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

Good day, everyone, and welcome to the SKY Interim Results Briefing. Today's call is being recorded. At this time, I would like to turn the conference over to SKY Chief Executive, Sophie Moloney. Please go ahead.

Good morning, and welcome to our discussion about SKY's interim results for the half year to December 2020. I'm Sophie Moloney, and it's a pleasure to be here as SKY's Chief Executive. With me on the call today is Andrew Hirst, our Interim Chief Financial Officer; and Gareth Jones, our Head of Commercial Finance. And we look forward to the discussion with you, our investors. I also want to take a brief moment to thank Chris Major, our Director of External Affairs; and her team and Amanda West, our Investor Relations Lead for all of their hard -- their work to get us to this juncture. So in terms of our agenda for today, I'll make some opening remarks and discuss our strategic priorities, after which, Andrew will speak through a few of the more important details of the half year results. We expect that most of you had an opportunity to read the material prior to the call, so we'll try and get through at a reasonable pace, and Amanda will poke me if I need to go faster and leave plenty of time for questions at the end. So a few opening remarks from me, and I must say, I want to get off this slide dearly promptly, given disclosure on it. As I said on 1 December, I'm hugely humbled and excited for being appointed as SKY's Chief Executive. I'm also hugely grateful to Martin Stewart for the transformational program he instigated at SKY and for the opportunity to work with him and then carry the vision forward as his successor. Now as I shared with our SKY crew yesterday, I've actually been in pay TV since 2003, having kicked off my career at SKY in the U.K., and returning home to join SKY in New Zealand in early 2018. Since my appointment as Chief Exec, I've taken time to focus on 3 key areas: our people, our partners and our operational rigor. I've also taken the opportunity to look at our strategy through a fresh lens. I have a very clear sense of what we need to do as a business. And what you can expect to see from me is a clearly articulated strategy and a relentless focus on delivery, something my early years at SKY U.K. taught me. I readily get that -- put that while words matter, actions speak louder, and we need to act. So turning then to that fresh lens on our strategy. You'll see that the overall theme for these interim results is what matters most. And what matters most, without question, is our customers. If there's one thing our people are going to hear from me probably over and over again is that we must put our customers first. Every decision starts by asking how does this make SKY better for our customers. Now I firmly believe that if we get that right, along with valuing our people and our partners, the value creation for you, our investors will follow. And at our core, we're a content company. With our satellite delivery technology and streaming services, we really are here for all New Zealanders. It's truly a unique advantage and it's one we need to take better care of. So turning then to Slide 4 and the half year performance for this financial year 2021. It's good to be able to report strong -- to report a strong result for the first half, which we are going to detail later in the presentation. But as we're looking into the second half, we know we need to do better. The first half is a very strong result. The second half sees an uplift in our programming rights cost line, which means that stabilizing our revenue remains a clear priority as well as reducing our overall cost base. So how are we going to do that? Well, put simply, we're going to do that by focusing on what matters most for our customers. And what is that? Well, again, it's pretty simple in my view. It's easy, reliable access to the content they want to watch in ways that work for them. Now I know you've seen content laid in Slide 4, and I suppose the reason I really like this one and why it's different is that it more clearly shows the depth and variety of what we offer to New Zealanders, especially from a linear perspective. And linear viewing as far from a thing of the past as our connected boxes tell us. It's really a unique offering in this market. And I think we've possibly been guilty in our ambition to speak about streaming and new services that we neglected to talk about what we offer to our main customer base. And one of the interesting reflections from the lockdown in 2020 was just how much of our news, our documentaries and our entertainment content kept our customers happy. When live sport was almost nonconsistent, most of our large base of SKY customers stayed loyal, enjoying everything else that was on offer. It really was a salient reminder of the power of the bundle. But coming back to that question, how do you manage their programming rights costs line to further improve profitability into the second half year and beyond? Well, turning then to the partnership slide, again for me, by focusing on what matters to our customers, and that also means being comfortable with the new co-exclusive world that we now live in. Now I must admit, we do overuse this term. I thought what on earth are they talking about. I thought we lived in an exclusive or a nonexclusive world. And for awareness for those on the call, co-exclusivity simply means SKY and its partner, with a direct-to-consumer offer, like Discovery, will have access to the same content for distribution in New Zealand. It really is the reality of the world we live in, and it's something we're completely comfortable with. Now while others may see it as a threat, I see it, and we see it as an opportunity to manage our costs while still super serving our loyal SKY customer base. But of course, continuing to secure the content and striving to do so, the content that matters to our customers remains a strategic priority. And not having the Black Caps at home this summer was a tough reminder of what it's like when it's not there, all day on SKY. And I have to say, my lovely 89-year-old aunt did remind me of this over the summer break. So this absolutely remains a key priority. And, as the slide says, we'll continue to partner as a content company with the likes of Vodafone and Spark to distribute SKY's compelling content slate as widely as possible. Focusing then on what matters most, more specifically for the half year that has just been, we turn it into Slide 8, actually our customers. Before I comment further on this page, a word on terminology. I know we have traditionally talked about satellite customers. But I'm yet to meet a Kiwi who uses that word to describe themselves, I'm a SKY customer. And for the hundreds of thousands of New Zealanders, who have SKY in their home, their experience has led to Sky Box, not dish on the roof, we certainly hope it isn't. So from now on, the Sky Box customer does. Now we've made significant progress in stabilizing our Sky Box customer numbers as the following slides will illustrate. You'll notice that at times, we report customer numbers year-on-year, and for others, we will draw out the 6-month comparison. This is just a better account for the extraordinary impact of COVID-19 in the period, and of course, we'll always make it clear what reporting period we're referring to. So a few call-outs. For the first time, we've separated out the Vodafone reseller customers. For clarity for those in the call, these customers have a Sky Box in the home. However, they have recently signed up for the service and received their bills in the relationship with our partner, Vodafone. We have all but completed the migration of these customers to a direct relationship with SKY, and we are pleased with the results, given us a strong conversion rate of almost 90%. You'll also see that we've identified a number of customers that were receiving Lightbox in the hard bundled product from Spark at the time of the merger of Neon and Lightbox platforms in July. And we are extremely pleased to convert over 1/3 of these to paying Neon subscribers when we launched the new platform, and this growth has continued. Taking this into account, along with continued organic growth, has resulted in a year-on-year growth in streaming customers of 80%. And as a final note, we've also decided to split out our commercial customers for the first time. Having previously been included -- these having previously been included within our satellite customer base and satellite as the method of delivery. We believe it's important that we provide more transparency and also provide insights to the value these customer relationships generate for SKY. So as said out on Slide 9, we are seeing strong evidence that we're reaching a stable core of Sky Box customers. A significant milestone in this period was achieving net growth and direct customer numbers before the impact of migrating reseller customers were taken into account. This has not been achieved for a number of years, as you can see from the chart on the next slide as well. This reflects our strong presence in key loyal customer segments as well as the new capability we have built and continue to build in customer value management. Overall, we're leaning into the advantage we have in satellite, which generate 75% of our revenues, and SKY is 1/3 of households throughout the country. I believe the next few slides will give you a sense of the reason for our optimism on reaching a stable base of Sky Box customers. So on Slide 9, direct customer activation is up 25,000 or up by 50% and disconnections improved by 16%. The trend line showing the net direct movement demonstrates we have had a very stable 6-month period. These new activations are coming from our traditional strongholds, but also, importantly, we're seeing new pockets of interest. Now we acknowledged that there was a peak demand at the start of the period as we exited the lockdown restrictions and that we're also benefiting from broadening our sales channels. And our research has identified that those who aren't currently a customer of SKY but are open to being so, equates to 1/3 of all New Zealand households. Turning now to churn. The first slide with a downward trend is one we want to actually celebrate. So SKY's churn rates have continued to come down from approximately 17% 4 years ago to 12.4% today. Now you'll see here that we have split out the total Sky Box churn to show the impact of direct customer retention compared to the total retention rates with the total, including direct and reseller customers. As evident through the lower churn rates on a direct customer relationship basis, we expect this to have a further positive impact on total churn. Now we also anticipate that the upcoming [indiscernible] broadband and it is coming. It's expected to have a further positive impact on customer retention based on evidence we've seen both offshore and pay TV and through local provider bundling. Turning now to Slide 11, [ second thing ]. You'll see this slide, in particular, demonstrates just how sticky our customers are. 70% of our Sky Box customers had been with SKY for more than 5 years. This is an increase from 55% just 4 years ago. And this group of customers have extremely encouraging retention rates. Churn is just 6% on an annualized basis. And at the other end, we've also made significant progress in improving our retention of customers through their early periods when churn levels are traditionally higher. In the last 12 months, the churn rate for first year customers have improved by 27%. And we know that the longer we retain them, the more likely it is they will become a very loyal and valuable customer of SKY. I now want to take some time to discuss some of the initiatives we are investing in to add value to our loyal Sky Box customer. Turning now to Slide 12, Sky Go. So Sky Go is available to all Sky Box customers at no additional costs to their monthly subscription and has proven to successfully increase customer loyalty. Sky Go allows customers to enjoy our content on different devices at different locations with a personalized and on-demand type experience. And we're excited to say we're currently rolling out a new and improved Sky Go with heaps more content and enhanced features that have been road tested by more than 1,000 of our Sky Nation customers. We know that customers value having access to Sky Go and it results in a lower average churn rate than customers that use it, especially where new customers adopted in the first 12 months of subscribing to SKY. This makes these development efforts very worth while. And at the same time, we note that by moving Sky Go to our new digital platform, we've been able to rapidly develop the product and have more flexibility for the future, which we're excited about. Slide 13, Sky Broadband. This is another example of where we're looking to deliver additional value to our customers. While we will widen our sites over time to our streaming customers, our Sky Box customers will be our first priority. And as I said earlier, we do expect this to have a positive impact on churn. And I do think it's important to remind ourselves in terms of our strategic lens that we are a content company, not a telco, and our purpose is simply on adding value and making life easier for our SKY customers throughout our fiber-ready homes. Exceptional service and user experience are, therefore, clear priorities here. And the customer trials have been valuable in guiding our development of the final product. The positive sentiment from the trail group gives us a good sense of the value we can offer for our customers. Full details of the customer offer will be available when we start rolling out in the coming weeks. It's not far away. Slide 14. You've heard us talk about the potential for a new Sky Box for some time, since the decision was taken to cancel the IVP project in June 2019. Since then, we've been listening to our customers, and we have a clear understanding of what's required. That is driving a design of the user experience. And an interesting insight that I was -- that they shared with me about a week ago is that what this does need to deliver is the ability for our customers to search and curate the SKY content just as much as other parties have. Now based on what we've seen offshore, and the research we've been doing at home, we believe the new Sky Box will support the attractiveness of the SKY proposition to both existing and new customers. And I note that 1/3 of households are open to SKY, as I mentioned earlier. Now where it makes sense, we'll look to partner on the development of the box on associated platforms and systems to achieve the economies of scale and inputs we need. Now I know you'll all be interested in what's the business case is for this and the timing, as is our Board. So the one-off and ongoing costs and the potential timing for being in market are not for discussion today, but we will, I promise, provide more details at our Investor Day. Turning then to streaming on Slide 15. This continues to be an important part of our business as we look to meet the demands of New Zealanders. We're obviously pleased with the significant growth we've achieved in a short time, having grown by 80% year-on-year, and by 250% over the past 4 years, although I appreciate this was off a lower base. At the same time, pricing and packaging initiatives, together with a strong sports content offering, have delivered significant growth in Sky Sport Now, and we're seeing high levels of engagement with this product. We're also excited to note that Neon continues to improve and the organic growth here is improving day by day. What I think is really important is to note that the growth we are experiencing is not coming at the expense of our valuable Sky Box customer base. And we see that on this slide some useful data points to evidence this. Turning finally, but last is not least, to our customer -- commercial customers on Slide 16. They have been [indiscernible] within our reporting, and we're going to provide you with a bit more detail now and going forward. While there are approximately 8,000 commercial customers, these are obviously at a much higher ARPU with nationwide coverage and all of them are existing SKY by satellite. This helps bring SKY not only to local pubs, but also to 55,000 hotel rooms and also into retirement villages, sports clubs, gyms, shops and offices throughout New Zealand. It remains an important part of our current business and a way for us to showcase our content to customers, and noncustomers as they frequently visit these commercial premises. We split out our customer types into 3 main groupings: licensed premises, accommodation and corporate retail. While we're still planning for recovery to pre-COVID levels, there is potential for revenue growth in the license premises as we continue with our new value-based appropriately tiered pricing model, reflecting the size and location of each license premise. So now we get to financial performance. As I said at the beginning, while our financial results for the first half are good, we must do better. Revenue was down 7% year-on-year, and clearly, stabilizing this is a clear priority. That said, we are comparing against the period that hadn't imagined an operating environment that included lockdown and border restrictions. When we remove the direct impact of COVID-19 and one-offs, the underlying revenue decline was 3% compared to 5% in the prior year. To offset this revenue decline, we were pleased to report that operating expenses were down significantly at 18%. When we strip out one-off expenses in both periods, although mainly in the first half of FY '20, we're still showing a 15% reduction made up of permanent and COVID-related cost savings, which Andrew will kindly go through in more detail shortly. As a result, we have delivered first half EBITDA of $116 million at a margin of 33% versus 23% in the prior year. While this is absolutely encouraging, there is more to be done to stabilize and then grow revenue and to lock in permanent savings to our operations. And on that note, I'm going to hand over to Andrew, who will provide more detailed information on our financial performance. Over to you. Thank you, Andrew.

Thanks, Sophie, and good morning, everyone. So starting from the top, turning firstly to revenue. As Sophie has already mentioned, our first half total revenue was down 7% on last year, but after stripping out the direct impact of COVID and one-off impact of the 1-month free for customers migrating from a reseller to a direct relationship with SKY in order to mitigate a change in the billing cycles, the underlying revenue decline for the first half of this year was 3% compared to 5% for the first half last year. I will cover off each of Sky Box, streaming and commercial and advertising revenues in the next few slides, but the other key points to note on this slide is that when we compare to the second half of FY '20, which is perhaps the more comparable period to the first -- this first half of FY '21, as it was also impacted by COVID, we see the revenue decline was just 1.4%, which reflects a 4% decline in Sky Box revenues, partly offset by continued growth in streaming and a partial recovery of commercial and advertising revenues. So turning firstly to Sky Box revenue. Sky Box revenue declined by 9% in the first half of FY '21 compared by a 7% decline in the first half of last year. Despite the decline in Sky Box customers having slowed considerable this year, it was 4% versus 6% last year and only 1.8% in the last 6 months. Our Sky Box revenue was impacted by a number of factors that caused ARPU to reduce by 5% from $83 to $79. This is a decline of only 1% in the first half of last year. A significant portion of that $4 ARPU decline, in fact about $2.5 of it, which due to factors that were structural or one-off in nature, and I'll go through this now. The migration of 33,000 resellers customers from Vodafone to being direct with SKY did have a negative impact on revenue, and therefore, ARPU. Because with the change to becoming direct SKY customers, we no longer recognize revenue on a gross basis for wholesale commissions as part of our OpEx, as we did the most customers were in the reseller relationship. This change in treatment accounted for $0.44 of the $4 ARPU decline or $1.6 million in revenue terms. Most importantly, while this reduced revenue and ARPU, it did not materially impact our profitability from those migrated customers as our operating costs also reduced due to the removal of the commission costs, this will have further impact on ARPU in the second half of this year as we'll get the full year effect coming through. But again, we will also get the offset in savings on commission costs. Secondly, we have seen lower sports penetration through the first half of the year than we would normally expect as penetration was suppressed by package downgrades as a result of the reduced sporting calendar as well as economic pressure on our subscriber base as a result of COVID. This impacted ARPU by $0.52 or about $2 million of revenue. Offering the first month free with a one-off first month free to migrated reseller customers contributed a further $0.78 to the $4 ARPU decline or $2.8 million of revenue. The discontinuation of Sky Watch reduced revenue by $1.5 million or $0.42 in ARPU terms. And finally, fewer pay-per-view events as a result of a reduced sporting calendar resulted in $800,000 impact on revenue, or $0.21 in ARPU terms. I appreciate there's a lot of detail. But as I said earlier, the important part of all of that is that these factors were all structural or one-off in nature, and in some cases, we hope it will be reversible. The combined effect of these one-off or direct COVID impacts was almost $2.50 of a $4 ARPU decline in the first half, with the underlying decline of $1.50 being much more in line with prior periods. And one last point on ARPU, we would normally have rolled our annual price increase to allow for the inflationary impact on our rates costs, but instead, we opted to look after our customers in 2020 and did not put through a price increase in what was already a challenging year for New Zealanders. As a result, prices have not been increased since April 2019. Now let's look at streaming revenues, which continue to grow significantly. We achieved 80% growth in streaming subscribers year-on-year, both through organic and inorganic growth. Revenues have similarly grown by 45% year-on-year, which is an improvement on the 35% growth last year. Streaming ARPU has reduced in the first half of FY '20 when it was $26. Due to the change in the mix of our streaming customers as a result of the considerable growth we have achieved for the Neon relative to other streaming products, including Sky Sport Now. ARPU fell $16 in the second half of FY '20, following the acquisition of Lightbox. But in the current period, we've seen it increase back up to $18. And while we have continued to grow Neon subscriber numbers, especially following the merger of the Lightbox and Neon platforms in July, we have also increased the percentage of Neon customers that are paying direct rather than through Spark at a wholesale rate. At the same time, we've also granted Sky Sport Now subscriber numbers, which are packaged at a higher price point. Looking now at our commercial and advertising revenues. You can see pretty clearly from the chart the impact of COVID had on the first half as well as the second half of last year, but also the signs of recovery in the period relative to the second half of FY '20. Commercial revenues were down $7.5 million or 27% year-on-year as we move to provide discounts and suspensions to customers during the COVID restrictions. Albeit, we have seen some recovery in this first half. Licensed premises retuned to normal billing on the 1st of August, other than the 2 weeks lockdowns during August. And accommodation provided discounts half from 1st of November. So we expect to see continued recovery obviously subject to any further impact if the COVID situation changes again. While there's still some way to go to get back to the consistent levels of commercial revenues we've seen in the previous periods, we have identified opportunities to grow commercial revenues with the invent of a new tiered pricing model for licensing customers and also broadening the customer base across all sectors. Advertising revenues were down $3.7 million or 14% year-on-year, consistent with the wider advertising market being down due to COVID, albeit the return of sports and less economic uncertainty has seen some recovery compared to the prior 6 months to June 2020. SKY's share of the advertising market was down slightly in the period, reflecting the higher portion of our revenues we generated from sport, which, despite returning quicker than expected, was down compared to pre-COVID levels. Now looking at our costs. Total operating expenses were down significantly in the period, with total savings of $52 million, an 18% reduction. Adjusting both periods for the impact of one-off costs, the underlying reduction year-on-year was $44 million or a 15% reduction. The one-off cost of $3 million in the current period related to the resignation of the former CEO, while in the prior period, the $12 million of one-off costs related to redundancies, satellite reservation fee and consultancy costs mainly associated with the acquisitions of Lightbox and RugbyPass. The $44 million of underlying cost reductions this year includes a mixture of COVID-related savings primarily related to sports rights and production costs as well as permanent savings of $18 million, which represented 42% of the underlying cost reduction. The majority of the $44 million reduction in underlying costs was in programming, which was down $31 million or 18%. This was mainly due to equitable reductions negotiated with rights holders as well as lower production costs as a result of canceled or postponed sporting events due to COVID. The $18 million of permanent savings included the nonrenewal of domestic credit rights and savings from RugbyPass as we've moved to significantly reduce the cost base of that business. The subscriber-related broadcasting infrastructure and other cost lines all benefited from the restructuring carried out in prior periods as well as a range of other cost-saving initiatives and streamlining of operations and technology platforms. The reductions in depreciation continues from prior periods and is consistent with our transition to a lighter capital model. We expect to see this trend continuing and also benefit from the move to the new Optus deal in December 2021. Turning now to bridging the year-on-year movements in EBITDA for the first half. We officially added back the one-off costs from the first half of FY '20 of $12 million. After adjusting for these, our normalized EBITDA for the first half of FY '20 was $101 million. The direct revenue effect of COVID was $14 million, was mainly in our commercial and advertising revenues, which were down $7.5 million and $2.5 million, respectively. The same were impacted by lockdowns and restrictions on gatherings as well as a greatly reduced sporting calendar. We also saw a reduction over and above the normal seasonality in our sports penetration of around 2% to 3% between July and October, the impact of which was a further $1.9 million. We had actually expected to fare worse, but the return of key New Zealand sporting events like Super Rugby, the NRL and the Tri-Nations helped limit the impact on subscriber revenue. In addition, the impact of COVID on acquisitions from March to June carried over the first half by reducing our [ working ] subscriber base, driving a further revenue impact of $1.9 million. On the cost side, we worked hand in hand with our partners in New Zealand and around the globe to negotiate discounts, deferrals and alternative arrangements for the many sporting events that were canceled or postponed in 2020, which resulted in year-on-year content and production cost savings of $19 million and $5 million, respectively. The production cost savings from COVID-affected events were partly offset by the delayed Super Rugby Aotearoa season, which would not have normally fallen in the first half of FY '21 as well as reinvestments in additional local events, such as the Taini Jamison Silver Ferns Netball series against England, the North vs South Rugby fixture and the Jacks Ridge rally event to name just a few. As we return to our a normal but by no means fully confirmed sporting calendar for 2021, we do not expect to maintain this level of savings going forward, albeit, to the extent the sporting calendar continues to be suppressed, we would expect savings relative to our contractual obligation. Our underlying subscription revenue in the first half was down $11 million versus the first half of last year. This consisted of a decline in Sky Box revenue of $28 million, of which $4.5 million was COVID related, due to lower acquisitions, sports penetration and pay per viewing, partly offset by $11 million growth in streaming revenues. The underlying Sky Box subscription revenue declined year-on-year with 6.9%. Although as discussed earlier, we continue to stabilize our Sky Box customer numbers and much of the average decline in the period was one-off or structural in nature. As part of our ongoing activities to create efficiencies and rightsize the cost base, we've made a number of structural changes in the business in the first half that have resulted in permanent savings of $18 million, including the full year effect -- for the full year impact of restructuring activities during FY '20; the nonrenewal of domestic cricket, including both rights and production costs; and we have discontinued both Sky Sport News and the Sky Watch Magazine. We've also significantly reduced the cost base of RugbyPass, and our decision to bring our reseller customers over into a direct relationship with SKY has also saved us commission costs. All of these permanent savings will flow through to the second half of FY '21. Lastly, the one-offs for the first half related to the departure of our previous CEO as well as the 1 month free reseller migration offer, offset by other income from the release of some RugbyPass content provisions made June 2020 that were subsequently found not to be fully required as we managed exit rates commitments on better terms than originally expected. Looking now at CapEx. Our allocations to capital investment remain tightly controlled as we transition to a lighter capital model. Despite our first half CapEx of $20 million being just under 6% of revenue, we expect second half CapEx to bring the full year back in line with our long-term target of 7% to 9% of revenue. Sky Box installation CapEx increased in the first half compared to last year due to the higher levels of activations as Sophie has discussed earlier. Comparing the year-on-year movement. The first half of last year included $10 million of CapEx related to increasing our forecast capabilities and streaming platform enhancements, which haven't been repeated this year. The soon-to-be completed sale of OSB has meant that we were not investing in our OSB assets during the current period. And as we previously outlined, selling OSB will avoid at least $50 million in future CapEx spending over the next 5 years. In summary, our message on capital investment is that we are continuing to transition to a lighter capital model, and our preferred approach is to partner where it makes sense to do so. Looking now at cash flow. We are very pleased with the level of cash flow from operations generated during the period of $121 million, which compares to $92 million in the prior period. I'll note that for both of these cash flow from operations figures, we have excluded the movement in working capital in order to get a like-for-like comparison between periods. This is because we get the very unusual situation in the current period, where the cash on hand at June 2020 of $111 million was inflated by a significant level of unpaid payables that mainly related to programming rights for sporting events that had either been canceled, delayed or held under a different format, where the value was still being negotiated through an equitable reduction process at June 2020. To put that into context, we had a $57 million decrease in payables in the current period versus a decrease of only $12 million in the prior period. So in order to remove this distortion for the current half year, we have removed the net impact of the movement in working capital to arrive at the $121 million figure and the $92 million figure for the prior period. Cash outflows for CapEx, interest, tax and lease repayments are all in line with expectations in the prior period. As a result, we closed the period with $123 million cash on hand, and together with our $200 million borrowing facility, we have sufficient funds available to repay our $100 million of the bonds when they fall due in March 2021 and still have significant funding headroom going forward. I'm very sure that's enough for me. I'll hand you back to Sophie now who can talk about the full year outlook.

Thank you, Andrew. Well done. Before we open the floor for questions, which I'm sure there will be a few, I'll make some brief comments about what we're seeing for the second half of financial year 2021. First and foremost, we will be focused on further stabilizing our Sky Box customer base. Those customers will soon be enjoying the new and improved Sky Go app. And those who are on fiber-ready homes will be the first to be offered our new Sky Broadband service. Our goal is to stabilize and eventually grow the Sky customer base along with preserving ARPU. We recognize that it's important that we further slow our revenue decline in the second half. Streaming customer numbers and associated revenues are expected to continue to grow in the second half, although at a slightly slower rate than experienced at this reporting date. We also expect to see continued uplift in commercial revenues in a post-COVID recovery market, although, of course, we stay very aware of the current situation and the impact on our commercial customers. Programming costs will increase in the second half as we enter into our new partnership with SANZAAR and New Zealand Rugby from 1 January, and also from the expected return to full contractual rates for other sports partnerships. Of course, this all assumes that there is no further impact to the 2021 sporting calendar. And if there is a further impact, then we acknowledge the potential for further negotiated equitable reductions and/or deferring of these costs. The sharp focus brought to the company's cost base in the first 12 months will also continue in the second half -- in the first 6 months, I should say, will also continue in the second half. And of course, this is all subject to no further impact of COVID versus today on business performance. So looking at our FY '21 outlook. Today, following a positive first half, we are confirming our guidance for FY '21 as issued to the market on 3 February. The guidance ranges do include the impact of 2 subsequent events itemized in the interim financial statements, being the commenced commission's approval of the sale of OSB to NEP and the negotiation of the RugbyPass earnout settlement. Now these 2 items, which will be accounted for in our second half results, will impact both EBITDA and net profit after tax. However, they will be recorded in other income, not revenue. Taking into account the impact of the second half outlook, we readily acknowledge that our earnings will be more heavily weighted towards the first half of this financial year. While we have made significant headway to reduce our operating cost base, we did benefit from COVID-related programming savings in the first half and our new deal with SANZAAR kicked in from 1 January 2021 this year will mean no earnings in the second half as we'd always anticipated. Our second half of FY '21 expenses will include one-off broadband launch costs and accelerated depreciation on legacy digital platforms as we move products, such as Sky Go, as was touched on earlier, to SKY's new digital platform. We currently have a much lower debt profile following our capital raise, and therefore, interest costs will reduce further once $100 million of bonds are repaid in March 2021, very soon and we enter into the lower-cost 10-year Optus deal in December, as Andrew has already noted. So we remain in a strong financial position, with cash on hand and undrawn debt facilities providing significant headroom going forward. And we have an exciting program of work ahead with a focus on what matters most, which is adding more value to our customers; our people; our partners; and in turn you, our investors. And I really look forward to sharing more details at our Investor Day in Q4. Thank you very much to listening for the formal part of the presentation. I'll now be handing back to Christy to move us into questions.

[Operator Instructions] First, we'll go to Arie Dekker from Jarden.

First topic I just wanted to touch on was satellite ARPU. I guess you've broken out what you sort of see as the one-off impact versus the structural impacts. Can you just sort of talk to -- like do you see ARPU back over $80 in second half '21?

I think that, that will be a challenge in the second half. But per the commentary that Andrew gave, we're conscious and really leaning into the $1.50 there that we think does look like it sort of [ seasoned ]. So we're going to be leaning into this in the coming months to really understand what's driving that. But, Andrew, did you want to give a bit more detail?

I was just going to add to, I think, Arie, bear in mind, the first of the item I've talked about being the migration impact of customers from the reseller to direct with particularly a 2- or 3-month effect in this half. We're going to have a 6-month effect out in the second half. So that will continue to impact ARPU, albeit we're going to get cost savings offsetting it. So I think we're kind of a bit in a new norm in ARPU terms because we've got somethings that's moved from above the line to below the line essentially. So that's going to be -- the first thing we're going to see is more decline from that and then certainly see we're going to lean into the $1.50.

No, that's helpful. And just on that, 2 follow-ups. Firstly, just you referenced have -- not having made a price increase for some period. But presumably, there's no intention for price increases any time soon. And then further to that, just in terms of a review of package pricing, which I think is sort of slated for post the broadband launch, can you just talk to what you're thinking in terms of approach to package pricing and time frames?

Yes. I think that's right. It's certainly not a FY '21 move in terms of price increases. And I think, as Andrew said, it was the right thing to do in 2020, not to put that on our customers given what everyone was suffering. That said, we do acknowledge the increase, particularly in our sports rights costs. And so I think it is something that we'll have to look at, albeit, Arie, in the context of an overall review of our value for money work streams our pricing and packaging, which you're right, is something that we're looking at this calendar year. And I think it's in that context that we'll look at the overall envelope that New Zealand customers have and figure out what the best way forward is.

Sure. Look, you were really clear about the new set-top box and waiting until Investor Day. But I guess just one question. Clearly, the company has had a bit of a checkered history in rolling out and assessing and looking at these sorts of things. Can you just sort of provide at least some comfort that this is something that you sort of think can be done in 12 to 18 months versus sort of those 2, 3 years plus?

Well, the comfort I can give you, Arie, is it's going to be a #1 focus for me now that I'm really comfortable with where broadband is. And as I noted when we're going through it, I'm interested to see if there are partners that we can work with that can help us actually get to the right place faster. So that's something I'm looking at very closely. But absolutely. I think there's a worldwide chip shortage, which would impact delivery of set-top boxes of a hybrid nature, DTH and IP into our market. I think it's a 52-week lead time on the Broadcom chipset. However, that bit for me is the maximum time line that I'd be wanting to work with. So yes, it's a big priority off the back of it, and I particularly look forward to sharing more information at our Investor Day.

Just a point of clarification. Are you saying implicit in the second half guidance that there is an allowance for any negotiation of savings on programming rights outside of your contractual obligations?

We've taken a very conservative view just looking ahead at what might be there. But otherwise, you're right, Arie, we haven't negotiated any agreed reductions at this stage.

And could you talk to where those -- so you do have some negotiations ongoing. Do you think, in terms of your position on those negotiations, that savings are achievable in calendar year '21?

Yes. I think -- I mean we're in really conversations, particularly with New Zealand Rugby on behalf of SANZAAR about the impact on the agreement that we signed up to in 2019. We're partners, and we're keen to get clarity on those impacts ideally before 30 June.

Sure. And then final one, I mean, I guess the second half guidance implies EBITDA down to sort of circa $70 million and with another half of increased IP rights costs to absorb, there is albeit a minor reference to dividends at the back of the presentation. I mean, presumably, you're not contemplating against that sort of earnings momentum backdrop, any return to dividends anytime soon?

Well, look, I think the Board was really clear at the time of the cap raise that, that's something that we'd look at in FY '22 for the first time. So yes, not on this half. [ Would not ] be up to comment on it at this stage, Arie.

And next, we'll go to Phil Campbell from UBS.

Just a few questions from me. I just wanted to check. Is there a subsequent settlement for the Lightbox acquisition?

When you say subsequent settlement, are there deferred payments required, is that your question?

Yes, yes, in terms of the acquisition.

No, no, they're done. No, no, it's -- they're all done and dusted on Lightbox.

Okay. Awesome. The other one I just had was on broadband. I was wondering, Sophie, if you could maybe just give us any feedback from the Sky Nation panel on broadband and then if you've got any comments around kind of how many subscribers are required to get to breakeven at an EBITDA level.

So I can certainly say that the feedback from the SKY Nation panel is incredibly positive. And the Wi-Fi 6 router that we've talked about and also coupling that with our customer service, those seem to be resonating. So as I said earlier, this is not about us becoming a telco. It's actually about delivering value to Sky Box customers. And the feedback is so far so good. And we've been very clear that, whilst we've had some cost to date and there is a bit of investment still before we see the revenues come in, we're very comfortable that it's the variable cost model and the way that we're looking to deploy is very sensible. So yes, we're comfortable with the lead in that we've got. Anything else you want to add to that?

No. Good as well. Yes.

And next, we'll go to Brian Han from Morningstar.