also in Q4.
With this, I hand back to Max. Thank you, Rainer. Before we go to questions, I just wanted to give you a few examples on how we are doing across our strategic priorities to go and grow local, digital, smart and NuCom. If you go to Page 15, I think at the intro, I already talked about our local content push on Pulse 24 on Beat the Channel, on the content company that we've just set up with Christian Ullmann and Carsten Kelber and indeed on a very strong lineup of formats in Q4 that we feel confident will continue our trends in gaining audience share and total video views. If you go to Slide 16.
On Joyn, 5,000,000 monthly active users, 4,900,000 app downloads, four months in is not a bad start. If you recall, we set a target of getting to 10,000,000 monthly active users in the first two years. And with the progress we're making, I am hopeful that we can get there more in one than in two years. We have a great product, great user feedback, and I think importantly, we're doing something very unique. One aggregator platform, 55 channels, huge library and originals and all of that for free, easy to access.
And indeed, it's quite encouraging for me when you look at the numbers that 79% are using our apps to consume content. And also the mix between live TV and video on demand, I think, is very good and healthy. We are continually working to bring new features and make our platform available across all technology ecosystems. And importantly, we are well advanced on our subscription premium launch before the end of the year. I'm not going to give you a lot of detail on this because we will have a specific announcement and moment for that, but suffice to say that I'm really excited.
We'll have 10 originals. And just to mention one, we'll launch with a political thriller series called Dignity that's built around the Colonia Dignitas ex Nazi cult, in the sixties in Chile. And I've had the chance to watch some of the rough cuts, and I think is going to be talk of town and hugely exciting. On '17, how are we turning all this into money? I just wanted to give you a little bit more progress update on what we're doing on addressable and targetable.
You heard earlier d force with Airtel is Life. ING Bank was the first campaign, and we're seeing big advertiser interest and think we will have tradable inventory in 2020, somewhere around €2,500,000,000 ad impressions or €200,000,000 plus gross advertising revenues. On addressable TV, we've now run 60 campaigns. We've had about 3x the inventory available in the third quarter versus the first quarter. This is no doubt still small, but we're putting all the technology and data systems in place that make me confident that in 2020, this will be a significant growth driver in transforming our advertising monetization engine.
On to NuCom, look, I am very confident that we're creating huge value with NuCom. And I just wanted to spend a moment and focus on our four signature companies, where we are either market leaders or very strong number two, where we are addressing very big and fundamental consumer needs and huge addressable markets, where we have very clear growth factors. And indeed, this week, we've just done the cutover on eHarmony in The U. S. After one year of incredible work to our technology and marketing platform, and we have very high expectations for growth resulting from this as we go into next year.
On Slide 19, because in Q2, we talked about Flaconi as an investment case, I just wanted to give you a glimpse of what that means. We've been growing Flaconi about 34% for the first half. And as we are investing in accelerated growth, that has boosted to 59%. We are now for many of the premier beauty companies in Germany, their number one growth driver. And indeed, we have also expanded Flakoni into Poland with very good initial success and revenues.
To close, two points. One, we're making good progress on our strategic priorities, digital platforms, smart reach and NuCom and this despite increasing macroeconomic headwinds. Two, we're confident that we have the right strategy and will continue to invest into the future of our business. Remember, already more than 50% of revenues are non TV ads, mostly digital, growing 13%. And indeed, as I think you get from the presentation that Rainer and I did, we wanted to both give you a sense of the confidence we have in our strategy, but also be clear and transparent about some of the risks and challenges we face.
And maybe as a closing remark, both Rainer and I have put in somewhere around €6,000,000 of our personal money. So please take this as an assurance that we are nothing, if not all in and committed and convinced in delivering our strategy and the future for the group. Thank you.
We We will now take our first question from Omar Sheikh from Morgan Stanley. Please go ahead.
Good morning, everyone. I've got a couple of three questions, if I could. First of all, Max, on the guidance, obviously, it's you've highlighted a scenario, downside scenario where TV ad revenues declined high single digits in Q4. I just wonder whether you might be able to give us a sense of how likely you think that is and when it is you think you might know for certain, what the outturn will be? Secondly, just wanna, if you could just dig into Joyn, obviously, very encouraging app downloads so far.
Could you talk a little bit about the investment that you plan for next year, given perhaps you have a bit more visibility and some early signs of success? And then finally, could you give us an update on The U. S. Output deals? I think you have three or four still outstanding.
Just wondering if could tell us where we are. Thanks very much.
Thanks, Umer, for your question. I'll take the first one. First of all, we have already said in our presentation that we continue to target a mid single digit group revenue growth and an adjusted EBITDA margin at the lower end of our before target range of 22% to 25%, the same guidance which we have given also in our Q2 call. For sure, that takes into account the dynamic revenue growth of Red Arrow Studios, NuCom Group, and also our digital and smart advertising business. So, the scenario negative scenario, you can also say worst case scenario of EUR850 million takes into account that we that the visibility for the last two months of the year is pretty unclear.
And please have in mind that approximately 40% of our annual adjusted EBITDA is done in the fourth quarter. So and to go up to a high single digit decline in the last quarter perhaps sounds based on that what we've reached, especially up to in the first nine months, sounds not very realistic. But we have to flag it somewhere somehow because we have seen fluctuations in our last quarter between in the EBITDA between on the sales and EBITDA of approximately plus $40,000,000 to minus $60,000,000 That hopefully takes it into right picture gives you the right picture, what we believe the $850,000,000 looks like.
Joyn? Yes, I'll take that. Maybe just to add one comment on guidance, Omar. Really, I think what Rainer and I looked at is we wanted to make sure that we are prudent and transparent in what is a likely range of outcomes. And we just can't call it.
And we went back, I think, as Rainer said, and looked at the past two years. And not that I like it, but I think the reality of the advertising and the business and booking patterns is that we have been significantly wrong two years in a row. We've been wrong positive one time, we've been wrong negative the other time. I think we're looking at a range of outcomes for this Q4 that still has a lot of bandwidth. And there are reasons to feel good.
One could argue last year was very weak, so we should have a stronger flow on that. We're seeing some pretty decent booking patterns. There are also reasons to be cautious because there's a lot of uncertainty out there. I think we have a history when there is a lot of uncertainty. Think as we showed in Rainer showed in one of the charts that companies react to that, I think, wrongly by curtailing their advertising and marketing spend.
So I wish we could give you a more precise answer, but I think we're doing what is right and prudent, which is providing a range of outcomes and rest assured that the team with Reiners and my guidance will do everything to maximize performance and growth for the group. Now on Joyn, one, think we're quite pleased, I think, with the progress that we've been making on Joyn. Sometimes I wish, I don't know how many of you on the call because most of you are not Germany based have ever had a chance to use Joyn. And maybe actually in follow-up, can for those that haven't with the team, can try to find a way that you can use it. Because sometimes it's actually difficult, I think, to realize or understand what we're doing.
That in an environment we're still being able to access entertainment, information, TV, and all these things frictionless in an app that really works is unusual. And I think we have an offering here that is exciting a lot of people, and we're seeing pretty good growth behind it. In terms of investments, look, what we said before, and I know nothing different to that, is that we would anticipate investments for 2020 to be in the same range of the investments that we're making this year. It might be marginally more, but let's say somewhere in the 100,000,000 €120,000,000 range of which then, of course, because it's a fifty-fifty joint venture with Discovery, each partner carries 50%. Third question update on U.
S. Output deals. I think we're quite comfortable where we are. It was very important for us last year to lock in Warner because that's a bedrock and kind of gives us the inflow that we want, number one. Number two, we're accelerating both production and inflow of local content, and you have seen our announcements on more local production firms.
And number three, I think on the balance, we're moving from big multiyear output deals to smarter packaging and picking. And when I talk with the content team, we're quite confident that we have the right agreements in place to secure the inflow that we require at cost we can handle. Thank you.
Thanks very much.
We will now take our next question from Laurie Davison from Deutsche Bank. Please go ahead.
Hi, guys. It's Laurie here from Deutsche. First question is on advertising share. In terms of TV advertising share, you've lost share in third quarter somewhere around 2% percentage points based on the RCR results yesterday. Yet you're saying your audience share is good.
So why are you losing share? And should we expect that to continue in the fourth quarter? Second question is just on the Red Arrow international sale. Can you just update us on what level of interest you've seen for that and what your current thoughts are about whether you might dispose or merge with another entity? And then third question is just over the cash flow over third quarter.
It looks significantly worse cash flow conversion than last year. Can you just highlight whether there's anything one off going on in the cash flow? Thank you.
Hi, Laurie. So I'll take the first two, and I'll let Rainer talk about cash flow. So on audience share, look, if you take a look at the first nine months in, then we're gaining something like 0.8 audience share, which is, by the way, smack identical, I think, to the kind of gains that RTL has. So if I take a look over the year, then I think the performance is very analogous. If you look at the third quarter, that was strong in shares.
If I look at the flow throughout the year, it was marginally below last year. And I think RTL gained a little bit. But we see those moves depending on programming sequencing of what we have on here all the time. And as I look across the year, I think I'm confident in our outlook on audience shares and that overall, we're building and gaining. And by the way, maybe in some ways more important, if you look at nine months and you look at total video view time, then we're losing something like 3% in total minutes.
So that's the linear reach decline of which we're compensating two of those three points with digital growth. Again, it's slightly different in Q3 because of some of the year ago comparators. But I think the nine months picture is indicative of what we expect for the year. And so is what we're doing digitally already completely compensating the structural linear decline? The answer is no.
And of course, you guys understand that you to compensate for that in audience and minutes viewing number one, you have to compensate for that in revenue number two, then profit three. And one, two and three are successively more difficult, but I think we're in a very good way. And because you were comparing to Airtel, if you look at our 37 digital growth, I'm very pleased with that. And the rather bare bones set of numbers that Airtel provided yesterday, I think indicated they are at, I don't know, 14% or something like that. Red Arrow Studios, very healthy process, very strong interest.
And that's really as much as I think we want to say at this moment. And I'm reasonably confident that we'll be able to talk about what the outcome of this process is in some way, shape or form before Christmas. And I'll let Rainer take cash.
Yeah. Let me add to the process. Overall, we are evaluating all different kinds of scenarios, including a potential sale or business combination with a partner. And as Max already said, we're very happy with that. And cash flow is mostly phasing because a lot of this change compared to last year is program payments and also a little bit of CapEx.
Okay. If I could just come back on the first question. It was actually about the advertising share, your TV ad share. The audience share, I agree with you, actually has been reasonably good. But why are you losing TV ad share despite the audience share being relatively strong?
Laurie, one audience share and if you want TV advertising share correlate in the long run, but don't necessarily correlate mathematically in the short run because of the way TV advertising is being booked with agencies. And we've seen in past years that we sometimes have overperformance in a quarter, we have underperformance in a certain quarter. We have a lot of volume driven deals in place with agencies where they have very strong incentives to honor those deals because otherwise, they have a major profitability issue on their P and L. And so we've learned to kind of count our chickens after the December 31. Do I I don't have I don't quite know what is RTL's concept of an advertising share and what is counted in this or not.
Do we think that they will have done marginally better in, let's say, TV advertising decline in Q3 than we have? Yes, same in the same vein that we did marginally better than they did in the first six months. If one takes a longer range view, we tend to in a market that really has three participants move reasonably in tandem.
Okay. So we should expect that ad share loss to recover over the fourth quarter?
One would hope to see some recovery, but I'm going to couch that into Reiner's uncertainty statement that we have a lot of moving parts here between macro, between advertising, booking patterns. And so as frustrating as that may be, the best I can say is that we, I think, have a very capable team that is doing everything it can to maximize performance and outcome for Prozyn.
Understood. Thank you.
We will now take our next question from Chris Yonem from HSBC. Please go ahead.
Yes. Thanks guys for taking my questions. I'd like to take them one by one, if that's okay with you. First, coming back to Loris' last question on the share. I actually think you guys may have underperformed in the first ten months of the year versus RTL.
And that kind of raises the question why these share agreements are not being met? I mean, you flagged the important also to the agency's p and l, but, yeah, do you think the the flow this year has been has been lower towards you guys?
I I don't know the answer, Chris, because I I can see our books. I can't see at the ad's books. But, if I look organically, the easy the best way I can compare is if I look organically, nine months in Entertainment revenues were about minus 2%. And if I read Airtel's numbers correctly yesterday, they are about minus 2%. Then underneath, there may be some mix and contribution differences.
I'm not entirely sure we're all counting apples to apples in how we're treating certain portfolios of advertising. So for example, we count addressable in digital and smart reach because we think that's a better metric to insulate core TV performance relative to the things that we're investing in. I think, for example, RTL is counting addressable into their TV performance. And because that's growing, that will kind of temper maybe the view on TV ad losses. So based on what I can see, I just don't see a big difference.
But I'm very happy to look at where we come out by the end of the year. And then I think all of us will have transparency both on our performance and NetEase performance, be able to compare the By the way, the other comment that I should make because we I find in our conversations, this is not a point about you, Chris, but all of us are very, very focused on the advertising market and TV performance, which understandably is critical. But if you look at the diversification we have, particularly with NuCom, I think that is helping us to outperform many of our peers in terms of revenue performance. And I think importantly, we're building a better and more diversified portfolio for the future, much as the earnings that we're investing this year may be painful to all of us.
Right. If I may still follow-up on that. So as a general comment about share deals, you don't think that they're necessarily that. So even if, you know, going into negotiations for for 2020, you don't expect any any significant difference, in your discussion on just overall share versus, let's say, last year? Or am I over interpreting that?
I want to be careful to get into too much detail on what advertising details are done, how. But I think what we've seen historically, and we would expect to see that in the future is quite an equalized market and positions.
Right. Okay. Then another one on Studios and the potential disposal. I have to say I was a bit surprised to see the kind of multiples put in the press. Now we know that not everything that's being put out in the press in such a process is necessarily to be taken for at face value.
But still, I mean, is there sort of a comment on I mean, you flagged there's great interest in the during the process. I mean, what kind of I mean, I'm pushing it a bit. What kind of EV range are we looking here? I mean, are multiples like eight, nine times EBITDA realistic? Or how and what sort of shape do you think The U.
S. Business being sold is today?
It might strike, Chris, but I can't. I mean, there's an active process I can't comment. I will tell you that I've read a lot of things in the press that made me laugh and smile because there's speculation around buyers that are interested, which are different to the ones that we're really discussing with. There's discussions on multiples range that are different to what we're looking at. Look, we're confident that we're in a good process.
And I think it's a great business. Maybe that's the most important point to make. If I look at studio performance, if you look at it over year to date, and you have seen our numbers earlier, this is a business that in nine months is up 22% organic, 28% reported. We have just renewed a number of major output deals and also a number of major talent plays. There's a lot of interest in the world for very, very strong content production assets.
And so we'll see where we come out.
That's already helpful. And then a final comment on I know it's early for 2020, but when you look back over the last year, the €70,000,000 you wanted to invest in entertainment in 2019. I mean, where we stand currently, do you think we've at least when it comes to those kind of investments, we've sort of reached a trough? Or should we brace for, yes, maybe a little bit more to come next year? How do you see this sort of big one off investment in 2019 as we enter 2020?
Yes. As we have said, our situation is that we want to finish the year first, and then thereafter, we will discuss next year because we have this fluctuation in front of us how the advertising markets will develop. And also next year is especially the development of the advertising market, one of the key factors, how we will perform. On the other side, we have clearly committed ourselves to make all the investments which are necessary to make this shift happen between regional and U. S.
Content as soon as possible. And that's clearly what we wanted to attack further on, and that's what we will do. And therefore, please let us finish the year, and then we will comment what we will do next year.
Okay. Thanks very much, guys.
We will now take our next question from Julian Rock from Barclays. Please go ahead.
Yes, good morning. I'll ask my question one by one. If I start with Red Arrow, that was one of your best performing division with 15% organic in Q3. It's going to increase back the percentage of revenue coming from TV despite you highlighting the decrease of its percentage as a good thing. And you just told us it was an amazing business.
So can you explain the strategic rationale of selling Red Arrow? Or is it just because you have too much debt, in which case, will it not be better to cut the dividend?
I can, Julian. The I think what we're looking at is to really make sure that the businesses and the wheels we have are very synergistic to each other. And so we're very confident fundamentally that we have a strategy where we have an entertainment wheel, and we have a NuCom commerce and digital wheel and those two are feeding each other. And I say it every time, but I will say it again, I think that is a unique business model relative to media competitors in Europe. I think it is meaningfully superior.
And when I look around the world, I think there's a lot of evidence that that is the case. When one looks at content, what we're really focused on is you know, having a strong ecosystem that can feed content into our German entertainment network, are both TV channels, but also digital outlets. And so for that Red Seven, for that, Pajama Pictures, is the company that we've just set up, are important. And I would expect more of those kind of activities in the future. And similarly Studio seventy one because it's a major feeder of digital content for us in Germany and beyond that in The US and other places is critically important.
So when you take a lens that way, then the international part of Red Arrow Studio is a very good business, but it's not as synergistic as we would possibly wish. And thus, I think it's prudent for us to look at a moment where these assets I think are valuable in the world, whether there's a partnership or a sale or other things. And we could then use that cash to reinforce more of the strategy I just talked about.
Thank you.
That's the answer to your net debt question on which is related to that. We are when we reach our guidance, the lower end of the former range on adjusted EBITDA, we and that's what we already flagged in Q2, we should end up at a net debt to EBITDA ratio of 2.5. So and that's the situation. So we are not in a situation that we have to sell something to get to our leverage targets in that case. Okay.
Thank you. The second question is coming back on advertising. I mean you've been very clear on trying to go through your target, but highlighting a worst case scenario, which is 14% below consensus, and it's all based on November, December, and you have no visibility. But surely, you must start off some visibility on November. You at least have the first week, and with booking, you probably have the first two weeks.
So can you tell us what happened in the first week or the first two weeks of November?
Yes, we have some visibility, Julian. But that's a dangerous game because then we get into beginning to comment on our business on a weekly basis and we're commenting on a daily basis. I can only reiterate what I said earlier. I think there are a number of reasons to feel good about the fourth quarter. There are things that we like, and there's a number of reasons to be concerned about.
And indeed, our forecasts are changing on a daily basis. So we will do everything to deliver the business with our targets and ambition. But at the same point in time, I think there's significant risk. And that is why we have provided you a range of possible outcomes. That's really as much as I think we're going to comment on that.
Okay. And then the last question is on addressable TV. You said it was small, but you were very confident it was starting well. So can you give us an estimate of how much revenue roughly you're going to generate this year and maybe a range for next year?
Yes, I can. I think it's somewhere around 25% or so this year. I think a more important view would be if you look at d force, which is the vehicle to give the market more access to addressable inventories. We think we'll be able to feed somewhere in the range of 200,000,000, 200,000,000 plus gross advertising revenues between Airtel and us through that vehicle. And so gross doesn't equal net obviously, but think you can see that as we move into next year, I think addressable can meaningfully add revenue and profit, and we're still in the early days of scaling this.
Okay. So just so EUR 200,000,000 is on a gross basis, d force I. RTL and you and €25,000,000 is just you on a net basis?
Yes.
Okay, very clear. Thank you very much.
We will now take our next question from Lisa Yang from Goldman Sachs. Please go ahead.
Hi. My question again is on the advertising trends. I don't I know you don't really want to comment November, December given the limited visibility, but could you give us a trend for October because surely you have a better visibility on that month? That was the first question. Secondly, I have a question on your programming reinvestment.
I think you previously mentioned you wanted to reinvest about €110,000,000 I think this year. But when I look at your program amortization, it's only up 20,000,000 in the first nine months. So I just wanted to check how much of that €110,000,000 has been reinvested in the first nine months? Why the gap versus the programming amortization? And how much more we should expect in Q4?
And last question is on NuCom. Could you quantify the level of investments in Flaconi for this year, potentially next year? And going forward, how should we think about the margin for this business given the change in mix and you're investing in probably lower margin businesses. So should we see further margin dilution going forward? Thank you.
So let me start with your first question and also give you a general statement At the beginning, what we currently see, there is no strong indication that our TV advertising business will decline high single digit percent in Q4 as described in our beer case scenario. And please have in mind that we and that's what lots of you think and know, that we have easier comparable figures in Q4 twenty eighteen. And for sure, and that's what Max already mentioned before, that there is a certain potential for our advertising share gains vis a vis RTL, means that the full year targets can still be reached. However, and that's the reason why we have explained it. However, given the decline of TV core advertising revenues in the first nine months and the overall weak German business climate, that's the reason why we have highlighted the risk for pronounced adjusted EBITDA decline of up to EUR 60,000,000.
That's the only reason for that. So the trend for October, we had and I look to Rafe two, we had a very strong October year. So therefore, we had a decline, which is perhaps high single digits somewhere in October. But that doesn't mean, and that's the reason why we are optimistic also to be on that level, which we originally outlined, that November and December will be on the same path. Second question, reinvest of €100,000,000 For sure, you don't see all the numbers because we also have them in working capital and somewhere else.
And so at the end, the numbers which we have announced at the beginning of the year will more or less be the number which we will do in our investments on that in the year 2019.
Okay. And then on NuCom, so our investments in Flaconi this year are somewhere around 10,000,000 to $20,000,000 I think for next year, look, we're managing a portfolio. So we will have a careful look at the right balance in that portfolio of continuing to drive growth acceleration in a number of companies and at the same point in time, to build out a better balanced portfolio of top line and bottom line growth. And so I would expect to see very meaningful both top and bottom line growth in the NuCom portfolio. And also, if I take a slightly longer range view, we are expecting to build margin in those businesses, but we're just choosing and Flaconi is a great example in businesses where we have good structural profitability.
And we think there are unique opportunities to build market leading positions to take cash to do that now, and translate that into bottom line earnings and growth down the road.
Thanks, Matt. Can I just follow-up on on the second question around programming? How much has been done in the first nine months? So just so, you know, we have a view of, you know, how much needs to be done in q four in terms of reinvestments? Thanks.
This is Ralf speaking. I mean, you can assume that we have done roundabout three quarter of the invest, yes, because this is our phasing. There will still be additional invest in Q4, yes? And just to remind you, when you look at scheduled consumption, this is only one part of our program cost. We also have directly expensed program cost, and this is more relevant when we look at local content, yeah?
So the share of directly expensed content cost is growing, which you don't see in the cash flow statement.
Okay. Thanks. Very clear. Thank you.
We will now take our next question from Richard Ehry from UBS. Please go ahead.
Yes. Good morning, everyone. I've got a number of questions, if I can just take them one by one as well. The first one, just following on from Lisa's question on programming costs. Within the statement, the consumption programming assets in the P and L is actually down 1% for the first nine months.
And so are we expecting a significant increase as we go into the fourth quarter? And if the advertising market does drop out in a worst case scenario, as we've seen with other, let's say, TV businesses as they manage their programming expenses, is there a lever to manage that in a worst case scenario? So that would be that's the first question, please.
Richard, Ralf speaking. Obviously, as you know, Q4 is our biggest quarter in all aspects, also meaningful for content cost. And there is obviously leeway to steer the cost. Our planning foresees that we will do more in local content, yes, but we also have a little bit flexibility on U. S.
Content, obviously. And how this turns out will also be a function, obviously, of the overall environment.
Ralph, just a follow-up. I mean the original guidance for program expenditure this year was about €1,100,000,000 I think that was the cash number. So obviously, there's a timing difference between cash and accounting numbers. But last year, you did DKK $965,000,000 of programming costs, of which DKK 300,000,000 were done in the fourth quarter. If you're doing the GBP 1,100,000,000.0 or even take into account some adjustments that you've got a substantial change in programming budgets in the fourth quarter.
I mean is that correct? And if you review that the market is negative, why you're not warehousing content when the market is better? Yes.
Are you asking a cash investment in the cash flow statement or cost?
Well, I'm asking for both.
Yes. Well, look, in terms of cash flow, this number also contains payments for content we have written off last year, yes? And there's no change to our overall guidance we have provided earlier in the year. And as I said, in the P and L, we do foresee continued investments in line with what we have said. And as I said, the outcome will be a function of the overall environment as we have some flexibility to steer our content cost.
This is as much as I can say right now.
The second question just comes from the other costs within the Entertainment business, which are actually up year on year despite, obviously, the, let's say, deconsolidation effects of MaxDone seven Next and also, supposedly, basically, cost savings that were coming out as you were going to simplify the business. And also, I would imagine there are some cost program about the corporate level. So how do we think about that other cost line item, which seems to be increasing whereas previously, you talked about taking out costs within that line item?
Well, Richard, I think we have also guided for additional invest into our digital platform business and monetization, I. E, ad tech, yes. So the overall program was roundabout 120,000,000 including the content cost. And we have guided earlier in the year for cost offsets within the Entertainment segment of roundabout EUR 50,000,000. I would say we still stick to what we have guided.
And but we can debate this once we have the full year results released.
Okay. So just on sort of third question with regard to Studio One. Obviously, we've seen continuation of growth coming through in the third quarter, and the third quarter was particularly strong. Are we are now at a stage where this business is now starting to turn profitable? Or are we still in a negative EBITDA scenario within Studio seventy one?
Well, Studio seventy one is your question, I believe. It's roundabout breakeven.
Okay. And then just a last question in terms of just on the plus 37% increase in, obviously, the digital and smart revenues, which was an acceleration from the first and the second quarters. Can you just outline within those numbers what's actually driving that so we can quantify the changes?
So Richard, we have not provided a specific breakdown historically. So but obviously, our platform businesses are contributing to the growth. As Max already highlighted, we also have our addressable TV within digital and smart. And whilst we have only done switch in so far with the d force joint venture now in full force, we will also introduce the spot overlay product. So it's good contribution from all relevant, let's say, businesses within digital and smart.
So just on the back of that, as we look at as those businesses ramp up into the fourth quarter, which is obviously the biggest quarter, should we see a continued acceleration of the growth that we've seen in first quarter, second quarter, third quarter this year?
Richard, I think we would we will continue to see dynamic growth. The specific percentage growth rate, I think it's too premature to tell, but it should grow dynamically also in the fourth quarter.
Okay. Thank you.
We will now take our next question from Conor O'Shea from Kepler Cheuvreux. Please go ahead.
Yes, thank you. A couple of questions from my side as well. Firstly, just to be clear on the programming cost phasing. I had the impression previously that in terms of the phasing of the extra investment that that would start to cycle out in the fourth quarter and it was concentrated in more in the second and third quarter. Has changed?
That's the first question. Second question, just in terms of the because
I
think you brought it up in one of your explanations for October that October year was particularly strong. Can you give us a sense of roughly what the breakdown for October, November, December was last year for core TV advertising as the overall quarter was particularly weak, down 8%. So if we could have what the mix was between October and say, November, December? Then just clarification on the international part of Red Arrows being sold, could you isolate what the specific revenues for the just the international part that was being sold were in 2018 and also the EBITDA, if possible? And then very last question, just in terms of the cost savings.
I think earlier in the year, you said that if TV advertising were weaker than expected, you could make up some of the difference with additional cost savings. Just wondering, is that the case? And are these should we consider these cost savings permanent or temporary? And to the extent that they are temporary and they will cycle in back in next year, could you maybe quantify them?
Okay. I'll try to answer some of the questions, but obviously, I can't be too precise. So when we start with the second one, October 2018, what's strong was your question, and you wanted to have a breakdown for November and December. For sure, we're not doing it currently. I think we have given out everything which we want to say to it.
We also given you the idea of that. For sure, these are the two months where we rely most on to finish the year. And that's everything we can say to that. TV ads your fourth question was, are the cost saving permanent or temporary? If you can quantify them.
And where does it come from? For me, more or less, the situation which we have is that we have this we have two effects for the current market development. And we really rely on the last quarter, as we already said several times. So, for us, how much is temporary, how much is a trend, that's something which we have to figure out when we finish the year on one side. On the other side, we have a high correlation.
We already mentioned that during the speech, you know, to the overall economic environment. So, you know, it's very difficult for us to quantify where it comes from. And therefore, we won't comment on that, too. And the programming cost phasing, how this is cycling. At the end of the year, we have said several times that we would like to spend $80,000,000 incremental content costs, which are primarily related to local content investments.
So we do not expect total U. S. Content spend to increase. And that's also so we have to see how this will develop also going on forward. But our expectation is, as Ralph already said, that we will continue in our TV grid and especially in local content, irrelevant currently what the overall market is doing because we have to do it.
Because on our path, to change the shift, we have to invest further and to integrate our formats in the market in our program.
And that's we can't react
to changes in the overall market currently, so because we have to fulfill a long term strategy here. And also, for Red Arrow, it's too early to isolate the international business because, first of all, we haven't decided what we want to do. Second, when we are finished, for sure, we have to do it. And that's also discussion, which we then will have in March because then we should normally know what we are doing and how it will look like.
Okay. But can you say whether it's profitable at the moment or not, just the international part?
Yes, sure.
It is. Okay, great. Thank you.
We will now take our next question from Patrick Schmidt from Warburg Research. Please go ahead.
Yes, good morning. Thanks for taking the question. More general ones, looking at zirconia you're highlighting, what are your thoughts about Douglas, the German retailer wants to establish their, let's say, digital marketplace for online beauty products? That will be the first question. And second, could I have your thoughts about the profitability of your smart and digital revenues?
I know you're obviously in the ramp up phase, but in a assumed steady state scenario, what do you think about the quality of your contacts? Obviously, addressable TV is similar to the current ones, but the digital ones, so the ad contact on your platform Joyn, how does that convert into price and ultimately into money? Thank you.
Yes. So on flaccone, I mean, Douglas is obviously our biggest competitor. I don't have the specific Douglas numbers, but I do know that we are growing meaningfully faster than this. And it's been very interesting for us to have conversations with the big beauty companies where that sentiment is really changing. We suddenly are a very big driver of their businesses.
They're realizing this is a quality place where we can create theater for their brands. And we're having a lot of strategic discussions on how we build the business going forward. Just like Douglas, we are expanding internationally, but we're doing this very thoughtfully and carefully market to market and where we have strength and the reason to believe that we can build a competitive advantage. Profitability on digital and smart advertising in steady state should be comparable to the profitability of TV advertising. In fact, one could argue it should be marginally better, but it's very, very early days.
But certainly, think at a steady state, reach is reach. And as our reach gets more intelligent, the intelligence or addressability of that reach should yield some incremental pricing. One has to offset that probably to the fact that running digital reach businesses in cost terms is probably slightly more expensive. So all in all, I think the best answer I can give you is I would expect that steady state, in buildup phase, but at steady state to mirror the historic profitability in TV.
Yeah. And so that's a classical contribution business because you have fixed costs, put more in, that directly takes you down to the profitability.
Okay. But you said reach is reach. Wouldn't con confirm that if you, I don't know, look digital on a on a platform, you might not be, you know, in terms of your traditional laid back audience share, might be getting smaller. So so distraction might higher. And when you look online, Eclipse and also Studio71 also showing that profitability is more difficult to reach.
Yes. Those are two separate things, I think. The best way I can answer it is that we have very exciting conversations with big advertising clients when we discuss total reach. So it's important to understand, by the way, it's true globally that still TV advertising and digital advertising markets are segregated in ways that sometimes is very surprising. And what we are working very hard on is to provide total reach to our advertising clients where we can package together the audience that is watching an entertainment show at eight in the evening or 08:15 in the evening on TV, but also is watching that same show either live in streaming or the day after or three days after.
And that's a high quality audience that we can package together. And I think the yield that can be generated on that reach is at least parity across different platforms, if not better at digital. That is very different from yields on what I call scatter inventories. And particularly if you look at the big social media platforms, a lot of the views are being measured for people to have spent three seconds also in Continent. So that's a different quality level and there's different pricing for that.
Okay. Thank you very much.
We will now take our next question from Annick Maas from Exane BNP Paribas. Please go ahead.
Good morning. So just looking at the TV ad market for next year, I'm looking at consensus, they have entertainment still growing at 1%. I suspect you've started your first conversation with advertisers for next year. Can you please tell us how they are progressing? My second one is for Max.
Just can you typically tell us how much you spend typically in a week focusing on Joyn as opposed to the other businesses that you're running? And my third one is just on digital and smart advertising. Looking into next year, what are you currently modeling in your own forecast? Do you expect this line to grow 10%, 40%? What are the ranges?
Thank you.
Okay. I'll happily take those questions, Anik. I'm smiling into your second one. There's people who are frantically going through my calendar to answer that with mathematical precision, but I'll give you the answer in a second. Look, TV ad market, I just don't know.
I really don't know. I will certainly say that I think the quality of available macro forecast, whether that's Nielsen or all of these, is very weak. In fact, we have pretty much largely stopped looking at them because all they do is extrapolate the path forward. And so they're always lagging, you know, three, six, if not more months in their understanding of where the advertising market is going. I think our job, as we do in Q4, is to build a robust business that is future proof, that has a better mix and better balance between TV advertising, digital and other assets that we're building, and to have an approach to forecasting where we can handle a weak market.
And if the market ends up being stronger, we can use that strength to drive and reinvest in the businesses. Second question, I think your question was, or maybe I got it wrong, how much time I personally spend on Joyn, and the answer is a lot because it's a very important part of our future. And I will certainly see and talk with the team in various interactions on a weekly base, digital and smart growth rate for 2020. Look, we'll set our budgets when we sit together in March. But certainly, and I think that's obvious from our strategy statements, we would continue to expect strong growth on digital and smart.
And certainly, ambitions will be to accelerate that growth.
Thank you.
We will now take our last question from Catherine O'Neill from Citi. Please go ahead.
Hi, thank you. I just wanted to go back to the leverage, and you talked about being around 2.5 times by the end of the year, so at the very top of your target range. Could you maybe talk about how you plan to get into a more comfortable area of that target range if you're not planning to cut or adjust down the dividend? Secondly, in terms of strategic reviews and, you know, where the share price is, etcetera, are there any other assets that you would, consider looking at as part of a a strategic review where you think you could realize value? And then finally, on on Joyn or your OTT ambitions, I think in the past, you've talked about looking to expand into other markets.
I wondered if that's still past the plan and how you think you'll go about that.
So let me start with your first question. I've said before that we target 2.5x net debt to EBITDA based on the low end of our EBITDA range. For sure, this number will increase when we will have a different EBITDA because that's the most relevant number to increase or decrease our leverage figure currently and especially up to the year end. Dividend policy, we confirm our dividend policy with a payout ratio of 50% of the adjusted net income because it's in place. And also to be clear on that, in 2019, our dividend will reflect the adjusted net income decline, which we have guided at the beginning of the year.
And it's also based what we have to pay out on that, what we will reach up at year end. So nothing else to say about that. And we feel comfortable with the 2.5x year end because that's the high end of our range. We have to invest further. So we have to see what we can do.
Our strategy is currently not to sell assets, what we always do and what we always have to do, and that's what we did with our portfolio. And that's the reason why we are looking on the international Red Arrow part, is that we challenge our businesses, and then we see what we can do. But it doesn't mean on the other side that we are also not ready to move in the other direction. So at the end, we have to make our decisions based on the business and what is right and what is wrong for our strategy. And we have a clear strategy in front of us.
And if they need some investments also in the next years, then yes, we are ready to do that.
And Catherine, on your third question on Joyn, yes. So as I commented previously, we have pretty wide and very solid interest across a range of markets to look at expanding Joyn. It's a game of one step after the other. Right now, the team is very, very focused on getting a premium subscription version into the market before Christmas. That is absorbing all energy that we have.
As soon as we've done that, we're going to go back and look at with what pace we can expand in more countries. I would certainly expect for something meaningful to happen in that space next year, and that's, I think, as much as I'm going to comment on that for now. Thank you.
Could I sorry, could I just come back quickly on that? You talked about the investment for Joyn next year being maybe a net investment, million, CHF120 million, does that incorporate some kind of plan for expansion into other markets? Or would that be on top of the sort of existing CHF100 to CHF120 million you prefer to?
The answer is it does not. But expanding in other markets, depending on how we structurally do this may or may not be a cost because those may very well be structured in a way that we can take advantage of some of the value that we have already created. So I wouldn't if you want, pluck a big number into a model. But again, that is all part of what we're working within our 2020 budget, and we'll surely have quite a bit of specifics on our joint ambition and expansion plans when we all sit down in March.
Okay, thank you.
Okay, ladies and gentlemen. As our operator already said, this was the last question for the call. And as always, our Investor Relations team will be available shortly thereafter for any follow ups. Thank you, Have a nice day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.