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Executives

Jeremy Darroch - Chief Executive Officer and Executive Director

Andrew Griffith - Chief Financial Officer and Executive Director

Analysts

Laurie Davison - Deutsche Bank AG, Research Division

Polo Tang - UBS Investment Bank, Research Division

Julien Roch - Barclays Capital, Research Division

Daniel Kerven - BofA Merrill Lynch, Research Division

Giasone Salati - Espirito Santo Investment Bank, Research Division

Omar Sheikh - Crédit Suisse AG, Research Division

Matthew Walker - Nomura Securities Co. Ltd., Research Division

Sarah Simon - Berenberg, Research Division

Thomas A. Singlehurst - Citigroup Inc, Research Division

BRITISH SKY BROADCAS (OTCPK:BSYBF) F4Q2013 Earnings Call July 26, 2013 4:00 AM ET

Jeremy Darroch

All right, okay. Good morning, everybody. Thanks for coming along. We'll get going. What I'm just going to do is just run you through the plan for this morning. I'll start and talk you through the headlines of the results. Andrew is going to come and then take us through the detail of the financials. And then I'll come back up and talk a little bit about our plans for 2013 and '14. So if we can get through the disclaimer.

So we delivered another record financial performance and seen strong results across the board. Our revenues were up by another 7% to reach GBP 7.2 billion. We sold more products to more people, and they chose to spend more money with us.

Our operating profit growth was up 9% to a bit over GBP 1.3 billion. We expanded our margin again by a further 40 basis points. Free cash flow was very strong at 13%, and we exceeded GBP 1 billion of free cash flow for the first time. Earnings were up by 18% to reach GBP 0.60 per share, and all that means we have again been able to increase the dividend in line with EPS growth of 18% to GBP 0.30 per share. That's the ninth consecutive year of growth.

Now that financial performance comes up off the back of another strong year, a really strong year, I think, actually in terms of our operating performance. In what remains a challenging consumer environment, customers continued to choose Sky over other providers. So over the year, we grew our paid-for subscription product base by 3.3 million. Of this, the vast majority, 2.6 million, came from organic growth with a further 700,000 from the acquisition of O2's consumer broadband business.

Churn for the year was 10.8%. Whilst this was better on the previous year, it reflects our approach of really trying to strike the right balance between working hard to retain customers but also recognizing that some might leave in tougher economic times. And meanwhile, the proportion of our customers, we're taking all 3, TV, broadband and telephony, continues to grow strongly, up by another 3 percentage points to reach 35% of our base.

And as a result of all that, our ARPU again grew strongly, up by a further GBP 29 to reach GBP 577 per customer.

Now within those overall numbers, I think a couple of things really stand out for us, not -- and one of those is really the positive response we've seen from our customers to our new Connected TV services, which, as you know, have been a big area of focus for us over the last 12 months. 2.7 million customers, around 25% of our TV household base, now have got their Sky+HD box connected to the Internet. Of course, they're getting the very best service that we offer. That's an increase of 170% over the previous year. Together with a wider choice of content, that's really driven very rapid growth in the usage of our on-demand service. So on average, there were 6.2 million weekly downloads in Q4, something like 5x the level that we saw just a year ago.

Meanwhile, at Sky Go, our mobile video service, continues to go from strength to strength. Core users were up 19% year-on-year to reach 3.3 million. And our new subscription service, Sky Go Extra, has got off to a great start with 166,000 subscribers now paying us GBP 5 a month more.

Now I'll come back and talk later in the presentation about how we really -- how we plan to respond to that customer demand, accelerate, take up usage of these new services and bring forward returns for the business.

But before getting to all of that, I thought it was worth just taking a moment to step back and to look at our performance over a slightly longer time frame.

Over the past 5 years, we have achieved really sustained growth despite what's been obviously a challenging economic -- been challenging economic conditions during the whole period. So since 2008, as these graphs show, we've delivered a step change in the financial performance of the business with average revenue growth through that period of 8% per annum. We've more than doubled earnings per share. We've added over GBP 600 million to our base of annual free cash flow.

And that sustained financial performance is the result of a very successful transition to a multiproduct strategy. By broadening out, we've created more ways to grow. Now this is transforming the scale of the business, and it's opening up new sources of future growth. So over the past 5 years, we've now more than doubled our base of paid-for subscription products to reach 31.6 million. At the same time, we've continued to attract more customers to Sky, adding more than 2 million new customers over the same time frame.

And customers are spending more with us, over GBP 150 on average a year in 2013 compared to 2008. I think the scale of that transition is illustrated in our triple-play numbers. Today, more than 1/3 of our base choose all 3, TV, broadband and telephony, up from just from over 10% in 2008.

Now underpinning that growth, as I've said many times, has been a single-minded focus on delivering a better service for customers. We're constantly looking for new ways to improve the value that they get from their subscription. And so that means focusing our investments where it matters most for them. We're now spending something like GBP 1.3 billion a year more on the customer experience than we were 5 years ago, a growth of almost 5 percentage points as a proportion of revenue. But we've more than balanced that with savings in the broader back office. So by improving efficiency at the same time, we're reducing our operating costs as a percentage of sales by 800 basis points. And Andrew is going to talk in more detail about that in a moment on what we're doing. Now this improvement in efficiency is allowing us to increase our investment in the customer experience whilst also increasing our margins by more than 3 percentage points over the same time.

Now that investment is really focused in 3 core areas. First of all, we made huge strides in the quality and choice of TV that we offer customers. After all, it's the single most important reason that customers join Sky. I think it's no exaggeration to say we've now built the best pay TV experience, I think, of anybody actually in the world. We strengthened our traditional areas like sports, movies and news. We're broadening our content offering, providing new channels like Sky Sports F1 and Sky Movies Disney. We'll build out a new legative [ph] entertainment programming. We've got an expanded channel portfolio that includes Sky Atlantic and Sky Living. And we're significantly increasing our commitments in investing in original British productions.

Secondly, we help customers get more value out of the service by keeping innovating to introduce new technologies that work for them. Now that's enhancing the viewing experience. It's offering customers greater choice and flexibility to watch TV and consumer services that they -- the way they want to do so. That includes HD, of course, now in 4.8 million homes, and On Demand, which includes the UK's most complete catch up service.

And then finally, we've invested and put a lot of focus in becoming an industry leader in customer service, and that's increasingly being recognized. So in the last 2 years, we've come on top of Ofcom's customer satisfaction survey across each of pay TV, broadband and home phone.

So I think when you put all of that together, we exit the year in pretty good shape. Strong results that we've announced today build on a number of years of focus and progress both operationally and financially. Our transitioning to a multiproduct strategy has transformed the business and has opened up new sources of growth. And that's what's leading to a step change in the financial performance of the business, and I think it puts us in a good place to continue to deliver strong growth and returns.

So with that, I'm going to hand you over to Andrew. He'll talk through the numbers in more detail. And then, I'll come back and talk a little bit about next year.

Andrew Griffith

Thank you, Jeremy. Good morning, everyone.

We produced another year of record financial results. We delivered excellent growth in revenue, and this, combined with good discipline on costs, meant that profits were up. We generated record free cash flow and have more than doubled earnings per share across the last 5 years.

I was particularly pleased with our revenue growth. And in order to illustrate the underlying trends, I've broken it down into 3 key components: consumer revenue, our adjacent businesses and our content-related revenue. And as you can see here, we delivered healthy growth in all 3.

Overall consumer revenues grew by almost GBP 350 million, up 6%. Subscription revenues benefited from increased product penetration, a larger customer base and last year's TV price increase. Although Sky business dilutes this line slightly, it saw an improvement in the second half to return to growth for the year. Transactional revenue includes Sky Box Office as well as the new Sky Store and NOW TV day passes. It grew 9%, and we expect good growth in the future. We've seen usage of Sky Store triple in the last year, and the rentals per user increased to between 5 and 6 per annum.

The decline in service and revenue is the direct result of our work to improve reliability and reduce service visits and is a trend we expect to continue.

Revenue from our adjacent businesses grew strongly at 7%. Despite the impact of the 2012 Olympics, Sky Media held its revenues flat. And if you look through this effect, underlying revenues were up 4%. Our tailored advertising product, AdSmart, remains on track to launch this summer and has received good interest from advertisers. Sky Bet delivered another standout performance, thanks to an increase in new customers, whilst the fall in The Cloud revenue was due to the one-off impact of us ending low-margin white label services to mobile operators.

Finally on revenues, you can see here that our on-screen investment is translating into growth in our content-related revenues. Whilst wholesale customers' volumes were flat, our revenues grew strongly due to an improved mix of premium and HD channels, sales of our new Formula 1 channel and small rate increases. And although it's early days, we saw a rapid growth in our syndication revenues, with good international sales for programs like An Idiot Abroad and David Attenborough's Kingdom of Plants.

Turning to costs. Programming increased by 8%, slightly ahead of revenue growth. The largest driver of this was the inclusion of around GBP 60 million of sports rights that weren't in the prior year, namely the Ryder Cup, Lions Tour and a full season of Formula 1 costs. In movies, we've added Sky Movies Disney and acquired a broader grant of rights from 4 more studios to support services like Sky Go and On Demand, whilst our entertainment spend increased by GBP 55 million as we invested more in original comedy and drama.

Now a key factor behind our financial performance is our clear focus on operating efficiency. Our approach is working well, and it continues to be an area of opportunity for the future. Since 2008, we've reduced operating expenses from 45% to 37% of revenues. And on today's revenue base, that's equivalent to taking out over GBP 0.5 billion of cost.

Direct network costs increased by 6% despite much higher growth in customer volumes. We're now really seeing the benefit of scale and improved economics as we migrate our customers on to our fully unbundled network. This area is one that I expect to be a continuing source of efficiency. A good example is our recent backhaul deal with Virgin, which gives us greater capacity for lower cost, saving over GBP 100 million across the next 5 years.

Now at Sky, we talk a lot about the aggregation of marginal gains, and the biggest opportunity to apply that concept to achieve efficiency is in the high-volume, customer-facing parts of the business. As part of this, we've transformed our in-home service. With over 70% of customers now with our most reliable set-top box and more in-house engineers getting installs right first time, we've reduced service visits fully by half since 2010.

At the same time, we're helping customers self-serve. Today, 30% of customers are choosing to self-install when upgrading to HD. And on our newer products like wireless connectors, that proportion is over 90%.

In our broadcast operations, we've successfully completed our move to a new digital media platform. By eliminating tape, we deliver high-quality on-screen assets while saving the physical cost. More importantly, that platform is highly scalable. We incur cost to ingest each piece of content once but can then use it seamlessly across every one of our platforms.

Within our transponder fleet, we've switched to more advanced encoding, which will allow us to terminate 4 transponder leases despite growing the number of HD channels, and this alone will save GBP 40 million over the next 5 years.

So bringing all of these together, our continued work on cost efficiency, together with revenue growth, has resulted in record profits. Improvement in joint ventures, lower finance costs and a reduced effective rate of tax all contributed to 18% growth in earnings per share.

Once again, we converted more than 100% of net income to free cash flow. Higher EBITDA, improved working capital, reduced interest and lower CapEx was partially offset by slightly higher cash tax due to a one-off credit in the prior year. And with fewer shares in issue, free cash flow per share was up by 21%.

On the back of that strong financial performance, we've increased the dividend to GBP 0.30 per share, meaning we've now delivered average growth of 20% a year since 2004. With both broadband and HD, we've shown we can balance investment in growth with returns to shareholders.

So looking to the year ahead, we anticipate looking through any short-term investment and, once again, growing the dividend. And as a result of that success in delivering past investments, we've announced today another GBP 500 million buyback. Taking the dividend and buyback into account would give us that leverage of around 1.5x on an S&P basis at the end of June.

Our priorities for use of capital remain clear and consistent. We're a growth company, and we first look to organic investment, which remains an attractive and low-risk place to deploy capital. Alongside this sits our commitment to an ordinary dividend, which we know is a valued method of regular return. Then we'll consider acquisitions if we find opportunities that add to profits and growth. And finally, from time to time, we'll look to enhance those returns via share buybacks. And all of this is underpinned by financial flexibility, a strong balance sheet, good liquidity and complete absence of pension liabilities.

So in summary, we delivered a strong financial performance over the last 12 months. We've done a good job on cost, which has allowed us to grow our margins whilst continuing to invest in the business. We've grown revenue, profits, cash flow and earnings, and we've once again increased returns for shareholders.

Thank you. And I'll now hand back to Jeremy to take you through our plans for the coming year.

Jeremy Darroch

All right. Thanks, Andrew.

So into the new financial year, as I said, I think, in a strong position. Now we do expect the overall consumer environment to remain challenging. And as always, competition will seek to improve much, of course, much of that, of course, in response to our own pace and success.

We'll continue to drive our business to more broadly based growth with a focus on overall product sales now really firmly embedded in the business. We'll invest in those areas where our customers seek greatest value, as I said before. We certainly will not sit back. We'll embrace change and will drive the new trends in our market. And we'll also continue to build on our track record of delivering good returns from the investments that we make.

So what I'm going to do now is take you through the plans that we have for the year ahead. And it broadly focuses in 2 areas. First of all, we're going to seek to extend our leadership in 3 key areas that underpin our business: getting better on screen, ensure we continue to offer the best quality and value broadband service, and then drive home our advantage in customer service. And then secondly, we're going to push into and accelerate new services, responding to that customer demand that we've seen that I mentioned earlier, and thereby bringing forward more growth and returns for the business.

We see 3 areas of opportunity: first of all, to accelerate the rollout of our connected box platform across our base; secondly, to extend our leadership in mobile TV with Sky Go; and then thirdly, to enhance our market-leading On Demand service.

Well, what I'm going to start with is the left-hand side of that chart.

So first, we're going to be making this year a great year on Sky Sports. We've got an unrivaled breadth and depth of live sport on the platform. There's no better showcase for this than what you can see on screen right now this summer. So whether that's been Lions Down Under or the start of the Ashes, which promises to be a great series, if you're English anyway.

Now this will continue with our biggest ever season of Premier League football. So in the early part of the season, we're going to have every match between last season's top 4 as well as every club at least twice by December. I'm particularly pleased to have extended our partnership with the football league over the next 5 years. This is a really important contract and is one that firmly reinforces Sky Sports' place as the home of football for fans up and down the U.K. And of course, this is just one element of our lineup. So whether it's F1, the best golf from around the world, great tennis, or a second Ashes series, there's going to be a huge amount to look forward to on Sky and Sky Sports.

Now on Sky Sports, we're going to be strengthening our entertainment offering further with a big push on U.K.-originated programming. So we'll continue to develop our comedy strand across the portfolio of channels that we have that's really worked so well since we launched it. So that includes returning series such as A Young Doctor's Notebook, which has been just recommissioned for a second series, as well as some exciting new commissions, such as chickens, which will star Simon Bird, and the Yonderland, the team behind Horrible Histories.

We'll also be taking a big step in drama. We currently have almost 90 hours of original British production in development, and we're working with some of the best partners in the business. So forthcoming highlights will include those that you can see on the screen here. So The Tunnel, which is a crime drama co-produced with Canal+; The Smoke, which is an 8-part drama series about the crew of a London fire station, very, very good; and Fleming, which is a new drama about the life of James Bond creator, Ian Fleming. Dramas such as these, I think, will really reinforce the strength of the Sky brand. They'll open up wide monetization opportunities through onward sales, and they'll put even more value into our customer subscription.

Second, we are going to continue to offer customers the best quality and value broadband, building on the strength and the position we've quickly established in the market. Now, of course, despite our sustained success, still 2/3 of our base don't take the triple-play from Sky, which means that there is lots of headroom for us to go for. But because of that, it's also sometimes easy to forget the progress that we've made. From a standing start in 2006, we've moved quickly to the #2 position. And we've been able to do that because customers like what we offer them.

So our service next year will continue to be based on a tried and tested formula. First of all, outstanding quality with truly unlimited broadband backed up by market-leading customer service. Second, the best value in the market with our regular price less than half of BT's equivalent. And then thirdly, we'll be -- we're going to give our customers more choice as we continue to build out in Ireland and we grow fiber as part of our range. Now as part of this, we'll also be introducing a brand-new reader [ph], which would be both fiber and DSL compatible. And that'll, of course, help us to grow more efficiently in the future.

And then third, we're going to continue to build our advantage in customer service. So as customers take a broader set of products and services from us, I think customer service is becoming an increasingly important differentiator. So we plan to take the next big step up in customer service this year by rolling out our One Service model. Now we've been testing One Service for a number of months with the aim of providing our customers with a more joined-up service experience. As part of this, we'll be bringing a further 700 engineers in-house this autumn to help achieve better coordination between our frontline contact center agents and engineers in the field. Now the results that we've seen from the pilots have been excellent. First time resolution scores have improved by a further 10%. Levels of customer satisfaction have reached their highest ever levels. And importantly, net promoter score, which is, of course, a key measure of customer advocacy, as you know, is something like 3x higher in the pilot group relative to our base.

So I think extending our leadership in these key areas of the business will put even more value into our existing customer subscription. But I also then wanted to move on to address the second part of our plan, which is to push into and accelerate growth in new services.

And we've worked really hard over the last few years to align our products and services with the trends that we're seeing in our household base. And I think probably the single overriding trend has been this emergence of a more connected household. It really breaks down into a number of parts. First of all, we're seeing significant growth in connected devices. So on average, a Sky home has something like 7 connected devices per household. And increasingly, of course, that includes your Sky+HD box. Secondly, customers are getting or putting a greater importance on being able to watch content both in and out of the home. We've seen this with something like 600 million views on Sky Go over the past 12 months, up 40% year-on-year. And then third, there's a growing move to consume content in digital formats. So Sky Store, our movie rental service, registered a threefold growth in its rentals over the previous year. Now alongside that, of course, there's also one constant. And that is that customers continue to love great TV, and they continue to love the content and service that we provide them.

So I think with the momentum that we've established in services like Sky Store, like On Demand, like Sky Go, like NOW TV, the opportunity really exists for us to push a bit harder into this customer demand and bring forward both future growth and returns.

So if you look more closely at what we've announced today, as I said we see 3 areas of opportunity to drive growth in new services. First of all, we're going to significantly accelerate connecting our customers' boxes. So the biggest opportunity is the 4.8 million customers who all have already got a Sky+HD box, but they haven't yet connected it to the Internet. So for them, we've developed a new wireless connector, which is here, very small, developed in-house by our own team. It's smaller and cheaper. And then we can post it through the letterbox free to our customers, giving them instant access to the full range of on-demand services.

For everybody else, we'll be making WiFi standard in every set-top box from September. So this will ensure every new customer will be connected automatically. And we'll also roll out this box selectively to existing customers who don't yet have an HD box.

And then finally, for the 13 million households who don't yet have Sky, we're going to be taking a big step forward in reducing barriers to take-up with a brand-new NOW TV box, and I think everybody's got one on their seat. It's available today for just GBP 9.99. It's a fraction of the price of a Connected TV or a YouView box. It gives preview customers a really easy way to access Sky's content, great for the kids, by the way, and a second bedroom, and a wider range of catch up services. And if you haven't already, please check out some of those services out in the foyer.

Secondly, we're going to extend our leadership in mobile TV via Sky Go. We'll continue to expand our content lineup, adding more than 10 new channels to Sky Go in the next few months, adding to the likes of National Geographic and Discovery. We'll also improve functionality by redesigning the user interface and adding more search and recommendation. And as we build our offering, we'll increase our marketing to drive greater usage from customers. And of course, we can then monetize that buy up-selling them to Sky Go Extra, which is our new paid-for service that gives you greater functionality, more connected devices and download -- more download content.

And thirdly, we're going to go -- we're going to enhance our already market-leading On Demand service. So we'll be launching more than 20 new catch up channels on demand in the next few months. That will extend what is already the most complete catch up service on the market. It'll increase our customers' usage and habits, and it'll clearly differentiate our service from others'. We're also planning to extend the range of box sets that we have on offer, increasing the hours of content available by something like 50% over the next year.

And then the more content we have, the greater opportunity to monetize it through our new Entertainment Extra+ bundle.

Finally, we'll take advantage of the growing move to consume content and digital formats by expanding our movie rental business, Sky Store. So over the course of the next year, we plan to add even more new titles to the service, offering customers choice of thousands of blockbuster movies and helping us grow our share of the movie rental market. Over time, we also see the opportunity to move upstream into the movie retail market, which is about 6x the size of the rental market today.

In overall terms, we expect the cost of the accelerated product growth plan to have a reasonably modest effect with an impact of around GBP 60 million to GBP 70 million on operating profit for the current financial year. The spend will be largely volume driven, and the payback will be quick as we pull forward growth and returns from our investment.

We expect the returns to flow through in a number of areas: increased take-up of higher-tier packages; increased revenues from transactions from the Sky Store; increased penetration from NOW TV; and, of course, higher levels of customer satisfaction and advocacy.

And just to put all of this into a bit of context for you, it -- the plan really enables us to participate even more broadly in the marketplace. I think I've shown you this slide before, but I think it does a good job of summarizing the approach that we're taking.

So it demonstrates, I think, that by accelerating growth in our Connected TV services, we're in a stronger position to take advantage of new distribution opportunities like OTT and mobile. We're extending our windows. By growing Sky Store, we can compete more effectively in the DVD release window as well as building a longer tail of library content. And then we're able to offer a range of different payment types to meet different customer needs, whether that's a one-off movie rental transaction or a day pass for Sky Sports over NOW TV alongside the full subscription service that remains so durable.

Now all of this means that we're going to be creating a larger and more profitable business for our shareholders. We remain a growth business. And while we've got good momentum or see attractive opportunities to invest, we'll take them. We've got a strong, improving track record, I think, of delivering returns. We'll maintain our commitment to grow the ordinary dividend. And where the success of past investments gives us the financial strength to do so, we'll return capital to shareholders, as you can see by today's decision to seek approval for another GBP 500 million share buyback program.

So to conclude, we delivered a very good financial and operating performance again this year. We exit the year with good momentum and, I think, a great set plans for 2013 and '14. By pushing into customer demand for Connected TV services, we're creating a bigger, more profitable business. That puts us, I think, in a strong position to continue to increase returns for our shareholders.

now we'll hand you over to questions now. But I couldn't resist the opportunity before I do that of just reminding you of why TV is so -- why Sky TV is so good. So we've got a quick VT.

[Presentation]

Jeremy Darroch

Okay. All right, here we go. I think why don't you kick off?

Question-and-Answer Session

Laurie Davison - Deutsche Bank AG, Research Division

It's Laurie from Deutsche. And can you just give us an idea of where do you see the impact for BT Sports and the UV push and in the last quarter on the new visit subscriber metrics? There's no obvious evidence, but just if you've seen the trends. A second question is just on general revenue growth. When you're thinking about next year, you've obviously got full year price increase, you've got the O2 broadband impact, you've got NOW TV coming in. Do think you can carry on with the kind of 7% revenue growth we saw this year on that basis? And third question, just on the revenue assumptions you've made to get to that breakeven and profit contribution from your On Demand investments from 2015. That'd be very useful.

Jeremy Darroch

Okay. I'll do the first 2. Andrew, you give us 2 and 3. And, well, I think that if you look at the numbers in Q4, I was very pleased that they were very strong across the board. I think our organic growth was something like -- I think they were 11% on product side, 700,000 something year-on-year. So -- and we didn't really see -- in fact, I think we're seeing, as we've said many times, at the distribution level, the market segment more, open up a bit more. And I think -- as I've said, I think that's a good opportunity for us and it'd be a good opportunity for others. So our businesses has continued to perform well in a tough economy and, obviously, competition continued to improve. So we're in good shape.

Andrew Griffith

And on revenue, as you know, we don't give forward guidance specifically. I think some of the factors you should think about next year, we've obviously lost ESPN. So we used to retail ESPN. Those revenues dropped away and are pretty much a wash with the new O2 broadband revenues. The pricing we took this year was a shade lower than we took in the previous year. It's about 2.5%. And that's on TV which, as you know, is a proportion but by no means all of our subscription revenues nowadays. And I think so NOW TV we'll have to see. But as you know, we'll come back every 13 weeks and give you good sort of KPI reporting. In terms of the way we're going to drive revenues from some of the additional investments we're making today, I think, as you'd expect in our business, it comes from a variety of different sources. So we'd expect higher subscription revenues and ARPU from customers trading up to tiers that include box sets. More of our Sky Go customers. As we drive awareness, more people use Sky Go. Within that, more of them we would expect to be able to up-sell to Sky Go Extra. So you saw very good growth this quarter in Sky Go Extra. That's a subscription product. So that's one way we can monetize it. NOW TV, as we say, if you -- if we -- people take the boxes that we've got out there or take NOW TV on other platforms, that drives revenues. And that could be a number of forms. Either they could subscribe to the monthly movie service. That's a no-commitment service they can churn on an churn off. Or it could be that they become transactors. They buy a number of Sky Sports day passes. And again, you've seen the start of some good numbers on that, albeit that is early days. And then finally, and probably most importantly because this is how we continue over time to add the GBP 150 of ARPU that Jeremy talked about, is it'll drive loyalty and advocacy and an increased desire by customers to stay with us and buy more products from us. So we clearly see, when you get products like On Demand in a customer household, usage and consumption goes up a bit and so, to a degree, does our ability to take price on the back of that. So those are all the different constituents. We're not making forecasts. As you know, it's a volume-geared model. But we're very confident of the returns, and that confidence comes from the fact that we already see these behaviors in our base today.

Jeremy Darroch

Okay?

Laurie Davison - Deutsche Bank AG, Research Division

Yes.

Polo Tang - UBS Investment Bank, Research Division

It's Polo Tang from UBS. Just a couple of different questions. The first one is on the accelerated investment. What are you [indiscernible] now? I mean, is this investment offensive or for defensive just given the current operation with BT Sports? And the next few questions are really just for clarification on detail. I mean, if you look at your pay TV net ads, can you give us some color in terms of what proportion was NOW TV and what was DTH? Is there any underlying growth in DTH? And then also, just in terms of your 119,000 broadband net adds, can you give us some color in terms of how much of that was from fiber?

Jeremy Darroch

Yes, sure. The third one. Look, I think you should see the continued -- first of all, you should see this as a continuation of a trend, what's the story of this businesses been over the last 5 years. It's been around investing in users and technology. Actually pretty much with all of them, what we've done is we sort of tested them to learn and get confidence. If you think of Sky+, we had that in market for 1 year or 2. We accelerated HD. It was exactly the same. [Indiscernible] different because we were coming in straight away. And Sky Go, we build habit and usage, and then we've got Sky Go paid-for service. So those are just the next step on the back of that pathway. And interestingly, I was -- one of the things I was looking at before today was our broadband presentation, when we launch broadband. We talk about 3 things, which is sort of getting scale in broadband, driving product penetration and then leveraging network activity. Now I think we're starting to move into that third phase, and that's opening up new opportunities. So it's -- look, it's got nothing to do with any near-term trading. I think it's more about trying to just add another option and build more revenues for the business. And it shouldn't stop here. We should find new, good -- more good ideas in the future wherever and whenever they come from. In terms of TV growth, both group DTH and NOW TV, the bulk was NOW TV relative to DTH, but they were both positive. And in terms of the broadband growth, fiber?

Andrew Griffith

We saw reasonable performance in fiber. It's -- we just treat it as one of our SKUs within broadband. Or the closing broadband base about 2% now, taking fiber. So it's pretty early days. Remember, to the extent we went above the line with the fiber promotion, which is just one of the products we'll market from time to time, that fell outside of the quarter.

Jeremy Darroch

And I think what we said, I mean, they both did well, I think. But DSL continues to do well. It was -- I think we probably grabbed the lion's share of the growth again in the quarter. So yes. All right, we'll come to Julien and go that way.

Unknown Analyst

Yes, Can I ask a couple of questions on TV everywhere rights and then maybe one on retransmission. Just on TV everywhere rights generally. Give us an idea how those sort of rights negotiations work and the sort of average increase that rights [indiscernible] are looking for as you take those rights outside the home we. Also, it seems a sort of serious source of competitive advantage against your peers when you look at their offers. Is that -- talk us through maybe how you exploit that in terms of trying to win customers away from them with the -- a good Sky Go as compared to other TV everywhere apps out there. And does it make you think differently about your relationship with the mobile operators as you continue to push Sky Go or the content that brings? And then one on retransmission. With sort of ITV sort of grumbling about that recently, clearly it's a big factor in the U.S. at the moment. Is that something that gives you any concern at all in the medium term?

Jeremy Darroch

I'll let -- you want to talk about the rights?

Andrew Griffith

Yes.

Jeremy Darroch

I mean retrans, look, I think we offer Sky as a great service. It's a very efficient way for them to get to market. In terms of switch -- ITV with the BBC, it's -- we shouldn't forget the fact this is a way license fee payers choose to consume their license fee. What's the license fee today? GBP 100...

Andrew Griffith

GBP 35.

Jeremy Darroch

GBP 35 a day. I think they pay about 50p. So I think it needs to be seen in that context. But with all the free to our providers, we're trying to find ways that we can also help them on the platform as well. Actually, I think one of the great things about the catch up service is that for likes of ITV and BBC, is it's actually provided a, consumers would tell you, a better way to get access to the ITV player and -- foreign demand with the ITV player than having to go -- or the Sky universe go in through a different connection. In terms of inflation?

Andrew Griffith

Yes, in terms of mobile and On Demand rights, I mean you won't be surprised when we say it's different for different products. In sports, eventually. We've owned rights for the whole territory across all different distribution mediums. So that hasn't been a feature of conversations for a very long time, probably approaching a decade. In other areas, it's been a -- be a function ultimately of the derive -- demand by customers. So if you take something like just, give you an example, Sky Movies Disney, there we've done a complete new rights arrangement. If you now look at something like Sky Go, probably look, like me, a lot of you got young kids. You can get literally most of Disney's movie library, all of the animations going back many, many years. Tens of dozens of movies that you can download and take with you on the go if you're a Sky Go Extra customer. That we saw drive significant increase in usage. And what you're always trying to do in any content conversation is share the benefits of that with a content provider. That's what makes a sustainable business. It makes an enduring partnership. So in that sort of example, we're very happy to pay a bit more. Some content, that -- those rights aren't as important. The sort of type of content that's consumed on the go or on demand isn't as big a feature as it is in other genres. So I'm sorry, I'm not being coy. It will just generally depend right by right, deal by deal and type of content by type of content. In general, it's not an inflation that we see, it's just a reflecting the increased value of the increased consumption that we see across platforms. In terms of mobile operators, look, all it says to us is exactly what we're doing today, is that as you yourselves know, more and more consumption is happening on tablets, on devices away from the main TV. In general, we see that as additive. It's not cannibalizing TV viewing, which is a strong as it's ever been. It's adding to that, which is good news for a company like us that's long contents and is in the business of getting customers to pay for it. So we're pushing ahead, but it doesn't change any view that we have on mobile voice. It just says these devices, these form factors represent a really big, outsize opportunity for us.

Jeremy Darroch

I think just one other thing. Just -- well, generally, you start working with others. You know what? We're very keen to work with different people. Obviously, we -- you will want to work on scale ideas and where we feel we've got good alignment of interest. We've actually got something like 16 distribution relationships now across the business. So we're working very broadly. And growth of onward distribution revenues, whether that be through wholesale revenues or other agreements, have been a key part of our financial performance. So if we can -- if we'll work more closely with them, we'll -- we'd seek to do so.

Unknown Analyst

And so is it a competitive advantage [indiscernible]?

Jeremy Darroch

I think it's -- I mean, is it a source of advantage? I think it is. And we'll see how much that can grow. But it's only one. I mean, I think we compete in multiple levels. So it's one side. All the other things we've talked about. Julien, do you want to go?

Julien Roch - Barclays Capital, Research Division

Julien Roch of Barclays. First question is -- I know, Andrew, you said you weren't giving forward guidance, but you've given one on the accelerated investment of a loss of GBP 60 million to GBP 70 million. So I was hoping you could give us a split between -- for the first year revenue, one-off cost, i.e. to dongle and boxes, and then the recurring cost, i.e. to content, so we can try to model the kind of a return on investment? That's my first question. The second question is, could you comment on the timing of the Champion's League when you -- give us some market noise there. It's coming in the autumn, so I'd like some comment on that. And then the last question is you see no change in trends in Q4. Any comments on July whether there's still no change in trends with more noise from your competitors?

Jeremy Darroch

Okay, thank you. Yes, I'll do 2 and 3 and give Andrew 1. I'm not sure the team had said when the renewal is. I mean, our expectation is probably going to be sometime this calendar year. And then from -- we're in good shape as we go into -- we still have 2 years to go on our existing contracts. So they would obviously be on the market early. So we'll do that as always, as it comes up. And generally, our football business is in good shape actually. And as I say, I was really pleased to do the extension with the football league. Sure it takes us across 92 clubs rather than just the top 20. And Sky Bet has taken headline sponsorship of that as well as the Sky Bet Football League, which will be good for that part of the business. In terms of July, it's too short term, but we're a -- so a good try.

Andrew Griffith

And then look, in terms of our guidance, trying my best to help and then you just keep pushing. Look, there is clearly -- we get some revenues coming in. So if you look to '14, '15, our guidance of flat is a combination of a degree of the revenues that have come through from the investment we made in '13, '14 and a degree to which we anticipate that the investment doesn't follow specific financial years that the activity were in place may flow through and make it a net figure for '14, '15. But remember, there's always a balance. We're very conscious as to what we need to at the bottom line as well, about how we deliver growth and returns. And it's our job, I think, to sort of make those ultimately come good whilst at the same time being willing to push through some medium-term growth.

Jeremy Darroch

[Indiscernible]. Sorry, and then I'll come back to you. Sorry.

Unknown Analyst

It's Paddy [ph] from Goldman Sachs. I've got a couple of questions really. The first one has to do with the multiroom strategy. I mean, can you tell us where you are with that? I mean, you've got all these on-demand and mobile products. How are you going to protect that Multiroom revenue stream? And are there plans like a sort of network DVR at some point in the future? The second question really is on marketing spend actually for next year. You've highlighted there's going to be a bit more spend around your On Demand. But we think there'll always be a bit more competitive activity. Can you give us some kind of broad color on how you're thinking about marketing spend for next year?

Jeremy Darroch

Okay, I'll do one. Andrew -- it's good to be the CFO. [Indiscernible].

Andrew Griffith

The -- well, on Multiroom, I think it's actually been a really durable part of the business. I think Multiroom customers on the whole are pretty -- are pretty happy that we're just going to try and put -- find ways to put more volume into that. So we bundled in things like Sky Go rights off of -- to that service. In terms of technology, we can make -- just through our existing box platform, we're working on innovations like shared plan, and that makes that whole service, the whole Multiroom service better. Well, that -- ultimately, that takes us to things like network PVRs and we'll see. But I think on the whole, customers tend to think of it as a sort of whole home subscription actually, even though it might be sort of tiered in terms of what we charge them. So we're very conscious of that with some of our best customers. So we want to keep giving them a good service and keep finding ways to put more value into that service.

Andrew Griffith

And look, in terms of marketing spend, it's not a source of efficiency, say. We've got lots of areas that are sketched out today as to where we're going to continue to drive hard. I'm very happy to be forward looking and say that over the medium term, we do expect sort of continuing efficiency gains that we've seen elsewhere. Marketing, as you know, is more of an output of the success that we can have in terms of adding customers or driving products. I think the above-the-line spend we're happy with. I think we'll continue to press on with that. We're seeing good levels of take-up in it. Of course, as you broaden your product set, you've just got more messages to get across to customers. And so that's, again, not something that we're looking the pull back from. But elsewhere in our operating cost base, we can do a lot to continue to work to offset it.

Jeremy Darroch

Yes, sorry. You can pull them.

Daniel Kerven - BofA Merrill Lynch, Research Division

Okay, it's Daniel Kerven from Merrill Lynch. A few questions. First of all, just in terms of GBP 65 million of investment, to what extent does that cover the cost of migrating the remaining 75% of homes to your connectivity? Secondly, on O2. I think when you acquired O2, it had close to 500,000 customers. But you say now it only has 400,000. To what extent is it about churn? Or does it reflect migrations to Sky Broadband? And if so, what proportion of the 119,000 broadband additions -- Sky Broadband additions were from O2 migrations? Thirdly, just on CapEx. CapEx is around GBP 75 million higher than depreciation. I think the key one is that gap is getting on for GBP 1 billion over the last decade. When will depreciation catch up with CapEx? And finally...

Jeremy Darroch

You have 3. Off you go.

Daniel Kerven - BofA Merrill Lynch, Research Division

Right.

Jeremy Darroch

Off you go.

Unknown Executive

It's a good one. It was a good one.

Jeremy Darroch

Sorry?

Unknown Executive

It was a good one.

Jeremy Darroch

He was asking [indiscernible] questions [indiscernible]. [Indiscernible]

Andrew Griffith

Okay.

Unknown Executive

Sorry. Off you go.

Andrew Griffith

The GBP 65 million, which we said is volume driven, goes a very long way to connecting those boxes. Jeremy talked about our ability to send out to 4.8 million customers who've already gotten HD boxes or ready to be connected. It's got an Internet port. We developed the new software, plugs into the USB. And the cost of doing that is very cheap and efficient. So it's a -- so it goes a long way to achieve our goals in that space. In terms of O2, look, we've taken a prudent approach to how we recognize customers. The experience in this sector is very clear. Inevitably, as you go through a migration process, that's quite intrusive for customers. We will be migrating them one by one at the exchange level across to our network. That's how we're going to drive the returns and benefits from that. But against that dislocation and against what we'd anticipate to be really reasonable churn, and we always thought this would be the case, there's no change in our assumptions because of the nature of those sort of basis, we've taken a prudent approach to how we recognize those, and those are largely stable customers. That's the test that we set ourselves. And the good news is none of our position assumptions have changed. It continues to be a really good source of up-selling products because typically, these are customers taking maybe 1, at best 2 products, and we back ourselves to significantly increase that up-sell. It's a good base for doing that. Look, your final question on CapEx. It's going to be just a mixture. I mean, we give very good disclosure of where we're spending our money. You can see the depreciation coming through. What you'll see from time to time is that that'll phase into different projects. So depreciation was up about 5% this year. Some of the development work that we've done on things like NOW TV start to be depreciated, some of the additional functionality that we're able to deploy in our boxes. And that's typically quite short life. Because it's software, it's an intangible asset, we'll run that down over 3, maybe 4 years. So you'll see that increased depreciation. Conversely, some of the projects we're doing in CapEx have very long paybacks. If we've upgraded studio facilities. If we built construction of new buildings on our main site, then those have a much longer life. So I'm very happy to go through in more detail with you if you'd like to sort of break down the assets and the notes and the accounts, but there's nothing untoward there. We've got a very clear set of policies and approaches.

Jeremy Darroch

Any here? We've got one from here.

Giasone Salati - Espirito Santo Investment Bank, Research Division

It's Giasone Salati from Espirito. Three questions, I think, all very, very close. NOW TV, that new box looks very much like a Roku 3. Can you say there's Roku 3 distributor then in the U.K. so just we have some track record of how well it's going in the U.S.? And the -- and I'm also wondering if that is in any way going to be included in some triple-play offer? It seems like the perfect product to be bundled together with a broadband offer. And lastly, you have given a very clear guidance in terms of where you expect to see revenue growth. Can I push to ask you, is NOW TV -- are there -- in terms of revenues or profit, NOW TV and the related box and stuff for you the biggest growth opportunity? Or you still see in the existing customer base more growth from up-selling and other options you have described?

Jeremy Darroch

Okay, sure. I know this pretty well. On Roku, it is in conjunction with Roku. It's a Roku 3 box, only the chat. I mean, it's part of that partnership with with Roku, which worked really well actually. I think there's a lot of interesting ideas with it. Certainly, bundling it with broadband, I think, could be good. I think it could be a great gift at Christmas. I said it's -- I think with my own kids certainly we saw a thing -- it's a gift to them. Good for the Street and market. So there's lots of different ways, I think, we can do it. And actually, I think one of the things that we are quite good at and we get behind is selling a physical product. So I think that will also be quite helpful. So I'm sure there'll be lots of different ways we want to test it and see if we can deploy it.

Andrew Griffith

Look, in terms of the -- your second two questions, I mean, yes, it'd be very natural to bundle it with broadband. I mean, I think we'll force that, but we've got nearly 750,000 stand-alone broadband customers. Why wouldn't they if they'd like some great sport on a pay-as-you-go basis or maybe a movie sub be interested in that? So we'll not leave opportunities unturned, but we're not forcing a bundle from day 1. In terms of the opportunity between NOW TV and the existing base, look, I think they're both outsize opportunities. We've got a proven track record of being able to up-sell our base. They're highly engaged with this. If we can make them aware of new products, we can follow those consumption trends and monetize those. NOW TV speaks to the 13 million households in the U.K. that we haven't yet got a direct relationship with, and that's clearly a very large volume opportunity.

Jeremy Darroch

Good. Is there somebody else?

Omar Sheikh - Crédit Suisse AG, Research Division

So Omar Sheikh from Credit Suisse. Just a couple of questions. Could you give us a sense of how much demand do you think there is for BT Sports? I know that BT talked about a demand of 500,000. Could you just sort of just give us some sense of what your customers are telling you about their appetite for that product? And perhaps if you have any numbers for how many of those 500,000 might be on the Sky platform, that will be useful. And secondly, on Champions League, could you give us a sense of how we should think about what impact the renewal might have on your programming costs next year? Because if, for example, the cost goes up, so I'm guessing it's a must-have for both you and BT, would you look to take some program expense out elsewhere? Or should we just assume that, that will come through in an increased fixed cost?

Jeremy Darroch

Two. I'll just do one. So let me start on Champions League. I can't give you specifics. I'll try to chime in on the inflation, and you'll understand why. What I would say -- what I'll say more generally is that we don't actually think -- there's obviously tiers of content and value, but I don't think we think of anything as being absolutist in terms of what we do. I mean, the Premier League I mean, very obviously, we're in the Premier League, with less content than we've had today very successfully when [indiscernible] were around. But as every year rolls on and we're investing more in content and we've got a bigger bulk of content in more individual contracts, it is also giving us, I think, greater optionality to make choices, and we're certainly thinking in that way. So we tend to think of content in 2 ways at the absolute top level and then at the individual level. And there are always lots of choices, I think, you can make either within an overall sort of envelop in direction of value where you want to get to financially, and we'll be happy to do that. And then I just -- I would just -- as a final kind of reminder, I probably don't need to tell you this, but just also remember that the Sky Sports customer in the heartland is people who really want a broad range of sport, who know most sport. Ball sports fans have got a big interest in other sports and have a big viewing over those sports as well. So we always look at this in the context of the breadth and range of Sky Sports, the Sky Sports office.

Andrew Griffith

Yes. I'm not sure there's much we can say, Omar, on the first question. I think you'll understand it's early days. we'll see how we go through this quarter. I mean, it's well known in the market how many ESPN customers there were that were inherited on day 1. But, I mean, they're not -- it's not our numbers to give.

Jeremy Darroch

Why don't we go -- Matthew, and then we'll come forward and then -- sorry, sir, we'll come to you actually...

Matthew Walker - Nomura Securities Co. Ltd., Research Division

It's Matthew from Nomura. Two questions, please First one's on broadband. Excluding O2 and looking at the various trends, what kind of sort of net app profile do you think we should be looking for, for broadband for the coming year? I mean, sort of verging on Omar's question, when BT are coming to people on your own satellite, apparently they're trying to sort of say if you get BT Sports, you have to lock up your BT contracts for broadband for 12 months. There's probably a couple of million Sky TV users who've got BT for broadband still. Part of that is the sort of the dark pool of people that you bring over to yourselves. How do you think about what the available pool of people is for broadband? And when you're adding broadband customers, what percentage is typically coming from other players, i.e. churn of other players? And what proportion is sort of genuinely new to the broadband market? Second question, which is a bit of an odd one, but is, I mean, obviously, the -- there's various opportunities abroad? Is Sky looking at any acquisition opportunities abroad that are not in Ireland?

Jeremy Darroch

Yes, I mean, on 2, we're pretty focused on our plan here in the U.K. We see good opportunity in the U.K. I think our opportunity is -- certainly is opening up, so we're very focused on that. On broadband, and you might want to chip in, look, I -- we've said we've got lots and lots of headroom in our base of homes, and it's a long-term gain. I mean, it's -- it would have been great if we converted everybody in the first couple of years, but we didn't. But every year, we find new ways to grow. So we're not changing any of our levels of aspiration. Obviously, BT is spending a lot of money. I mean, they've spent about GBP 400 million, GBP 500 million. So it's a lot of money to throw at retention. So I think we'll just keep on with progress. We'll come back and be able to update you every quarter. But we feel good about the range of services we've got. And I think at every level, our execution, whether it be from marketing to service delivery, is in a good place. So we'd expect a further year of really good progress on broadband.

Right, I'm going to go to Sarah because I've been very rude, and I'm going to come over there and then I think we're going to call it a day.

Sarah Simon - Berenberg, Research Division

It's Sarah from Berenberg. Three questions, please. In Q3, you gave WiFi connectors away to a group of customers, and you treated it as exceptional. What has made you decide to treat the -- well, part of the GBP 60 million to GBP 70 million not as exceptional? Secondly, you mentioned Ireland, but can you -- it's obviously broadened the pool of people who you can up-sell to. Can you give us an idea what kind of sub adds in terms of broadband you've be making in Ireland over the last couple of quarters since you launched? And then thirdly, just in the context of what you've been saying about broadening Sky Go and so on, can you give us some help on programming costs as a percentage of revenues, which is a number, I think, you've given in the past from time to time?

Jeremy Darroch

Yes. So you'll do 1 or do...

Andrew Griffith

Yes, 2 or 3. So on Ireland, we're getting going. We don't spread the numbers out for Ireland, but they're not distorted in terms of the overall 119,000...

Andrew Griffith

119,000.

Jeremy Darroch

119,000 adds we did in the quarter. It's still early days, early days there. On programming costs, we continue to not seek to reduce that as a percentage of sales. So we're seeking to maintain that as a percentage of sales over time. Of course, you'll get individual blips when contracts come in. So next year, of course that has an affect with Premier League when you're -- over time when we're trying to track it as the same percentage of our overall revenues and make it a priority for investment. WiFi, would you?

Andrew Griffith

Yes. Look, the thing that was exceptional in Q3 was the fact that we received a rebate or we were awarded a rebate for customers that have been overcharged in the past. So that was what was the exceptional event. Against that, we wanted to make sure that that gave -- that money gave back to customers. It was customers that had been overcharged, and we wanted to find a good way of giving them back value in a way that they would particularly appreciate. And we chose at that point that the best way of doing that was to give a discrete cohort of customers WiFi connectors just as a of giving them something back for their subscription, and because that's a good activity. So the constant theme is that giving customers, getting them connected drives value for them and drives value for us. Clearly, we're not going to treat that as an exceptional cost going forward. It was the exceptional receipt that we just need -- we wanted to net off to give that back to customers that drove the accounting treatment in Q3.

Jeremy Darroch

All right. Yes, sorry.

Thomas A. Singlehurst - Citigroup Inc, Research Division

It's Tom here from Citigroup. I had 2 questions. The first one was on the number of customers in contract across the marketplace. I was just wondering whether you have a rough idea of existing broadband subs for the market as a whole who are now back on to a 12-month contract as a result of what BT TalkTalk and yourselves has been doing. The second question is on churn and pricing. I mean, obviously, churn has tingled up a bit in 2013, which is understandable especially in the aftermath of the price increases. Should we interpret the fact that you're taking less pricing in 2014 effectively as a sign that you're worried about that churn rate? Is that a way of sort of mitigating churn? Or can you just talk about the interrelation of those 2 metrics, please?

Jeremy Darroch

So I think I don't have a number for in-contract customers across the marketplace, I've never actually seen that, so I wouldn't know what that was. In churn, though, I mean, look, we take a -- we often say pricing is a sort of mix of strategy and tactics, right? Long term, we want to be seeing our -- obviously, our prices tick up as -- and that creates the capacity to invest. Tactically, from time to time, we'll think of absolute levels of pricing. There's actually a lot of value we're going to offer this year. So we -- we're pretty -- we're happy with the rate we're taking. I think it's, I don't know, slightly below levels of inflation. We're cognizant, obviously, of the consumer environment. We don't want to overload people only but take pricing on a regular basis. And but actually, churn, you have a pricing event, to be honest with you. So you get a lot of things like the cause in whenever you take pricing almost at any level within the range. So it's not particularly a big factor in terms of our thinking. We're not that sophisticated in our analysis.

Andrew Griffith

Unfortunately.

Jeremy Darroch

Right. Okay, we'll call it a day. Thank you very much. Have a good summer, and we'll see you in the first quarter. [Indiscernible].

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