Interim results for the half-year ended 31 March

29th May 2014

FUTURE PLC

Interim results for the half-year ended 31 March 2014

Future plc (LSE: FUTR), the international media group and leading digital publisher, today announces its   un-audited interim results for the half-year ended 31 March 2014. The analysis in this announcement is, except where it refers to statutory results, based on normalised results. A presentation to analysts will be held today at 9am at the offices of Numis, 10 Paternoster Square, London EC4M 7LT.

Financial Highlights

Summary

·      Normalised Group revenues down 1% to £48.5m

-       UK revenues up 2% to £41.5m, representing 85% of Group revenues

-       US revenue down 14% to £7.3m

·      Strong growth in Digital and Diversified revenues, up 9% to £16.8m******

-       Digital and Diversified revenues now represent 35% of total Group revenues

-       Digital and Diversified advertising represents 70% of total advertising revenues

·      Impairment charge of £26m booked in the period on the carrying value of print assets

Outlook

·      Disposal confirmed of Sport and Craft titles to Immediate Media for up to £24m; of which £22m in cash and £2m in working capital. Deal expected to complete during the summer.

·      Transformation programme underway; restructuring under new leadership team and proposed reduction in headcount of over 170 roles in UK; over 40 roles already cut in US

·      Future plc is historically geared to the second half, which we expect to continue driven by seasonality in core sectors and restructuring activity already undertaken in the first half

Peter Allen, Future's Chairman, said: "Whilst the Board is disappointed with the results for the first half of the year, we have already taken significant actions to address the fundamental issues. Since appointing Zillah Byng-Maddick as CEO on 1^st April we have completed a thorough review of the organisation. In the UK we are currently consulting with staff on a transformative restructuring programme which the Board believes will simplify our business, allowing it to thrive in an increasingly digital and mobile age, with a renewed focus on revenue and margin growth in core sectors.

"Today we also announce the disposal of our Sport and Craft titles to Immediate Media for up to £24m. These divisions are well managed and very successful parts of Future's portfolio and will continue to thrive under their new owners. However their disposal will enable Future to focus on the remaining lead verticals with an emphasis on the growing consumer technology market."

******

Notes
* Normalised results are presented to better reflect the current size and structure of the business and give a better indication of the performance of the ongoing business. The normalised results exclude revenues and costs relating to activities closed or divested between 1 October 2012 and 31 March 2014, but include any new activities launched in that period. Closed or divested activities are not such that they fell to be classified as discontinued under IFRS. The analysis in this announcement is, except where it refers to statutory results, based on normalised results.

** EBITDAE represents earnings before interest, tax, depreciation, amortisation and impairment of intangible assets and exceptional items.

*** EBITE represents earnings before interest, tax, exceptional items and impairment of intangible assets.

**** Exceptional items for 2014 include impairment of intangible assets of £26.0m.

***** Adjusted earnings per share exclude exceptional items, impairment of intangible assets and related tax effects.

****** Digital & Diversified Revenues include digital activities, FutureFolio, Future Plus and events.

The most significant foreign currency affecting the Group is the US Dollar. The average exchange rate for the period was $1.6369=£1 (2013: $1.5801=£1), representing a 3% weakening of the US Dollar against Sterling.

Enquiries

Future plc
Zillah Byng-Maddick, Chief Executive                                           Tel: 020 7042 4433
Chris Taylor, Director of Communications                                     Tel: 020 7042 4033/07980 221942

Brunswick Group
Jon Coles / Andy Rivett-Carnac                                                   Tel: 020 7404 5959

About Future:

·      Future plc is an international media group and leading digital business, listed on the London Stock Exchange (symbol: FUTR).

·      Future has been named Consumer Digital Publisher of the Year for three years in a row by the Association of Online Publishers (2011, 2012, 2013) and has been named the Professional Publishers Association Digital Publisher of the Year for two consecutive years (2012, 2013).

·      We have operations in the UK, US and Australia creating more than 200 publications, apps, websites and events.

·      We hold market-leading positions in Technology and Photography sectors.

·      We attract more than 58 million monthly global unique users to our websites, which include techradar.com and musicradar.com.

·      Future sold more than 15 million magazines last year. Our best known brands are T3, Total Film and Xbox: The Official Magazine.

·      Future has developed its own app-creation software, FutureFolio. We produce over 100 digital editions, and have sold over 5 million digital issues in the last year.

·      Future exports or syndicates 225 publications to over 89 countries, making us the UK's number one exporter and licensor of magazine content.

·      Follow Future plc on Twitter at www.twitter.com/futureplc and on LinkedIn at www.linkedin.com/company/future-publishing 

***

Chief Executive's Statement

Future has faced difficult trading conditions in the first half, and the Board is disappointed with the results for the period. Since joining Future in November 2013, it has become apparent that the strategy only partly mitigated the decline in print revenues and we needed a radical review of the company's activities.

Since my appointment on the 1^st April as Chief Executive we have carried out a root and branch review of the organisation, to revisit basic principles and identify where Future derives its intrinsic value, who its principal revenue stakeholders are, and the structure required to more effectively serve those stakeholders.

As part of that strategic review we have decided to focus on the company's core activities, above all around the consumer technology audience. As a result of this we initiated a review of the portfolios, which has ultimately led to the decision to dispose of the Sport and Craft titles and have reached agreement with Immediate Media on the sale of these titles for up to £24m. This disposal highlights the underlying value of the business. The proceeds will be used to pay down current debt and facilitate the restructuring activities already announced. We are working with our banks currently on a new and reduced working capital facility going forward, including the re-setting of covenants.

Performance in the period

Overall, normalised revenues are down 1% year-on-year at £48.5m, driven by modest growth in UK revenues offsetting declines in the US. Future continues to see successful growth in its Digital and  Diversified revenues, up 9% year-on-year. Group Digital and Diversified revenues now account for 35% of total Group revenues. UK EBITDAE for the first half stands at £0.6m, while total normalised Group EBITDAE is £(0.7)m.

Looking at some of the category verticals in more detail, Photography saw a strong performance, driving growth in Creative, while Technology and Sport & Auto have both seen incremental growth. But in the Games category, the market has continued to be challenging, which has led to disappointing results in our Entertainment division.

The Board acknowledges that a degree of over-confidence in business planning for 2014 led to over-investment in some areas and consequently a general increase in costs. In addition, while the transition to new Digital and Diversified revenues has been well executed, the back office systems and ways of working have not been standardized, creating complexity, leading to increased costs.

More positively, investment in Events, as part of the Digital and Diversified strategy, has performed well, specifically with the launch in March 2014 of The Photography Show where over 30,000 consumers and professionals attended the show at Birmingham's NEC, generating £1.4m in revenue for Future. We also continue to roll out ecommerce and affiliate opportunities, prioritising TechRadar, our largest single online property, which reaches on average almost four million tech consumers in the UK every month.

Our US business continued to face challenges and in March 2014 we announced a streamlining of the business to fast-track the transition to a digital model, appropriate to the US market. Print support functions and editorial leadership of Future's international print brands have been assumed by Future's UK content team. In total, over one third of US staff have left the business, including a number of the management team, and the new management has renewed its focus on delivering sustained margin improvement.

A non-cash impairment charge of £26m (2013: £Nil) has been incurred in the year which reflects the structural decline in the print marketplace.

Future Transformation

Since taking up the role of Chief Executive, we have reviewed all aspects of Future's operations. My conclusion, supported by the Board and shareholders, was that Future, in its current form, had become too complex. There is a lack of standardised processes, leading to a lack of focus. This has meant that some activities, while revenue generating, are often low margin. Hence the conclusion that the Company should be simplified and focus on areas where we see highest potential.

It is also my observation that Future needs to re-engage with the key requirements of its three principal revenue stakeholders: its consumer audience, its commercial clients and its shareholders.

Early this month I informed staff that Future will undergo a transformative restructure: simplifying our business, removing distractions and focusing on our core strength: creating excellent, engaging and expert content that is channel-agnostic and connects. Connects consumers to our experts, with opportunities to learn and engage; connects consumers to their peers; and connects these engaged consumer audiences to our commercial partners. This is content which can be created for delivery wherever our consumers want it - online, on mobile, in print, at events and beyond. And it will only be created if it demonstrably supports our strategy.

Clearly, Future's print revenues have continued to decline, but our consumers are highly-engaged and new revenue streams are available. Our revised business model is based on the virtuous circle of engagement in two core content areas: reviews (when consumers are looking to make product purchase decisions and where we can derive ecommerce revenues) and 'how to' opportunities (when consumers want to learn more and are prepared to pay us to help them do so, through tutorials, events etc). These were the foundations of Future's initial success in the 1980s, and they will remain at the core of our strategic focus through the next phase of transformation.

The streamlining of our consumer strategy - with an increased focus on the consumer technology market and a clear channel-neutral approach - allows for a simplification and standardisation of our digital advertising platforms and opportunities. Where appropriate we will also look to rationalise brand activity online in areas where consumers are less interested in our brands but discover and value our content that reaches them through the strength of our search engine optimisation.

The transformation programme has already begun, with the disposal of our Sport and Craft titles. In addition a consultation process began in mid-May, involving all staff, a reflection of the extent to which all areas of the business are affected by the evolving working practices. The proposals reflect a functional approach to re-organising the business: with all our content and marketing staff grouped under one director, focused on creating industry-leading content that connects with our consumers. Likewise, we are grouping all commercial and consumer revenue activity under respective directors. I propose to transform our current IT division into a focused digital Product and Technology division, creating standardised platforms for all our digital offerings. I have also re-organised and strengthened my leadership team to reflect this new functional approach.

Outlook

We have begun transforming Future and simplifying our business to focus on our core strengths and this will continue into the second half. Looking forward it is likely that in the short term this change will impact our bottom line but allow our longer-term margins to increase significantly. 

Interim statement

Statutory results for half-year to 31 March 2014

Normalised results for half-year to 31 March 2014

The normalised results for the Group, and a reconciliation to the statutory results above, are set out on pages 28 to 30.

Normalised results are presented to better reflect the current size and structure of the business. The normalised results exclude revenues and costs relating to activities closed or divested between 1 October 2012 and 31 March 2014 but include any new activities launched in that period.

Review of operations

The review of operations is based primarily on a comparison of normalised half-year results for the six months ended 31 March 2014 with those for the six months ended 31 March 2013. Unless otherwise stated, change percentages relate to a comparison of these two periods. 

Key Performance Indicators

An update on the key performance indicators is given below:

Analysis of revenue for half-year to 31 March

Whilst Group revenue overall fell by 1% to £48.5m, Digital and Diversified revenues continued to show growth and were up 9%. Digital and Diversified revenues now represent 35% of the Group revenues, with Digital and Diversified advertising representing 70% of our total advertising revenues. In contrast print-based revenues continued to decline in the UK and the US.

On a geographic basis, the revenues arising from the UK-based business, which now represents 85% of the Group in revenue terms, once again continued to be resilient in tough market conditions.

Revenue from the US-based business fell by 14% impacted by the continuing decline in print-related revenues arising from circulation and advertising. This decline has been offset by planned reductions in the cost base with all US print support functions, such as consumer marketing and production, moved to teams in the UK hub.

Analysis of EBITDAE for half-year to 31 March

Group EBITDAE fell in the half-year, with the US remaining flat year-on-year and the UK decreasing by 75%. Further detail on these movements is given in the following sections of the statement.

UK-based performance in half-year

UK-based activities saw revenue up by 2%. Within this Digital and Diversified revenues increase by 15%, underpinned by growth in both Technology revenue and a pleasing inaugural performance for The Photography Show. This has partially offset the continued decrease in print revenue which the Group continues to experience.

Circulation revenue was down 2%, with the largest negative impact arising from UK print newstrade, which was down 6% driven partly by a higher number of returns than forecast. This decline was offset by increases in digital copy sales, which have increased by 10% year-on-year.

Advertising revenues were up 10% as digital advertising revenues continued to increase, coupled with growth in the diversified segment in part as a result of event advertising.

EBITDAE in the UK has fallen with margins being impacted by increased costs incurred as part of the transition to new revenue streams. As the transitional revenues have been established costs have been higher than in previous years and this has significantly impacted our margin.

UK revenue by sector is set out in the table below:          

Whilst the Entertainment sector has been tough as a result of the low levels of activity in Games, Technology and the Sport & Auto sector - which includes our Cycling activities - has continued to grow its revenue base.

US-based performance in half-year

US revenues totalled $11.9m, down 11% on the prior year. Within this, print revenues have declined by 25%.

Circulation revenue overall fell by 24%, with the largest negative impact arising from print copy sales which were down 28%. Advertising revenues fell by 2%, with print falling by 7% and digital remaining flat. Digital advertising in the US represents 80% of total advertising revenues. The US performance was impacted by the weakness in the Games release schedule.

At the EBITDAE level, planned cost savings have offset the reduced revenues, which have resulted in a small increase year-on-year in the EBITDAE loss to $2.3m.

US revenue by sector is set out in the table below:

Revenue continues to grow in Technology and despite a reduction in revenue in other areas we have seen increased levels of contribution in all areas except Entertainment. The fall in revenue has been partially offset by the planned savings in overheads which will continue in the second half as the savings from the restructuring activities in the first half come through.

Seasonality of the business

The business has a second half seasonality impact, with larger revenues during H2. As a result in the last two years EBITDAE across H1:H2 has been 17%:83% (2013) and 22%:78% (2012). The weighting towards the second half of the year is expected to continue this year, driven by:

•           Seasonality of certain sectors of the business, eg Cycling

•           Margin improvement activity undertaken during March

•           Phasing of commercial revenues

•           Volume of planned activity

Net finance costs

Net finance costs were £0.5m (2013: £1.0m) reflecting a decrease in the average net debt compared to the prior year.

Taxation

The tax credit for the six months ended 31 March 2014 is based on the effective rate, estimated on a full year basis by territory, being applied to the taxable profits or losses of each territory for the six months ended 31 March 2014.

Cash flow and net debt

Net debt at 30 September 2013 was £6.9m. During the period there was a cash inflow from operations before cash exceptional items of £4.1m (2013: cash inflow of £1.9m).

During the half-year cash outflows totalled £5.1m (2013: £4.4m) in respect of the following items:

·      £1.5m (2013: £1.3m) in exceptional costs

·      £1.5m (2013: £1.3m) in respect of capital expenditure

·      £0.5m (2013: £0.7m) in net interest payments

·      £0.9m (2013: £0.8m) in net taxation payments

·      £nil (2013: £0.3m) in bank arrangement fees

·      £0.7m (2013: £nil) in dividends

Exchange and other movements accounted for the balance of cash flows.

As a result of the above net debt at 31 March 2014 was £7.8m, an increase of 13% from September 2013.

Bank covenants

The Group was in compliance with all its covenants at 31 March 2014 as set out in the following table:

Interest payable under the Credit Facility is calculated as the cost of three month LIBOR plus an interest margin of between 2.0% and 3.25%, dependent on covenant ratio. The key covenants are set out in the following table:

Interim dividend

The Board has agreed that there will be no interim dividend.

Risks that may impact the second half of the financial year

The principal risks and uncertainties that affect the Group on an ongoing basis are described in our Annual Report 2013 (on Pages 19 and 20), which is available at www.futureplc.com.  These have not changed since the year end and are as follows:

Operating environment

The macro-economic environment continues to be difficult. Despite a more positive outlook, in both the UK and the US, general trading conditions remain tough. The economic environment, as well as the general move to digital products, has resulted in printed magazine sales and print-related advertising revenues falling.

Intellectual property

Future uses, and grants licences to its licensees to use various types of third-party content including music, audiovisual material, photos, images and text. As publisher, Future is responsible for any intellectual property or other infringement relating to the same and as licensor, Future is responsible to its licensees.

Financial

Forecasting remains difficult in all consumer markets but this is particularly the case in relation to sales through digital newsstands which are emerging. The long lag time for reporting on sales of printed copies and associated retail promotional spend in the US and bookazines continued to be a challenge in the year. As we diversify our revenue streams, new activities are inherently more difficult to accurately forecast. In addition the Group is exposed to interest rate risk and foreign exchange risk.

IT

In the event of a total network or server failure or data loss there would be a major impact on the production of magazines, operation of websites and the operational effectiveness of the business.

Staff

The Group's strong reputation in digital media makes its staff potentially attractive to competitors. There is a risk that key staff will move elsewhere if offered significant increases in remuneration with which Future is unable to compete.

Personal data

A loss of personal data triggers the need to notify users and the Information Commissioner's Office (ICO) and Future may suffer reputational risk, as well as a significant financial penalty, if it is responsible for the breach.

Consolidated income statement

for the six months ended 31 March 2014

(Loss)/earnings per 1p Ordinary share

Consolidated statement of comprehensive income

for the six months ended 31 March 2014