SKY Network Television Limited (SKT.NZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SKY Network Television Limited FY '25 Annual Results. [Operator Instructions] I would now like to hand the conference over to Ms. Sophie Moloney, Chief Executive Officer. Please go ahead.

[Foreign Language] Hello, everyone, and welcome to Sky's 2025 Results Briefing. I'm Sophie Moloney, your Chief Executive, and I'm pleased to be joined by Andrew Hirst, Sky's Interim Chief Financial Officer. I'll begin with an overview of this year's performance before taking you through each of the key business areas. Andrew will then provide more detail on the numbers before I take you through the outlook for the year ahead, including briefly touching on the recent acquisition, given with just a few weeks post completion. We'll then hand back to the operator to open the line to your questions. We're pleased to have delivered results within the updated guidance given at the half year in what's been a demanding financial year that included the delivery of a challenging migration to a new satellite sit against the backdrop of a tough economic environment. Having completed the satellite migration during H2, not long thereafter, we announced the exciting acquisition of Discovery New Zealand, now called Sky Free. And this morning, after many much negotiations and hard work, we've announced the renewal of the New Zealand rugby rights from 2026 to 2030. It's [indiscernible] to have secured this important partnership with an exciting suite of rugby content for our customers and through an agreement that makes economic sense for our business. With each of these key strategic outcomes acknowledged, it's been a rightly important 6 months of Sky, and these achievements are a testament to the dedication of the Sky's team with a strong focus on execution. So to the highlights. And continuing from the half year, our results include a number of one-off impacts that are largely noncash or cash neutral. We've adjusted for these items to show the underlying performance of the business. Particular call-outs include the disciplined cost control that's evident and EBITDA and the ongoing ability to generate strong cash flow. Pet supported another step up in the dividend with 15.8% growth year-on-year. And turning to our report [indiscernible] in the second year of the 3-year target. In 2 categories, our target for CapEx intensity and employee engagement, the results are already lined back with our FY '26 ambition. The critical customer NPS metric has been improving every month since the completion of the satellite migration as our teams got back to more reasonable levels of demand. The revenue target has been outside our graph, and that's put pressure on our EBITDA margin. Despite the revenue challenges, we're still on track to deliver the revenue-linked target for programming costs and CapEx. And perhaps most importantly, for our owners on the call, we're firmly on track to deliver on the promised dividend of $0.30 per share in FY '26. So to revenue, and while our key growth engines of Sky now broadband and advertising, we're firing, adding over $22 million this year, it wasn't sufficient to counter the decline in Sky Box. Direct satellite migration impacts to Sky Box have been adjusted. However, additional impacts such as customer churn and delays to planned revenue-generating initiatives primarily across Sky Box and advertising remain unaddressed. The combined effect of which is at least $5 million. That said, growth in newer revenue streams has increased revenue diversity with Sky Box making up 62%, down from 78% 5 years ago and 68%, 2 years ago. The EBITDA bridge on Slide 6 shows how despite the revenue headwinds, we were able to manage our costs to soften the impact on earnings. As disciplined reduced expenses by 0.8% and including savings of $15.6 million across programming and other cost management initiatives. And we've continued to reinvest growth, that's largely variable costs from adding broadband and streaming customers along with investing to grow digital advertising. We have been clear that Sky's multi-platform approach is a key competitive strength. By combining 2 highly aligned and complementary businesses, pursuant to our recent strategic acquisition, that strength has multiplied. Sky is now a significant player in the free [indiscernible] space through established and much loved brands. And with a boost to Sky's position in digital through the fast-growing ThreeNow, BVOD platform, which was, until recently, the 1 missing product from our portfolio. Importantly, this is without incurring the significant development cost of building a platform and audience from scratch. And it is to extend our audience reach and brings a younger, more diverse profile that's valued by right partners and advertisers and will also play a role in our revenue ambitions adding a low-cost pass to paid through subscription services. Now comes close to offering the quality and depth of year-round local and international sports that's available on Sky. It's decision on where we invest is tested against our unmatched viewership data. That data also shows an watch a variety of sports, minimizing Sky's exposure and increasing the value of the bundle, which is secured through long-term agreements and hits by content breadth and staggered renewals. As examples, this year, we've added to the bundle through 6-year partnerships with New Zealand Cricket and the U.S. PDA Golf and an 8-year deal with Six Nations Rugby. We know what we should hold exclusively or co-exclusively and we've also made choices on what not to hold. Both our content bundle and data are core strategic assets that we intend to continue enhancing and strengthening. It's not all about sport with entertainment also playing a vital role to keep customers engaged weekend, week out. We have a strong lineup and entertainment from multiple global and local partners and with Sky Originals production. That said, we've been working on refreshed entertainment strategy that creates greater flexibility to secure and curate content that resonates. We're reducing our reliance on output deals and pass-through channels to move towards the fresh, more responsive approach to viewership trends. We mentioned in the acquisition presentation, the content coming on to our balance sheet at no cost with providing the runway to execute this change and to capture content synergies. This is predominantly in the entertainment content space. And you can see from the chart is also delivering highly complementary genre strengths to enhance their content position. Moving then to the operational performance of the business. And starting on Slide 11 with Sky Box and Pod. The encouraging news is that in the context of the pressure on consumer wallet, the migration impact of waking up the Sky Box customer base and consequent service interruptions resulting in discounts back in line with FY '23, coupled with our reduced marketing spend, activations were stable at 21,000 and disconnections improved by 8.5%. Churn was lower and even more so in earlier 10-year group. With more good news and validation of our new product strategy, that churn among new device customers is less than half of that for the Classic Sky Box. Importantly, it's 62% lower in the 5-year plus growth that makes up 84% of our base. And that leads nicely to a key headline at 167,000 households are now part of the new Sky experience. Aside from the lower churn, this is important on many levels, given that these are digital products thereby unlocking access to video-on-demand content that increases value for customers has a lower cost to serve and with the pathway to add revenue from digital ad replacement. That said, revenue did soften, largely due to a lower opening customer number and average base. That was somewhat offset by ARPU growth from sports price increases and higher penetration of this pack to 72.5% from 71% last year. Given the clear benefits of the new Sky experience, there will be no lease-up by my team and continuing to enhance viewing experience and helping our customers make the switch from satellite only with our home broadband permits. Turning to Slide 13. Sky Sport Now continues to fire. In the second half, we've reconfigured the subscription model by removing weekly passes to encourage a step-up to monthly subscriptions. It's been a positive move with good growth in monthly subscribers. That's evident in the 20% increase in recurring customers, which is how we will report from this point. Understanding some customers' preference for more flexibility as we continue to test and learn with our digital offers, we laid the trial a day pass option at $29.99, capture transactional revenues, and that too has been a superb success. Both changes show up in the revenue growth of 16% for the year. That includes a 19% increase in H2 compared to the second half of last year, which included several World Cup. NEON performance has been steady within the period, but not where we want it to be. What is particularly pleasing is the increase in engagement and what clear, the launch of New Zealand's first SVOD [indiscernible] year 18 months ago is working as planned, offering choice at a lower price point and adding incremental digital revenue that shows up in the advertising line. This year now sits at 23% of the NEON base and has been an important part of our strategy through a tough trading period. Advertising has been going from strength to strength and is soon to be boosted further as we scale faster in both linear and digital. Revenue grew by 7% as we started to unlock new digital inventory, grow partnerships had a full year contribution from NEON and again, increased year and linear this time by 11%. In October, we launched digital [indiscernible] on Sky Sport Now, which enables more personalized ad delivery and live sport and gas advertising customers the opportunity for more precise targeting. Unlocking more products for digital ad replacement is firmly on our road map with some of that activity having moved to FY '26 due to satellite migration. Through the Sky Free acquisition, we've secured a meaningful share of the important linear market and a strong stake in the fast-growing digital ad space. We've included a bit more detail on the TV advertising market to give some color on recent trends in the linear and digital space. Since 2019, while it's true that linear TV decline has been running at 5.8% CAGR since 2020, digital video growth is at 17% CAGR with the TV segment we play in running at 19%. Achieving scale and at the same time, acquiring the ThreeNow BVOD platform means we're well positioned to manage any change in mix. There are many factors at play that the size of the prize we're going after is meaningful, and we have proven capability and exceptional content for us to go after this opportunity. The results for Commercial was solid and a testament to the value-add Sky offers for its customers in a competitive environment and the hard work and innovation of this team. As examples, our premium accommodation solution is now well established, and we've added the new revenue stream from the Samsung reseller partnership. The next opportunity comes to the launch of the business position of the new Sky Box and Pod in the first half of FY '26. This enables digital viewing to access to video-on-demand and third-party it and these premises. Sky Broadband has built real scale in the last year, moving past 50,000 customers. We've had growth across all plans, but as with other providers, -- we've seen a shift in the mix following the doubling of plan space by network provider Chorus. That's lowered average revenues, but margins remain healthy, including cost efficiencies as we've achieved scale. And with that, I'll hand over to Andrew, who will take you through the numbers.

Thanks, Sophie, and good morning, everyone. Starting with the headline results, as Sophie has already mentioned, all metrics have been delivered within guidance. As you will see when I take you through the next slide, there are a number of one-off adjustments impacting the results. many of which were referenced at the half year. So in terms of the underlying result, revenue is at the lower end of guidance, which reflects the continued tough economic climate [indiscernible] delays in a number of planned initiatives due to the need to focus on satellite migration. EBITDA is in the middle of guidance, reflecting this revenue pressure, but partly offset by a strong focus on our cost base and response. Net profit after tax is down on last year as it was impacted by higher depreciation, reflecting the recent period of outlaid CapEx and new products. And in terms of cash flow, we had another strong year of cash generation. with free cash flow of $24.8 million, which was 4.6% higher than the prior year, and on an adjusted basis was $36.7 million, just slightly down on last year. Digging into the detail on the next slide, I'll walk you through the one-off items that we're adjusting for. Firstly, for revenue and other income, we had $4.4 million of revenue impacts from satellite migration made up of $1.5 million of discounts and credits provided to customers who were impacted by service interruptions and $2.9 million due to a 2-month delay to the planned sports price increase on Sky Box. Offsetting this, we had $4.9 million of other income from an accounting adjustment to the lease term for our previous satellite lease. For operating expenses, as reported at the half year, programming costs included $18.3 million noncash costs for accelerated content amortization following the change we made for NEON content. Operating expenses also included $1.4 million of content impairment $3.4 million of transformation costs, $2.3 million of transaction costs relating to the acquisition of Sky Free and $2.9 million of costs related to satellite migration. And finally, we had $13.2 million of satellite migration CapEx, which was well within the $10 million to $20 million range we guided to. Moving to the next slide, where we have provided a rep on the direct impact of the migration project. As we said from the outset and well before we become aware of the need to accelerate, we have commercial agreements in place with [indiscernible] to support us with the cost of migration, meaning we always expect that the project would be largely cash neutral by the end of FY '26. Despite the increased costs and revenue impacts as a result of the accelerated time frame and unexpected service issues, that was always still our expectation. On this slide, we've shown the impacts on revenue, OpEx and CapEx as well as the financial support we are receiving from Optus to help fund these impacts. To date, we've spent $17.7 million on CapEx with a further $2 million to $4 million expected in FY '26 as we complete a dual LNB rollout. The revenue and incremental cost impacts, all of which have been in FY '25 have amounted to $7.3 million bringing the total migration costs over the 3 years to $27 million to $29 million. So far, we have received $10.2 million of CapEx support from Optus, which has come through our leasing cash flows, with a further $6.1 million to come in FY '26. In addition, due to the acceleration in service issues with the old satellite, Optus agreed it will compensate us for up to $10 million for our incremental cost of revenue impacts. We have concluded a claim process with Optus and will receive $8.2 million of compensation, which will come through as other income in FY '26. We will exclude this from our underlying results in the same way that we have excluded the costs and revenue impacts in FY '25. The final net impact will depend on the level of CapEx spend in FY '26. But as you can see, the migration has been largely cash neutral to Sky. Turning to the next slide on operating costs, where you will see the benefit of our cost discipline in the face of challenging revenue year. On an adjusted basis, expenses were down $5 million year-on-year. starting with programming costs, which reduced by $7 million. Net savings has been achieved through smart and sometimes tough choices on content renewals and acquisition in all cases driven by our data on what our customers value. We have one-off events, both this year and last. This year, we had the Paris Olympics and All Blacks Northern Tour. And last year, we had the World Cup of FIFA Women's, ICC men's, Netball and Men's Rugby. Subscriber-related costs reduced by $10 million, a 12% saving that was across areas like marketing, people cost savings from changes made during the year and efficiencies from outsourced partners and streamlining operations. Forecast and infrastructure is the only area where costs increased with the majority of the $14 million uplift related to the cost of growth in Sky Broadband as well as a smaller increase due to growth in our streaming products. And finally, in the other cost category, reductions included lower consultancy and people costs, which more than offset continued investment in our ad sales business. Turning to Slide 23, looking at CapEx. Adjusted CapEx, which excludes the $13.2 million of satellite migration spend has returned to our target range of 7% to 9% of revenue. It's down 17% year-on-year. reflecting a return to normal after a 2-year period of accelerated investment to build inventory in new customer products. While the product rollout continues, our investment is now at run rate levels. We have continued to direct over half our CapEx spend towards growth. This includes investment in boxes, pods and broadband routers, costs associated with installations for newly acquired customers and the continued rollout of developments such as IP [indiscernible] and digital, ad tech. The enhanced and maintained category, which has remained fairly stable for the last few years, included platform, digital and data focus [indiscernible] and transmission equipment and system upgrades. Turning now to Slide 24 on cash flow. It's pleasing to report that we've again had a strong cash flow year, with cash flow of operations of $120 million. albeit this is lower than last year due to working capital movements and the one-off costs in satellite migration. CapEx was $4 million lower than last year despite including the $13 million of satellite migration spend as we move past the accelerated investment phase in new products over recent years. Lease costs were $9 million lower, largely because of the $9.5 million of Optus CapEx rebates that I talked about earlier. Total of $30 million was distributed to shareholders by way of dividends. That's a 21% increase year-on-year. And finally, we closed FY '25 with $32 million of cash on hand and an undrawn bank facility of $100 million. Moving from cash flow to capital management on Slide 25 and starting with dividends, our adjusted free cash flow available for distributions was $36.7 million. This is after adjusting for the cash impact of one-off items and net of the offsetting benefit from the Optus CapEx rebates. The Board has recommended a final dividend for FY '25 of [ $0.135 ] per share, bringing the total for the year to $0.22 per share, which equates to 82.5% of the adjusted free cash flow. And as a reminder, dividends are fully imputed. With regards to capital management activity, as you know, our most recent buyback program was paused throughout the year due to the ongoing NZ rugby negotiations and the program closed on the 31st of March. For now, the Board has decided to pause for further capital management options as we prioritize the integration of Sky Free. This pause will be reviewed periodically as we get further into the integration and synergy realization process. And just on Sky free, on the next slide, I'll give you a quick reminder of the FY '26 expectations. The chart here should be familiar as they were included in our completion information on the first of August. On the left, you can see the pro forma underlying free cash flow impact for FY '26, which we expect to be positive. On the right, you can see how we get to the $10 million of incremental EBITDA on a group basis by the end of FY '28 through executing on identified synergies. A few other aspects to note with regards to Sky Freen in FY '26, we expect an 11-month gross revenue contribution of approximately $85 million from linear and digital advertising, including revenue share arrangements with WBD. CapEx is expected to be $3 million to $4 million. And we've assumed net integration costs over FY '26 and '27 of $6.5 million, which is net of a contribution from WBD. We will commence the acquisition accounting group shortly, this will have an impact on the FY '26 P&L as it determines the fair value of assets acquired, such as content and therefore, impact things like amortization expense, but it has no impact on cash flow. We expect to provide a further update on Sky free at the half year, assuming the acquisition accounting work is completed by then. I do note that we expect it to result in a one-off bargain purchase gain in FY '26. And finally, from an integration and operational perspective, we've appointed an experienced Chief Transition Officer and put in place an integration governance framework, and we have a 12-month transitional service arrangement in place with WBD, and for the most part, we are leaving the 2 businesses to run largely independently for the first 2 to 3 months before the integration work really kicks off. And on that note, that's all for me. I will now hand you back to Sophie to cover off the outlook and FY '26 guidance.

Thanks, Andrew. Great job. Turning to Slide 28 and having completed the acquisition of Sky Free plus 3 short weeks ago, our guidance at this time is on a stand-alone Sky basis. Our revenue guidance reflects the ongoing economic challenges we expect to continue for at least the first half. FY '26 concludes the first 6 months of the new, New Zealand rugby agreement, albeit the first year reduction will be more muted as a portion of the final payments on the existing deal flow through to FY '26. And while we'll continue to be disciplined in our cost management, we will also reinvest in marketing, customer experience and people after a challenging FY '25 and to lay the groundwork for acceleration from FY '27. [indiscernible] sees EBITDA guidance within a range of $142 million to $162 million, excluding one-off transaction and net integration costs. As noticed, we are no longer guiding on NPAT as is not considered a meaningful metric for market valuation purposes. CapEx guidance of $60 million to $70 million is in line with our 7% to 9% of revenue target and excludes satellite migration spend of between $2 million to $4 million. And finally, I take great pleasure in confirming our dividend guidance of at least $0.30 per share, which reflects the target we set back in 2023 to double the dividend. This excludes one-off items in line with our policy, and at $0.30 a would deliver an increase of 36% uplift on FY '25. On Slide 29, as a reminder of our purpose. We're privileged to share stories share possibilities and to share joy. And our ambition is to do this in a way that makes Sky New Zealand's most engaging and essential media company, and our strategic pathways are key to creating this value. Importantly, especially with the Sky Free acquisition is our enduring to be a responsible and sustainably profitable New Zealand-focused business. In connection with our strategic pathways, we'll continue our focus on the priorities we've progressed in FY '25 with crew engagement and new Sky experience, content engagement and advertising, each playing a crucial role in our future success. At the same time, successfully integrating Sky free and optimizing the benefits that the acquisition presents across both businesses is a key priority. I can tell you 3 weeks in, and we're hugely excited at the possibilities this unique opportunity brings. That said, I can assure you we'll be appropriately focused, so not to lose sight of the existing opportunities we have in front of us within both businesses. Achieving on both fronts is the bottom line for '18. And in this way, we'll be setting the scene to accelerate our growth from FY '27. And with that, I'll now hand back to the operator, and we look forward to your questions. Thank you.

[Operator Instructions] Your first question today comes from Rob Morrison with Craigs.

Congratulations on securing the rugby. First question. My pleasure. So first question on the payout ratio. So you've given some good color on what you expect for FY '26, and so if I assume the midpoint of that range, it does look like if you pay the $0.30 per share dividend, it will be at the top of your payout ratio. So with the Rugby benefit flowing through in would you expect to pay the dividend out something closer to the midpoint or maybe lower end of the payout range then?

Thanks, Rob. You're right, in terms of the payout ratio FY '26 in terms of the way that we've guided the market, we haven't actually got to '27 as yet. So that will be part of the conversation. But yes, overall, we're always looking to drive better margin in the business. So I won't be able to confirm that right now, but we look forward to doing so in due course.

No worries. So given again the good data you've detail you've given us, we can work out what the programming costs are your expectation for them in FY '26. And so it looks like about $245 million at the midpoint, it's down quite a lot, $22 million. What's driving that if the rugby isn't a significant input

The question is what's driving the reduction in '26, is that your question?

Yes, correct. You have the $22 million programming cost guide reduction?

Yes. So there's obviously, as I think we mentioned, we had one-offs in '24 and '25. There's a little less of those in '26. So in particular, in '25, we had the Olympics, which was a reasonably big number Yes.

And also, we have -- as we talked about, we've been very focused right across the portfolio and looking at our entertainment spend as well, which we have -- which has driven through the savings there.

Would those 2 together be, say, 75%, I guess, the majority of that step down in cost?

Big chunk of it, yes.

Your next question comes from Arie Dekker with Jarden.

I just start with how trading is going for the first, I mean, almost 2 months of '26, -- what are you sort of seeing is the same sort of rate of momentum and Sky Box customers? Or is it different?

Look, we're -- the first month has gone well. We're obviously in peak sports, Arie, as you'll appreciate. But we are seeing some ongoing equates from turn level in terms of our customers calling in to us. So we're really mindful of that, and that's why we've guided the market as we have. We're really very focused on getting back to those more reasonable levels of churn, which [indiscernible] come back from last year, thankfully. And off the back of the satellite migration being completed. And so seeing more customers move on to our new Sky experience, too. We see improved churn if we move customers on to that product. So there's a lot to look forward to in this financial year, but we are being really mindful of the economic climate and [indiscernible] customers through it. So the month of July, we're in a good place. But yes, we're really mindful of the ongoing context.

Yes. And then just so I make sure I'm interpreting this correctly in terms of the payments to NZ Rugby and so not quite getting the full benefit, or a full half year benefit the reduced right there. So are you essentially making an exit payment under the old deal that will flow through in 1 January and that's offsetting what would otherwise just have been what we would have expected of 50% of the benefit in '26 and 50% in '27.

Yes, broadly, I wouldn't characterize it as a new series of exit. It was just in the last year the deal. There was [indiscernible] you've also got some, the calendar year versus financial year. So broadly, you're correct, Arie, terms of your statement.

Yes. And then I guess, just in terms of -- and I mean, I may be wrong on this, but you've got a Sky shareholder vote on the Rugby rights, which be very surprised if they wanted the upheaval of not having them. But I guess the question is what information will you be providing to shareholders to help inform your decision on whether to vote for the rights deal?

Yes. So look, spot on, we obviously work with in the NZ [indiscernible] Co, and our corporate lawyers to make sure we're giving all of the relevant information [indiscernible] company act, which we will be doing. I think the critical container for you to reference is the 47% to 49% of revenue. And I think that, that toggling to revenue is super important, right, because as revenue isn't where we want it to be. We need to make sure we're managing that cost line. And so that's a vitally important part of that messaging. And no doubt you'll have interest in the notice of the meeting comes out for ASM. But we're going to be providing shareholders with the information we think they need and look forward to a positive outcome.

Just on Discovery, I don't want to read too much into it because I guess it's a little bit of the margins. But I mean, I think you talked about full year revenue of $95 million. I mean 11 months, $85 million, is this the first of what is a small downgrade in the revenue outlook for Discovery, because 11/12 of $95 million is a bit more than $85 million? Or are you just rounding it?

It's literally rounding. Nothing more, nothing less. So.

Yes, it's 3 months downgrade. And I think it is really important to understand we are -- we will look at the half year to do an update, obviously, but we're obviously guiding Sky as a complete stand-alone core business. So yes, certainly, no downgrades than given, Arie.

Okay. And then just on CapEx, $60 million to $70 million. I guess I was just a little bit surprised that like the top end of the range, $70 million what are the things that are going to swing up for you in terms of up to that top end of the range just to get a sense of how cautious you're being on that guidance?

I think look, it's obviously we don't have the issues we have issues. We don't have the spend we had in the last couple of years, obviously, on the rollout of new products, but we're still working through quite a significant CapEx load. So I appreciate that that's a range that's sort of towards the top end of the 7% to 9%, but we're pretty comfortable forward in that and rounding. But I don't think we are at the risk of pulling outside that range.

Yes. And then last question, and I recognize that this was covered off at the half year as well. But can you just give a little bit more color on the accelerated content amortization $18 million, obviously, $18 million, $19 million isn't insignificant. The reference is there and the notes are super clear on just what's going on there.

We provided quite a bit of detail, I think you find in the annual report around that and also in the half year, but it also relates to a shift in the way we're doing the from an old policy to 1 that's based on viewership, which has a more accelerated program. So yes, we're still spreading the [indiscernible] over an 18-month period, but it's more loaded to the front end. So there's quite a bit of detail in the Annual Report around that.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

Thank you. So I guess we have covered some of the programming costs, but sorry to come back to Neon. I just wanted to clarify if you look on a sort of like-for-like basis, part of the reduced content costs this year or programming costs, does that relate to the accelerated amortization? And maybe related to that, should we expect a difference between cash costs and amortization then if you have now sort of taken a noncash amortization this year. I assume the total cash paid is still going to be the total cash paid even though you treated as noncash and nonrecurring for this year?

Yes. There's not a big swing between reporting and cash. And I think the numbers we're talking about in terms of the reductions are all on an underlying basis, so excluding that one-off impact. So the number that we were talking about earlier is excluding that $18.3 million charge.