P&L Check ProSiebenSat.1’s Thin Digital Margins

The broadcaster’s digital expansion to protect its advertisement business against Netflix and Facebook is pushing up revenue but profit growth is slow and won’t change any time soon.
Broadcasting still brings in the profits but digital services are the future.

Thomas Ebeling is fighting battles on many different fronts, but fending off international competitors moving onto his turf is arguably the biggest.

The chief executive of Germany's largest private media group ProSiebenSat.1 – the only media company in the blue-chip DAX index – is up against US internet giants Facebook and Google for ad revenues and Netflix and Amazon Video for streaming services. In particular, the competitive streaming offerings pose a huge challenge to the group's core broadcasting business.

Unlike the country's big public broadcasters, ProSiebenSat.1 receives no state funding. Without that financial cushion, the company needs to invest in areas showing the most potential for growth in the highly competitive media and advertising market. To that end, Mr. Ebeling has been broadening the scope of ProSiebenSat.1, expanding beyond its traditional broadcasting business into new online services and e-commerce firms. He has also continued to streamline operations.

Television by itself isn’t a business with double-digit growth figures anymore. Thomas Ebeling, CEO ProSiebenSat.1

“Television by itself isn't a business with double-digit growth figures anymore, unlike the other business pillars we're expanding into,” the chief executive told Handelsblatt.

The broadcaster has acquired an online perfume retailer, which can advertise during the hit show Germany's Next Top Model, an online erotics shop, dating site Parship and comparison portal Verivox. It has also built up a streaming platform, called Maxdome, which is competing with Netflix and Amazon Video.

The problem with these new digital ventures, however, is that despite strongly expanding revenue, profit growth is weak.

The company's financial results speak for themselves. Sales in 2016 surged by 17 percent year-on-year to nearly €3.8 billion ($4.15 billion). That growth came almost exclusively from digital products. The new Digital Ventures & Commerce division, which encompasses online retailers, travel portals and internet dating sites, posted a 66-percent jump in sales.

05-12 p24 ProSiebenSat.1 in Numbers-01

In 2016, sales outside the core German-language broadcasting business  accounted for 42 percent of total sales, up from 34 percent the year before. The new division Digital Entertainment, which includes online video rentals and a YouTube marketing company, saw sales jump 22 percent to €463 million, while Content Production & Global sales rose 32 percent to €421 million.

But the three divisions hardly contributed to the group’s overall profits. ProSiebenSat.1 still makes the lion’s share of its profits in traditional TV advertising, mainly from its three major channels Pro Sieben, Sat. 1 and Kabel eins. Although sales in this segment rose only 3 percent and made up 58 percent of total turnover, TV still accounted for about 75 percent of the group's operating profits.

The digital operations have significantly lower operating profit margins than ProSieben’s traditional broadcasting business. The latter had a profit margin of 32.4 percent last year, while Digital Entertainment only made 8 percent, Digital Ventures & Commerce 21.5 percent and Content Production & Global Sales 10.5 percent.

Mr. Ebeling, 58, makes a case for looking at the synergies between the traditional and new businesses in stead of focusing on each division separately to better understand the group's overall financial performance. “The [new] businesses aren’t always very profitable, but they extend, stabilize and strengthen the traditional TV business,” he said.

Thomas Ebeling wants to boost two things at ProSiebenSat.1 - sales and his salary. Shareholders, however, blocked his pay rise on Friday.

ProSiebenSat.1, for example, airs ads for its subsidiary Verivox, an online portal for fee comparisons. Those ads, in turn, drive Verivox's main competitor Check24 to buy more airtime as well, according to Mr. Ebeling. Online stores, he added, also provide valuable customer data used by the TV channels  for targeted advertising.

While Mr. Ebeling's has seen sales rise from his expansion strategy, net profits lag far behind, rising a meager 4 percent last year. And for investors, he delivered dividends that were up only 5 percent.

Yet, the chief executive is sticking to his sales-driven growth strategy, targeting €4.5 billion by 2018. To meet that goal, ProSiebenSat.1 turnover will need to grow 9 percent this year and next year. The CEO is eyeing takeovers, which could help to achieve the target.

Mr. Ebeling also wants to lift recurring earnings before interest, taxes and amortization, or ebita, from €1 billion to €1.125 over the same period. That requires earnings to grow by 7 percent in 2017 and 2018.

The low earnings growth rate means that the group will again lag behind expanding revenue, as it did last year.


Joachim Hofer covers the sports, leisure and IT sectors for Handelsblatt. To contact the author: [email protected]