Sky Plc ADR's (SKYAY) Jeremy Darroch on Q3 2016 Results - Earnings Call Transcript

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Sky Plc ADR (OTCQX:SKYAY) Q3 2016 Earnings Conference Call April 23, 2016 10:00 AM ET

Executives

Jeremy Darroch - Chief Executive Officer

Andrew Griffith - Chief Financial Officer

Analysts

Scott Wipperman - Goldman Sachs

Benjamin Swinburne - Morgan Stanley

James Dix - Wedbush Securities Inc

Allan Nichols - Morningstar

Operator

Thank you and welcome to the Sky PLC Results Conference Call for the Nine-Months ended on March 31, 2016. This call is being recorded. Hosting the call will be Jeremy Darroch, Chief Executive Officer and Andrew Griffith, Chief Financial Officer. This call is a property of Sky PLC. It may not be recorded for broadcast or without written permission by Sky PLC.

This call also includes forward-looking statements in respect to the Group’s business and strategies. All forward-looking statements are subject to risks, uncertainties and are qualified by cautionary statements in Sky’s 2015 Annual Report and updated by its 2016 Interim Management Report.

I would now like to hand the call over to Jeremy Darroch, Please go ahead, sir.

Jeremy Darroch

Thanks and good morning everybody and thank you for joining us today. We’ll begin this morning by taking you through the headline results along with some of the key milestones we’ve achieved during the quarter and then of course we would be very happy to take any of your questions.

So it's been another strong quarter for Sky with really good momentum and I think excellent execution in implementing our strategy right across the Group. We’re continuing to invest in the areas that matter most for our customers and delivering world class content, marketing, and innovation across all of our platforms and best-in-class customer service.

And our strategy is working. We’re attracting more new customers across our platforms, our existing customers continue to take more products from us and you can see that in the numbers that we posted today. So in Q3 we added 177,000 new customers across the Group, that takes our total customer base now to 21.7 million households and alongside that we also grew total products by 686,000. Our operating performance delivered another excellent set of financials. The Group revenues for the first nine-months increased by 5% to £8.7 billion whilst operating profit was up by a further 12% to £1.1 billion.

So if you run quickly through the headlines of each of our markets. Now in UK following a very strong first half, we had another good quarter of growth while we added 70,000 new customers and we surpassed 40 million products in Sky homes. Churn was slightly higher at 10.7% but that reflected that decision to reduce discounting activity during the quarter. We delivered 6% increase in revenues, £6.2 billion and together with our strong focus and operating efficiency that resulted in a further 15% increase in operating profit to £1.2 billion.

Now our main focus in the UK this quarter has been on launching our groundbreaking new product Sky Q. Our market is concentrated on building brand awareness, so the first installation is taking place towards the end of the quarter and we’ve been really pleased with the early response. We’re just getting going in terms of building this new top-tier offering which will serve alongside our existing platforms of Sky Plus and Now TV and together this range of innovative products it means that we can now serve the whole of the market better and meet the various needs of different customer groups.

In Germany and Austria, we started to see a great response to our new entertainment offering, which we launched in the quarter. We added 73,000 new customers that’s the second highest third quarter growth in 10-years and almost 2,000 new products. So that help to drive 10% increase in revenue to 1.1 billion and record a positive Q3 operating profit that’s the first time what we’ve seen that in Sky going forward. And now in spite of all investments that we’ll be making in programming, marketing and rolling out our connected home strategy, which shows the progress we’re making I think in this region is very strong.

In Italy, we had a really good operating performance. We added 34,000 new customers that was the highest quarterly growth in four years as well as the further 49,000 new products. Channel growth was 11% a resilient performance as we effectively mined the business through the loss of the Champions League rights and against the backdrop of a heavy promotional environment in Italy. Our revenues in Italy were down 2% to £1.5 billion that reflected a lower than average customers while our operating profit was lower at £22 million as we invested in the connected strategy and the marketing of Box sets.

So taking together, it is clear that we’re making strong progress as we execute on our plans to be [indiscernible] and sustain the business. In January we laid out our extensive plans to keep giving customers the very best content, fantastic range of products and of course industry leading customer service and we’ve already made excellent progress in each of these plans. During this week, we announced a new deal with Sony that’s our first Pan-European deal for movies, as far as our new deal from Sky Sports the exclusive home of Formula One in the UK from 2019.

Our regional commissions are building momentum with Stan Lee’s Lucky Man being our most successful UK drama series however and we launched the second series of Gomorra Italy in the next few weeks. Yesterday we announced our most ambitious slate of productions yet, we’ll work with some world-class talent people like Idris Elba and Tim Roth in six major new shows all over this year and next.

Now we said that 2016 was going to be a very busy year as we transform the Sky experience for customers through our innovations. So alongside the launch of Sky Q, we launched Sky Box sets in Italy and the new [indiscernible] at the end of March and this app launched first here in the UK but we’re rolling out to Germany, Italy over the coming months, it's a good example of how we can deploy innovation developed in one country rapidly across the Group.

Across the Group we’re also continuing to roll out our proven connected home plans. We added 400,000 new customers in the quarter and that means around 11 million customers can now access the full suite of on-demand services that are proving to be so successful. So in conclusion I think it's been a good start in the calendar year, seasonally further strong progress against our strategy, we’re investing in the right areas and that’s bringing the best TV experience to our customers across all of our markets. And across our large group our plans are delivering well and they are opening up significant growth opportunities for the future.

So with that let’s open up the call for any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question from Scott Wipperman, Goldman Sachs.

Scott Wipperman

Thanks for taking the question, for doing the call. I guess first could you just update us just on the latest thinking that’s on the wireless strategy in the UK. Just in light of the reports around the O2 Hutch deal potentially facing opposition as well as prospects you might have signed a capacity deal with Hutch. And then related to that I guess has the thinking changed at all about whether or not actually owning network infrastructure would be something that would be of interest to you, if that deal gets blocked? And I have a follow-up.

Jeremy Darroch

Yes, sure. Look in terms of wireless the way we should think about it is a base plan, which is the existing agreements we’ve got in place and we’re making good progress on that as far as the launch this year and no change to that and I said we are making good progress there. The extent to which the three Hutch deal offers us certain opportunities, obviously that depends upon getting approved so we’ll just have to see what happens there. But I think we feel pretty optimistic about wireless in any scenario. We haven’t really changed our view on owning assets, I think we’re quite happy with the plans we’ve got in place that allow us to go and reach the information [right] (Ph).

Scott Wipperman

Great. And then could you maybe just comment on just the net leverage kind of evolution and just kind of the comfort with your ability to get back down to the two times target. It looks like we’re kind of bouncing around a little bit in fiscal 2016 it looks like it's predominantly due to currency translation with the euro and sterling. But if any comments you could share on that would be helpful? And then I have one other.

Andrew Griffith

Hi Scott, it's Andrew. Yes, its [indiscernible] high movement in net debt is just due to retranslation of the period end, obviously we have as we will have over time growing proportion of euro cash flows that are hedged to operate to the earnings line with quite a lot of our interest costs being in Euros. So we retranslate that at the balance sheet date, you get little bit of distortion and that’s moved the net leverage ratio around at the moment. On an average basis it was actually fallen year-on-year, so it's just a function of the currency of the balance sheet date. And there is no change to our expectation and indeed our aspiration to de-leverage over time and use that two times level.

Scott Wipperman

Perfect. And then just in terms of just update us just kind of thinking on the competitive environment in Italy, just given the recent media set with any announcement just if you could maybe just talk a little bit more what about kind of you have doing at the Sky Italia kind of how you feel about the competitive position over the coming quarters and thanks for taking all the questions.

Jeremy Darroch

Yes sure Scott, look I would say that we feel really positive about the position we're building in Italy, first of all we own the asset that we own in our market, Sky Italia is by some way the market leader, the strongest brand in Italy and has done - it's has been a tough market particularly well over the last few years. And if you look performance relative to comparable whether it would be something [Indiscernible] you could take something like about the Telco industry in Italy Sky Italia has completely outperformed.

So I think it's a really good business, very high quality business and it fits well with us. Actually Italy I would say generally probably one of the less competitive market in Europe, tend to be few players there, so relative to other the places it's no easy market certainly, but actually there is probably less competition. And then I think we got lots of opportunities now in Sky Italy, we're just starting to see it to be pleasing quarter for them.

But I think we are just starting to see [indiscernible] to come through, it’s got multiple ways we can grow and we've got great IPTV deal in place with Telecom Italia which we can grown and explain across their base of homes. We are coming out with some new proposition which is starting to get good growth from the south of Italy which has been more challenged. The basic DTH proposition is in pretty good shape in Italy.

We're also extending our free to air business, so whether it's channel TV8 which is two of our big free to air channels there. And of course that makes a lot of sense in that market. And then we're working on similar things that you see across the group, so investing in content, continuing to broaden out that content offering. I think this year Italy didn’t have the Champions League it just shows the breadth that what we offer that they have been able to really muscle through that.

And then really applying our skills and innovation to accelerate the progress eventually that they probably wouldn’t ordinarily been able to do, certainly not as quickly as a standalone basis. So that’s getting to sites Sky Q into our marker quicker, our Kids Box Sets we just launched this quarter. All of those things I think overtime talking in for example to Sky going on OTT platform only things overtime I think will allow us to grow well in Italy and we are just at the start of that journey. So of course we'll be competitive, but we're in a good place.

Scott Wipperman

Great. Thanks for all the color and for doing the call.

Operator

And next we'll hear from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne

Thank you. Jeremy, just thinking up on the Sony deal and Pan-European rights maybe you could look out for us a number of years and help us think about how Sky may take its product set throughout Europe on assuming OTT would be the way to tap that. But just any high level thoughts as to what have to happen for you to make a bigger move into new markets and sort of what kind of changes and regulations, change in business model, how are thinking about that opportunity from where you sit today?

Jeremy Darroch

Sure, look I would tell you Ben I think, much the opportunity is moving our way, the first thing to say about OTT and I think OTT is a good opportunity to all the markets in Europe in a light - infrastructure way. From the UK we started distributing OTT from 2005, so our basic technology base is very-very strong. Of course one of the things that we hope to develop in the UK as well as capability to deliver live programming in particular sport. I mean that's a whole world of difference versus just doing on-demand programming because of the peaks viewing that you get.

And just to give you some color on that I mean we run the satellite platform and something like five or six months liability and our TV platform is getting pretty close to that and I think that’s clearly quite usual on the top space. So the technology place, I think [indiscernible] some stuff we need to align in the second half of this year, but that's good and we'll standardize across our existing markets. I think then we would start to say where it will be sensible places for us to go to and there is always a choice and do you want to go with the deeper offer in a market or [Indiscernible].

If you want to go deeper, you definitely need good local content in markets in Europe, we think are well placed in Europe with our relationships with all the big content players in the Europe, we know them well. And so if we can find people to work with them that would make sense, or perhaps you might think about just rolling out some of our content across multiple territories as we've seen all these years. So I think these are the options that we're thinking about and dealing with.

And of course we get the three core markets of Italy, Germany and UK really brought together, we got the synergy plan locked in and they start to come together and start to work on more common content, which things like the Sony deal allows us to do and more common innovation which we can do ourselves. And we really secure that opportunity which is very significant and there we're starting to think about where we might go next.

So to me [indiscernible] priority was to make sure that secure and locked down the immediate opportunity in front of us and I think we're doing a good job at that. And then start to think about what might be the additional things on top and a lot of the building blocks are starting to go into place.

Benjamin Swinburne

That’s helpful. Jeremy is there anything you need or maybe multiple things you need on the regulatory side around single market or anything else to make to sort of move forward, are you comfortable today that you said [indiscernible].

Jeremy Darroch

I don’t think there is anything from a regulatory point of view that is in the way, I should say actually Ben which is alongside I think the regulatory flow is also moving that way. I mean typically the markets we operate in be quite local across Europe and that’s starting to change and of course a big theme of the EUs introducing to market. So things like providing geo blocking make it a easy for a customer who has acquired a subscription in one market to consumer throughout Europe is the place that the EU want to go, so because all of these things I think enabled business like us and to so you just say well it’s just going to be easier to go into little markets.

Benjamin Swinburne

Thank you.

Operator

And next we’ll hear from James Dix with Wedbush Securities.

James Dix

Hi guys, I have two questions, one I was wondering if you can give us some color on your AdSmart metrics like the number of clients maybe app spending and average CPM versus non-AdSmart clients? And second if you can give us some color on the macro in the markets that you do business in? Thank you.

Jeremy Darroch

Sure, I think there is two, one I think the UK is in pretty good shape actually and I think that hasn’t really changed over this year, there is ups and downs and things like consumer confidence and the household budget spends but broader I think into the good place [indiscernible] and obviously help in the UK of course because things like food inflation has been pretty low in the UK, and I think that trend is going to continue.

Italy tougher definitely, north of Italy looks very similar to Germany and the UK but still the same [indiscernible] so we thought about really developing specific offers for the south of Italy to attract more people to sign up. I think if you start to look at GDP forecasts or you see as much as I have [indiscernible] so Italy is setting organic growth buts not really getting there yet. For us that’s not a major concern because our plans in Italy are very much self help and we are going to be within the business, obviously longer term we want to see the Italian economic backdrop be a bit better.

And I think Germany is a little bit of [indiscernible] we've seen unemployment rates reducing in Germany which is a good thing, we know that obviously helps our business and I think the economic environment is generally pretty benign in Germany. It's only to say that GDP forecast has been coming back or we've been there, but [indiscernible] affect our business in the short-term. So generally I would say Germany is a pretty healthy market economically in terms of consumer spend.

So that’s the sort of color on the three, probably UK in the best shape, Germany in the business and Italy a little bit behind. And the only other thing I would say that UK is that this is [indiscernible] we haven’t really seen any affect of that and playing through our base. Occasionally people are a little bit cautious about making a long-term commitment where there is something like [indiscernible].

Andrew Griffith

Hi James good morning AdSmart is going really well actually and we continue to get excellent traction with advertisers. We’ve broaden the product that we offer this quarter again so from a 100 attributes when we launched it, there is now a 1,000 different attributes that advertisers could buy. Today we’ve had 800 different advertisers and they’ve run 85,000 campaigns, 70% of them we think are either new to TV entirely that come from print or digital or new to Sky for the first time.

There is a bit of [indiscernible] categories that are working particularly, well we see autos I think every major car manufacturer and indeed some niche ones as well have now advertised on the platform. And classic use cases either to segment the market with different models within their range deliver to different customers, or to bring perhaps a product that they wouldn’t otherwise have been able to advertise on TV.

And financials has also been a big category for us this quarter, the tax year in the UK end at the end of March. They see a lot of financial product advertised and it's been a great product for them, because they have not had a lot of choices before there is a very limited amount of financial press typically and the customers with sort of relatively high affluence. The Sony deals we get in the CPM is three to four times what we’ve get for this equivalent spot ad and that hasn’t really changed. So despite now broadening the revenue brace, broadening the range of advertisers purchasing it, we’ve been able to hold that spread, which is important. And it's also good for customers.

We’ve done a little bit of research that we’re starting to see and maybe it's a little early, but what we seeing as the channel skipping, channel hopping in ad breaks it's 50% lower amongst customers who are viewing targeted ads rather than the old untargeted flavor. So we’re very happy with it, don’t forget also w use ourselves, there is a big efficiency tool for us as a marketer trying to reach our customers. And as we think about one of the ways that we will have [indiscernible] or be able up sell mobile for example as a category, using AdSmart will be a really good way for us to be able to do that and target our base.

James Dix

Thank you.

Operator

[Operator Instructions] We will now move to the next question Allan Nichols of Morningstar. Go ahead please.

Allan Nichols

Hi thanks for taking the question. A couple of things first as your Sony deal signify any changes in Pan-European deals and particularly in sport and your churn jumped in the quarter and can say anything more about what the sustainability of that is? Thank you.

Jeremy Darroch

Sure Allan, good morning. I think the Sony deal and it comes back with a deal we extensively we did with HBO and the new deal we put in place with Showtime last quarter. I think it tells us or tells me that we're seeing an increased appetite from big producers, content provider to have one conversation across the markets that’s we're in. We are very opened to that so we can find and do more of those things I think that will just work well, because we can definitely get better grant of rights, much easier alignments across all of our markets and it works well for us and for these supplier.

I didn’t probably didn't say too much on sport yet, which is still quite different by markets, or it's more around movies and our TV programming. In churn I would just personally say I’m very comfortable where we are with churn and obviously we saw some ups and downs. In UK we rolled back from some, I thought the market from a discount point of view is running a bit hot to customers and we pulled back from that. And that in the short-term and that really means that you lose few types of customers and also takes a little while for the content just to get used to the new offset.

That's just natural and [Indiscernible] we are ahead on churn its essential within so I wouldn't lead too much into that. So Europe and UK, we very much have been focused on landing Sky Q which our new box platform, so our marketing has been - looks more about that growth and some much acquisition and marketing. And it’s up in Germany it’s a little bit high churn, because we're rolling off 24-month contracts. We have a little bit higher churn, but again that will jus work its way. So in overall terms, I think we're in good shape on churn [Indiscernible].

Allan Nichols

Great. Thanks.

Operator

And at this time there are no further questions. I'll turn the call back over to Jeremy Darroch for any closing remarks. Please go ahead.

Jeremy Darroch

Okay great everybody, thanks for joining the call this morning and just to summarize we are very pleased with the start of calendar 2016 and the strength of our operating metrics and our financial performance this quarter. I think we're in good shape to close the strongly and then have a strong first six months of the next fiscal year, but we'll talk to you along with follow-up. So thanks very much. Good-bye.

Operator

Ladies and gentlemen, this will conclude you call for today. Thank you for your participation. You may now disconnect.

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