Technicolor is a worldwide technology leader operating in the media and entertainment industry. Its activities are organised in two business segments, Entertainment Services (the combined Production and DVD Services businesses) and Connected Home.
Technicolor’s H1 results were in line with management expectations and we made only minor adjustments to underlying forecasts (numbers now reflect implementation of IFRS 16). Work on The Lion King contributed to a very busy H1 for Production Services, which also has a good H2 pipeline. Connected Home has market leadership in broadband gateway access and has made good progress with its cost saving plan. We expect working capital to swing back to the group’s advantage in H2 and operating margins to start to rebuild. The share price has recovered from recent weakness but remains well below peer based and DCF valuations.
Connected Home operates in a large (FY18: $16.4bn) but tough market, with little growth, thin margins and limited visibility. Scale is key, giving access to cheaper components and leveraging platform development costs. The DVD market continues to decline, although increased market share has allowed some offset. The broad customer spread in Production Services ensures a high base workload, bolstered by the appetite for high-end content from VoD platforms and growth in VFX-heavy movies. Studios increasingly outsource animation and the strength of the gaming market is driving enhanced user experiences.