BRITISH SKY BROADCASTING GROUP PLC
Results for the nine months ended 31 March 2009
STRONG GROWTH IN A TOUGH ENVIRONMENT
CUSTOMERS RESPOND TO HD
More consumers choosing Sky TV, and saving with Sky Broadband and Sky
Talk
. Strong net customer growth of 80,000, up 43% from the prior year,
to reach 9.318 million households
. Very strong customer response to Sky+HD with 243,000 net additions;
over 1 million Sky households now take HD
. Sky+ surpasses 5 million households with 406,000 net additions in
the quarter
. 1.4 million customers, 15% of the base, now take all three of TV,
broadband and telephony, up from 0.8 million in the prior year
. Invested in high quality content with 33 HD channels and acquired
key rights in sports, movies and entertainment
Strong revenue growth, continued focus on managing costs
. Adjusted revenue up 7% to GBP3,960 million; reported revenue of
GBP3,996 million
. Good progress in costs helps to offset upfront investment of
meeting record demand for Sky+HD
. Adjusted operating profit up by 13% to GBP589 million; reported
operating profit of GBP622 million up 23%
. Adjusted operating margin up by 0.8 percentage points to 14.9%
. Adjusted basic EPS growth of 13% to 19.2 pence; basic EPS of 9.7
pence
. Strong free cashflow of GBP264 million, reducing net debt to
GBP1,670 million
Note: See page 2 for results highlights and reconciliation of non-GAAP
measures and page 12 for definition of terms
Results highlights
Customer Metrics (unaudited)
Quarterly Net Closing
Additions Base'000s
31-Mar-09 31-Mar-08 31-Mar-09
Net Customer Additions 80 56 9,318
Additional products
Sky+ 406 262 5,056
Multiroom 46 40 1,769
Sky+HD 243 43 1,022
Broadband 130 229 2,085
Telephony 195 180 1,695
Line-rental 270 42 673
Other KPIs
Gross additions for the quarter 327 289
(000)
Churn for the quarter (annualised 10.6% 10.5%
%)
ARPU (GBP) GBP452 GBP424
Business Performance (unaudited)
GBP'millions 9 months to 9 months to %
Mar-09 Mar-08 movement
Adjusted revenue(1) 3,960 3,706 7%
Adjusted operating profit(1) 589 521 13%
% Adjusted operating profit 14.9% 14.1%
margin(1)
Adjusted EBITDA(1) 800 701 14%
Adjusted basic earnings per
share(1) 19.2p 17.0p 13%
Free cash flow 264 175 51%
Net debt(2) 1,670 1,912 (13%)
Statutory Results (unaudited)
GBP'millions 9 months to 9 months to %
Mar-09 Mar-08 movement
Revenue 3,996 3,706 8%
Operating profit 622 504 23%
Cash generated from 770 614 25%
operations
Basic earnings/(loss) per 9.7p (6.8)p n/m
share
1 All figures exclude related exceptional items. Revenue and operating
profit exclude GBP36 million of additional revenue relating to amounts
invoiced in prior years and GBP3 million of EDS legal costs (2008: GBP17
million). Adjusted earnings per share also exclude an impairment of
GBP191 million relating to the Group's investment in ITV (2008: GBP474
million), an adjustment of GBP6 million relating to a deferred tax
write-off following a change in law in the period in respect of
industrial building allowances (2008: nil), GBP12 million relating to
mark-to-market gains of derivative financial instruments that do not
qualify for hedge accounting (2008: GBP5 million gain) and related tax
effects. Adjusted earnings per share for the nine months to 31 March
2008 also excludes GBP67 million gain relating to an exchange
transaction for National Geographic.
2 Net debt is defined as cash and cash-equivalents (GBP473 million),
short-term deposits (GBP395 million) and borrowings related financial
instruments (GBP589 million) net of borrowings (GBP3,127 million).
Jeremy Darroch, Chief Executive, said: "We have made a strong start to
calendar 2009. In difficult times,
customers are making careful choices and responding to the combination
of quality and value that we offer. Over 9.3 million families now
choose Sky and they are taking more products from us than ever. "We are
progressing well against the priorities we set out in January.
The combination of the long-term trend towards high definition and the
launch of our new HD box strategy generated a huge response from
customers. Over one million customers now subscribe to our high
definition service and around a quarter of new Sky+HD customers were
new to Sky. In total, almost one in five homes in the UK use Sky+ to
get more from their TV viewing experience. As a result of this strong
demand, we have already been able to create around 750 new jobs in our
customer service and installation teams, as part of the 1,000 we
announced in January. "At the same time as enjoying great entertainment,
more customers save
on their household bills when they switch their broadband and telephony
services to Sky. 15% of our customers now take all three of TV,
broadband and telephony, up from 9% a year ago. In little over a year
from launch, we have added 673,000 line-rental customers, saving
customers even more money."Strong growth in customers and ARPU has seen
revenue increase by 7%.
We are further improving our operational efficiency whilst continuing
to invest in customer-facing areas. So despite the higher upfront cost
of meeting record demand for Sky+HD, we delivered a 13% increase in
operating profit in the period."Through our Bigger Picture programme, we
are making a contribution
to UK life in three key areas, the arts, sports and the environment. We
are building on our partnership with British Cycling by creating a
professional road cycling team with the ambition of winning the Tour de
France and inspiring more families to get out and ride for fun and
fitness."Looking ahead to the rest of calendar 2009, we expect conditions
to
remain challenging. In this environment, and at a time when people are
spending more time at home, we will continue to provide our customers
great entertainment and money-saving broadband and telephony. At the
same time, we will stay focused on cost efficiency to allow us to
invest sensibly in areas that drive long-term value for the business,
such as high definition, with the objective of emerging stronger from
the downturn."
OPERATIONAL REVIEW
In the three months to 31 March 2009 ("the quarter"), we saw
accelerated customer growth and strong take up of additional products
as customers responded to the choice, quality and value we offer in
home entertainment and communications.
Net customer additions for the quarter were 80,000, 43% higher than the
rate in the prior year, taking our total base to 9.318 million. Gross
customer additions were 13% higher year on year at 327,000 and churn
was 10.6%, broadly in line with the prior year - a good performance in
a challenging environment.
We continue to see strong demand from our existing customers to take
more products from us and we passed some significant milestones in
Sky+, Sky+HD, broadband and telephony during the quarter. As we
continue to unlock the considerable value in our existing customer
base, growth in paid-for products translated into a new high in ARPU of
GBP452.
Strong Take-up of High Definition
We continue to see a significant opportunity in high definition (HD)
and have been positioning the business over several quarters to take
advantage of this long-term trend. On 28 January 2009, we set a new
everyday low purchase price of GBP49 for a Sky+HD box. This was met with
an accelerated rate of take-up, leading to HD net additions of 243,000
in the quarter. As well as strong demand from existing customers, HD
has been a key driver of new customers with around a quarter of HD
additions in the quarter being new to Sky. Behind this performance is
our innovative Sky+ technology, the enhanced picture and sound quality
of HD, and our outstanding range of content from great brands, with 33
channels broadcasting over 12,000 hours of HD content every month.
As previously announced, we are expanding our customer service and
installation teams to support strong demand for Sky+HD following the
introduction of a lower box price. The expansion programme is making
good progress, with around 750 jobs added to date from an anticipated
total of 1,000 by the end of June.
The success of Sky+HD was the principal driver for very strong growth
in Sky+ net additions, which increased by 55% year on year to 406,000.
Today, over five million customers, 54% of the total customer base,
choose to control their viewing with Sky+. More than ever before,
households want to personalise their TV experience through the use of
innovative Sky+ technology and additional features like Sky Anytime and
the recently launched iPhone 'remote record' application. Across all
Sky+ households there are 17 million instances of time-shifting per
day.
Switch and Save
Our value message featured heavily in marketing during the quarter and
this resonated well with customers in the current environment. Our'Show Me
the Money' campaign highlighted savings of up to GBP185 a year
when BT customers switch their broadband and telephony services to Sky.
In addition, our focus on driving attachment of Sky Talk to broadband
through bundled pricing led to strong growth in customers taking all
three products. 15% of customers now take all three of TV, broadband
and telephony compared with just 9% a year ago. While this represents
rapid progress, there remains significant opportunity with 7.9 million
customers yet to upgrade to all three products.
More recently, we have been expanding our set of communications
services to include line rental and provision of new telephone lines.
This allows customers to consolidate all of their fixed-line bills,
including line rental, with Sky as the sole provider. We were
particularly pleased with growth in the quarter, with 270,000 line
rental customer net additions to reach 673,000.
Progress On-Screen
The return of US drama favourites 'Lost', '24' and 'Bones' to Sky1 in
the third quarter was met with a good response from customers, with
viewing share up year on year in both Sky and pay TV homes across the
Sky1, 2 and 3 portfolio. We continue to see success in our
original UK drama and factual programming, with both 'Ross Kemp: Return
to Afghanistan' and our original UK drama 'Skellig' (broadcast over the
Easter weekend) delivering audiences of over one million. In movies,
our 'James Bond in HD' season delivered record viewing to Sky Movies
Modern Greats, as well as the highest ever proportion of HD viewing to
any of the Sky Movies genre channels in Sky+HD homes. In sports, we
delivered another landmark in the period as customers were also able to
enjoy, for the first time ever, an England overseas test series
broadcast in HD.
Looking to the summer, we have a strong line-up with The Ashes and the
British & Irish Lions tour, as well as ICC World Twenty20 cricket, US
Open Tennis, US Open and US PGA Championship golf, all live and in HD.
On Sky1, we will be showing our new Sky original drama series, Martina
Cole's 'The Take', and our most recent American drama acquisition,'House'.
We have further strengthened our content offering during the quarter
with key rights renewals. We secured five packages of live Premier
League rights for three years from the 2010/11 season, bringing more
Premier League football to Sky customers with 115 games a season live
and in HD. We have also completed negotiations and signed contracts
with two of the major movies studios: Fox and Warner Brothers.
The Bigger Picture
During the quarter, we continued to extend our Bigger Picture
commitment, making the arts more accessible, encouraging participation
in sport and helping to create a healthy environment. In February,
Antony Gormley, launched 'One & Other' (www.oneandother.co.uk), the
first in a series of live art events mounted by Artichoke and Sky
Arts. In February we also announced the creation of a professional
road cycling team, 'Team Sky', with the ambition of winning the Tour de
France within five years, inspiring families across the UK to get out
and ride for fun and fitness and supporting competitive cycling
in Britain. On the environment, we are working with programming
suppliers to 'green' television production, including reducing the
energy consumption of Gladiators by 35%. Off screen, our 'Appetite for
Action' initiative, which aims to reduce food waste, is now active in
over 1,000 primary schools.
FINANCIAL SUMMARY
Our financial performance for the nine months was strong, with adjusted
revenue increasing by 7%, and both adjusted operating profit and
adjusted basic earnings per share (adjusted EPS) up by 13%. This strong
performance was after absorbing the upfront cost associated with
meeting unprecedented customer demand for Sky+HD. Early action on costs
in the first half of this year (particularly in the areas of cost to
serve our customers, supply chain and central costs) has allowed us to
invest in accelerated HD take-up in the third quarter, and still
deliver a 0.8 percentage point increase in adjusted operating margin
for the nine months.
At the Interim Results, we announced a reduction in the price of our
Sky+HD box to a new everyday low price of GBP49, which we expected to
increase the acquisition or upgrade costs for a high definition
customer by approximately GBP100. The actual acquisition and upgrade
costs per customer have been in line with these expectations, leading
to associated cost in the third quarter of around GBP60 million. This
upfront investment in accelerated HD growth generates a significant and
recurring revenue stream through ongoing monthly revenue from the HD
pack subscription as well as new customer ARPU. In addition, the growth
of Sky+HD will create a larger installed base of our most advanced
boxes, providing us with a platform for further innovation and the
launch of new services for customers over time.
Reported revenue of GBP3,996 million includes GBP265 million related to
Sky Broadband and Sky Talk and GBP151 million related to Easynet.
Reported operating profit of GBP622 million includes losses
attributable to Sky Broadband and Talk of GBP107 million and a GBP19
million loss from Easynet. For a full reconciliation to adjusted
revenue and operating profit, please refer to the "Exceptional Items"
paragraph on page 9.
Revenue
Group revenue excluding exceptional items increased to GBP3,960 million
(2008: GBP3,706 million), up 7% year on year, driven by continued
customer growth and strong product penetration.
Retail subscription revenue, excluding exceptional items, increased by
9% to GBP3,060 million (2008: GBP2,808 million), reflecting strong take
up of paid-for products, in particular Sky+HD and our telephony line
rental product. Reported retail subscription revenue (and operating
profit) also includes GBP36 million of additional revenue relating to
amounts invoiced in prior years (please refer to the "Exceptional
Items" paragraph on page 9).
Wholesale subscription revenue increased by GBP14 million to GBP150 mill
ion (2008: GBP136 million) reflecting the return of Sky's basic
channels to the cable platform. Advertising revenue decreased by 6% to
GBP234 million (2008: GBP248 million), reflecting the weak advertising
environment. We estimate the overall TV advertising sector was 12%
lower than in the prior period.
Installation, hardware and service revenue was GBP192 million (2008: GBP
212 million), down 9% on the comparable period with the strong growth in
take-up of Sky+ and Sky+HD by both new and existing customers offset by
lower prices paid by customers for boxes.
Sky Bet revenue remained flat on the comparable period at GBP35 million
(2008: GBP35 million) with strong growth in customers and revenue from
the internet offsetting a decline in TV betting and gaming.
Other revenue of GBP289 million (2008: GBP267 million) increased by 8%
on the comparable period. The majority of this increase was driven by
growth in Easynet Enterprise revenue reflecting continued growth in new
business and contract wins.
Costs and Operating Profit
We continue to make good progress on cost efficiency, with adjusted
operating margin increasing by 80 basis points year on year, despite
the higher upfront cost of meeting strong demand for Sky+HD.
Programming costs as a percentage of sales has steadily declined over
the last six years, which reflects our focus on balancing investment
across the entire portfolio of rights despite our continued investment
in differentiated programming. Direct programming costs increased by
GBP14 million to GBP1,309 million (2008: GBP1,295 million) primarily
due to higher sports costs and third party channel costs, reflecting
our expanded channel line up and new carriage agreement with Virgin
Media. This increase was partially offset by savings in movie costs,
which reflected recent contract renewals with the major studios and an
overall reduction in the number of titles delivered. Entertainment and
News costs were also lower year on year, with a higher proportion of
entertainment costs than usual falling in the second half of the year
as a consequence of the 2008 US writers' strike.
Direct network costs increased by 52% to GBP258 million (2008: GBP170
million) reflecting both the strong growth in broadband and telephony
customers, costs associated with the additional 605,000 line rental
customers year on year, the connection of those households that do not
already have an active phone line and higher Easynet variable network
costs as a result of new business contracts.
Marketing costs were impacted by strong demand for HD throughout the
period and our decision to accelerate the take-up of Sky+HD through a
lower retail box price of GBP49 in the third quarter. As a result,
marketing costs increased by GBP92 million to GBP661 million, primarily
reflecting both the higher volume of Sky+HD net additions achieved
(351,000 higher year on year in the period) and the higher subsidy in
the third quarter. Subscriber management and supply chain costs fell by
GBP51 million to GBP497 million. Savings in part reflected the lower box
price achieved on Sky+HD sales as well as continued efficiencies in our
costs to serve customers together with supply chain savings.
Transmission, technology and fixed network costs increased by GBP43
million to GBP268 million (2008: GBP225 million). The increase was
driven by a combination of growth in Easynet network costs and higher
transponder costs as a result of more than doubling the number of high
definition channels on our platform year on year.
Administration costs (excluding exceptional costs) were in line with
the prior year at GBP378 million, reducing as a percentage of sales
by 70 basis points.
Earnings
Profit before tax in the period of GBP339 million (2008: GBP20 million)
includes the Group's share of joint ventures of GBP15 million (2008:
GBP12 million), a net interest charge of GBP107 million (2008:
GBP89 million)and an impairment charge of GBP191 million (2008:
GBP474 million).
Taxation for the period was GBP170 million (2008: GBP138 million) and
included the write-off of a deferred tax balance of GBP6 million. The
full year adjusted effective tax rate is expected to be around 31%.
Adjusted profit for the period was GBP334 million (2008: GBP297
million), generating an adjusted basic earnings per share of 19.2 pence
(2008: 17.0 pence). Including all exceptional items, profit for the
period was GBP169 million (2008: loss of GBP118 million), generating
basic earnings per share of 9.7 pence (2008: loss of 6.8 pence).
The issued share capital at the start and end of the period was 1,753
million shares of 50 pence. Over the entire period the weighted average
number of shares excluding those held by the Employee Share Ownership
Plan for the settlement of employee share awards was 1,740 million.
Exceptional Items
In accordance with IAS 39 "Financial Instruments: Recognition and
Measurement" ("IAS 39"), following a review of the carrying value of
the Group's investment in ITV plc at the end of the period, we have
recognised an impairment loss for the nine months of GBP191 million.
This was determined with reference to ITV's equity share price of 20.0
pence at 27 March 2009 (the last trading day of the Group's reporting
period) compared with 47.5 pence on 27 June 2008.
Subscription revenue of GBP3,996 million includes GBP36 million of
additional revenue representing amounts invoiced in prior years, which
did not meet revenue recognition criteria under IFRS until March 2009.
Administration costs included a GBP3 million charge relating to the
costs from the Group's claim against EDS during the period (2008: GBP17
million), which provided services to the Group as part of the Group's
investment in CRM systems software and infrastructure.
Net interest includes GBP12 million relating to mark-to-market gains of
derivative financial instruments that do not qualify for hedge
accounting (2008: GBP5 million gain). Taxation for the period included
the write-off of a deferred tax balance of GBP6 million, following the
abolition of Industrial Building Allowances announced in the 2008
Finance Act.
Cash Flow and Financial Position
Cash generated from operations for the period was GBP770 million. After
tax, interest and capital expenditure, free cash flow was GBP264
million, up 51% on the prior year. The financial position of the Group
remains strong. After seasonal payments and the deposit for the new
Premier League rights, the Group had net debt of GBP1,670 million as at
31 March 2009. Cash, cash equivalents and short-term deposits were
GBP868 million, significantly exceeding the GBP480 million of
guaranteed notes due for repayment in July 2009. The Group has no
further bond redemptions until October 2015. On 9 April 2009, Moody's
upgraded Sky's senior unsecured credit rating from Baa2 to Baa1. The
outlook remains stable.
Enquiries:
Analysts/Investors:
Robert Kingston Tel: 020 7705 3726
Francesca Pierce Tel: 020 7705 3337
E-mail: investor-relations@bskyb.com
Press:
Robert Fraser Tel: 020 7705 3036
Bella Vuillermoz Tel: 020 7800 2651
E-mail: corporate.communications@bskyb.com
A conference call for UK and European analysts and investors will be
held at 08.30 a.m. (BST) today. To register for this, please contact
Yim Wong or Emily Dimmock at Finsbury on +44 20 7251 3801 or at
bskyb@finsbury.com. A live webcast of this call and supporting
materials will be available on Sky's corporate website,
http://www.sky.com/corporate. A replay will be subsequently available.
There will be a separate conference call for US analysts and investors
at 9.00 a.m. (EST) today. Details of this call have been sent to US
institutions and can be obtained from Dana Johnston at Taylor Rafferty
on +1 212 889 4350. A live webcast of this call and supporting
materials will be available on Sky's corporate website,
http://www.sky.com/corporate. A replay will be subsequently available.
Click on, or paste the following link into your web browser, to view the
associated pdf document:
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