Time Out Regulatory News (TMO)

23 March 2020

Time Out Group plc

("Time Out", the "Company" or the "Group")

Trading update for the year ended 31 December 2019

A year of transformation with the opening of five new food and cultural markets

Time Out Group plc (AIM: TMO), the global media and leisure business, in accordance with the announcement by the FCA on 22 March 2020, in which it requested all listed companies observe a moratorium on the publication of preliminary financial statements, will not be releasing its preliminary results for the year ended 31 December 2019 on 26 March 2020 as scheduled. Today the Company issues a trading update for the 2019 financial year and does not expect any deviation from these published figures once the audited results are announced.

Financial highlights 

· Significant year-on-year growth with gross revenue increasing by 58% to £77.1m (2018: £48.8m) and net revenue by 30% to £63.3m (2018: £48.8m), driven by Time Out Market expansion(1)

· Group gross profit growth of 45%, further benefitting from the continued progression of gross margin to 73% (2018: 66%)(2)

· Group adjusted EBITDA(3) in line with expectations, with a 42% year-on-year improvement to a £4.7m loss (2018: £8.1m loss), despite a year of significant investment in Time Out Market cost base

· Group operating loss declined by 18% to £13.4m (2018: £11.4m); 10% underlying improvement excluding the benefit of IFRS 16 adoption and the prior year gain of £4.5m on disposal of Flyt

· Time Out Market net revenue grew by 158% to £23.2m (2018: £9.0m), driven by a combination of Lisbon's continued progress (7% growth) and the opening of five new markets in North America

· Time Out Media EBITDA loss improved by 72% to £2.2m loss (2018: £7.9m loss), with the key milestone of positive EBITDA achieved in H2

· Adjusted net debt(4) of £29.9m at 31 December 2019 (2018: £4.8m), which includes cash of £13.4m and debt of £43.3m. Reported net debt was £62.3m including £32.4m of IFRS 16 lease liabilities

· Funding: Successful £17.1m equity placing and additional £15.5m debt secured in the period

· Outlook: The COVID-19 pandemic has had a significant effect on trading with the temporary closure of all six Time Out Markets and a slowing of advertising revenues. Given the material uncertainty of the situation it is not currently possible to quantify the full trading impact of the outbreak. In the meantime, the Group has cash reserves of £11.4m, as at 29 February 2020 and an undrawn debt facility of £18m, alongside various cost mitigations and other available options

Operational highlights 

· The Group's global brand audience increased by 18% to a monthly average of 63.2m (2018: 53.6m), primarily driven by growth in social media channels

· Time Out Market's scale transformed by the opening of five new markets

§ Lisbon continued to exceed expectations with a record 4.1m visitors (2018: 3.9m), £36.8m of TTV(5) (2018: £35.1m) and adjusted EBITDA of £5.3m (2018: £4.4m)

§ Opening of four owned & operated markets in Miami, New York, Boston and Chicago, and the first management agreement in Montreal, growing the number of concessionaires to 139

§ Dubai management agreement signed (for an expected 2020 opening), increasing the number of contracted sites to eleven, with a growing pipeline of attractive, global opportunities under consideration

· Time Out Media economics continued to rapidly improve

§ Digital advertising growth of 10% to £16.4m (2018: £14.9m), driven by audience growth, programmatic advertising and creative solutions

§ Focus on higher quality revenues and operational improvements delivered a seven percentage-point increase in gross margins to 67%

§ Continued delivery of efficiencies with 9% year-on-year savings in operating expenses

(1) See Appendix 1 for the explanation of gross and net revenue

(2) Gross margin calculated as gross profit as a percentage of net revenue

(3) Adjusted EBITDA is stated before interest, taxation, depreciation, amortisation, share based payments, share of associate's loss and exceptional items. It also includes property lease costs which, under IFRS 16, is replaced by depreciation and interest charges. This is a non-GAAP alternative performance measure that management uses to aid understanding of the underlying business performance.

(4) Adjusted net debt excludes lease-related liabilities arising from the implementation of IFRS 16

(5) Total transaction value includes food, bar and retail sales

Commenting on the update, Julio Bruno, CEO of Time Out Group plc, said:

"2019 was an exciting year for Time Out. The successful opening of five new Time Out Markets saw the transformation of this division from a single, highly popular market in Lisbon to a global portfolio, demonstrating that the concept can be effectively replicated in cities around the world. Notwithstanding recent developments, the success of markets opened in 2019 indicates that there is a growing demand for this concept globally as landlords look for ways to increase the attractiveness and footfall of their properties.

Our Media business also made significant progress during the period. Digital advertising growth of 10% materially outperformed a challenging market and the continued focus on higher margin activities and operational efficiencies has rapidly improved the economics of the division. With audience growth of 18%, Time Out has strengthened its position as the leading global brand for experiencing the best of a city.

Commenting on current trading, Mr Bruno added:

The outbreak of the COVID-19 pandemic has had a significant recent impact on trading with the temporary closure of all six Time Out Markets and a slowing of advertising revenues.

We are responding quickly to these unprecedented times with a temporary "Time In" rebrand, a launch of an e-version of the magazine, complementing our online digital content, a review of the operating structure and preserving our cash position. We are in the process of assessing the potential financial impact, which will be highly dependent on the duration of the outbreak, coupled with the response from governments and consumers alike. However, in the meantime, our primary concern is the wellbeing and safety of our employees, their families, our guests, concessionaires and their teams."

This announcement is released by Time Out Group plc and contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 (MAR), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by Julio Bruno, Chief Executive.

Notes to editors

About Time Out Group plc

Time Out Group is a global media and leisure business that helps people explore and experience the best of the city through its two divisions - Time Out Media and Time Out Market. Time Out launched in London in 1968 with a magazine to help people discover the exciting new urban cultures that had started up all over the city. Today, the Group's digital and physical presence comprises websites, mobile, magazines, live events and Time Out Market. Across these platforms Time Out distributes its curated content - written by professional journalists - around the best food, drink, culture, entertainment and travel across 328 cities in 58 countries. Time Out Market is a food and cultural market which brings the best of the city under one roof: its best chefs, drinks and cultural experiences - based on editorial curation. The first Time Out Market opened in Lisbon in 2014 and Miami, New York, Boston, Montreal and Chicago followed in 2019 with a further pipeline in other global locations. Time Out Group, listed on AIM, is headquartered in the United Kingdom.

FORWARD-LOOKING STATEMENTS 

This document contains "forward-looking statements", which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or that include the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would", "could" or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond the Group's control that could cause the actual results, performance or achievements of the Group to be materially different from future results, performance or achievements expressed or implied by such forward-looking, including, among others, the achievement of anticipated levels of profitability, growth, the impact of competitive pricing, volatility in stock markets or in the price of the Group's shares, financial risk management and the impact of general business and global economic conditions. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These forward-looking statements speak only as at the date as of which they are made, and each of Time Out Group Plc and the Group expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Time Out Group Plc's or the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. Neither the Group, nor any of its agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained in this document. 

Chief Executive's Review

Group overview

Financial summary

(1) See Appendix 1 for the explanation of gross and net revenue

(2) Gross margin calculated as gross profit as a percentage of net revenue

(3) Adjusted EBITDA is stated before interest, taxation, depreciation, amortisation, share based payments, share of associate's loss and exceptional items. It also includes £4.0m of property lease costs which, under IFRS 16, is replaced by depreciation and interest charges (see Appendix 1)

2019 was a transformational year for Time Out Group as it continued to deliver on its key objectives of growing the Brand's global audience, scaling Time Out Market ('Market') internationally and significantly improving the economics of Time Out Media ('Media'), which delivered positive EBITDA in the second half of the year.

Revenue growth

Group net revenue growth of 30% to £63.3m (2018: £48.8m) was primarily driven by Market (158% growth), which benefitted from the successful opening of five new food and cultural markets in North America, including the first management agreement in Montreal; Time Out Market Lisbon also continued to exceed expectations with net revenue growth of 7% to £9.5m. Media revenue growth of 1% was also encouraging within the context of a challenging media landscape and the continued delivery of the operational plan to focus on higher-margin activities and, in doing so, curtail the volume of low-margin live events, optimise the frequency of certain print publications and concentrate e-commerce efforts on organic traffic.

EBITDA improvement

Media's strong focus on gross margins and operational efficiencies enabled it to improve its full-year adjusted EBITDA loss by 72% to a loss of £2.2m (2018: £7.9m loss). This operational strategy further drove the seven percentage point increase in Group gross margins to 73% (2018: 67%) and the overall 42% year-on-year improvement in Group adjusted EBITDA to a loss of £4.7m (2018: £8.1m loss).

Although it was a period of significant investment in the Market cost base, in support of the accelerated global roll-out, both divisions made positive contributions to the Group achieving the critical milestone of divisional adjusted EBITDA (before corporate costs) of £0.9m in H2.

Operational summary

The following operating KPIs reflect the global, and increasingly integrated, nature of the Group:

(1) Global brand audience is the estimated monthly average in the period including all owned & operated cities and franchises. It has been redefined to include print circulation, unique website visitors, unique social users (as reported by Facebook and Instagram with social followers on other platforms used as a proxy for unique users), social followers (for other social media platforms), opted in members and Market visitors. Facebook and Instagram have only reported unique users since September 2018 and therefore the H1 2018 unique users has been estimated by applying the growth in followers on these platforms between H1 2018 and H1 2019

(2) Total transaction value across all Time Out Markets including food, drink and other retail sales

(3) Number of concessionaires across all markets opened at period end

The growth and diversification of the brand's reach across Time Out's digital, print and physical channels is a primary objective for the Group. Results were positive during the year, with 18% growth in global brand audience to a monthly average of 63.2m, driven by material and accelerating gains across Time Out's social channels and global websites

Social media audience

The expansion of Time Out's social media audience, which is particularly attractive for the Group's advertising partners, was the main driver of total Global brand audience in the year - with full-year growth of 28% (48% in H2) to a monthly average of 32.0m (2018: 25.0m). In particular, strong progress has been made on Instagram where global unique users grew 177% to a monthly average of 5.1m. The Group has delivered similarly encouraging gains on Facebook, where unique users grew 22% to an average of 19.9m.

A key factor in this growth has been the deployment of AI technology which has enabled the editorial teams to optimise the production, scheduling and distribution of content - including higher volumes of video and Instagram stories. On Instagram, new Time Out Market handles were launched in North America, alongside the streamlining of other Time Out handles to focus on highest value pages. Furthermore, all social channels were seeded with content series featuring Time Out Market chefs and bartenders, food dishes and live media events (e.g. the 'Undateables Live'), which combined to drive higher engagement rates.

Website audience

Strong growth in Time Out's global website audience was also encouraging with a 12% year-on-year increase in unique users to a monthly average of 23.8m - further reflecting the strong focus on the upskilling of our teams to produce higher volumes of quality, "digital-first" content, more efficiently.

While the team continued to produce and optimise content for search engines ('SEO'), which remains the largest source of web traffic (c.60% share) and grew 11%, the reliance on Google and its competitors is reducing with social referrals now accounting for 20% of traffic and growing 63% in the period - a direct result of the social strategy outlined above and a trend management expects to continue in 2020.

The Group's content strategy maintained a strong focus on the curation of the best things to do in cities around the world - written by professional journalists. This regular, high-quality and local content creation is supported by key global content projects throughout the year including the highly successful 'Time Out Index' of the world's best cities, the 'World's Coolest Neighbourhoods', 'The DRINK List', 'The EAT List' and 'The DO List' - which collectively drove 7% of all website traffic and generated significant brand awareness through accompanying global press coverage in leading publications such as BBC, CNN, Mail Online, NBC and many more. At the same time, the expansion of Time Out Market-related content has helped grow Time Out's engaged and valuable audience in the food and drink category by 25% year-on-year (41% in North America), providing a larger base of food-and-drink consumers to which the markets can be promoted.

The growing profile of Time Out Market was further evidenced by the strong growth in Time Out website audience in Market cities - with Lisbon growing average monthly unique users by 45%. Strong growth was also delivered in Miami (33%), Boston (139%) and Montreal (averaging 170k unique users since its launch) - cities where Time Out has not traditionally had a Media presence.

Beyond Market cities, growth of the 'unstaffed' locations launched in H2 2018 has been very significant, now accounting for 16% of audience in 2019, with key 'staffed' APAC cities also delivering similar levels of growth as the Market cities.

Print circulation

Circulation decreased 5% to a monthly average of 3.5m, due to the decision to optimise the frequency of certain publications. However, with 42 million magazines distributed in the period, Print remains a key driver of Time Out's brand awareness and the engagement with the magazines within Time Out Markets has been a further positive demonstration of the synergies that exist between the Media and Market propositions.

Time Out Market visitors and other KPIs

The profile and reach of the brand also continues to benefit from the growth of the physical Time Out Market audience, which grew 43% to 5.5m visitors in total in 2019 (2018: 3.9m) - driven by the opening of the five new markets in North America - with Lisbon alone attracting over 4m visitors (6% growth).

As a result, Time Out Market TTV grew 87% to £65.5m of which Lisbon accounted for £36.8m (5% growth). Furthermore, the number of concessionaires within the portfolio increased by 207% to 139, consisting of 120 of the best chefs of the Time Out Market cities, including six Michelin stars and nine James Beard Award winners.

Time Out Market trading overview

(1) See Appendix 1 for the explanation of gross and net revenue

(2) Trading EBITDA represents the adjusted EBITDA from owned and operated markets post opening, and the development fees relating to management agreements. It is presented before pre-opening costs of new markets and other central costs of the Market business

Time Out Market P&L overview

2019 was a pivotal year for Time Out Market with a transformation in scale, alongside significant investment in the cost base. Net revenue growth of 158% to £23.2m (2018: £9.0m) was primarily driven by the opening of four new 'owned & operated' markets in Miami (May), New York (May), Boston (June) and Chicago (November). Time Out Market Montreal, the Group's first management agreement, also opened in November and, combined with additional pre-development fee income from the signing of further management agreements for upcoming Time Out Markets in Prague and Dubai, drove the growth in management fees in 2019.

Despite the growth in trading-related operating expenses from the opening of the four new owned & operated markets, the Group delivered £5.3m of adjusted Trading EBITDA (2018: £4.6m), a 16% year-on-year increase. However, a £0.7m (30%) increase in central costs (primarily headcount-related), combined with a £2.0m increase in operating costs of the new markets in the pre-opening periods ('pre-opening costs'), drove an overall 143% decline in adjusted EBITDA to a full year loss of £0.6m (2018: £1.4m).

Lisbon overview

Time Out Market Lisbon had another outstanding period of trading in its 5th anniversary year exceeding all expectations. The market updated and diversified its food offer by successfully replacing eight concessionaires, including the addition of Michelin-star chef João Rodrigues - clearly demonstrating the continued strength and appeal of the concept to the best restauranteurs and chefs of the city. 

Net revenue grew 7% to £9.5m (2018: £8.8m), primarily driven by the aforementioned growth in visitors, but also benefiting from 20% growth in Time Out Bar revenue and strong performances by the Studio and Chef's academy. Good cost control further contributed to an adjusted EBITDA of £5.3m, 23% ahead of the prior year.

New markets opened in 2019

The openings of the five new markets in North America were successful with encouraging trading volumes from the outset - driven by the strength of the chosen locations, quality and profile of the chef line-ups, and extensive and sustained press coverage. Consumer feedback has been very positive, generating a large number of online reviews with an average Google review rating of 4.4 (out of 5). Feedback from professional critics has been equally positive, with just a few examples including reviews in the Miami Herald ("Time Out Market Miami is the food hall to conquer all food halls"), the New York Times ("In Brooklyn, a new food hall with breath-taking views") and the Chicago Tribune ("The chef line up is dazzling").

Visitors to the markets not only get to experience food from some of the city's best chefs but also curated, cultural experiences - a key differentiator versus other more formulaic food hall offerings. As such, activation of the markets has been a key focus from the outset, "bringing the magazine to life" through a number of signature events (e.g. around Super Bowl, Valentines Day), art installations (e.g. during Miami's Art Basel) and smaller-scale, regular activations (e.g. live music, comedy) - which engage locals and tourists alike, and grow awareness of the markets.

As with the early stages of Time Out Market Lisbon, the understanding of the US consumer base and local seasonality patterns is evolving and the Group is developing targeted plans for incremental marketing investments to supplement Time Out's extensive owned Media platforms. The team is also exploring how best to integrate online and app collection and delivery services into the markets.

Key operational insights have also been leveraged from each opening and rapidly applied across the portfolio, helping the Group gradually deliver improvements to beverage mix and margins, as well as efficiencies in staffing levels and outsourced services such as cleaning and security.

At the time of publication of this announcement, the six Markets have been temporarily closed in support of the local and global efforts to contain the spread of COVID-19. During this period, the Group will reduce the largely variable cost base and work to support its staff and concessionaires.

Planned openings

Time Out Dubai, a management agreement which was signed in April 2019 with Emaar Malls, is currently expected to open before the start of the Expo 2020 Dubai in October 2020. Located in Souk Al Bahar, an Arabian-style retail, entertainment and dining destination in the heart of downtown Dubai, the market will offer a unique waterfront position next to the iconic Burj Khalifa. It will occupy 30,000 sq ft, accommodating 670 seats and will include food from 16 of the top chefs and restauranteurs of the city, three lounges and cultural experiences. Construction has commenced, and curation is progressing very well with approximately 50% of concessionaire agreements already signed.

Beyond 2020, the schedule of planned Time Out Market openings remains strong, including a mix of owned & operated and management agreements:

· London Waterloo (owned & operated) - currently expected to open in late 2021, construction is underway and curation is expected to commence in the second half of this financial year

· Porto (owned & operated) - the project was formally approved by the Directorate-General for Cultural Heritage during the year, having consulted relevant authorities including UNESCO. Full planning was submitted in January 2020 and an opening in H1 2021 is currently being targeted

· London Spitalfields (owned & operated) - the revised planning submission has been completed and the Group awaits the outcome.

· Prague (management agreement) - expected opening date in 2023

The current schedule of openings may be subject to delays should the COVID-19 outbreak lead to a prolonged period of disruption.

Development pipeline

There is a strong and growing pipeline under review of other potential locations in cities around the world. The Group is particularly encouraged by the level of interest from potential management agreement partners, with landlords viewing Time Out Market as an excellent solution for their footfall requirements.

Management agreements now appear to offer significantly greater potential for the Group than initially envisaged, with these projects requiring no capital outlay and provide long-term visibility over guaranteed revenues.

Time Out Media trading overview

Time Out Media P&L overview

2019 was an outstanding year for Time Out Media, with rapid progress made with the implementation of the operational plan (announced in 2018) to focus on growing higher margin activities and delivery of operational efficiencies. Net revenue growth of 1%, combined with further gross margin improvements of seven percentage points, drove growth in gross profit of 12%. 

The shift in revenue mix to higher margin Digital Advertising and E-commerce was a key contributor to this improvement in gross margin. Importantly, material gains were also delivered within each Media business line as a result of greater commercial discipline and other operational improvements: Print gross margins increased 6 percentage points to 41% with the optimisation of frequency of certain print publications, alongside changes to printing and distribution, and better yield management; Live Event gross margins improved 27 percentage points to 46% with a greater focus on sponsor-led events, typically as part of a creative solutions; and E-commerce gross margins improved 8 percentage points to 82%, as the Company continued to focus on organic traffic.

This greater focus has also enabled further overhead efficiencies, with operating expenditure savings of 9% (£2.8m) in the year, most materially in headcount-related costs but with further gains across almost all other cost categories. 

The combined impact of the above has been a £5.7m (72%) improvement in adjusted EBITDA to a loss of £2.2m (2018: £7.9m), with Media reaching the key milestone of £0.7m positive adjusted EBITDA in H2. EBITDA improvements were delivered across all countries, with the most significant gains in the UK (£2.7m) and US (£1.7m), where Media has its largest presence. The US Media business, in particular, is critical to the growth of Time Out Market in North America and, although it remains loss-making, is expected to deliver further EBITDA gains in the medium term.

Digital advertising

Total Advertising sales grew 1% in the year which is an encouraging performance in the context of the wider media landscape and the operational changes outlined above. Importantly, the strong focus on digital advertising has resulted in its revenues growing 10% in the year, with further notable gains in the UK (15% growth), US (5%), Portugal (104%), Spain (33%) and Hong Kong / Singapore (57%). While digital advertising revenue fell in France (-24%) and Australia (-10%), both countries still delivered positive EBITDA in the period. 

Programmatic advertising growth of 28% has been the key driver of the increase in Digital advertising revenue, benefiting from audience growth as well as the restructuring and training of sales teams to build more strategic relationships with agencies and media trading desks. Tactics were also deployed to increase yields on remnant inventory - including the global implementation of 'Prebid', an open source technology which allowed our supply-side platform (SSP) partners to bid against each other, and 'Open Bidding' to enable SSP bidding partners to compete with Google AdX. During the period, due to industry-wide agency and client concerns around transparency and fraud across the programmatic sector, the Company aggressively pursued Private Marketplace (PMP) and Programmatic Guaranteed (PG) business, enhanced with Time Out's first party data, which further helped drive higher yields. Other product developments, which helped deliver incremental direct and programmatic video revenues, included changes to Time Out's video player technology which enabled the business to serve individual and carousel players with Time Out content.

Integrated Creative Solutions have been the other key driver of digital advertising growth - incorporating brand content, which leverages Time Out's in-house editorial capabilities, and social display (as a rich media format). Sales teams have been upskilled with digital capabilities and a strategic focus has been on ensuring outgoing creative solution proposals include a higher digital component.

Post year-end, in the wake of the COVID-19 outbreak anticipated travel and leisure advertising campaigns have been suspended or cancelled. Whilst this is expected to impact near term trading, the quality of Time Out's content and audience will remain desirable when digital marketing spend returns.

Print advertising

Print revenue, which declined 4% (approximately 2% adjusted for the aforementioned changes to US print frequency), was a highlight of 2019 within a global market in which magazine advertising is estimated to have declined 10% (Source: Group M, This Year Next Year, Dec 2019).  This is further evidence of the authority of the Time Out brand and the desirable audience its high-quality content continues to reach. 

The UK has been the standout success, with Print revenue growth of 6% in a UK market that declined 12% in 2019 (Source: Group M). While primarily driven by the sale of all available cover wraps in the year, custom print (as part of wider creative solutions) has also played a key role in this growth. For example, to drive consideration of the new Seat Tarraco, Time Out created bespoke Time Out Magazines in Glasgow, Manchester and Birmingham for the first time in its 50-year history. 300,000 magazines were distributed by co-branded teams and all content was also represented online and amplified with high impact display ads, native placements, dedicated emails and across Time Out's social platforms.

Post year-end, in response to the COVID-19 outbreak printed magazines have been suspended in all cities. Initiatives such as a temporary "Time In" rebrand, the digitisation of the magazine and house bound relevant content have sought to retain the Print audience during this period of disruption.

Other revenues

The live event revenue decline was directly linked to the change of strategy to focus on sponsor-led events as part of higher-margin creative solutions, with gross profit growing by £0.5m (95%) in the period. Examples included an experiential-driven campaign for Nescafe's Azera brand, for which Time Out programmed a series of 15 street events supported by a media campaign which included printed content. In the US, similar activations were staged for clients such as Netflix and Nickelodeon and increasingly were integrated with Time Out Market, where activations included custom cocktails and tasting dinner for brands such as Fever Tree and Tap Portugal.

Local Marketing Solutions (formerly Premium Profiles) had a more challenging period with weak new subscriber acquisition in London and Paris, impacted by turnover within the sales team and difficult high street conditions for local operators.

E-commerce (formerly Affiliates & Offers) grew 3% in the year, primarily relying on organic traffic. Technology improvements and a strong mix of deals drove higher conversion rates of Offers. Affiliates also had a strong year with all lines of business growing in light of improvements to content in key verticals (e.g. Hotels, Attractions), as well as the addition and renegotiation of key partnerships.

Financial Review

(1) See Appendix 1 for the explanation of gross and net revenue

Revenue

Gross revenue for the year increased by 58% to £77.1m (2018: £48.8m). While this was primarily driven by the expansion of Time Out Market in the period, with five new markets opening in North America since May 2019, it is also heavily impacted by the revenue recognition for food sales in the new markets. Previous financial reporting of Time Out Market revenue has almost exclusively related to Time Out Market Lisbon, where revenue is reported after concessionaires' share due to differences in the operational model adopted. Therefore, and as explained further in Appendix 1, an adjusted measure of 'net revenue' (which excludes concessionaires' share of food sales) has been introduced to provide management and investors with a clearer understanding of the underlying growth trend. On this basis, Group net revenue increased by 30% in the period to £63.3m (2018: £48.8m).

Gross margin

Group gross profit increased by 45% in the period, benefitting from the improvement in gross margin (as a percentage of net revenue) from 66% to 73%. This seven percentage-point gain was primarily driven by Time Out Media, which improved its gross margin from 60% to 67% in the year through its operational focus on growing its highest-margin digital activities, while also improving the gross margin across all business lines by implementing a range of initiatives including curtailing low margin live events, optimising the frequency and distribution of print, and focussing e-commerce activities on organic traffic. Group gross margin will further benefit in future from the shift of revenue to Time Out Market which delivered 83% gross margin in 2019 which was slightly lower than prior year due to the higher proportion of Time Out bar sales in new markets than in Lisbon.

Implementation of IFRS 16 (Leases)

IFRS 16 was adopted on 1 January 2019 and, for comparison purposes, the impact of this new standard on key financial measures has been highlighted below and further explanation provided in note 10. In summary, the adoption of IFRS 16 has increased the reported operating loss of the Group by £1.0m and decreased net assets at 31 December 2019 by £4.2m.

Operating expenses

The significant growth in operating expenses in the year of 27% (a £10.8m increase) was driven by Market, which increased its total operating expenses by £13.3m in the period. This was primarily a result of the trading-related operating costs of the new markets (which increased by £10.6m), but also included investments in the pre-opening costs of each market (£2.0m) and the central infrastructure (£0.7m) required to scale the operation globally. This increase was partially offset by Media, which reduced its operating costs by £2.9m (a 9% year-on-year saving) due to the continued delivery of headcount-related efficiencies and savings across the majority of other cost categories.

Adjusted EBITDA

Adjusted EBITDA is stated before interest, taxation, depreciation, amortisation, share-based payments, share of associate's losses and exceptional items. Although IFRS 16 was adopted in the period, the £4.0m cost of property leases has been included in the operating expenses discussed above, as the Board believes it provides a fairer reflection of the operating margins of the business.

The 42% growth in Group adjusted EBITDA to a £4.7m loss (2018: £8.1m loss) was entirely as result of Media delivering a 72% year-on-year improvement to an EBITDA loss of £2.2m (2018: £7.9m) - driven by 1% net revenue growth, a seven percentage-point increase in gross margin and 9% operating cost savings. Importantly, the division also achieved the key milestone of positive EBITDA in H2.

This was partially offset by the investment in Time Out Market's cost base with the division delivering an EBITDA loss of £0.6m in the period (2018: £1.4m profit). Corporate costs also increased by £0.3m in the period due to higher executive remuneration.

Operating loss

The reported operating loss was £13.4m (2018: £11.4m), a 17% year-on-year improvement, and includes an additional net benefit of £1.0m from the adoption of IFRS 16 - comprising the saving of £4.0m of property lease costs (previously reported in operating expenditure), offset by £3.0m of incremental depreciation on the right of use asset created in relation to these property leases. Other items of note within the operating loss include:

Exceptional items

The net exceptional cost of £0.3m is materially lower than the prior year on a like-for-like basis and relates to employee redundancy costs and a small gain arising on the exercise of the Time Out Market option over the remaining 3.7% of MC-Mercados da Capital (Time Out Market Lisbon). The net exceptional gain in the prior year of £3.1m was driven by the £4.5m profit on disposal of the Group's investment in Flyt Limited, partially offset by staff restructuring costs of £0.8m and a £0.6m non-cash charge relating to the revaluation of the option over the minority interest in Time Out Market Lisbon.

Share based payments

The value of these options at issuance has been amortised over the time to vesting of the option. There were 12.9m options outstanding at 31 December 2019 (31 December 2018: 9.7m). 

Depreciation

The depreciation charge of £3.6m (2018: 1.1m) increased by £2.5m, driven principally by the additional depreciation following the construction and fit-out of the new Time Out Markets (£2.7m). A further depreciation charge of £3.0m was recognised on right-of-use assets after the implementation of IFRS 16.

Amortisation

The amortisation of intangible assets of £4.7m (2018: £4.6m) includes £2.2m (2018: £2.2m) relating to acquired intangible assets and £2.3m (2018: £2.2m) relating to other intangible assets, primarily acquired and internally developed software.

Net finance costs

Net finance costs of £7.1m (2018: £2.5m) primarily relates to interest on debt of £4.4m (2018: £1.9m) - driven by the additional £32.7m of debt funding secured since 1 July 2018 - coupled with the foreign exchange gain on financial liabilities of £0.6m (2018: £0.3m loss), and the amortisation of deferred financing costs of £0.3m (2018: £0.1m). In addition, the interest costs in respect of lease liabilities following the implementation of IFRS 16, was £3.0m in the period.

Foreign exchange

The revenue and costs of Group entities reporting in dollars have been consolidated in these financial statements at an average exchange rate of $1.27 (2018: $1.34). The operations reporting in euros have been consolidated at a rate of €1.14 (2018: €1.13).

Cash and borrowings

Borrowings include the £20.0m of loan notes from Oakley Capital Investments Limited ("OCI") plus accrued interest. In addition, Time Out Market secured further debt funding of €15m from Incus Capital Advisors, S.L. ("Incus"), principally on the same economic terms as the €9.0m loan secured in November 2017. At 31 December 2019, the balance of the Incus debt, including accrued interest was £19.6m.

The Group also successfully completed a £17.1m cash placing in October 2019. The Group also continues to have an option over an additional debt facility of £18.0m should further liquidity be required.

Outlook

As a result of the significant progress made in 2019, Management remain confident in the Group's long-term prospects. However, in the near term the COVID-19 pandemic has had, and will continue to have, a significant impact on trading. We have already proceeded with the temporary closure of the six Time Out Markets, for a period as yet determined, and we have seen a slowing of advertising revenues.

We are trading in an environment of rapidly changing circumstances and are still assessing the full impact of COVID-19, which will be dependent on the duration and severity of the virus and the response by governments and consumers alike. The outcome of this assessment may result in a material uncertainty over the Group's ability to continue trading as a going concern. As a consequence, we anticipate the audit report for the year ended 31 December 2019 to make reference to a material uncertainty related to going concern. In the meantime, the Group has cash reserves of £11.4m as at 29 February 2020 and a previously announced undrawn debt facility of £18m, alongside various cost mitigations and other available options.

Julio Bruno

Chief Executive Officer

Appendix 1

Unaudited summary consolidated income statement

For the year ended 31 December 2019

In previous periods, the revenue in the Income Statement includes all Media revenue, revenue generated from our Lisbon market (representing Time Out's share of the food and beverage sales made by concessionaires to consumers, and other revenue from Time Out operated bars, sponsorship, retail, the Time Studio, events and co-working spaces) and any fees from management agreements.

During the year, the Group opened four new owned and operated markets in which all transactions are made directly between Time Out Market and the consumer. The Group also opened Time Out Market Montreal, its first management agreement, in which Time Out operates the bar and recognises the related revenue, in addition to the on-going management fee. This contrasts with Lisbon market where consumers transact directly with the concessionaires for any food and beverage purchases (excluding the Time Out operated bar) and Time Out Market is paid a share of revenue by the concessionaires. Therefore, the total value of all food, beverage and retail transactions in the new markets is included in the income statement, representing the gross revenue of these operations.

To aid comparability between periods, an adjusted revenue measure ('net revenue') has been introduced which is calculated as gross revenue less the concessionaires share of revenue. There was no difference between gross and net revenue in prior periods and Time Out Market Lisbon revenue will continue to recognise revenue on the same basis as it has historically.

The implementation of IFRS 16 on 1 January 2019 materially benefitted EBITDA in the year as property lease costs (£4.0m) are no longer included within administrative expenses and instead are replaced by additional depreciation costs (£3.1m) and interest costs (£3.0m). Adjusted EBITDA is presented including the property lease costs to aid comparison of profitability between periods. Due to the rapid transformation of the Group, the most appropriate measures of performance are evolving and will be subject to continual review.

Unaudited summary consolidated income statement

For the year ended 31 December 2018

Appendix 2

Unaudited Consolidated Statement of Financial Position

Year ended 31 December 2019