Sky has reported an operating profit of £679 million (€632m) for its half-year, down 9 per cent as a result of the increase in Premier League costs (up £314 million year on year,) which was “substantially” offset by its strong revenue growth and “excellent” progress in operating efficiency.
Jeremy Darroch, Group Chief Executive, commented: “We have delivered a strong first half performance across the group, continue to make significant progress against our strategy and remain on track for the full year.
Across the half, we have continued to drive customer and product growth in all our markets, adding over 500,000 new customers – faster growth than last year – and selling two million products. That means, in the past three years and since the Skys have come together, we’ve now added 2.5 million customers and total products are up almost 25 per cent. This has resulted in sector-leading revenue growth of 6 per cent which we’ve achieved despite some pressure on discretionary consumer spending across Europe and a decline in the UK advertising market.
In a year in which we are absorbing significantly higher programming costs, as a result of the step up in Premier League costs, our financial performance has been good. To put this into perspective, our first half operating profit of £679 million is down £65 million on the prior year despite absorbing an additional £314 million of Premier League costs, highlighting the strength of our underlying financial performance. This has been supported by the efficiency of our operating model and the achievement of our £200 million synergy target six months early.
We remain confident in our strategic plans and have made significant progress against them. We’ve launched Sky Mobile in the UK, delivered further enhancements to the customer experience across the group and extended our reach in Europe’s largest TV market with the launch of Sky Sports News free-to-air and Sky 1 in Germany and Austria. Whilst churn in the UK has remained higher than planned, we have a full set of actions to address this, including replicating the success of our Italian loyalty programme which has resulted in reduced churn.
We enter 2017 focused on giving more quality, choice and value to our customers. In the UK we plan to launch our Sky TV service without the need for a satellite dish for the first time, at the same time as pushing ahead in the £15 billion mobile market. We are continuing to build our European TV production studio with 100 original series going into production this year. And we will broaden our businesses further with the launch of Sky Store in Germany and Austria and the full roll-out of our targeted advertising service, Sky Adsmart, in Italy and Ireland.
Whilst we expect the backdrop in our territories to remain uncertain, we are on track as we enter the second half of the financial year and we remain focused on delivering our clear strategy for growth.”
In the UK and Ireland, Sky added 205,000 new customers in the half, driven by a strong Christmas trading period, with a further 1.2 million products sold. This included 124,000 new TV products, taking its total TV customer base to over 11.4 million. In addition, it added 140,000 new broadband products meaning that over six million broadband households across the UK and Ireland choose Sky to provide their broadband service.
Performance in Germany and Austria was described as “strong”, delivering revenue growth of 10 per cent to £907 million, while recording an operating loss of £11 million versus a loss of £41 million in the prior year. Across the half, it added 231,000 new customers, up 8 per cent year on year, with total product growth of 486,000. Churn of 10.6 per cent was up year on year with more customers coming to an end of their 24-month contracts versus a year ago.
In a challenging consumer environment, Sky has grown its customer base in Italy for five quarters in a row now and operating profits have reached their highest H1 level for five years.
Revenue was up 9 per cent to £1.236 billion, with like-for-like growth of 4 per cent excluding the sale of the Rio Olympic rights in the first quarter. Operating profits were up £41 million year on year to £70 million. This was driven by total customer growth of 67,000.
Ted Hall, Senior Principal Analyst, IHS Technology, said that Sky delivered a characteristically impressive” set of results for the first six month of its financial year – but with some notable caveats. Despite adding 500,000 customers across Europe and increasing revenue for the period by £692 million to £6.41 billion, the rise in Premier League TV rights costs in the UK lowered operating profits, by 9 per cent across the group and 18 per cent in the UK and Ireland, he notes.
“Keeping content costs down is a priority for Sky, highlighted by its carriage-fee dispute with long-time channel partner Discovery, which could see key factual channels and Eurosport disappear from Sky TV and Now TV on 1 February. Discovery has more to lose than Sky in this scenario, risking a big hit to its UK advertising revenues, and Sky will not want to show weakness to its other content partners – also seeking more favourable carriage deals – by caving to Discovery’s demands.
Customer losses – which could be accelerated by the loss of some key channels – are a concern for Sky, though, with annualised churn remaining high, at 11.6 oer cent. This is partly attributable to broadband customers switching to alternative providers, but also of a shifting TV base – though it is attracting new customers with online service, Sky’s satellite business is under pressure. One response to this is the planned launch of a pure-online version of the flagship Sky Q offering in 2018 – though the size of the niche this service will appeal to is questionable,” he suggests.