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

Thank you for standing by, and welcome to the SKY Network Television Limited Investor Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Martin Stewart, Chief Executive. Please go ahead.

Thank you very much. Good morning, everyone. I'd like to also introduce Blair Woodbury, our Chief Financial Officer, who is with me; and Sophie Moloney, our Chief Commercial Officer. I'm going to make a few remarks, covering broadly 3 topics. I'm going to talk about Sky during the current COVID-19 phase and where we're tracking today; secondly, talk about the purpose of the capital raise; thirdly, to talk about our refreshed growth strategy. We can, of course, dive into any slides or topics that you want us to, and there will be time for a Q&A after I finish speaking. So starting with Sky during the current COVID-19 period, where are we today? What's been happening? So we were tracking well pre-COVID. We had strong growth in our streaming services. We were seeing reduced churn in our satellite customers, and we had clear evidence that our strategy that we embarked on last year was gaining good traction. Now when the COVID crisis hit, we were well prepared as a business, and we were quickly able to transition to operating under the Level 4 and then Level 3 restrictions. We were designated as an essential service, and we had just under 50 staff on-site and the balance of our team, over 1,000 people, working successfully from remote locations. Now we believe that we delivered exceptionally well to our customers during this time. We did see good increases in our entertainment viewership across all of our platforms. And we saw specific increases in both our NEON and Lightbox subscribers. Now those increases mean that we actually managed to achieve our 1 million target that we announced in February. We actually got there by April, a little bit ahead of the 2021 expected trajectory. Obviously, during the COVID period, there has been no live sport. But our strong lineup of entertainment, news and our nonlive sports content has served customers well. We also offered a range of complementary upgrades for Sky Sport customers across entertainment, movies on pay-per-view packages. And that helped us minimize our net sports downgrades to only 8% of the sports base. Now there's been a couple of other interesting things that have sort of proven themselves out in the last few months. Obviously, the first one is there's a big appetite for streaming. It's really developed well in this period. We now have more than 40% of our total subscribers of around 1 million take our service via streaming. Secondly, it has actually been complementary to satellite rather than substitutional. So satellite churn has remained in line with pre-COVID levels. We also see that there's clear power in the bundle across -- especially across sports and entertainment where we've managed to keep our customers with the entertainment offering, even in the absence of live sports. Now obviously, pure sports streamers fell, but we did have the ability to hold up customers with an entertainment bundle, especially in DTH. Now we've also managed to change the way in which we operate extremely quickly. We've accelerated a body of work that we had planned for the whole of 2020 pretty much into the last 8 weeks, and it allowed us to prove both to ourselves and to our customers that we can do things in a different and more effective way. Now during this period, we've obviously been closely managing our cash flows. And at the 30th of April, the impact of a sort of reduced net working capital and reduced operational costs saw our net debt managed to reduce to $159 million. Now we recognize that while in the short term, we fared better than expected, if disruption does continue for an extended period, then outcomes are likely to deteriorate further. But for the financial year '20, we're currently expecting EBITDA to be in the range of $155 million to $175 million and net profit after tax to be in the range of $20 million to $25 million. So what's happening now as we enter Level 2? Well, obviously, we're delighted that some live sport is going to return in the coming weeks. It is going to be a gradual return, but it will be great to have some activity for our customers. And we're talking to all of our sports partners about what that means and about how we can return the games and the actions to our screens. Now as we move through Level 2 and hopefully into Level 1, we're going to take a -- we've been taking a comprehensive approach to reposition our business and to strengthen our balance sheet to deliver on our growth strategy. And that immediate responses involved 3 things. Firstly, the operational cost reduction and cash preservation efforts now mean that we can expect OpEx and CapEx savings of around $80 million to $95 million in financial year '21 against what we previously talked about in February and in August last year. And Blair is going to obviously take you through some of those details in due course. Secondly, we secured bank group support for our business plan. There will be no step down. The limit -- the $200 million limit will be maintained through an extended period now to the 31st of July 2023, and we have negotiated enhanced covenant flexibility. Now these amendments were secured conditional on the equity raising, but the revised pricing does provide significant interest savings relative to Sky's bonds. And of course, thirdly, launching this capital raise to give us sufficient balance sheet flexibility and liquidity to fully execute on our exciting growth plans. Now just to deal specifically with the purpose of sort of the use of funds as it were of the capital raise. Now we did signal in the first half -- at the half year results in February, the Board was considering what the appropriate capital structure would need to be in order to align with our strategic objectives. And I say, once we've -- while we've fared pretty well in the immediate short term, we are in an extended period of uncertainty around the full return of full live sport with crowds, et cetera. Obviously, we are yet to see what the full economic impact of the crisis will be. And we decided that it's very appropriate for us to be prudent to raise money in this fashion. We will use the proceeds to pay down debt, obviously, including the $100 million bond that matures in March 2021. And we will be left with sufficient liquidity to withstand any further near-term headwinds that COVID could continue to present and of course, to execute on our growth ambitions. So turning lastly to what those growth ambitions are. We spent 2019 setting up a platform for growth. As always, our goal is to connect our customers with the sport and entertainment content that they love and enjoy in ways that work for them, and that clearly means looking at businesses beyond our traditional satellite offer. Our transformation into that -- into a modern digital consumer-led multimedia business will involve, firstly, our satellite business because that is still the core of our business, very loyal customers who have stuck with us for a long time. But we will also need to continue to grow streaming, building on our current success. We will continue to improve customer experience, move to a lower-cost operating model, and we're looking forward to being able to unveil our new digital platform, particularly the first evidence of our changes will be a merged NEON and Lightbox offering, which we'll have in the market with a refreshed look, feel, greater functionality, greater content by mid-July. Thirdly, we will seek to grow our number of customer relationships with a fixed and in due course, mobile broadband offer. And lastly or fourthly, we'll continue to develop and grow RugbyPass because we believe it has a potential to deliver meaningful international revenue streams. Now the combination of our existing businesses and the new businesses of mobile and broadband and RugbyPass will give us a substantial and stable group of businesses with an increased set of options for growth. Now that we do have, obviously, a mix of types of businesses in there with some more mature than others, but we do think that overall, they are closely aligned as segments. They're complementary. They leverage content rights and core skills, which are applicable across all 4. Now we already do have a significant customer base at 1 million customer relationships, but we think there's still plenty of opportunity for growth in a significant portion of our business, particularly in streaming, mobile and fixed broadband and of course, RugbyPass. Now we believe that the market sizes across all 4 of these businesses are meaningful. If you just take the New Zealand television market alone, it's worth $1.4 billion annually. Now I'm very pleased that we have been able to withstand this crisis period. It's a testament to the talented executive team that we've put together. We've worked extremely hard in this period on behalf of our customers, shareholders, all of our stakeholder partners, and we're delighted that we're able to successfully execute on this capital raise as it secures the ability for the company to execute on all of our growth plans. And I will leave it there and hand back to Izzy to open the Q&A session. Thank you.

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Just on the operating cost savings that you've outlined. Can you just sort of provide a bit of visibility on what you've sort of assumed on the programming cost front within that? Where that sort of sits in there with regards to rights? So seems to be $45 million to $55 million of OpEx savings. Do the sports rights cost savings sit within that? Do they?

Arie, the deals that we have with all of our sports partners leave open the need or the requirement for a negotiation in such a situation, and that's the process that we're going through with them. Those cost savings that are in there are not including anything that we would seek to negotiate those operational costs and capital expenditure costs only.

Okay. So with -- in terms of your guidance, though, the guidance is predicated, and that would be in that potential further pull the guidance predicated on achieving some cost savings with rights holders.

Yes. But we haven't broken anything out. And obviously, that's not something that we want to talk about publicly.

Yes. Okay. Over, I guess, and that's sort of understandable, I mean, you're in the most sort of acute sort of period, hopefully, of disruption and presumably still in negotiations. Can you give some sort of time frame over when you think you'll have visibility on what savings you will realize from the disruption we've had to date and a basis for getting that proportionate relief that you're looking forward as you go through FY '21? What sort of time frames are we talking about?

Well, I don't think that we'll be actually able to give much in the way of detailed guidance until our annual results presentation.

Yes. No. I'm not looking for guidance, but what you're sort of saying is that by the time you get to your results presentation, you would hope to have concluded those negotiations by that point.

That would certainly be an aim. Obviously, it depends on how much sport actually gets up and running at that point.

Yes. But there's also -- I mean do you expect to get any relief for the sport you've already missed out on?

Well, yes, it is a negotiation at the end of the day. And I think that we are best just having those negotiations privately with our partners and trying to reach an equitable agreement.

Okay. Just on the CapEx savings. Can you talk to what you're going to sort of suspend or stop in terms of stuff that's been taken permanently out of the CapEx bucket? And then just where the remaining CapEx is being directed through this guidance period?

Yes. Mainly, the money that we're spending is on our new products and on our customer-facing applications. That's our focus. We have spent about $5 million on building our broadband infrastructure that's necessary. And we've spent about another $10 million on developing our new streaming platform. Those projects will continue through to their soon-to-be fruition. So that money that we're still spending is focused on those 2 areas, plus, obviously, necessary replacement sort of maintenance CapEx, systems CapEx that's needed for the core satellite business. A lot of the savings that we have managed to achieve, obviously, do come from a -- there has been a drop-off in volume in the DTH acquisitions in this period. But apart from that, really, what we've done is simply reprioritize and recut projects, finding different ways to renegotiate their cost of delivery.

On the entry into broadband, you've made the decision to do that organically. Is that sort of confirmed?

Yes. What we've done is we worked with Chorus and with Phoenix to build or to adopt a sort of a capital-light model, a very variable cost basis -- based model. But we think that was the best route for us to be able to deliver what we want, which is the better-priced -- better pricing, better speeds and better customer service. The thing that is always or should always be remembered about Sky is that by far, the strongest part of our sort of brand scores, even when things were not great in a year and a bit ago when I arrived, still a sort of a shining light in that was our customer service, and we consistently rate well in the New Zealand market compared to other similar operations. So we're looking forward to utilizing that with the great service that Chorus and Phoenix can provide for us.

Sure. And how much more CapEx do you see yourself needing to invest to -- in the broadband to get sort of set up and ready to go?

We've got about $1 million left in sort of kit as it were, but then, obviously, there's variable CapEx as we grow the subscriber volume.

And outside of the customer service, can you say anything on what you'll be doing to sort of differentiate yourselves on your broadband launch?

Yes, it's going to be faster and cheaper.

Okay. So speed and price. And just in terms of that model that you've sort of set up and because, obviously, you've sort of got a whole lot of pressures in the business and then things that you're looking to do in terms of transitioning through to growth, is that model that you've sort of set up with Chorus and Phoenix, is that one that enables you to get to breakeven on a low number of customers?

Yes. I'm not sure we're going to tell you exactly how many, but it's not a big number. Look, we're very pleased with it. We've got the -- it's up and running in quite a few of our staff homes. And it seems to be working really well. So we're very pleased with the ability that we've created to deliver good, reliable speeds.

Yes. And then just last question on this one. I mean is the strategy and the movement to broadband specifically, is it to establish a meaningful profit pool or to stem churn or both?

Arie, it's Blair here. Realistically, it will be both. I think we've got to remember that delivering high-quality content over multiple networks has always been what Sky does, and it was a clear missing in our portfolio. And as we've seen the growth in streaming, it made sense to make sure that our customers continue to get that great service and the high-quality delivery. And the best way to do that is for us to have a direct relationship with the customer rather than relying on too many parties getting in between the content and the network.

Sure. And then just last question for me before I hand it over to someone else. Just on the revenue guidance, and obviously, forecasting in this environment, as you've pointed out, is very challenging. But could you just provide a little bit of color on what you've assumed in terms of the contribution from commercial and advertising in FY '21?

Yes. Look, you're right, Arie. It almost feels like a random number generator at sometimes. We have assumed that there is continued challenges in both the commercial and advertising markets. Initially, that was because a lot of the businesses literally were shut down, so it didn't make sense for them to advertise. Now we're starting to work through exactly what that's going to mean in terms of their ability to invest in reaching their customers via our platform. So we've taken what I would describe as a conservative set of assumptions on both advertising and commercial revenues. Commercial revenues, just to call up -- remind people that we try to -- we're trying our best to help those customers, and we put them on pausing their subscriptions because it didn't make sense to send them a bill when their businesses were closed. So we're working through how can we help those businesses reopen. Hopefully, the pubs and clubs open today. And then we can flow that through into what the revenues may or may not look like over the next 6 to 12 months.

I mean given that subscriptions are holding up better, just in terms of like -- and like I said, accept that it's difficult, but just trying to understand the contribution that's made to your guidance. I mean if that sort of each individually $50 million to $60 million, so $50 million to $60 million revenue lines, have you assumed as you ramp up through FY '21 that you kind of like on commercial that you might sort of be at half of normal levels and advertising may be sort of 75% of normal levels for the full year '21? Or have you been more conservative than that?

Yes. Probably slightly more conservative than that, Arie.

[Operator Instructions] Your next question comes from Phil Campbell with UBS.

Just a few questions from me. I just wanted to clarify, Martin or Blair. In the guidance for FY '21, in terms of the programming operations cost savings of $20 million to $25 million, does that not include any rights price relief? So there's no rights price relief included in FY '21 at all?

In that number, no.

But is there any -- because obviously, you've got this other number of the $135 million to $155 million of additional or potential pool of other cost savings. Is that primarily potentially rights savings? And so in FY '21, there's no actual rights price relief assumed?

No, that's not accurate. There is -- we've had to make some assumptions around events that will or will not happen. But the number around programming operations is actually sort of internal costs for shows, production, other activities that, by necessity, a lot of it has been saved because we just haven't had that activity in the last 8, 9 weeks. And the other number that you quoted is a mixture of things, which covers rights but also a whole raft of other cost lines as well.

Yes. I suppose I just wanted to make sure I'm completely certain because obviously, we've got increased satellite churn and lower ARPUs in FY '21, which is impacting the revenues, plus we've got impacts on advertising and commercial as a result of managing of the economy slowing and possibly a gradual pickup in sport, but I just wanted to make sure. So if there's no reduction in rights costs in that FY '21, that would obviously -- I just wanted to double check that there's no reduction in rights price assumption in FY '21.

How do we unmute, Sophie? I do not know.

Hi. Can you hear me?

Yes. Go ahead.

Hi. It's Sophie Moloney here. Look, it's a very good question. And as Martin was saying at the outset, we are engaged in confidential, as you appreciate, negotiations with our key sports costs and given that the force majeure event is making reduction raising. And so what we're looking at for the remainder of the calendar year is that more than likely not -- assuming not the same sport calendar, reduced sport calendar. So we are -- we sort of modeled an approach that takes into account what we think we hope will come back to our screens, what we think net value is going to be, and then, of course, it's a negotiation to see where we land. I hope that helps give a little bit of color.

That's fine. But I just wanted to -- so in the actual guidance range that I think it's $100 million to $130 million of EBITDA, does that assume any reduction in sports rights?

Phil, it's Blair here. It's a bit tricky to break it out individually. So whilst there are savings assumed in the forecast, there's also some rights inflation for some of the other elements as well. So when you net all of those off, it does look -- appear like there are no savings, but that's not practically how it's working, as Sophie just laid out.

Okay. I think I understand that. In terms of the, I suppose, again, going into FY '21 fiscal, like obviously, there's a reduction in some ARPUs, I think, for satellite, and there's an increase in churn. I'm just wondering, is it possible to kind of out of the revenue decline that you're assuming kind of can we break down some of those buckets in terms of what you're assuming for like -- I think you gave some guidance on commercial and advertising, but what the kind of impact is on the satellite revenues?

Yes. Look, you're right, Phil, there's a mix within the residential satellite space. It's a combination of continuation of churn. We're hopeful that the churn levels will reflect the more recent activity that we've been doing. We -- over the last 18 months or so that we've seen significant reductions in churn, but there is still churn, so we've assumed that, that will continue. And then the ARPU is more of a temporary nature, which really reflects the timing differences between sports coming back and sports customers going back to being full-paying customers. So we have conservatively allowed for a bit of a mismatch in that timing. And we do think that could have somewhere between the sort of a $4 to $5 type temporary impact on ARPU.

Okay. That's awesome. The other one was CapEx. So obviously, there's a CapEx savings number of $35 million to $40 million. So in terms of like total CapEx that you're expecting for FY '21, are you able to give us a kind of a number for that? Is it still going to be around that 7% of revenues? Or is it a different number?

Yes. Look, I've said historically that we'll be in the 7% to 9% range. Obviously, in conditions that we're in today, it's not a normal world, so we're hoping that it would be at the lower end of the range, maybe even slightly below.

And then the other one was just, obviously, you talked about broadband a little bit. I'm just wondering where the relationship with Vodafone kind of sits within that launch.

Yes. We've got a good relationship with Vodafone. They've been a good partner of ours for a long period of time. I'm sure they will still be a good partner of ours. The -- we do have an ambition in due course to find a way to be a mobile -- offer a mobile service, which obviously will be through an MVNO structure. So obviously, Vodafone would be first on our call list to try and talk to, to achieve that. I know that's something they've been -- or we've been keen to talk to them about.

And did you -- I think in this presentation, it talks about you considering an MVNO. Is there any more color in terms of the time lines in terms of when a decision will be made on that?

No. That's what I'm saying is that's something that we are -- we're keen to continue to explore. And we'll have a look at what we can do with the various options that people have. But I think that Vodafone is a good partner for us, and that's something that we'll be keen to look at.

There are no further questions at this time. I'll now hand back to Mr. Stewart for closing remarks.

Okay. Thank you all very, very much for your time, appreciate it, and I hope everybody keeps well. And I look forward to seeing some of you in due course when times allow. Thank you very much.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.