Jeremy Darroch - Chief Executive Officer and Executive Director
Andrew Griffith - Chief Financial Officer and Executive Director
Bryan D. Kraft - Evercore Partners Inc., Research Division
Allan C. Nichols - Morningstar Inc., Research Division
British Sky Broadcasting Group plc (BSYBF.PK) H1 2012 Earnings Call January 31, 2012 10:00 AM ET
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 2011 annual report as amended by its 2011 interim management report. I would now like to hand the call over to Mr. Darroch.
Okay. Good morning, everybody, and thanks for joining us. Andrew and I will take you through the results and then we'll be happy to take any questions that you may have.
So it's been a good first half. In a difficult environment, we've delivered another strong operational performance and record financial results. Our existing customers are staying loyal and they're buying more from us, and we continue to add new households as well.
We're investing more off stream and we've improved the rates of products and services that we offer. We grew our revenues by 6%, we've reduced our operating costs and we expanded our profit margin. We've absorbed both a freezing of our subscription prices through existing customers and some cyclical headwinds and delivered 20% growth in earnings per share and 12% growth in free cash flow. And at the same time, we've increased returns to shareholders with a high dividend at the start of our buyback program.
So turning to the detail, our multiproduct strategy is working well and we're taking share in all of the sectors in which we operate. We added 772,000 new products in the quarter with growth in all product lines. Within that, we added 100,000 new Sky households with net growth of 40,000 in TV, and 60,000 in standalone home communications. We closed the quarter with a total base of 27 million products across 10.5 million homes. But over the last 5 years, we have now doubled the average number of products taken by each of our customers. However, we increased ARPU by more than 1/3 to GBP 544.
Our customers continue to be very loyal, and they're responding well to the extra value that we're building into their service, with churn up 9.6% from the prior year and a strong performance given the general environment.
We're making good progress developing our Content business and the results are very encouraging, so we closed the quarter with the highest ever level of subscribers to our premium channels across all platforms, but our progress in Entertainment is now beginning to accelerate with viewing share up by 1/5.
We're also maintaining our pace of innovation with a number of new initiatives that help customers get more out of their service. Sky Go is a particularly good example of how we're positioning the business to take advantage and lead in the emerging trend among customers to access more of our content away from home. And our on-demand service, Anytime+, is seeing increased usage and is already in over 1 million homes with usage increasing strongly.
So alongside the work to improve cost in our products, the efficiency programs we've put in place to our cost of business continued to deliver significant financial and operational benefits. Over the last 2 years, we reduced operating expenses by more than 5 percentage points. Much of those we've chosen to invest in customers, but we also used the benefit to increase returns with our operating margin reaching its highest level for 5 years in the first half. And I think this demonstrates the optionality in the business that's helping to shift our cost profile to more productive and volume over time.
So all told, it's been a good 6 months and the combination of a consistent strategy and strong execution is working well. Now this morning in London, I talked about our products in 2012. Of course, we've been operating in a tougher consumer environment for some time now and to be clear, we don't expect any material improvement in calendar 2012. Indeed, I think the first half may well be even more challenging.
It will all be too easy to get fixated by the short term, but we're not going to do that. We intend to push on to invest and develop our business and stay focused on the long-term opportunity ahead of us. And we've got a strong set of plans to open the pace again.
I talked about 3 areas of focus. The first was content where we continue to get even better. We're working with the best talent and we're developing very strong ideas into returning series. We're also making our content work harder for us, and our new dedicated Formula 1 channel is a good example of this. We'll get behind it, build opportunities through Sky Go, extend distribution through wholesale relationships and support other revenue lines like advertising backing in Sky business. And all of this makes content a highly attractive place for us to invest.
The secondary focus is innovation, where we'll be doing 3 things in the year ahead. We'll focus on the themes of portability, on-demand content and compelling devices. We'll build our success of Sky Go by extending distribution and adding new channels to the lineup. We'll expand our on-demand service, Anytime+, with new deals to add content from the BBC to ITV and we'll also make it ISP-agnostic and therefore available to more homes.
And we'll add to our mobile content by developing our Sky+ app so customers can manage their recordings on the move, use their iPhone or iPod as a remote control at home, will add a social dimension through our new partnership with zeebox.
The third is broadband, where we've also built 3 initiatives prior to the year ahead. First, we're going to extend our footprint, bringing our unbundled network to an additional 1.4 million homes by the end of 2013. Second, we'll launch our Wi-Fi service in 10,000 locations across the U.K. at no extra charge for all Sky Broadband Unlimited customers. And third, for customers who want highest feeds, we're adding fibre to our range using wholesale access to beat this local infrastructure. So together, these initiatives represent a significant enhancement to our broadband offer.
And finally, we're also going to be launching an entirely new service in 2012. So building on our early innings with Sky Go and Sky Player, we'll launch a new service which will give another choice to the 30 million U.K. households who haven't yet chosen to subscribe to pay TV. We'll also give access to Sky Movies on-demand with no additional contract. You'll be able to pay monthly or rent a movie on a simple pay-as-you-go basis. And soon we'll extend this to include sport and entertainment as well.
We're very excited about the opportunity. We feel we've developed a good plan, and we look forward to taking -- to talking more about it to you closer to launch.
So in summary, we've got a strong 6 months with good progress on all fronts. Our approach is working well, and we've got a strong and exciting set of plans for the year ahead and we'll stay focused on delivering sustainable growth in revenue profits and cash flow. It's not been an easy environment, but our approach to growth is working well, with another very strong financial performance.
So thank you. And now, Andrew and I will now be happy to take any questions that you have.
[Operator Instructions] The first question comes from Bryan Kraft from Evercore Partners.
Bryan D. Kraft - Evercore Partners Inc., Research Division
Two questions. First, with respect to the over-the-top service, the new online video service you're planning to launch, how do you think about managing the risk of potential cannibalization of the pay TV base by that service? And then my other question just had to do with how you think about pricing in 2012. I know you have the price guarantee which I believe goes through August, so I just want to understand kind of how you're thinking about pricing beyond that?
True, Bryan. I think we're obviously very aware of the cannibalization risk. I think the first thing to say is this is really about growing the total market. We can deliver the service very efficiently because it hangs off our existing infrastructure. So actually, the cost -- the additional costs that are associated with the service other than the launch marketing and acquisition costs are really not that significant. I think we manage it a number of different ways. First of all, or rather overall go-to-market propositions, how we broadly market the service by specifically how we target the service at the various customer segments which we've developed and we're quite skilled at now. Thirdly, obviously how we price it relative to the satellite service as well. Again, fourth, I would just say that our existing customers who take the full satellite service are very happy. They've proved very, very loyal to services like HD 3D, Sky+, it's a really great -- it's a great service for the family. So I think we're going to be able to position this well to be complementary to what we do in satellite subscription as opposed to being in conflict with it. In terms of pricing for 2012, it's our intention generally to take pricing. We haven't concluded yet what our plans will be for 2012. You're right, the price promise rolls through to August of this year. The good news, I think in our point, is we want to take pricing to 24 months, so I think that is a good launchpad probably for the summer of next year.
The next question comes from Allan Nichols from MorningStar.
Allan C. Nichols - Morningstar Inc., Research Division
With your new production facility, how much of your content is now being produced in-house? And how much of that do you resell? And do you have any interest in acquiring Cable & Wireless Worldwide after their stock has collapsed? They do have some interesting assets that could benefit you and reduce your reliance on BT.
I mean, in terms on our kind of level of U.K. commissions and productions, it's still reasonably small relative to the overall base of programming that we've got. The total, I guess it would be somewhere in the region of probably a bit less than 20% in total. We're obviously doing more and more of that in our own production facility. We have not yet restarted to develop much downstream revenue, but that's one of the things that we are thinking about as we scale up our investment in the U.K. content. By potentially going further upstream and acquiring more of the IP, we've got 2 or 3 good examples if that, but it will be something we'll probably seek to do a bit more over time. Andrew?
We can't comment on any specific in terms of acquisitions. We don't have any substantial acquisition plans right now at all. What I think in terms of where we sit with our assets, we're pretty happy. So we acquired one of a guest number of very scalable U.K. call networks with Easynet. Actually, we didn't think our competence relates squarely within the B2B space. So actually, we thought that's a difficult market and we exited that 2 years ago, because we saw that market was getting difficult so we took value out of -- off the table and exited B2B, and I don't think we have any intention of going back into that space. And then finally, the business is delivering well for us in terms of access to the local loop, we can get that on a regulated basis. So I don't want to comment on any specifics, but I think I've laid out pretty much how we feel about our position in telecoms.
The next question comes from Stanley Martinez from Legal & General.
First, I wanted to start off with a question on the dividend and share buyback. And I acknowledge and respect that you have a payout at Sky that you believe is sector leading. And of course, long-time investors know the company is dispositioned towards financial conservatism. But nonetheless, could you maybe play some context around the 5% growth in the interim versus the 12% growth in free cash flow? And that figure itself was restrained this half year by some nonrecurring factors around exchange, unbundling costs and the studios. And perhaps should I presume a stronger cadence for the final dividend, or are you perhaps willing to engage on whether the scale of the GBP 750 million share buyback that you just started might become a more recurring annual feature?
Stanley, to be frank, we enjoy debating with shareholders on these things, so we're absolutely not closed in our minds. But let me just make a few points, if I may. The first thing is that the dividend is weighted to the second half of the year. We've traditionally done that, it gives good visibility of what the final earnings are and we can rightsize the dividend to be around 50% of that. The second is that this year is quite unusual. We set out last summer a very clear policy, as you say, sector leading 50% payout ratio, and we're coming off of a background of 2 things: One is that due to the investments that we've made and which we said we would look through in terms of the dividend, our previous payout ratio was 60% and 66%, so we're sort of coming down and normalizing at the 50% level. But secondly, at the same time, our previous commitment to the long term was to pay out 40% of earnings. So 50% itself represents a new step up in the level of cash coming out of the business. This year, we'll pay well over GBP 400 million out of cash in dividend. And as you say, if you combine that with the buyback, that means in aggregate GBP 1 billion of cash is going to come out of the business and we've only just got going with the buyback, it's only been 2 months since we received shareholder approval and authority. So certainly we'll look at these things. I think probably the best time to do that is in the summer. When we've done this full year, we'll look to the cash flow and we have the AGM or whatever we do going forward. But at the moment, I wouldn't signal any intention to change. I think we've got ourselves into a good clear policy now. I appreciate your diligence, but we need to get going with that and get the cash out of the business, get it into shareholders' hands and that's exactly what we're doing.
Of course. And if I could just ask one more operational focus question. The total subscribers and programming costs were both affected by, it looks like, your marketing focus away from emphasizing the video product absent some of the assets, the Ryder Cup in the last year quarter and more of a focus on broadband, primarily as you look to unbundle more of your exchanges and unbundle BT's Infinity, should that be your focus in terms of your marketing focus on the mix for the next several quarters, at least until we get a commercial rollout of the streaming product nearer to the launch?
So I think in terms of the general marketing stance, we really retain through the year. So for example in the run up to Christmas, we used -- marketed movies, Sky movies across all platforms to start off a new year. It's typically Broadband and Talk because of sort of pricing pressures post-Christmas and we can switch to, say, lots of stuff. As you move into the spring, we'll be on Formula 1 to get behind that piece of the content. We've got a big summer of sports in the U.K., either sport that we have directly or the Euro Championships and the Olympics will be a great choice for customers in terms of watching the Olympics so -- which will be the key part of our marketing. And then we will fill in between that with more typical advertising, largely around Broadband and Talk, while we can reinforce our volume messages and then some longer messages on content and service delivery. So either -- we're switching according to the mood of the season right throughout the year.
[Operator Instructions] The next question comes from Hale Holden with Barclays Capital.
I was wondering if you could give us any thoughts on Premier League renewal that's coming up. Specifically, how you're thinking about other entrants into the market, ESPN or maybe Al Jazeera. We were surprised to see them in the France soccer rights process.
Yes, sure. I mean, look, I think what I'd say is we're in a normal stage of the cycle. We would expect the tender documents to be issued fairly soon. But that's really down to the Premier League. It's always, I think, people are thinking a lot about who potentially could be bidding. Our experience is that it's all pretty competitive. We're well prepared, as you would expect. We're very clear on what we want to do. So I think we're in a good shape to do well in the next round of bidding, whenever it comes. But we should expect -- I'm sure planning is always a speculation between now and then about whether it be ESPN or Al Jazeera or anybody for that matter. I think for all of us here, we've just got to go get our heads turned to which buyback and just focus on what we want to achieve and that's what we'll do.
Okay. Second question is the over-the-top products. Looks pretty offensive versus the Netflix entrance in the U.K. market. Maybe you could sort of talk about how you view Netflix versus your platform and are they a legitimate competitor at this point or are they not?
No, I think -- it's not -- I know a lot of people saw focus on Netflix because understandably, they've just come to market. So we're not really focused on that. I mean good luck to them. I think they stand a good chance of being successful here. More it is if you look at the U.K. market, we know it's gone through analogue switch-off, so we know that digital devices and connected devices are just not going to naturally grow in the base. The development of the U.K. broadband infrastructure means that it's -- there's a much more reliable core backup to deliver video over. This looks like a distribution opportunity that could reach some scale. But I mean, it's a good way for us to monetize our content more broadly in the marketplace, which is really the pathway we've been on since 2004, '05. So in some cases, we'll have to wholesale out to others. The cable network for example in the U.K. is a closed network, that's only way we can access those customers. Over the top is good rollover in soft retail, and we typically prefer to do that because it gives us more control in terms of marketing and our ability to push hard. So I think this is really about how do we grow the market from our point of view, either how do we get more of that, of those 13 million homes that don't pay for television in the U.K. today to do so, make it easy for them to do so and obviously send their business Sky's way. And I think as part of doing that, we have to recognize that we've got to keep developing our services, offer more choice and do things that are different to what we've done in the past. But that's really the thinking behind it.
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. Look, thank you very much for joining us today. And just to summarize, I think we've had a really good 6 months. We've got an exciting year ahead of us. We've got, I really think, a great set of plans to deliver our customers more great television and more choice in terms of our product lineup. We do expect the environment in the U.K. generally to remain challenging but against that, I think we're going to have more reasons for new or prospective customers to enjoy their stay with Sky. So thank you for joining the call today and with that, we'll speak to you all fairly soon.
Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.
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