Our double digit EBITDA and operating profit growth reflects management’s continuing attention to controlling costs, in light of slower revenue growth during the year. We also delivered strong operating cash flow growth, up €9.5 million to €26.4 million during 2007.
I am also pleased that we were able to distribute €50 million to shareholders during the year.
Revenue
Revenue increased 2% to €166.4 million. Channel and online revenues increased 2% to €122.9 million, with subscription revenue increasing 4% to €80.6 million offset by advertising revenue decreasing 6% to €37.3 million. Other channel and online revenue, including live events, research and interactive, was up €1.8 million at €5.0 million. The primary drivers of the improvement in channel and online revenues were an increase in the number of subscribers, partially offset by the full year impact of the price reduction in the Sky deal for the UK channel signed in the prior year. Advertising revenues decreased, notably in the UK and the Netherlands, offset by increased advertising in Italy and Poland.
Programme distribution revenue increased 11% to €21.0 million. The increase is primarily the result of a programme sale in Israel, partially offset by the appreciation of the Euro versus the US dollar as distribution sales are predominately US dollar-based.
Consumer products revenue was €22.5 million, a decrease of €1.1 million. The decrease was due to the change in recording DCP Power Rangers revenue on a net basis1. Total consumer products revenue would have increased 10% had revenue been recognised on a consistent basis with the prior year, with both DCP Power Rangers and JCP gross revenues increasing year-on-year.
Marketing, selling and distribution costs
Marketing, selling and distribution costs decreased 8% to €50.0 million resulting from decreases in costs related to the change in the DCP Power Rangers contract1, marketing expenses and music licence costs offset by production costs associated with the sale of programming in Israel and higher participation fees.
General and administrative costs
General and administrative costs increased 1% to €48.5 million. There was an increase in personnel-related costs and bad debt expense, largely related to specific provisions. This was offset by a release of provisions made in the prior year for indirect taxes (unallocated to segments) and lease exit costs charged in the prior year.
EBITDA
EBITDA increased 11% to €69.4 million. Channels and online EBITDA increased 6% to €51.1 million. This was primarily due to the increased revenue as described above on a flat cost structure. Programme distribution EBITDA increased 13% to €13.0 million due to the net impact of the programme sale within Israel and cost savings related to marketing expenses described above. Consumer products EBITDA increased 5% to €12.8 million, primarily driven by strong net growth of Power Rangers1 offset by increased costs from participation fees. Shared costs not allocated to segments decreased 21% to €7.5 million due to the release of provisions for indirect taxes and lease exit costs charged in the prior year.
Amortisation and impairment of programme rights
Amortisation and impairment of programme rights (defined as cost of sales in the income statement) increased 3% to €43.4 million primarily due to increased amortisation associated with acquiring the worldwide rights on a number of properties offset by the appreciation of the Euro versus the US dollar, as the programme library is predominately US dollar based.
Finance income (net)
Finance income (net) increased €2.2 million to €5.9 million due to an increase in interest income earned from higher average cash balances during the year and higher interest rates.
Gain on foreign exchange
The gain on foreign exchange recognised during the year of €10.8 million primarily relates to gains on inter-company transactions which reflect the exchange risk of doing business with foreign group members where the functional currency is not in Euros2.
Profit before tax expense
Profit before tax and minority interest increased by €13.6 million to €43.8 million, resulting from increased EBITDA as discussed above, a gain on foreign exchange and increased financial income.
Tax expense
The effective tax rate for the period was 14% compared with 22% in the prior period. This lower rate primarily reflects the differential pattern of profit distribution among the tax jurisdictions in which the group operates and the utilisation of deferred tax losses not previously recognised.
Minority interest3
Net profit attributable to minority interest increased by €0.3 million to €0.5 million resulting from higher profits from the Polish channel.
Earnings per share
Basic and diluted earnings per share increased to 43.9 cents from 27.7 cents and 27.6 cents, respectively in the prior period.
Cash flow
Cash and cash equivalents decreased by €27.6 million to €99.5 million from September 30, 2006 primarily as a result of the distribution to shareholders. Net cash generated from operations increased by €9.5 million to €26.4 million as a result of an increase in net profit and a reduction in programming spend, offset by an increase in the net amount due from our parent company, Disney.
Outlook
As we publish this report we are expecting that revenue will be adversely affected in fiscal 2008 by a number of specific factors, which could cause revenue to decline by 10% to 15%.
The primary causes of this decline are specific changes in a number of our deals. In channels and online a further per subscriber rate decrease with Sky in the UK and the effect of our anticipated renewal with Canalsat in France will have an impact on subscription revenue. In programme distribution we are expecting a lower overall volume of programming to be delivered, and in consumer products we are not planning a third series of A.T.O.M. Alpha Teens on Machines, and therefore the master toy licence sale will not recur.
We are also anticipating that this revenue reduction will feed through to EBITDA, alongside specific cost increases from the end of a rent rebate period on one of our offices and an increased investment in developing our digital activities.
Dene Stratton
Chief Financial Officer
December 2007
1 Reported revenue was unfavourably impacted by a change in our Power Rangers representation contract with DCP, which resulted in revenue being recorded net of DCP’s share of revenue. Measured on a like-for-like basis against the prior year, impact on revenues was €3.6 million. Revenue had been recorded gross along with the related DCP commissions in marketing, selling and distribution costs under the previous arrangement. This change has been phased in during the first half of fiscal 2007.
2 Primarily the result of balances between group members denominated in dollars. The Euro to US dollar exchange rate has increased from 1.270 at September 30, 2006 to 1.415 at September 30, 2007.
3 Minority interest relates to a third party’s 20% interest in Jetix Poland Limited.