British Sky Broadcasting Group (OTCQX:BSYBF) H1 2013 Earnings Call January 31, 2013 10:00 AM ET
Jeremy Darroch - Chief Executive Officer and Executive Director
Andrew Griffith - Chief Financial Officer and Executive Director
Allan C. Nichols - Morningstar Inc., Research Division
Adam Spielman - PPM America, Inc
Ajay M. Sadarangani - Manning & Napier Advisors, LLC
Thank you, and welcome to the British Sky Broadcasting Interim Results Conference Call. Today's call is being recorded. Hosting the call will be Jeremy Darroch, Chief Executive Officer; and Andrew Griffith, Chief Financial Officer. This call is the property of British Sky Broadcasting Group plc. It may not be recorded for broadcast without the written permission of British Sky Broadcasting Group plc.
This call may include certain forward-looking statements with respect to the group's business and strategy. All forward-looking statements are subject to risks and uncertainties and are qualified by the cautionary statements in Sky's 2012 Annual Report, as amended by the 2013 Interim Management Report.
I would now like to hand the call over to Mr. Jeremy Darroch. Please go ahead, sir.
Thank you. Good morning, everybody, and thanks for joining us.
Now I hope you had the chance to download our slides from the analyst presentation today. What I'll do is give you run through the main points from that, and then Andrew and I will be very happy to take any questions you may have.
So in summary, it's been a strong start to the year. Our focus on broad product growth is delivering good results. More customers are choosing Sky, they're staying loyal and they're spending more with us. We've made strong progress on screen and we're seeing that a growing take of the usage of our new services like Sky On Demand and Sky Go. We've delivered further improvement and efficiency in customer service. And these, all taken together, have translated into another strong financial performance.
Now looking at the headlines -- the financial headlines in more detail, our revenues grew by 5%. Operating profits were up by 8%, earnings per share were up by 18%, and free cash flow marginally down 3%. And we've increased the interim dividend by a further 20%, the ninth consecutive year of growth.
So as I said at the outset, our focus on broad product growth is working well. We've delivered good growth in our total base of paid-for subscription products, up by 10% year-on-year to 29.5 million. We continue to grow share in home communications, such as 1/3 of our customers take the triple-play premise, up from 29% a year ago. And as a consequence of this broad product growth, ARPU increased by GBP 24 year-on-year to GBP 568, also benefiting from our subscription price increase in September.
And we continue to attract our new customers in good rate, and we've added to that total of 271,000 over the course of the last year. We launched NOW TV in the second quarter, and that's helped to increase our TV net additions year-on-year from 40,000 to 50,000 in the second quarter, split equally between DTH and NOW. And alongside that, we added 38,000 customers in stand-alone home coms, which meant our overall net growth was 88,000 for the quarter, a good performance in the context of a tough environment and our first subscription price increase for 2 years.
Now despite that price rise, customer loyalty remained strong, with churn for the quarter at 10.3%, well within our long-term goal of around 10%. Although this is a reflection of the good work that we've done, I think, over the last few years to build more value into the subscription service.
Now, what we put on the screen, of course, is at the very heart of our customer experiences, as you know, investment in content is a key area of focus for us. And we see further good progress this year. Total viewing to pay channels in our platform continues to grow, and we've had strong performances across the board in sports, movies and entertainment.
Now we're also laying some important foundations for the future. Firstly on movies, you'll see we've announced a new deal today with Sony, which comes on the heels of similar renewals with Warner Bros. and NBCUniversal. And that means we've now renewed 3 of the 6 major Hollywood studios since July.
In Sports new agreements, the NBA basketball and international rugby mean that we've completed 21 sports rights renewals over the last 12 months.
And third, we continue to develop the capabilities of our content business. We've increased commissioning hours by 70% in the first half year, and we've launched Sky Vision, our own distribution business.
Now this takes us into the international market place and provides a strong platform to market our IP to overseas broadcasters.
So putting this all together, you can see the strength and durability of what we've been building around content. And with the development of our product and services, we're making it easier for customers to access content on their own terms. We're putting more value into the subscription whilst establishing a wider future revenue opportunity.
In the last 6 months, we ramped up our Sky On Demand and Sky Go services, expanding the content lineup, extending reach and driving use across both services. The Sky On Demand, our connected set-top box platform, is increasing exposure to new market segments. For example, we had over 3 million movie record transactions in the first half of 25% year-on-year. On Sky Go, we've increased unique users by almost 50%. And in Q2, 3/4 of Sky Go customers used the service at least 5 times. And I think this starts to show the value in utility that they're getting and, of course, there's much more to come.
So alongside all of that, efficiency also remains a key part of our strategy, and it means we can invest whilst also delivering strong financial results. In the first half, we reduced other operating cost by 200 basis points as a percentage of sales year-on-year. Improved box reliability means that service visits are at their lowest level for 8 years, rate first time scores are at all-time highs. And by making it easier for customers to transact online or through their set-top box, we've reduced call volumes by 15% year-on-year.
So critically, none of this efficiency improvement is at odds with good service. It's driving strong increases in customer satisfaction, as well as reducing our monthly cost of service. So business is in good shape as we enter 2013. Now before talking about some of the priorities for the year ahead, I just wanted to spend a little time considering the wider context.
Although we don't have a crystal ball, our core planning assumption is developing a significant improvement in the economies in the U.K. and Ireland. Alongside that, the market remains competitive, and we look on the basis that competitors will get better all the time. So our job is to keep improving at a faster rate than anybody else. We've got a very clear view of how we'll move through the year ahead, which is consistent with the approach that we talked about in our full year results in the summer, maintaining a disciplined approach to growth, staying focused in overall product sales rather than any single metric, keep developing our broad strength in content and building for the future with new services like Sky Go, Sky On Demand and NOW TV. But at the same time also continuing to drive efficiency of our broader back-office operation.
And what I'll do now is just briefly take you through some of the areas that we'll be focusing on in a bit more detail. So starting with Sky Sports, 2013, we think, is going to be a fantastic year for Sky Sports. We've got an outstanding series of events coming up to include more and better golf, live and exclusive Formula 1 coverage, great rugby, cricket, alongside the outstanding football from not just the U.K. but Europe as well. No other sports broadcaster comes close to this breadth and depth of sports offering.
In entertainment, we'll be focusing on the opportunity in drama. We know this genre's highly valued by customers, but it also opens up wider business opportunities along with distribution. Earlier this month, we announced our biggest ever drama slate, and we're working on co-commissions with some the world's leading content businesses, the likes of HBO, NBC and Canal+. And hopefully, that gives you a sense of our ambition here. And then we're going to keep making it easier for customers to access our content wherever and wherever they choose. We'll be getting more Sky+ HD boxes disconnected and we'll be adding more content to our On Demand service.
Last week, we announced the launch of Sky Go Extra that for just GBP 5 a month, customers are able to register up to 4 devices and download the latest shows and blockbuster movies for offline viewing.
So to close, I think we performed well in the first half of the year. As we look ahead, we see the challenging economic environment, which we continue to navigate well. We have a clear approach and consistent set of priorities. The business is well-placed for an expanding market opportunity, and strong execution means that we've been well-placed to continue to increase returns to our shareholders.
So thanks for listening. I'll now turn the call over to Q&A.
[Operator Instructions] The first question comes from Allan Nichols from Morningstar.
Allan C. Nichols - Morningstar Inc., Research Division
First, churn was very good at 10.3%. It's still good, but that is still an increase from the past couple of quarters and year. Do you think that is because of BT's new sports channel or the economy or what do you think is causing that to blip up a bit? And also on your programming costs, they have increased 10%. Is that because of having to pay more because of BT's aggressiveness in sports content? If you could address that, I'd appreciate it.
Sure, so Jeremy here. I think we're going
churn. BT actually aren't in the market yet. So we're pretty clear that the sort of small movements on churn. A bit of the economy, I think. But also our sales, we've hit the margin. I mean, we're very focused on the kind of quality of additions that we make, and so we're not overly trying to hold on to the last customer where perhaps people can't afford the service or whatever, then we're quite happy to see them re-base. So I think it's -- we're tracking it at 10% over time. That was our goal. As you say, we -- it fell quarter-on-quarter, and feels like we're in a good shape. And actually, I think the big conclusion has been over a few years of a tougher economic background in the U.K., churn has continued to track that 10% level pretty well.
And on programming costs -- Allan, it's Andrew. Again, no impact in this period from BT, those -- their impact in the market, if anything, is more prospective. So in sports, you have the cost of the Ryder Cup, which is the biennial event that didn't fall into the comparative period. We're also still in the first full year of Formula 1 that we had some of the -- those costs in the first half. That will start annualizing from here on. We're spending more in terms of original commissions on our entertainment portfolio. And in movies, we're buying more rights, so that we get movies to support our On Demand and our Sky On the Go offerings. So broadly, the story is we're paying more to get more. There's a little bit of inflation, but very little. So what we're able to do is invest more in volume for customers, and therefore, deliver them more value.
[Operator Instructions] The next question comes from Adam Spielman from PPM.
Adam Spielman - PPM America, Inc
I was wondering if you could just comment on the over-the-top competitive landscape in the U.K. How do you guys see it? Obviously, Netflix is over there, but there are other providers. And that's an area of concern here in the U.S., particularly for satellite video-centric companies, and I know that the landscape is different. So I was hoping you could talk a little bit about that.
Yes, Adam, sure. Look, I think the first thing to think about when you think of the U.K. is that still only half of the market pay for a regular pay TV subscription. So the fundamental headroom in the market remains very large. And I think the second thing to say is that one of the reason that's the case is because we have a strong free alternative here. So the sort of low-priced offer in the U.K. is pretty enough historically what we've always competed against. And so I think that means a couple of things. I think, first of all, the opportunity for new services OTT to open up new customer segments is actually pretty good in the U.K. and many people can benefit from that, ourselves included, and we're starting to do that with our own OTT services. Actually, we've been doing that for some time, but I -- but we'll probably scale a bit more from here. But I think it's not really where the big value segment of the market is. I think that remains in the sort of more traditional pay TV subscription model. So -- and we've never really seen, in the U.K., any sort of low price off getting significant traction from a volume point of view as I say largely because there's a good free alternative. So if people are constrained in terms of what they're willing to spend, either they tend just to take the free service. So I think we'll see how it develops over the next few year. It's potentially an emerging opportunity. But I don't think we should, at this stage, either be just confuse it with where the scale opportunity is, which is really in the subscription part of the business. In January remember that the headroom opportunity in the U.K. to get more people to consume TV over time is one of the big opportunities.
Adam Spielman - PPM America, Inc
Great. And then just a follow on Slide 46, I appreciate all the detail on at least you guys laying out how S&P does the leverage. How do you -- the bottom line number, 1 -- about 1.5x, how do you feel about that number? Do you manage share repurchases and capital returns and acquisitions around any type of number like that?
Adam, look, we don't. We provide that. Clearly, it's a more reflective and efficient balance sheet number than we were when we acknowledged about a year ago. We probably over-delevered partly because of our inability to return capital to shareholders during the bid. But what I always say, and there's no change in it, is that we run the business both as a growth company and you see that with top line growth of 5% for the half, accelerating to 6% in the second quarter. But also so that -- to create value for shareholders over the medium term, and sometimes, that will mean that we're able to return excess capital to shareholders as we have over the last 12 months where, from a combination of dividend flows and share repurchases, I think we've returned GBP 1.3 billion. That's equivalent about 80p per share. So that will be a feature at some point in the cycle. There will also be other times when we'll feel we've got good opportunities ahead of us to invest in primarily organic growth, potentially bolt-on acquisitions. None of that is a change. That is exactly how we've set out use capital in the past. What has changed is that over the last 12 months, we've been able to deliver on some of that promise and we've been able to slightly re-lever the balance sheet.
[Operator Instructions] The next question comes from Ajay Sadarangani from Manning & Napier.
Ajay M. Sadarangani - Manning & Napier Advisors, LLC
Just a quick question on BT's TV offering, I'm sure you've got any questions on this already. But I guess there was an announcement that they added some new channels from Viacom and from some other content guys. Yet the pricing seems to be low. And I guess, how much of a threat is this to your pay TV penetration potential, if you will, because you did mention that they were half the market as now deep-penetrated, but as the other half is more of the low-end kind of value-seeking market, and then what are the risks that they're happy taking this low-end BT offering may be getting some NOW TV once in a while, and kind of being happy with that?
Yes, so I mean, -- I think the first thing to say is that there's no existing customer. The big trends that we've seen in the marketplace, is that more customers continue to choose Sky. When they do choose Sky, they continue to offer us more of their business. And then we do well on the back of that. We don't really see anything in -- that we see in the marketplace or trends in our business that suggests that, that's going to change.
I think we have competed and seen a number of low-priced, low package offers market place in the past through a variety of providers, and not yet seen anybody really be particularly successful with any of those. So we've seen the likes of [indiscernible] in the past, ESPN did reasonably well. But nothing that has stopped us growing and persuading more people to trade up to Sky over time. And then again, all of the -- a lot of the new distribution pathways that are emerging, as a part of this, BT Vision, for example, or YouView boxes, are good mechanisms for us to distribute our content over. So you said that either through NOW TV or something else, and that's how often quite an efficient for us to get to the marginal customer, where we've got no footprint sack, no downstream customer service management cost, how we can just simply wholesale our content over-the-top and we're very keen often to do that because it's quite an efficient way for us to monetize that segment of the marketplace. So I think we're in a world where certainly, there are more segments developing and there is -- the market is becoming broader. And the good news is it seems to me that we're as well-placed to service our broader market than anybody, and certainly our plan is to try and do that. BT will launch in the summer, really in terms of their sports offering. So we'll obviously see how they go at that time.
And Ajay, if I may just add one thing, the majority of customers joining us today, and therefore I suspect the majority of the sort of flow in the market place are customers taking a triple-play. And I think when you look at various different price points, which I appreciate can be challenging from afar, one of the components to look at is actually the price of broadband. So although our basic package cost GBP 21.50, within that, customers can access a free broadband product that would be substantially more from incumbent providers. So it's just important to look at the full composition of the bundle.
[Operator Instructions] There are no further questions at this time. I would now like to hand the call back to Jeremy Darroch for any closing remarks. Please go ahead, sir.
Okay, well, look, thank you, everybody for listening and for your questions. Just to summarize, it's been a good first half performance driven by now what is a -- I hope you have hope that you'll see a very consistent approach, and we're focusing on broadly based growth to maximize the opportunity in the marketplace and build multiple products and widen the distribution of our content. We'll continue to invest in our customers' experience, whether that be getting better on screen or improving the products and services we offer, and we're balancing this by improving the efficiency of our operations. And I think today's results hopefully illustrate how well that approach is continuing to work. And it's these principles that are really allowing us to drive operational performance and grow our key financials at the same time.
So thank you very much for your time, and we look forward to speaking to you again later in the year.
Thank you. This concludes the conference call. Thanks for participating. You may now disconnect.
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