ITV returns to profit thanks to cost-cutting and more ads

Strategic review begins with new chief executive set to join next month

ITV swung back to full-year profit in 2009 after the worst advertising recession on record, but the chairman, Archie Norman, warned that the next Budget could derail the recent improvements in the advertising markets.

The UK's largest commercial TV broadcaster posted a pre-tax profit of £25m for the year to the end of December, following a £2.7bn loss in 2008. The interim chief executive, John Cresswell, said ITV's cost-cutting drive, as well as moves to bolster the balance sheet and improve performance, had paid off. It was also buoyed by an improvement in the advertising market.

Mr Norman yesterday warned that the ad market wasn't out of the woods yet. He said the anticipated "austerity Budget" this year, as well as a potential increase in VAT, would have "a significant impact" on advertising.

Mr Norman, appointed last year after a succession crisis at ITV, said change at the broadcaster was "an imperative". He warned: "The way people consume media is being transformed and consequences for established broadcasters will be profound."

The strategic review, announced in January, is already underway, Mr Norman said, as he confirmed that the incoming chief executive Adam Crozier's starting date was 26 April. The review had already started "to give Adam a racing start," he said, adding: "We need to look pretty fundamentally at the shape and form that the business takes." He remained firm over the company's need to overhaul the business for the long term. "My interest is in building a great business for the future. My objective is a four- to five-year future. Instant change is no change," he said, adding: "Under Adam Crozier's leadership, ITV will set out on the journey to become a very different business over the next five years."

The group had been hit by huge impairment charges in 2008, which dragged it into the red. Before those impairment costs and other charges, adjusted profit fell from £112m in 2008 to £108m.

"In the context of the drop in advertising, these were still an impressive set of results," said Paul Richards, an analyst at Numis. "The company brought better than expected cost savings, and the ad market strengthened towards the end of the year."

The shrinking advertising market last year prompted ITV's ad revenues to fall 9 per cent to £1.2bn. The situation improved during the winter, and ITV's early forecasts for April predict that revenues from advertising could be up by as much as 20 per cent. Mr Cresswell cautioned: "This is against unprecedented declines of the previous year and, over the medium term, we remain cautious."

He said the production business ITV Studios had suffered in 2009, as the cuts to ITV's budget saw a "significant reduction" in its commissions. The revenues at the division fell 4 per cent to £597m. He added: "The programming budget was reduced last year, but the budget we have today is strong and we have a strong programme schedule for this year."

Audience share at the broadcaster's channels rose slightly, despite the production budget cuts, up 4 percentage points to 28.2 per cent in peak time.

Yet online operations were more disappointing, despite a rise from 85 million video views in 2008 to 215 million a year later. Mr Norman admitted that ITV.com remained smaller not only than the BBC's online operations but also those at Channel 4. Revenues from the internet rose from £18m to £24m.

The pension deficit also rose to £426m, up from £178m in 2008, though the management said it would not be changing its payments into the scheme.

As Mr Norman sets about reshaping ITV, it emerged yesterday that Baroness Prashar would become the fifth board member to leave since he took over as chairman at the start of January. She leaves after five years.

In the in-tray: Key challenges for Crozier

Archie Norman has only just begun a strategy review for "fundamental" change at ITV in earnest, but incoming chief executive Adam Crozier's inbox is already overflowing. The review is designed to "help map out the journey of change in channel strategy, content development, culture and organisation required to return ITV to sustainable earnings growth" in the next three to five years.

Mr Norman yesterday outlined the biggest challenges facing Mr Crozier. "The first is sustaining the existing broadcast business," he said. "That is the engine of our cash generation and profit. We can't let ITV1 fall back. Sustaining that is crucial to the business."

This could involve introducing some element of pay TV at the group in the future, although ITV1 is likely to remain free.

Mr Norman added: "We can't just be a free-to-air broadcaster going forward." There is also the issue of making online pay. "We need to do more to be efficient on the internet: ITV.com's revenues are too small," Mr Norman said.

The company must also decide what to do with ITV Studios. Analysts believe there is little chance the production arm would be sold, as Mr Norman said: "We are very clear that content is central to our future."

20 per cent

ITV's forecast for its rise in advertising revenues during April.