BRITISH SKY BROADCASTING GROUP PLC Results for the half year ended 31 December 2009 GOOD SECOND QUARTER COMPLETES A STRONG FIRST HALF Strong demand across the board in the second quarter * Good progress on both legs of growth - adding more customers and selling more products - 172,000 net additions takes the total customer base to 9.7 million - One million net subscription product sales, up 36% * Sky+HD surpasses two million households with net additions more than double the prior year at 482,000 * 18% of customers now take TV, broadband and telephony More innovation for customers in 2010 * Bringing more high quality content and HD channels to customers * Switching to selling HD-enabled set-top boxes as standard * Launching Europe's first dedicated 3D TV channel Strong financial performance in the first half * Total revenue up by 10% to GBP2.9 billion * Absorbed the cost of strong demand to deliver 4% growth in operating profit to GBP401 million * Strong financial progress in broadband and telephony * Free cash flow up 5% to GBP290 million(1) * Adjusted basic EPS of 14.47 pence(1) up 11%; reported basic EPS of 14.70 pence up 54% * Interim dividend increased by 5% to 7.875 pence per share (1) See page 2 for financial highlights and pages 2 and 11 for reconciliation of non-GAAP measures Results highlights Customer Metrics (unaudited) Quarterly Closing Net Additions Base'000s 31-Dec-09 31-Dec-08 31-Dec-09 Net Customer Additions 172 171 9,708 Additional products Sky+ 553 515 6,455 Sky+HD 482 188 2,082 Multiroom 102 68 1,999 Broadband 101 163 2,404 Telephony 130 139 2,112 Line rental 178 173 1,304 Other KPIs Gross additions for the quarter (000) 402 398 Churn for the quarter (annualised %) 9.6% 9.9% ARPU(GBP) GBP492 GBP444 Business Performance (unaudited) GBP'millions 6 months to 6 months to % Dec-09 Dec-08 movement Revenue 2,873 2,601 10% Adjusted operating profit(1) 401 388 3% % Adjusted Operating Profit Margin (1) 14.0% 14.9% Adjusted EBITDA(1) 567 525 8% Adjusted basic earnings per share(2) 14.47p 12.99p 11% Net debt(3) 1,679 1,642 -2% Statutory Results (unaudited) GBP'millions 6 months to 6 months to % Dec-09 Dec-08 movement Revenue 2,873 2,601 10% Operating profit 401 385 4% Cash generated from operations 673 588 14% Basic earnings per share 14.70p 9.54p 54% 1 Adjusted earnings before joint ventures, interest, taxation, depreciation and amortisation (EBITDA) and adjusted operating profit for the six months ended 31 December 2008 exclude EDS legal costs of GBP3 million. There are no adjusting items for the six months ended 31 December 2009. 2 Adjusted basic earnings per share (EPS) for the six months ended 31 December 2009 is based on adjusted profit for the period which excludes a GBP7 million gain relating to remeasurement of all derivative financial instruments (not qualifying for hedge accounting) (31 December 2008: GBP11 million gain) and related tax effects. Adjusted basic EPS for the six months ended 31 December 2008 is based on adjusted profit for the period which excludes adjusting items as detailed in note (1), a GBP59 million impairment relating to the Group's investment in ITV, a charge of GBP6 million relating to a deferred tax write-off, and related tax effects. 3 Net debt is defined as borrowings (GBP2,322 million), net of cash and cash-equivalents and short-term deposits (GBP494 million), and borrowing-related financial instruments (GBP149 million). Jeremy Darroch, Chief Executive, commented: "It has been another good quarter in what remains a tough environment, with more customers joining Sky and strong demand across our entire product range. The standout performance came in high definition TV with almost half a million customers choosing Sky+HD for our best home entertainment service."Our financial results were also strong. Total revenue increased by 10% in the first half of the year and, by focusing on operational efficiency, we have been able to absorb the upfront cost of meeting demand and deliver 11% growth in EPS. In recognition of the overall performance of the business, we have increased the interim dividend by a further 5%, representing a doubling of the dividend over five years. While the economic outlook remains uncertain, we remain well positioned with high-quality products offering customers great value for money. "This year, we intend to build on our success by bringing our leading HD box technology to even more customers. From today, we will start selling HD-enabled boxes as standard and customers will receive the box for free when they subscribe to our HD pack of channels. These are important steps which will allow us to grow more efficiently and further accelerate the pace of innovation for customers. This weekend, Sky will offer the UK's first live public broadcast in 3D, using our existing Sky+HD platform, and we are on track for the commercial launch of our dedicated 3D channel in the spring." OVERVIEW The business has performed well in what continues to be a tough consumer environment, with strong demand for our products across the board. We are delivering against both legs of growth, with net customer additions of 172,000 and one million net subscription products sold in the quarter. Within this was a standout performance in HD and, today, we have over two million customers choosing to pay for our best viewing experience. In the context of this higher level of activity we have executed well, completing a record number of installations in December despite the adverse weather conditions. We also completed the rollout of full unbundling and around 1,150 of our exchanges are now enabled. Our strong operational performance is reflected in a 10% increase in total revenue, including a 16% increase in retail subscription revenue. We have successfully absorbed an estimated GBP70 million of upfront cost related to high demand for HD, delivering 3% growth in adjusted operating profit and 11% growth in adjusted basic EPS. We are proposing a further 5% increase in the interim dividend to 7.875 pence per share, which is supported by healthy free cash flow and a strong financial position. OUTLOOK FOR THE BUSINESS While the economic outlook remains uncertain, we enter 2010 in a good position and we will continue to focus on a consistent set of priorities. In addition to customer growth and take-up of additional products, we will seek to extend and build on our leadership position in high definition and seek to grow our share in home communications. We will continue to invest sensibly where we see long-term advantage and stay disciplined on costs. OPERATIONAL REVIEW During the quarter we increased the overall number of customers and sold more products to our existing customers. DTH customer net additions were 172,000 in the quarter, taking the total base to 9.7 million. Within this, gross additions of 402,000 were in line year on year and churn was 9.6%, a 0.3 percentage point decrease year on year. Net additional subscription product sales (Sky+HD, broadband, telephony and line rental) were up 36% in aggregate, with growth in each product line, helping us to deepen our customer relationships even further. As customers rewarded us with more of their business, ARPU rose by 11% to GBP492. This quarter saw record growth in Sky+HD following a good response to our Christmas marketing campaign. We added 482,000 net Sky+HD customers, a 156% increase year on year, meaning that we have added 1.3 million HD customers in the last 12 months. Today, more than two million customers are choosing to pay just 30p extra a day to enjoy our highest quality viewing experience, including 37 channels from a range of leading brands. We continue to extend our HD offering further for customers. This quarter we added E4 HD, Sky Movies Indie HD and MGM HD to the channel line-up and completed the roll-out of our new EPG to all HD households. Customers continue to respond to the exceptional value of our broadband, telephony and line rental products. One in four of our customers chooses Sky Broadband and we surpassed two million Sky Talk customers and 1.3 million line rental customers. At the same time, we successfully completed the roll-out of full unbundling, with 100% of target exchanges now enabled. We ended the quarter with 500,000 fully unbundled customers and the percentage of customers taking each of TV, broadband and telephony reached 18% - both of which will deliver improved underlying profitability. We are already starting to see the financial benefits of actions taken in calendar 2009, with first half broadband and telephony losses halving year on year to GBP37 million. Standardising Set-top Box Platform for New and Upgrading Customers Building on our success in high definition, we intend to bring our leading box technology and innovation to even more customers. From 28 January 2010 all new and upgrading customers will receive a Sky+HD box and, if they subscribe to our GBP10 a month HD channel pack for the first time, they will receive their HD box for free (subject to an installation charge). These moves are fully funded by supply chain efficiencies and therefore are not expected to change customer acquisition cost, whilst delivering many benefits to our business. Getting more of our best boxes into customers' homes today allows us to grow more efficiently, making it easy for customers to upgrade to our HD channel pack in the future with no need for a box swap or engineer visit. In addition, standardising around the HD box platform will simplify our customer-premises equipment and help us to accelerate further our pace of innovation. By passing on supply-chain savings, we will make Sky+HD even more accessible to customers and maintain our leadership position in this fast-growing segment. All HD boxes already have our new on-screen TV guide and later this year we will launch our video on demand and 3D service to HD boxes. Today we are also introducing a premium one terabyte HD box for customers who prefer greater in-home storage. For GBP249 (plus installation) customers will be able to store the equivalent of around 240 hours of HD content. Content and Innovation We continue to invest in putting great content on screen for our customers. This quarter we acquired the US PGA tour rights until December 2017, we were awarded five of the seven packs of live Premier League rights in Ireland from August 2010 for three years and we renewed our agreement with the WWE. In sport, we produced over 9,000 hours of HD content, 67% more than the prior year, and achieved our highest ever audiences for England's Rugby Union Autumn internationals and the Super League Grand Final. Sky Movies had a particularly strong quarter in terms of customers and audience share with seven premieres each achieving audiences of more than a million. In entertainment, our festive schedule was well received with 'Noel's Christmas Presents' attracting in excess of one million viewers. Acquired US content also performed well with the launch of new shows such as 'Modern Family' and we have a strong line-up for 2010 with the return of both 'Lost' and '24'. We continue to invest in high-quality original commissions and have got off to a strong start in 2010 with early episodes of 'Got to Dance' with Davina McCall attracting over a million viewers. This quarter we also extended distribution of our content to new platforms. In October, we launched Sky Player on the Xbox 360 console and, in November, we launched the Sky Mobile TV application for the iPhone, adding to our existing Sky News, Sky Sports and Remote Record apps. We have now registered over three million downloads of Sky applications on the iPhone. Sky 3D In April 2010, we plan to launch Sky 3D, Europe's first dedicated 3D TV channel. Initially, the channel will be available to commercial customers, offering a live Premier League match in 3D each week. Later in the year, as availability of 3D TV sets continues to grow, we plan to make Sky 3D available to all Sky+HD customers, with a wide range of 3D content including movies, sport, documentaries, entertainment and the arts. Sky 3D will work with all existing Sky+HD boxes and will initially be introduced at no extra cost for customers who subscribe to Sky's top TV package and the Sky+HD pack. As part of the preparations for this ground-breaking launch, Sky will broadcast the world's first live 3D TV sports event on 31 January 2010. Live coverage of the Premier League match between Arsenal and Manchester United will be filmed in 3D and broadcast over the Sky platform to selected pubs around the UK and Ireland. The Bigger Picture As part of our commitment to developing Sky's long term sustainability, we delivered a number of important initiatives in the quarter through our Bigger Picture programme. These developments focus on three areas: helping to tackle climate change; encouraging participation in sport; and making the arts more accessible. In October, we launched Sky Rainforest Rescue, a three-year campaign with WWF to help save one billion trees in the Amazon rainforest. We are calling on the British public for donations and will match contributions pound for pound up to a joint target of GBP4 million. The project forms part of our new set of environmental commitments, including an overall target to cut CO2 emissions across the business by 25% per GBPm of turnover by 2020. We plan to make our buildings 20% more energy efficient and to obtain 20% of our energy requirements for allour owned buildings from onsite renewable energy in the same timeframe. We have also committed to cut the energy consumption rate of our set-top boxes by 30% by 2012. Lumiere, our second public art project with Artichoke, saw the streets and historic landmarks of Durham transformed by light in November. The work of both UK and international artists was enjoyed by 75,000 people over the four day event. In December, triple Olympic gold medallist Bradley Wiggins signed to Team Sky, the new professional road cycling team. Team Sky is part of Sky's ambitious cycling project, in partnership with British Cycling, through which we aim to get a million more people of all ages and abilities cycling regularly by 2013. Since the quarter end, Team Sky had a successful debut at the opening race of the season, the 'Tour Down Under', where they took two stage wins and third place overall. FINANCIAL SUMMARY Group revenue increased by 10%, with a strong performance in subscription revenue. In the context of record demand for HD, adjusted operating profit was 3% higher at GBP401 million, with double-digit revenue growth and a tight focus on costs offsetting the upfront cost of customer acquisitions and upgrades. An improved contribution from joint ventures and associates, together with lower interest and tax charges, resulted in adjusted basic earnings per share of 14.47p, up 11% on the prior year. Reported earnings per share were 54% higher at 14.70p. Net incremental investment in accelerated HD growth is estimated at around GBP70 million, all of which was expensed in the first half. This reflects a higher number of HD upgrades, the higher proportion of new customers joining us directly with an HD box, fixed costs of GBP15 million relating to the creation of 1,000 new customer facing roles, all net of incremental HD pack subscription revenue. The payback profile of HD remains attractive with per customer economics in line with guidance given in January 2009. First half broadband and telephony losses halved year on year to GBP37 million and our broadband and telephony business generated positive EBITDA for the third consecutive quarter. This performance reflects continued customer growth in all of our home communication products and the benefits of removing standalone free broadband nine months ago. The Board proposes to further increase the interim dividend by 5% to 7.875 pence per share, which is supported by healthy free cash flow and a strong financial position. Our results include GBP284 million of revenue and GBP37 million of operating losses relating to Sky Broadband and Sky Talk (2009: GBP166 million and GBP72 million loss, respectively). Operating losses in Easynet were GBP12 million (2009: GBP14 million). Revenue Total Group revenue increased by 10% year on year to GBP2,873 million (2009: GBP2,601 million), with strong growth in subscription revenue offsetting weakness in other categories. Retail subscription revenue increased by 16% on the comparable period to GBP2,294 million (2009: GBP1,984 million). This reflects 5% average growth in the volume of customers and 11% year on year growth in ARPU. Wholesale subscription revenue increased by GBP22 million to GBP115 million (2009: GBP93 million) benefiting from the return of our basic channels to Virgin Media's platform in November 2008, as well as a higher number of premium channel subscribers. Advertising revenue was 5% lower year on year at GBP157 million (2009: GBP165 million), in line with our estimate of the overall sector performance. The first half saw higher relative payments to media partners as the result of a stronger year on year performance in viewing and impacts. Excluding these payments, we continued to outperform the overall TV sector. On 13 November we announced an agreement with Viacom to become their exclusive representative for television advertising sales in the UK and Ireland. As a result, all networks represented by Sky Media will benefit from a larger, more diverse collection of brands, harnessing the strength of an enlarged portfolio of channels and technological innovation. Easynet revenue increased by 2% to GBP100 million (2009: GBP98 million). Despite challenging conditions, Easynet has continued to grow recurring revenues whilst at the same time improving revenue mix by winning a greater proportion of larger, higher margin contracts. The business continues to take market share with key new customer gains from Mott McDonald, Multi Corporation and Charles Stanley. Installation, hardware and service (IHS) revenues were GBP99 million (2009: GBP142 million) with the strong increase in the volume of HD customer additions more than offset by our decision to lower the retail price of a Sky+HD box in January 2009. Other revenue fell by GBP11 million to GBP108 million (2009: GBP119 million), due to the loss of conditional access fees from Setanta and the absence of third party set-top box sales associated with the former Amstrad business. This was partially offset by higher Sky Bet revenues. Costs and Operating Profit We continue to make good progress on costs. In the context of a much higher level of product sales, adjusted operating profit increased by 3% with efficiencies in other operating costs more than offsetting continued investment in programming and in meeting the upfront cost of demand for Sky+HD. Direct Costs Programming costs increased by 9% to GBP920 million (2009: GBP843 million) reflecting our ongoing commitment to provide differentiated content for customers across a broad range of genres. More than half of this increase was within sports, reflecting both new additional rights (UEFA Champions League and Scottish Premier League) and underlying inflation in existing rights. The increase in third party channel costs reflected our new relationship with ESPN, the renewed carriage agreement for Virgin Media channels and growth in third-party HD channels. Entertainment programming reflected new rights in the current year such as 'House', 'Lie To Me' and 'Modern Family'. Direct network costs (classified within Transmission costs for statutory reporting purposes) increased to GBP246 million (2009: GBP159 million), due to higher volumes of broadband, telephony and line rental customers. Other Operating Costs Marketing costs increased by 22% to GBP540 million, reflecting strong demand for our products and around half a million more Sky+HD net additions year on year. An increasing proportion of new customers are now joining us directly with HD, with over 40% of gross additions taking Sky+HD in the second quarter. This was reflected in group SAC, which increased by GBP30 to GBP320. Marketing costs also reflect substantially higher upgrade volumes year on year, with around 300,000 more HD upgrades in the half. Subscriber management and supply chain costs fell by GBP5 million to GBP331 million (2009: GBP336 million) with rate savings achieved through greater in-sourcing of set-top box design and manufacture, offsetting the upfront cost of fulfilling demand for HD. This performance was also achieved in the context of significantly increased business activity overall, completion of our mailing of eleven million replacement viewing cards, and a higher volume of calls handled in relation to the roll-out of both our line rental product and the launch of ESPN and ESPN HD to Sky customers. Transmission, technology and fixed network costs (excluding direct network costs as detailed above) increased by 2% to GBP184 million. This is substantially below the rate of revenue growth and reflects efficiencies achieved through increased utilisation of exchange and backhaul assets and improved pricing on support services for network assets. Administration costs were held flat year on year at GBP251 million, reducing as a percentage of revenue by almost 100 basis points. This is in line with our aim of keeping growth in administration costs substantially below that of revenue through a number of initiatives, including managing headcount closely, renegotiation of travel contracts and supplier consolidation. Earnings After the Group's share of operating results from joint ventures and associates of GBP14 million (2009: GBP10 million) and a net interest charge of GBP57 million (2009: GBP60 million), the Group reported a profit before tax in the period of GBP358 million (2009: GBP276 million). The tax charge for the period is GBP102 million (2009: GBP110 million) reflecting an adjusted effective tax rate of 28%, down from 31% in the prior year. The Group has benefited from a streamlined entity structure and the lower UK corporate rate and we currently expect the effective tax rate for the year to be in the range of 28-29%. Adjusted profit for the period was GBP252 million (2009: GBP226 million), generating an adjusted basic earnings per share of 14.47 pence (2009: 12.99 pence). Reported profit after tax for the period was GBP256 million (2009: GBP166 million), generating basic earnings per share of 14.70 pence (2009: basic earnings per share of 9.54 pence). The issued share capital at 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 1,742 million. Cash Flow and Financial Position Operating profit for the period, including exceptional costs, was GBP401 million, generating EBITDA of GBP567 million (2009: GBP522 million). Cash generated from operations of GBP673 million (2009: GBP588 million) included a working capital inflow of GBP88 million (2009: GBP43 million), reflecting further improvements in receivables collection. Free cash flow for the period was GBP290 million (2009: GBP276 million) and included net interest payments of GBP87 million (2009: GBP71 million), tax payments of GBP101 million (2009: GBP56 million), capital expenditure of GBP202 million (2009: GBP194 million) and net amounts received from joint ventures and associates of GBP7 million (2009: GBP9 million). Exceptional Items Net interest included a GBP7 million gain relating to the remeasurement of derivative financial instruments not qualifying for hedge accounting (2009: GBP11 million gain), and related tax effects. Results in the prior year included an exceptional charge of GBP3 million within administration costs, relating to the legal expenses of the Group's claim against EDS; 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; an impairment loss of GBP59 million relating to the Group's investment in ITV, and related tax effects. Dividend The Directors are declaring an interim dividend of 7.875 pence per Ordinary Share. This represents an increase of 5% on the comparable period and makes this the sixth consecutive year in which the Group has increased its dividend to shareholders. The ex-dividend date will be 24 March 2010 and the dividend will be paid on 20 April 2010 to shareholders of record on 26 March 2010. The final dividend in respect of the 2008/09 financial year, also up 5%, was paid to shareholders during the period, resulting in a total cash dividend payment in respect of the 2008/09 financial year of GBP307 million. Corporate ITV On 21 January 2010 the Court of Appeal (CoA) delivered its judgment on Sky's appeal against the decisions of the Competition Commission and the Secretary of State requiring Sky to divest its shareholding in ITV to below 7.5%. The judgment upholds those decisions. Sky will review the judgment and order carefully and consider next steps in due course. EDS In a judgment handed down on 26 January 2010, the Technology and Construction Court ruled in favour of Sky after a five-year legal action against Electronic Data Systems (EDS) for deceit, negligent misrepresentation and breach of contract. The action related to EDS' former role as a supplier to Sky as part of our customer relationship management (CRM) project. The final amount of costs and damages will be determined by the Court in due course. However, based on the judgment, Sky anticipates that EDS will be liable to pay Sky an amount in excess of GBP200 million. Board Committee Appointment Daniel Rimer has been appointed as a member of the Remuneration Committee with immediate effect. Enquiries: Analysts/Investors: Francesca Pierce Tel: 020 7705 3337 Lang Messer Tel: 020 7800 2657 E-mail: investor-relations@bskyb.com Press: Robert Fraser Tel: 020 7705 3706 Bella Vuillermoz Tel: 020 7705 3916 E-mail: corporate.communications@bskyb.com To view the full text of this press release, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/2559G_1-2010-1-28.pdf There will be a presentation to analysts and investors at 09:30 a.m. GMT today. Participants must register by contacting Emily Dimmock or Yasmin Charabati on +44 20 7251 3801 or at bskyb@finsbury.com. In addition, a live webcast of this presentation to UK/European analysts and investors will be available via http://www.sky.com/investors and subsequently available for replay. There will be a separate conference call for US analysts and investors at 10.00 a.m. (EST). To register for this please contact Dana Diver at Taylor Rafferty on +1 212 889 4350. Alternatively you may register online at http://invite.taylor-rafferty.com/_bskyb/cc. A live webcast of this presentation will be available today on Sky's corporate website, which can be found at www.sky.com/corporate. An interview with Jeremy Darroch, CEO, and Andrew Griffith, CFO, in audio / video and transcript will be available from 7:00 a.m. GMT today at www.sky.com/corporate and www.cantos.com. This information is provided by RNS The company news service from the London Stock Exchange END
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