Vitec Group 1H 18 Results Highlight Improved Profitability

Josh Stinehour | August 13, 2018

The Vitec Group, owner of more than a dozen brands in the broadcast industry released its results for the first half of 2018. 

Total revenue for 1H 2018 was £183.3 million, an increase of 11.2% versus 1H 2017.  On a constant currency basis revenue increased 16% in the first half.

Gross margin for the first half was 45.7%, a 100 basis point increase over the 2017 first half. Operating profit was £25.5 million, an increase of 18.1% versus 1H 2017 (16.7% on a constant currency basis).  Operating margins for 1H 2018 were 13.9%, an 80 basis point rise over the comparable 2017 period.    

The above numbers compare the performance of continuing operations, as Vitec divested broadcast services business Bexel to NEP in August 2017 and also disposed of Haigh-Farr during 2017. It is interesting to note how these disposals have positively benefited the profitability of The Vitec Group.  1H 2017 operating margin was 10.3% when including discontinued operation (210 basis points lower).   

Vitec reports financial results across three divisions: Imaging Solutions, Production Solutions, and Creative Solutions.


Vitec Production Solutions Results:

Vitec’s Production Solutions business comprises the video heads, tripods, lights, batteries, and specialty camera system products, which in turn covers the results of Anton/Bauer, Autocue, Autoscript, Camera Corps, Litepanels, OConnor, Sachtler, The Camera Store, and Vinten. 

Revenues from Production Solutions were £57.1 million during the 1H 2018, a 2.5% increase over 2018.  There was an unfavorable currency impact to revenue of £2.3 million during the period.  On a constant currency basis, year-over-year revenue growth was 6.9%. 

Management attributes the growth to demand from the 2018 Winter Olympics in Pyeongchang and strong performance from the Litepanels Gemini lights and Flowtech tripod product lines. Vitec’s Group Finance Director Kath Kearney-Crof indicated those products (launched at the end of 2017) contributed £3 million of revenue in the first half.

The Company’s comments on the US market were curious.  Both the Vitec’s reports and prepared remarks cited the US Broadcast Spectrum Auction as negatively impacting the first half of 2017.  That is interesting because the auction didn’t actually conclude until April 13, 2017.  Moreover, later in the earnings presentation management indicated the current impact of the spectrum repack activities were less than anticipated.  In other words, the preparations for the spectrum repack have been more impactful to Vitec’s studio business than the repack itself.

Operating profit was £9.9 million in the first half for Production Solutions, representing a 56% year-over-year increase.  Operating margins for 1H 2018 were 16.5%, a considerable rise over the 10.8% level recorded in 1H 2017. 

The increase in margins was attributed to favorable foreign currency movements, higher volumes, impact from the Winter Olympics. 

Improving operational efficiency has been a focus of Vitec’s management for several years.  Recent initiatives have included the opening of a new manufacturing site in the UK and the transition of other manufacturing operations to the Company’s Costa Rica facilities.

For the first half of 2018, Production Solutions represented 31.0% of The Vitec Group’s total sales.  In 1H 2017 Production Solutions accounted for 33.7% of total sales.


Vitec Creative Solutions Results:

The Creative Solutions reporting business covers the Offhollywood, Paralinx, SmallHD, VitecEV, and Wooden Camera brands across product offering for video transmission, monitors, lens control systems, and camera accessories.

Creative Solutions’ revenues were £27.7 million, a year-over-year decline of 10.1% though only a decline of 2.5% on a constant currency basis.

Revenues in this segment were materially impacted by a fire at SmallHD’s North Carolina facility on April 26, 2018.  Most important, no injuries occurred during the fire (a good reminder there are things much more important than financial results).  The fire actually occurred at a building adjacent to SmallHD, however the smoke and heat damage was considerable, and resulted in the destruction of SmallHD’s on hand inventory. 

In a YouTube video about the fire, SmallHD CEO Wes Philips describes the inventory destruction as “millions of dollars of stuff.” Since certain SmallHD products have components with 14 week lead times from suppliers, the revenue impact for SmallHD has been significant.  And since SmallHD represents almost 25% of Creative Solutions revenue, the impact on the first half of Creative Solutions’ revenue is significant. During the earnings presentation, management indicated B&H even ran out of stock of a couple of SmallHD products.

Prior to the fire disruption, revenue for Creative Solutions was growing at 9% year-over-year on a constant currency basis (even excluding inorganic gains from the acquisition of RTMotion).  SmallHD had grown at 70% year-over-year in the first quarter of 2018.  Because of the disruption, Vitec is anticipating a compensating ‘surge’ in business for SmallHD based on pent-up demand.

Operating profit for Creative Solutions was £4.5 million during the first half of 2018, a 15.3% increase against 1H 2017.  Operating margin was 16.2%, which compares favorably to the 12.7% from the first half of 2017.

Vitec recorded a £4.7 million entry in other income related to an insurance claim for the fire damage.  This means all of Creative Solutions profit in the first half is traced to the insurance claim.  However, management believes had the fire not occurred, then operating margins would have still been in the mid-teens. 

Of note, while discussing the growth opportunities for the Creative Solutions business, Stephen Bird Vitec Group’s Group Chief Executive hinted at future acquisitions to complement the Teradek business, to better take advantage of opportunities in the broader wireless market.  

For the first half of 2018, Creative Solutions represented 15.1% of The Vitec Group’s total sales.  In 1H 2017 Creative Solutions accounted for 18.6% of total sales.


Market Commentary

During both management’s prepared remarks and the question and answer session with analyst, The Vitec Group offered a candid assessment of the market environment.  Referring to the Production Solutions business, Bird summed up the market opportunity with the following, “The traditional large studio is slowly diminishing.  The growth area is on-location shooting.”  The broader context of The Vitec Group’s presentation cast the core broadcast market as stable, but with notable cost pressures in the studio environment. 

The Vitec Group, in its filing and during its presentation, expressed widespread enthusiasm for the market for independent content creators.  The primary driver of this market is the vast sums of money being spent by non-traditional participants in the media sector, such as Netflix, Amazon, YouTube, and Facebook, on original content.  Management believes this investment in original content has led to the expansion of owner / operated production companies, and in turn is increasing demand for Vitec products.


Business Outlook:

Commenting on the first half results and outlook for the full year, Group Chief Executive Stephen Bird offered the following, “Balance sheet remains strong to support further organic and M&A investments. So to sum up, it has been a busy six months.  We have made excellent strategic and operational progress and our now a higher quality and higher margin business. Our expectations for full year are unchanged with material EPS growth.”


Related Content:

Press Release: Vitec Group 1H 2018 Results

Presentation: Vitec Group 1H 2018 Results

YouTube Video of Wes Philips Explaining Fire Impact


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