Good morning, ladies and gentlemen. Welcome to the Q3 nine months 2019 results call of ProSiebenSat.1 Media SE. This conference is being recorded. Today's call is hosted by Mr. Ralf Gierig. Please go ahead, sir.
Good morning, ladies and gentlemen. Also from my side, good morning to our Q3 nine months 2019 results call. Today's call is hosted by Max Conze, our CEO, and Rainer Beaujean, 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, "Joko & Klaas gegen ProSieben." For those of you who are connected to the telephone line, those will listen to music during the course of the trailer. 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&A session. With this, we start with the trailer.
Joko & Klaas, 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.
The prize? A live primetime slot where they get to do whatever they like. Joko and Klaas against ProSieben succeeded in a big way. More than 4 million viewers on average per episode. Even after the show, the audience couldn't get enough. Up to 20.2% market share as Joko and Klaas redeemed their bets the next day live on TV.
Good morning. Thank you for joining us. I hope you enjoyed the trailer. "Joko & Klaas gegen ProSieben," or what we in English call "Beat the Channel," is a signature show for us. With more than four million viewers per episode, and 19 million video viewers across the season. It is also a great example of how live TV can surprise and make a difference, and how we create IP. It has just been rated the number one show at the European Pitch event, and I am sure will travel globally. If you go to slide four, we are making good progress on our transformation agenda, with investments in the future of the group gaining traction. Joyn, with about four months in, is now at 4.9 million app downloads, five million monthly active users. d-force, 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 +59% in Q3. On local content, just a few examples. We've just launched, two months ago, a digital-first news platform called PULS 24 in Austria. Has 500,000+ app downloads, and if you consider that Germany is 10 times 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 local scripted content production company with the faces in front of and behind jerks., our most iconic comedy format. As you well know, we're exploring strategic options for our Red Arrow Studios International part.
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. 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. Onto page five, the numbers.
Group revenues for the quarter are up 4%, 3% organic, 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 -3% for the quarter and indeed -2% for year to date. Both Red Arrow Studios and NuCom are showing strong growth for the year and for the quarter. If you look at our mix, 56% of ProSiebenSat.1's business is now non-TV ads, largely digital, growing +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%. As you know, we're accepting earnings declines this year to invest in the future of the group.
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 +4% on a reported and +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 2019 is largely due to a high comparable figure in Q3 2018, resulting from valuation effects. Please turn with me to page number eight. Revenues of the entertainment segment declined by -4% to EUR 525 million on a reported basis and by -3% organically. This decline has primarily been driven by lower TV core advertising revenues, which fell -6% in Q3. In addition, the deconsolidation of maxdome and 7NXT 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 +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 +12%, helped by an increase in HD subscribers to 9.9 million. The adjusted EBITDA reduction to EUR 108 million in Q3 mainly reflects the already indicated higher level of investments, especially in local content. Besides that, the decline of advertising revenues by -EUR 50 million 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 number 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 2007. On the right-hand side of the slide, we looked at the TV advertising spend of our customers, which are listed at the stock exchange and compared this to the analyst consensus 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 -10% in the first 9 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 number 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 2019. Currency-adjusted revenue growth was plus 15%. Revenue growth of the production business was driven by good performance of the U.S. production companies Half Yard, 44 Blue and Left/Right. Studio71 also continued its dynamic growth of plus 41%, based on a good performance in its key territories, U.S., Germany, and the U.K. The number of Studio71's YouTube subscribers globally increased strongly by plus 29% in Q3 from 1.1 billion-1.4 billion. The good segment revenue performance also resulted in an increase of adjusted EBITDA by plus 46% to EUR nine million in Q3 2019.
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 a potential sale or business combination with a partner. In any case, our German production asset, Redseven 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 number 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 2019. Reported revenues benefited from consolidation effects primarily related to Aroundhome and Consumer Advice and eharmony and Matchmaking respectively. Those acquisitions have more than offset deconsolidation effects in the amount of EUR 30 million 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 Amorelie contributed to the +27% revenue growth and more than compensated a revenue decline of Verivox, 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 Flaconi in Poland in Q3. Adjusted EBITDA development reflected these incremental investments and hence declined by -EUR 4 million 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 % 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%-25%. 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. We have seen swings of TV advertising revenues in the fourth quarter from minus EUR 60 million to plus EUR 40 million 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 % 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 EUR 60 million would in this negative scenario affect adjusted EBITDA by a similar amount. Applying this number to the adjusted EBITDA of the last 12 months of EUR 913 million would result in a 2019 group-adjusted EBITDA of about EUR 850 million.
This figure assumes an about flat-adjusted EBITDA contribution of NuCom and Red Arrow combined in Q4 2019 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 PULS 24, on Beat the Channel, on Pyjama Pictures that we've just set up with Christian Ulmen and Carsten Kelber, and indeed, on a very strong lineup of formats in Q4 that we feel confident will continue our trend in gaining audience share and total video views. If you go to slide 16. On Joyn, five million monthly active users, 4.9 million app downloads four months in is not a bad start. If you recall, we set a target of getting to 10 million monthly active users in the first two years.
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, is 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. 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. Suffice to say that I'm really excited. We'll have 10 originals. Just to mention one, we'll launch with a political thriller series called Dignity that's built around the Colonia Dignidad ex-Nazi cult in the 1960s in Chile. 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 our [RTL is live] , ING Bank was the first campaign, and we're seeing big advertiser interest and think we will have tradable inventory in 2020 somewhere around two and a half billion ad impressions or EUR 200 million-plus gross advertising revenues. On addressable TV, we've now run 60 campaigns. We've had about three times 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 and monetization engine. On to NuCom. Look, I am very confident that we're creating huge value with NuCom.
I just wanted to spend a moment and focus on our four signature companies, where we are either market leaders or a very strong number two, where we are addressing very big and fundamental consumer needs and huge addressable markets, where we have very clear growth vectors. Indeed, this week, we've just done the cut-over 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. 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. Indeed, we have also expanded Flaconi into Poland with very good initial success and revenues. To close, 2 points. 1, we're making good progress on our strategic priorities, digital platforms, smart reach, and NuCom, and despite increasing macroeconomic headwinds. 2, 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%. 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.
Maybe as a closing remark, both Rainer and I have put in somewhere around EUR 6 million of our personal money. 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.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Omar Sheikh from Morgan Stanley. Please go ahead.
Morning, everyone. I've got three questions if I could. First of all, Max, on the guidance. Obviously, you've highlighted a scenario, downside scenario, where TV ad revenues decline 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 outcome will be. Secondly, just wonder 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? Finally, could you give us an update on the U.S. output deals? I think you have three or four still outstanding. Just wonder if you could tell us where we are.
Thanks very much.
Thanks, Omar, for your question. I 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%-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. The negative scenario, you can also say worst-case scenario of EUR 850 million
Takes into account that the visibility for the last two months of the year is pretty unclear. Please have in mind that approximately 40% of our annual adjusted EBITDA is done in the fourth quarter. 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. We have to flag it somewhere somehow because we have seen fluctuations in our last quarter in the EBITDA on the sales and EBITDA of approximately plus EUR 40 million to minus EUR 60 million. That hopefully takes it into the right picture, gives you the right picture, what we believe the EUR 850 million looks like. Joyn?
Yeah, 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 now, and we just can't call it. We went back, I think, as Rainer said, and looked at the past two years. 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. There are reasons to feel good.
One could argue last year was very weak. 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. I think as Rainer showed in one of the charts that companies react to that, I think wrongly, by curtailing their advertising and marketing spend. 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. Rest assured that the team, with Rainer's and my guidance, will do everything to maximize performance and growth for the group. Now on Joyn, I 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. Maybe actually in follow-up, for those that haven't, with the team, we 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. 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 EUR 100 million-EUR 120 million range of which then, of course, because it's a 50/50 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.
Number 3, I think on the balance, we're moving from big multi-year output deals to smarter packaging and picking. 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 RTL results yesterday. You're saying your audience share is good. 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? 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. I'll take the first two, and I'll let Rainer talk about cash flow. 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. 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. We see those moves depending on programming, sequencing of what we have on air all the time. 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.
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. 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-month picture is indicative of what we expect for the year. 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 have to compensate for that in audience and minutes viewing, number one, you have to compensate for that in revenue, number two, and then profit, three. One, two, and three are successively more difficult, but I think we're in a very good way.
Because you were comparing to RTL, if you look at our 37% digital growth, I am very pleased with that. The rather bare bones set of numbers that RTL 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. That is really as much as I think we want to say at this moment. I am reasonably confident that we will be able to talk about what the outcome of this process is in some way, shape, or form before Christmas. I will 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. As Max already said, we're very happy with that. 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. Why are you losing TV ad share despite the audience share being relatively strong?
Laurie, 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. We've seen in past years that we sometimes have over-performance in a quarter, we have under-performance 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&L. We've learned to count our chickens after the 31st of December. I don't quite know what is RTL's concept of a 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.
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. We should expect, though, 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 Rainer's uncertainty statement that we have a lot of moving parts here between macro, between advertising booking patterns. 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 ProSieben.
Understood. All right. Thank you.
We will now take our next question from Chris Johnen 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 Laurie's question on the share. I actually think you guys may have underperformed in the first 10 months of the year versus RTL. It raises the question, why these share agreements are not being met. You flagged the important also to the agencies' P&L, but why do you think the flow this year has been lower towards you guys?
I don't know the answer, Chris, because I can see our books I can't see RTL's books. If I look organically, the best way I can compare is if I look organically, nine months in entertainment revenues were about -2%. If I read RTL's numbers correctly yesterday, they are about -2%. 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. 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 temper maybe the view on TV ad losses.
Based on what I can see, I just don't see a big difference. 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 RTL's performance, be able to compare the two. By the way, the other comment that I should make, because I find in our conversations, this is not a point about you, Chris, but all of us are very focused on the advertising market and TV performance, which understandably is critical. 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.
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. As a general comment about share deals, you don't think that they're necessarily dead, so even if, going into negotiations for 2020, you don't expect 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 deals 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. 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 at face value. Still, is there a comment on? You flagged there's great interest during the process. Maybe I'm pushing it a bit, what kind of a view range are we looking here? Are multiples like eight, nine times EBITDA realistic, or in what sort of shape do you think the U.S. business being sold is today?
It might strike, Chris, but I can't. As an active process, I can't comment. I will tell you that I've read a lot of things in the press that make 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 strong content production assets. We'll see where we come out.
No, that's already helpful. Then a final comment on, I know it's early for 2020, but when you look back over the last year, the EUR 70 million you wanted to invest in entertainment in 2019. Where we stand currently, do you think we've, at least when it comes to those kind of investments, we've reached a trough or should we brace for 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?
Yeah, 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 market will develop. 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. 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 Julien Roch 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. Can you explain the strategic rationale of selling Red Arrow? Is it just because you have too much debt, in which case, would it not be better to cut the dividend?
I can, Julien. 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. 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. 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, and I think it is meaningfully superior. When I look around the world, I think there's a lot of evidence that is the case. When one looks at content, what we're really focused on is having a strong ecosystem that can feed content into our German entertainment network, which are both TV channels, but also digital outlets.
For that Redseven, for that Pyjama Pictures, which is the company that we've just set up, are important, and I would expect more of those kind of activities in the future. Similarly, Studio71, because it's a major feeder of digital content for us in Germany and beyond that in the U.S. and other places, is critically important. When you take a lens that way, the international part of Red Arrow Studios is a very good business, but is not as synergistic as we would possibly wish, 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, we could then use that cash to reinforce more of the strategy I just talked about.
Okay. Thank you.
Let me answer your net debt question on, which is related to that. When we reach our guidance, the lower end of the former range on adjusted EBITDA, and that's what we already reflect in Q2, we should end up at a net debt to EBITDA ratio of 2.5. That's the situation. 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. You've been very clear on trying to go for 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. Surely you must start to have some visibility on November. You at least have the first week, and with booking, you probably have the first two weeks. Can you tell us what happened in the first week or the first two weeks of November?
Yes, we have some visibility, Julien, but that's a dangerous game because then we get into beginning to comment on our business on a weekly basis, and then 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, the things that we like, and there's a number of reasons to be concerned about. Indeed, our forecasts are changing on a daily basis. We will do everything to deliver the business with our targets and ambition. 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. The last question is on addressable TV. You said it was small, but you were very confident it was starting well. 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 EUR 200 million-plus gross advertising revenues between RTL and us through that vehicle. Gross doesn't equal net, obviously. I think you can see that as we move into next year, I think addressable can meaningfully add revenue and profit. We're still in the early days of scaling this.
Just so EUR 200 million is on a gross basis, d-force, i.e. RTL and you, and EUR 25 million 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 know you don't really want to comment November, December, given the limited visibility. Could you give us a trend for October? 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 want to reinvest about EUR 110 million, I think, this year. When I look at your program amortization, it's only up EUR 20 million in the first nine months. I just wanted to check how much of that EUR 110 million has been reinvested in the first nine months, and where the gap versus the program amortization and how much more we should expect in Q4. Last question is on NuCom. Could you quantify the level of investments in Flaconi for this year, potentially next year?
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? Should we see further margin dilution going forward? Thank you.
Let me start with your first question and also give you a general statement again. At the beginning, what we currently see, there is no strong indication that our TV advertising business will decline high single digits% in Q4 as described in our bear case scenario. Please have in mind that we, and that's what lots of you think and know, have easier comparable figures in Q4 2018. For sure, and that's what Max already mentioned before, that there is a certain potential for our advertising share gains vis-à-vis RTL, means that the full year targets can still be reached. However, that's the reason why we have explained it.
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 a pronounced adjusted EBITDA decline of up to EUR 60 million. That's the only reason for that. The trend for October, we had, and I look to Ralf too, we had a very strong October last year, therefore we had a decline, which is perhaps high single digits somewhere in October. 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 EUR 100 million. For sure, you don't see all the numbers because we also have them in working capital and somewhere else.
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 investment on that in the year 2019.
Okay. Then on NuCom, our investments in flaconi this year are somewhere around EUR 10 million-EUR 20 million. 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. At the same point in time, begin to build out a better balanced portfolio of top line and bottom line growth. I would expect to see very meaningful both top and bottom line growth in the NuCom portfolio. Also, if I take a slightly longer range view, we are expecting to build margin in those businesses, but we're just choosing.
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. Max, may I just follow on the second question around programming? How much has been done in the first nine months? Just that we have a view of how much needs to be done in Q4 in terms of reinvestments. Thanks.
This is Ralf speaking. You can assume that we have done around about three quarter of the invest. Because this is our phasing. There will still be additional invest in Q4. 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. 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 Eary from UBS. Please go ahead.
Yeah, 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&L is actually down 1% for the first nine months. Are we expecting a significant increase as we go into the fourth quarter? 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? 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 costs, there is obviously leeway to steer the cost. Our planning foresees that we will do more in local content, yes. We also have a little bit of flexibility on U.S. content, obviously. How this turns out will also be a function, obviously, of the overall environment.
Ralf, just to follow up. The regional guidance for programming expenditure this year was about EUR 1.1 billion. I think that was the cash number. Obviously there's a timing difference between cash and accounting numbers. Last year, you did EUR 965 million of programming costs, of which EUR 300 million were done in the fourth quarter. If you're doing the EUR 1.1 billion or even taking into account some adjustments, that you've got a substantial change in programming budgets in the fourth quarter. Is that correct? If you review that the market's negative, why are you not warehousing content when the market is better?
Yeah. Are you asking cash investment in the cash flow statement or cost?
Well, I'm asking for both.
Well, look, in terms of cash flow, this number also contains payments for content we have written off last year, yeah? There is no change to our overall guidance we have provided earlier in the year. As I said, in the P&L, we do foresee continued investments in line with what we have said. As I said, the outcome will be a function of the overall environment as we have some flexibility to steer our content cost.
Okay
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 maxdome, 7NXT, and also supposedly basically cost savings that were coming out as you were going to simplify the business. Also, I would imagine there are some cost program about the corporate level. 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. Yeah. The overall program was around about EUR 120 million, including the content cost. We have guided earlier in the year for cost offsets within the entertainment segment of around about EUR 50 million. I would say we still stick to what we have guided, but we can debate this once we have the full year results released.
Okay. Just on sort of third question with regard to Studio71, obviously we're seeing continuation of growth coming through in the third quarter, and the third quarter was particularly strong. 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 Studio71?
Well, Studio71 is your question, I believe. It's around about breakeven.
Okay. 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?
Richard, we have not provided a specific breakdown historically. Obviously, our platform businesses are contributing to the growth, as Max already highlighted. We also have our addressable TV within digital and smart. Whilst we have only done SwitchIn Sofa with the d-force's joint venture now in full force, we will also introduce the spot overlay product. It's good contribution from all relevant, let's say, businesses within digital and smart.
Just on the back of that, 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 will continue to see dynamic growth. The specific percentage growth rate, I think it's too premature to tell. 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.
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 more in the second and third quarter. Has that changed? That's the first question. Second question, just in terms of Because I think you brought it up in one of your explanations for October, that October last 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%? If we could have what the mix was between October and, say, November, December.
Just a clarification on the international part of Red Arrow being sold. Could you isolate what the specific revenues for just the international part that was being sold were in 2018 and also the EBITDA, if possible? 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. I'm just wondering, is that the case? Should we consider these cost savings permanent or temporary? To the extent that they are temporary and they will cycle back in next year, could you maybe quantify them? Thank you.
Okay, I try to answer some of the questions, but obviously I can't be too precise. Let me start with the second one. October 2018 was 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. That's everything we can say to that. Your fourth question was, are the cost saving permanent or temporary? If we can quantify them. Where does it come from? For me, more or less, the situation which we have is, that we have two effects for the current market development.
We really rely on the last quarter, as we already said several times. 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. The other side, we have a high correlation, we already mentioned that during the speech, to the overall economic environment. It's very difficult for us to quantify where it comes from and therefore we won't comment on that, too.
Okay.
The programming cost phasing, how does the cycling. At the end of the year, we have said several times that we would like to spend EUR 80 million incremental content costs, which are primarily related to local content investments. We do not expect total U.S. content spend to increase. We have to see how this will develop also going on further, but our expectation is, as Ralf already said, that we will continue in our TV grids and especially in local content, irrelevant currently what the overall market is doing, because we have to do it. On our path to change the shift, we have to invest further and to integrate our formats in the market, in our program. We can't react to changes in the overall market currently, because we have to fulfill a long-term strategy here.
Also for Red Arrow, it's to really isolate the international business, because first of all, we haven't decided what we want to do. When we are finished, for sure, we have to do it, and that's also a 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. 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 Flaconi, 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. 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 an 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 to contacts on your platform Joyn, how does that convert into price and ultimately into money? Thank you.
On Flaconi, 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. 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. 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 a reason to believe that we can build a competitive advantage. Our 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. It's very early days. Certainly, I think at a steady state, reach is reach. 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. All in all, I think the best answer I can give you is, I would expect that steady state, not in build-up phase, but at steady state, to mirror the historic profitability in TV.
Yeah. To add that's a classical contribution business because you have fixed costs, you put more in, that directly takes you down to the profitability.
Okay. You said reach is reach. I wouldn't confirm that. If you, I don't know, look digital on a platform, you might not be, in terms of your traditional laid back audience share, might be getting smaller. Distraction might be higher. When you look online, clips and also Studio71 also showing that profitability is more difficult to reach.
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. 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. 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 8:00 in the evening or 8:15 in the evening on TV, but also is watching that same show either live and streaming or the day after or three days after. That's a high-quality audience that we can package together.
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'd call scatter inventories. Particularly if you look at the big social media platforms, a lot of the views are being measured for people to have spent 3 seconds or so in content. 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.
Morning. 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? 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, Annick. I'm smiling into your second one. There's people who are frantically going through my calendar to answer that with mathematical precision. 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. They're always lagging, if 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.
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, if I may, 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. I will certainly see and talk with the team in various interactions on a weekly basis. Digital and smart growth rate for 2020. Look, we'll set our budgets when we sit together in March. Certainly, and I think that's obvious from our strategy statements, we would continue to expect strong growth on digital and smart, and certainly our 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. You talked about being around two and a half 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 sort of into a more comfortable area of that target range if you're not planning to cut or adjust down the dividends? Secondly, in terms of strategic reviews, and where the share price is, et cetera, are there any other assets that you would consider looking at as part of a strategic review where you think you could realize value? Finally 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 part of the plan and how you think you'll go about that.
Let me start with your first question. I've said before that we target two and a half times 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. 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. It's also based what we have to pay out on that, what we will reach up at the year-end. Nothing else to say about that.
We feel comfortable with the 2.5 times 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. It doesn't mean on the other side that we are also not ready to move in the other direction. At the end, we have to make our decisions based on the business and what is right and what is wrong for our strategy. We have a clear strategy in front of us.
They need some investments also in the next years. Yeah, we are ready to do that.
Catherine, on your third question on Joyn. Yes. 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 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.
Sorry. Could I just come back quickly on that? You talked about the investment for Joyn next year being net investment EUR 100 million-EUR 120 million. Does that incorporate some kind of plan for expansion into other markets, or would that be on top of the sort of existing EUR 100 million-EUR 120 million you've referred to?
The answer is it does not. 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. I wouldn't, if you want, pluck a big number into a model. 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 Joyn 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. As always, our investor relations team will be available shortly thereafter for any follow-ups. Thank you and goodbye. Have a nice day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.