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Sky - 'Strong start to the year'

Charles Huggins | 21 October 2015 | A A A
Sky - 'Strong start to the year'

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Sky has continued where it left off last year, delivering a strong first quarter. Revenues increased by 6% to £2.8bn and operating profit rose 10% to £375m, due to tight cost control. Sky added 134,000 new customers in Q1, up 7% on the prior year; while churn was either flat or down across all territories, demonstrating the stickiness of Sky's customer base. The shares rose by 3% in morning trading.

Divisional performance:

The integration of Sky Italia and Sky Deutschland is on track, with the group on course to meet its target of £200 million run-rate synergies by the end of the next financial year. Sky now reports under three divisions:

UK and Ireland - Revenue grew by 7% to £2,003m and operating profit was up 20% to £358m. Customer growth of 77,000 was up over 50% year on year, the highest Q1 customer growth for four years. Sky added 759,000 paid-for products, including 43,000 new TV additions and 133,000 new broadband additions, growth of 77% year on year.

Germany & Austria - Revenue was up 11% to £336 million with a loss of £8 million on the back of higher Bundesliga and Champions League costs. 94,000 new customers were added, up 2%.

Italy - Revenue fell by 4% to £454 million largely due to lower customer numbers (down 1%). Profit was down £8 million year on year to £25 million.


Highlights this quarter include record viewing of Sky Atlantic in the UK, of the Bundesliga in Germany and the X Factor in Italy. Sky continues to invest heavily in its own original content, as well as securing key rights including multi-year deals with Disney and SANZAR southern hemisphere rugby.

Jeremy Darroch, Group Chief Executive, commented:

"We have made a strong start to the year with customers responding well to the quality and breadth of our content, products and services...As these results show, we are delivering against a clear set of plans across Europe, and are well positioned for the growth opportunities ahead."

Our view

The UK economy is recovering and Sky's customers are starting to find they have a little bit more to spend. Growth initiatives such as NOW TV, their pay-as-you go service for occasional viewers, are attracting a new type of customer. Good progress is being made in developing in-house content. With a consumer mobile launch being prepared for 2016, future opportunities for cross-selling also look promising.

Profit progression over the next few years could be lumpy, as Sky seeks to absorb £630m per annum of additional Premier League rights costs. Even so, by June 2018 analysts are forecasting earnings per share (EPS) of around 72p, a 30% increase on FY15.

Sky has built a very strong brand in the UK. It is the clear market leader in Pay TV but it faces the challenge of margin pressure, as competitors like BT bid against it for key content rights. If it can raise the performance of Sky Deutschland and Sky Italia, the impact of rising sports content costs might not be felt so badly. A larger Sky could potentially be better placed to bid for new rights too.

The low level of churn is a great strength; most of last year's revenues will still be there next year and the year after, because customers can't bear the idea of switching off. There aren't that many companies in the market with a revenue base as secure as Sky's. It now has around three years to try and improve the acquired businesses, before it has to go into battle for another set of Premiership rights.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.