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ZEEL CFO on TRAI tariff order impact on subscription revenue, advertising growth outlook & content cost inflation

ZEEL will continue to invest and scale up new businesses.

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MUMBAI: Zee Entertainment Enterprises (ZEEL) maintained its growth trajectory for the year end 31 March with an 18.7 per cent increase in y-o-y revenues. Advertising revenue for the financial was up 19.8 per cent on the back of consolidating the market share of its domestic broadcast business and monetisation of ZEE5’s consumer base. ZEEL's programming cost for FY19 increased by 21.7 per cent YoY largely due to the content cost for its streaming service. The media and entertainment conglomerate's numbers not only beat analysts' expectations but were impressive given the changes in broadcast and cable services regulation. It was an eventful year for the iconic brand given the news of its impending stake sale. However, moving forward, the Subhash Chandra-led company will continue to invest and scale up new businesses to widen its content offering. In a Q&A published in the company's annual report, ZEEL CFO Rohit Gupta commented on a wide array of subjects including its financial performance in FY19, outlook of advertising growth, new tariff order’s impact on subscription revenue among others

Here are the edited excerpts.

How was ZEEL’s financial performance in FY19?

We are happy to deliver yet another year of industry leading performance. During the previous fiscal, our revenues grew by 18.7 per cent YoY, led by strong operating performance across all businesses. Advertising revenues for the year grew by 19.8 per cent driven by the viewership share gains in domestic broadcast business and monetisation of ZEE5’s fast-growing user base. Subscription revenues grew by 13.9 per cent during the year. While international subscription remained largely stable, domestic pay revenues witnessed a growth of 17.4 per cent, led by improved monetisation of phase-III markets. Our movie production and distribution vertical drove a strong 30 per cent growth in other revenues. During the year, our cost base was elevated due to higher content investments and increase in marketing spends for our digital and broadcast businesses. Despite these investments, our EBITDA margins expanded to 32.3 per cent, highlighting the underlying profitability of our business. Our FY19 results are consistent with the performance over the past five years. We have registered 16 per cent CAGR in both revenues and EBITDA during this period on the back of strong operating performance.

Could you elaborate on the factors driving strong growth in domestic advertising revenues in FY19? What is your outlook for advertising growth?

During FY19, domestic advertising revenues witnessed a growth of 20.9 per cent led by traction in both television and digital businesses. Our domestic broadcast business gained another 170bps viewership share led by the regional and movie channels. We became the leader in Bangla and Kannada markets and further strengthened our share in Tamil Nadu. This helped us to improve our monetisation and grow ahead of the industry. Additionally, advertising revenues from ZEE5 contributed to growth. During the first three quarters, growth was relatively stronger at 22 per cent, helped by a low base and increase in ad-spends by consumer companies. However, in the fourth quarter, the growth moderated as the advertisers reduced spends due to uncertainty related to implementation of the tariff order. We believe that once the disruption is behind us, the ad growth will return to its normal growth trajectory. As ZEE5 continues to scale up, it would witness a concomitant increase in ad revenues as well. The movement of two of our FTA channels out of DD Freedish will have some impact on ad growth in the near-term but we are working with our strategy to compensate for that revenue loss through other channels. Our endeavor is to continue growing ahead of the industry.

What led to the acceleration in domestic subscription revenue growth in FY19? What are the implications of the TRAI tariff order on subscription revenue growth?

Our domestic subscription revenue growth stood at 17.4 per cent in FY19, a significant acceleration from the previous year. The growth during the year can be divided into two parts – strong 22.5 per cent growth during the first nine-months and a muted fourth quarter. During the first nine-months, we benefitted from monetisation of the newly digitised phase III markets. However, during the fourth quarter, implementation of the long-awaited TRAI tariff order negatively impacted the growth. Given that this regulation allows the consumers to choose and select individual channels or bouquets, the distributors’ infrastructure was put under immense pressure as the back-end had to cope with implementing millions of combinations. This led to execution challenges and disruptions on the ground. That said, ZEEL has seen satisfactory uptake of its channels and bouquets. We are positive that once the impact of the regulation settles, subscription growth will revert to its normal course. Our medium-term guidance on domestic subscription revenues remain unchanged.

Content costs have seen an increase in FY19. Is the company seeing content cost inflation, especially in the digital business?

In FY19, our content cost increased by 21.7 per cent YoY, slightly ahead of revenue growth, resulting in our content cost-to-revenue ratio going up by 100bps to 38.8 per cent. Three factors contributed to this increase – ramp up of ZEE5 Originals, higher movie amortisation costs, and increase in content cost of Zee Studios. To understand the cost inflation, we can divide ZEEL’s content in three categories. First, fiction and non-fiction shows for our television audience, which accounts for a substantial portion of our total content cost. Cost per hour for this category is growing in line with inflation. Second, original content for our digital platform, ZEE5. Cost of ZEE5 Originals is increasing significantly as we are ramping up production across 6 languages. In the digital business, higher talent cost and amortisation of fixed costs over fewer episodes push up the cost per hour. Though ZEE5 produced 50+ original series/films till Mar-2019, it is still a small proportion of our total content bouquet. Lastly, the acquisition of movie rights for both broadcast and digital businesses contributed to cost inflation.

What is the growth and investment outlook for new businesses and initiatives?

At ZEEL, we continue to invest and scale up new businesses to widen our content offering. Our new businesses – digital, movies and music, and live entertainment have gained traction during FY19 and are heading in the planned direction. ZEE5 completed its first year of operations and the platform has witnessed very encouraging response. ZEE5 released 50+ original series/ movies to become the largest digital content producer in India. Investments in digital will further increase as we ramp-up production of ZEE5 Originals and movie offering across languages. These content investments will be complemented by marketing spends. Our domestic broadcast business is preparing to launch movie channels in regional markets for which we have been building a library for some time. Incremental investments in the domestic broadcast would be limited. These content and marketing investments are expensed above EBITDA. Despite these investments, the company expects to maintain healthy margins.

Working capital saw a sharp increase in the past three years which has negatively impacted free cash flow. When do you expect cash generation to improve?

The increase in working capital is primarily attributable to our strategy of building a strong movie library and scaling up of original content production for ZEE5. On the digital original content front, we have built a strong slate with plans to release over 70 series/ films across six languages in FY20. Investments in movies and original content for ZEE5 will continue, however, as revenues from these businesses grow, we will start seeing an improvement in cash generation.

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