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

Thank you for standing by, and welcome to the Sky Network Television Interim Results 2022 Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Sophie Moloney, Chief Executive. Please go ahead.

[Foreign Language] Hello, everyone, and welcome to Sky's Interim Results Call for FY '22. I'm Sophie Moloney, your Chief Executive here at Sky, and I'm very pleased to be joined by Tom Gordon, Sky's new Chief Financial Officer, who joined us in December. I've been really impressed with the way Tom has quickly got up to speed and with the excellent contribution he's already making as part of my new executive leadership team. A bit more on that team later. So in terms of today's proceedings, I'll begin by providing an overview of what's been achieved in the half year at Sky. I'll then step into the detail on some key areas before inviting Tom to give you more color on the financial performance for the period. I'll then discuss components of our capital management review before moving to the outlook. And as usual, we'll make sure we have time at the end to answer any questions you may have for us. So I'll start with a reminder of our strategy and what matters most, our customers. Our special role at Sky is to connect New Zealanders with the sport and entertainment they love in ways that work for them right across the country. In this past week, we've been tuning into key reason action at the Beijing Winter Olympics. And tonight, we're also looking forward to sharing one of our Sky original shows raised by refugees with all of New Zealand on our free-to-air channel, Prime. Now I won't set through each part of the strategy but simply highlight our 4 key focus areas of customers, content, people and financial. In the past 6 months, we have increased our momentum in each of these key areas, and you'll see the evidence of it coming through in today's presentation. Today's results confirms our view that FY '22 marks a positive inflection point for Sky. We have delivered a solid return to revenue growth, and we're on target to achieve considerable permanent cost savings. As a result, having significantly raised our guidance in December, it's clear that the business transformation is gaining traction. And how does that play out in the first half? As you can see from the Slide 4, the firm focus on execution is paying off, and I'm very happy to report positive progress on all areas in the period. On the customer front, the number of relationships is continuing to rise, up 6%. And we continue to secure the content that our customers value, using our extensive data and insights to make informed choices. And on that note, we were very pleased to secure a 6-year deal with the Premier League as announced to the market late last week, which was secured on the same basis. On the people side, I'm extremely pleased that in the current COVID constrained world, Sky has attracted a number of talented individuals to be part of the team. Financially, as noted, we're returning Sky to revenue growth while also completing the first phase of our cost review exercise, the combination of which is delivering a swifter return to sustainable free cash flows. As a result, the Board and I are delighted to be able to confirm Sky's new dividend policy and the expectation of a return to dividends at the end of FY '22 in accordance with that policy. We are also exploring opportunities to invest capital to accelerate Sky's growth, and I'll return to this a little later in the presentation. Clearly, the much improved performance of the business has started to show through in these results, and I'm hugely proud of what the team has and is achieving to ensure greater value creation for our shareholders. On Slide 5, we've set out a snapshot of the progress we've made against our financial year targets. And while in the interest of time, I won't go through these in detail, I would like to call out some areas where we're delivering well beyond our original target. In particular, we're retaining more Sky customers with an annualized churn reduced to just 9.1%. And we're growing Neon and Sky Sport Now in both customer numbers and revenues. And as you'll be aware that on the 7th of December, we set more rigorous targets for OpEx and CapEx savings. Yes, there is more to do, but we have our sights firmly set on achieving those targets, and I expect the momentum of H1 to continue throughout H2. Let's now take a look under the hood at the operational performance during the first half. Turning to Slide 7. We're seeing a clear continuation of growth in the customer base at 6% year-on-year, as I mentioned earlier. This growth is driven by the continuing trend towards stabilization of the Sky Box customer base and that's before we unveil our game-changing new Sky Box as well as the strong growth in streaming of 23% over the past 12 months. During the period, we were pleased to launch our Sky Rewards program to recognize and reward the loyalty of our valued Sky Box customers, and I'm thrilled to report the response has been great with more exciting plans ahead. Looking at our streaming numbers for a moment. As you know, they currently include our key products of Neon for entertainment and Sky Sport Now sport. Our streaming numbers also currently include 2 other categories: RugbyPass, which has reduced to low levels since our pivot in this business away from streaming and retransmission, which is those of our customers who received Sky through Vodafone TV is an IP-only delivered service. Those 2 categories are somewhat masking the more significant growth of our 2 core streaming services. This becomes clearer if you consider that while total streaming growth was an impressive 23% year-on-year, Neon's rate was higher at 28% and Sky Sport Now is hitting it out of the park at 62%. To close out the slide, I note that broadband customer numbers are not separately broken out. And that's because our initial focus for the service has been on providing additional value for our loyal Sky Box customers. So we simply think of this additional service as part of that existing relationship. But I'll talk a little bit more about Sky Broadband shortly. Turning to Slide 8, and you'll see here the familiar breakdown of Sky Box acquisitions and disconnections. The first thing to point out is that disconnections have shrunk significantly, a 30% improvement year-on-year. In addition to the refocused efforts of the team, there are a number of drivers for this improvement that include completing the migration of reseller customers to a direct relationship with Sky and the impact of an increasingly loyal customer base. We did, however, have lower customer activations during the period, acknowledging the impact of the COVID lockdowns on our ability to carry out home installations during this time frame. Our acquisitions are getting more targeted with a greater use of the online tools now at our disposal. Also, our strategy has been refined to reduce the use of more deeply discounted sign-up offers. Both of these changes are expected to improve our cost of acquisition with lease dependence on third parties along with ensuring that customers join us on the right product for their household wallet. On Slide 9, we've taken the time to provide you with a snapshot of both the current tenure of our direct Sky Box space as well as new information on the ARPU profile. Both speak to the quality of our important Sky Box customer relationships. As you can see on the tenure side, 75% of direct customers have been with Sky for over 5 years. And for this group, churn is extremely low at just 6.7%. And similarly, on the ARPU side, 84% of customers pay us at least $50 a month. And of that, a healthy 32% of customers are paying over $89. Very pleasingly, this segment has risen by 4% from a year ago. You can see the correlations when Tom talks to the shift in ARPU when he comes to it in his section. Turning then to Slide 10. We're incredibly excited as we get closer to the arrival of our new Sky Box. And it's not just our teams that are excited, it's also what our customers are telling us. They can't wait to get their hands on it. Remember, this new box is more -- much more than a simple upgrade. It's the center of our new connected entertainment experience that seamlessly brings together all of your favorite Sky content and popular apps with one remote and a personalized experience. The combination of satellite and Internet technology delivers the ultimate and high-quality, reliable video and audio to every connected home in New Zealand. It's the game changer our customers have been asking for. And we continue with our focus on making this product by the customer, for the customer with the latest research helping us finalize the go-to-market offers and positioning. We're moving to staff and customer trials soon and as previously committed, we're on track to deliver the first boxes into customer homes from the middle of this year. Moving to Slide 11. This time last year at my first results as Chief Executive, I was promising we were about to launch Sky Broadband, which we successfully did in March last year. Less than a year on, the positive momentum has continued. Customer response to the speed, reliability and easy setup has been very positive, as evident from the un-telco-like customer satisfaction scores that remain above 80% after the first 100 days from joining. In addition to this, customer efficacy, I'm really pleased to be able to share that we're now also award-winning having taken out the best bundle at the very recent Broadband Compare Awards and also finishing on the podium and the People's Choice Award, a huge well done to the Sky Broadband team. Turning to Slide 12. In streaming, I mentioned upfront the 28% year-on-year growth delivered by Neon in H1. From both a brand and ARPU perspective, it's very pleasing to see that 96% of this growth has come from direct customers. While the cohort lockdowns have driven some at list in viewership, these lockdowns also coincided with the release of very strong -- of a very strong lineup of content, including HBO's The White Lotus and ITV's Love Island U.K., which I seem to recall as a favorite of at least one analyst on today's call. The other lead indicators of engagement and tenure are also both trending well with a 44% improvement in average tenure to 15.1 months. This is a clear signal that Neon's audience is becoming more committed to continuous subscription, and we're supporting and encouraging this trend through an annual pass option. On Slide 13, we see that Sky Sport Now continues to go from strength to strength, with 62% growth year-on-year, mostly weighted to the last 6 months and a positive direction of travel in our lead indicators. Growth has been driven by the underlying fundamentals of reliable delivery of an extensive year-round calendar of live sport, as well as the many shows and documentaries that keep sports fans coming back for more. The highly passionate Sky Sport Now team has continued to innovate and pivot to opportunities created by marquee events such as the Summer Olympics with the Olympic Pass attracting high numbers, including 71% who were new to the product. Turning then to Slide 14 and the engine room of our business, our excellent entertainment and sports content lineup. As you can see, we partner with some of the biggest brands on the planet with a deeper partnership approach that takes us beyond simply being the broadcaster. The deal with the NRL includes an innovative digital partnership, and we're also working directly with New Zealand Rugby to grow the game in Aotearoa New Zealand from the grassroots to new elite competitions, such as Super Rugby Aupiki. It's also about our commitment to showcasing the best of women's sport. And on that note, we are looking forward to bringing the ICC Women's Cricket World Cup to New Zealanders in just a couple of weeks' time. Due to these multiyear deals, we are now entering a period of greater certainty over our rights costs. And this sees us resolutely focused on maximizing the significant depth and value of these rights across all of our platforms. I mentioned earlier that we've been pleased to attract top talent to Sky, including a number of appointments to my executive leadership team. I look forward to introducing the executive in-person at the Investor Day in June, along with other key members of the Sky team who are helping to ensure we execute on our strategy at pace. And as I said at the outset, I'm incredibly proud of our people and deeply grateful for all of their hard work. Not least when so many of our teams have been either working on site in constrained conditions or working remotely for many months as a result of the COVID restrictions. We acknowledge the additional stresses that this creates, and it makes these results the results we're achieving even more notable. And with that reference back to our results, I'll now hand over to the talented Tom Gordon. Thanks, Tom.

Thanks, Sophie, and good morning, everyone. It's my pleasure to be addressing you this morning as Sky's Chief Financial Officer. In what has certainly been an exciting and fast paced couple of months since I joined the team, I've been pleased to have had the opportunity to connect with some of our investors and analysts already, and I look forward to meeting with more of you over the coming weeks. It's certainly a very exciting time to be joining Sky. So I'll begin on Slide 17 by taking you through the headline financials. The first thing to highlight is that while our NPAT is down year-on-year, the result for half one is already above the original guidance range for full year earnings that we gave back in August. This is largely driven by operating expenses, which are less than originally forecast, but are higher in comparative terms year-on-year due to the expected step-up in rights costs and a lower level of COVID-related equitable reductions. And pleasingly, we're on track to deliver the full year cost savings indicated in our December investor update of $40 million to $45 million, noting that these figures relate to reductions against our original forecast. At the same time, there's also a really positive story around revenues, which have returned to growth, up $15 million or 4.1% compared to the prior year. It's worth pointing out here that this is the first time in 6 years that Sky has seen a 6-month period of revenue growth. Free cash flow of $39.7 million is more than 3x higher than the business generated in the prior period. Another clear tangible sign that Sky's transformation is taking hold. Turning now to Slide 18 for a deeper dive on revenue. You'll see that revenue growth of 4.1% year-on-year is a significant improvement and certainly a turnaround from the 7.3% decline recorded in the first half of FY '21. Pleasingly, a portion of this growth is coming from our core residential customer base. Combined revenue from Sky Box and Streaming was $311 million, an increase of 1.3% compared to the first half of FY '21. And when we compare the current period to the second half of FY '21, that increase was $12.4 million or 4.1%. Now I will point out that the half one revenue includes an initial contribution from broadband in the Sky Box category as broadband is an additional service we provide as part of this relationship. Although Sky Box revenue is down year-on-year, we're really starting to see the stabilization effect coming through. It's also clear that the growth Sophie talked about in our streaming customer numbers is flowing through to revenue. I'll take you through the major revenue lines in more detail in the coming slides. But before I do, I'll cover other revenue. And although it's only a small part of the total, it is up by $7.2 million year-on-year. This is largely due to income from unsold programming rights, including for the 2021 Summer Olympics. Turning now to Slide 19 on Sky Box revenue. We're seeing real progress on stabilizing this key part of our revenue base. While year-on-year revenue was down 3.1%, this was a significant improvement compared to a decline of 9.4% in the prior year. And importantly, although acknowledging it does include an initial contribution from broadband, when we compare to half 2 of FY '21, we see that turnaround starting to come through with a 0.3% increase. It is also worth remembering that the current period revenue has been generated from a lower starting point customer base. So what we're seeing here is an increase in our average revenue per user, or ARPU, which was up $1.51 against the second half of FY '21. And it's important to point out that it wasn't driven by raising our pricing with the last increase taking place in April 2019. The uplift is due, as you could see from Sophie's earlier slide, by improved churn performance, which has meant more of our higher-value customers have stayed, a recovery in our sports penetration levels and a more normalized contribution from pay-per-view events. I'll now turn to Slide 20 for a closer look at streaming revenues, which are continuing to grow significantly. Here, you'll see the increased customer growth of 23% referred to earlier, has translated to a 34% growth in revenue. This is mostly due to a significant proportion of the growth coming from higher ARPU Sky Sport Now customers, but also due to a large portion of Neon's growth coming from customers who have a direct relationship with Sky. As mentioned earlier, the growth in the streaming customer numbers was somewhat masked by RugbyPass and retransmission, and this is also the case for revenue. While streaming revenue grew by 34%, Sky Sport Now revenue was double that of a year ago, up an impressive 101% and Neon grew 57%. Both are comfortably above our FY '22 target growth rates of 15% to 25%. Neon's growth also included the impact of the 14.6% price increase put through in May '21, and it was pleasing to see this didn't have a marked effect on customer numbers or our customers' behavior as we continue to grow customers and the average tenure. We've also included a bit of detail on our commercial slide to provide you with more color. I won't go into all of this on the call, but there are a couple of key points to make. Firstly, revenue is up by 13% year-on-year despite a longer period of COVID lockdowns, where we once again provided support for impacted customers. We have indicated on the chart the impact caused by COVID, which is steadily moderating to $4.2 million in this latest half compared to $7.2 million in the previous comparative period. We've also returned to regular billing in December, meaning that we started half 2 on a better footing. Moving to the next slide and looking now at advertising. We've achieved a 5% revenue increase despite the previous period, including revenue for the 5 discovery channels, which are no longer included. This was part of the renegotiation for discovery rights. And as a reminder, the change was reflected in the pricing of that renewal. Without this impact, advertising revenue will be much closer to the pre-COVID run rate. Moving to the expenses side. Programming cost increases are due to the 2021 Summer Olympics and rights inflation over a number of contract renewals. This has been somewhat offset by a lower level of discretionary and strategic spend, some contract renegotiations and further negotiation reductions due to COVID impact. Subscriber-related costs were stable. However, the current period included spending on the brand relaunch, which we expect to reduce in half 2. The year-on-year result is also exaggerated by the impact of COVID in half 1 of FY '21, where planned spend in that period was somewhat delayed. Broadcasting and infrastructure costs largely capture the variable costs of our subscriber base, and this has increased in line with the growth of our streaming customer numbers. Other on one-offs cover our corporate and head office spend, which have also reduced in line with the strategic cost reset program. And finally, depreciation and amortization costs continue to come down, and this is mostly due to the reset of the Optus lease and the exit of OSB leases. As we have already seen, Sky Box revenue has now stabilized, but still shows a decline year-on-year after adjusting for one-offs. However, pleasingly, this is now fully offset by the growth in streaming revenue. COVID revenue impact includes the discounts we continue to provide to commercial customers to support them through the pandemic, where the impact has been less severe in half one FY '22. Similarly, on the cost side, the global sporting calendar was significantly less disrupted this period, and as such we've received $10 million less in rebates and discounts. As a result, you can see the net COVID impact year-on-year is a $3.3 million drag on EBITDA. One-offs in the half includes the net impact of the Summer Olympics and the T20 World Cup offset by the reversal of negative one-offs in the prior period, such as the reseller migration credit called out in Sky's interim results for FY '21. Rates inflation includes the uplift in fees across multiple contracts, including NZ Rugby, ESPN and Universal. And finally, the permanent savings are largely in our programming cost lines, being the reductions in the need for discretionary and strategic spend following significant right win, offset by the impact on advertising revenue of transitioning Sky's 5 discovery channels to Discovery. On the next slide, CapEx. Spending is down 7% year-on-year and is on track with our revised FY '22 guidance of between $45 million to $50 million. And after a period of investing in core infrastructure, we've continued to weight our spending towards growth, including our investment in the new Sky Box. While half 1 CapEx accounts for 5% of revenue, we expect the FY '22 total to be within the 6% to 7% target range. We set for this financial year with the phasing of CapEx skewed more heavily towards half 2. As I mentioned, we've seen a strong improvement in free cash flows, which were up 201% on the prior period. Cash outflows for interest and tax are both lower and lease payments were down slightly due to the December 2021 Optus lease renewal with H2 set to include a full 6 months of these lower fees. As a result, we finished the first half with a very healthy cash balance of $73.9 million and with $55 million in net proceeds from the sale of our Mount Wellington properties expected in March. And with that, I'll now hand back to Sophie.

Thanks, Tom. It's now my pleasure to talk about the dividend policy and our capital management approach. As the Chair outlined at the Annual Shareholder Meeting in October, the Board has been reviewing the capital management strategy against the backdrop of expectations for earnings in the period ahead, as well as Sky's investment needs and potential opportunities. Looking first then at dividends. There are 2 main factors at play that give us confidence that a return to paying dividends is now appropriate. The first is Sky's improved performance across the range of metrics that we track, including the all-important test generation, which, as you've just heard from Tom, has already reached a sustainable profile. And second, we have an increased level of certainty over our content runway for key rights, as I talked about a bit earlier. With these 2 factors in mind, the Board has adopted a formal dividend policy of distributing between 50% and 80% of free cash flow after excluding one-off items. And the Board expects these dividend payments to start from the end of FY '22 in line with this policy. In terms of the way the discussion on capital management, as also referenced in Tom's presentation, we're now in a great position of having generated further free cash as well as expecting an additional cash inflow from the property sale next month. Clearly, and very pleasingly, this is a significantly changed position for us at Sky. To borrow a sporting analogy, to be able to play a more attacking game rather than a defensive one is hugely motivating for me and my management team. This also means that in the coming short while, the Board and I continue to assess opportunities for investment to further accelerate the growth of the business. Our clear focus when assessing any potential opportunities will be on improving the sustainable returns to shareholders. We have committed to providing more detail by our Investor Day in June, if not before, noting, of course, our continuous disclosure obligations. With that, we'll now look ahead and turn to Slide 30 and the outlook for the rest of the financial year. We have certainly entered the second half with a clear sense of purpose. We expect to deliver continued growth in customer numbers and revenues. Critically, we're on track to deliver the permanent savings we set out in our December market update. And flowing from this, we're confident in our ability to deliver results in line with the upgraded guidance we gave at that time. There's certainly a lot of work and opportunity in front of us as we continue the transformation of the business, including the all-important delivery to market of our new Sky Box. In everything we do, we will remain focused on what matters most, our customers and on creating value for our people, our partners and very importantly, our shareholders. Today's results are good, but we know we can and must continue to do better, executing with determination and focus on the opportunities ahead. Thank you. That now concludes our formal presentation. And so we look forward to your questions. And on that note, I'll hand back to the operator to help facilitate the process.

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

Yes, the first one just on the impressive growth in -- on and Sky Sport Now. I guess the first question on Neon. In terms of the rate of growth, what did you sort of see in the back half of calendar year '21? And what are you seeing early in calendar year '22? Like is the rate of growth very steady. I mean is it accelerating, declining just some color there?

Arie, I'm pleased to say that Neon continues like Sky Sport Now to go from strength-to-strength. So that momentum from the first half is continuing into the second half.

At a similar, rate?

Yes, at a similar rate.

And then just on Sky Sport Now, I mean how do you measure that one? Because obviously, you've got weekly and monthly passes that people would sort of churn in and out of. Are you measuring on a unit basis on people that are retaining it for a minimum period?

I'm not -- we're measuring it on the number of customer relationships. And obviously, we're very keen for people to look at the longer term. But we're just -- we're really excited actually that people are now aware of this product. Things like the Summer Olympics, Arie got it on the map for a number of customers who didn't realize the functionality that sits in behind that service. So we're excited about the continued growth, and we kind of look at it on a look, on a 90-day active in terms of that measurement going forward.

Just in terms of the Rugby rights, you've made some commentary around having pretty good visibility on -- your rights commitments now. Can you just talk a little bit about settlement of calendar year '21 disruption? And then just the status of '22 forward in terms of future disruption changes in the content is that settled? And what does that look like?

Arie, I mean we never want content to be disrupted by COVID but obviously, as everyone is aware, we have an equal reduction regime in place that we have agreed with New Zealand Rugby. We've obviously had to call some of that out in our half year results. And -- look, that's in place. We're very hopeful that the postpone games are just postponements to be honest because for us, it's actually much more important about delivering that content to our customers. But in terms of that broader relationship, we're really happy with where it is. In fact, we've got ongoing conversations about how we work more closely to grow the game at the grassroots level in particular with our partnership with New Zealand Rugby. And to the extent that there are further COVID interruptions, yes, we've got a really well-established regime now in place agreed with New Zealand Rugby. So super comfortable where it is and as I see it, the focus now is on how we maximize the value of that partnership, both for New Zealand Rugby, but more importantly, for our customers.

No, I understand. And so just a clarification, you've got the framework well established now in the case it's required for further disruption and the base contract sort of remains as it was, no changes for changes and how the competition sort of ended up?

I'm not going to go into any of the confidential arrangement between us and New Zealand Rugby Arie, in terms of that overall deal. What I will tell you is that we're both in a really good place and really comfortable about the value exchange in that partnership.

Just on the opportunities you're looking at, sort of any color on what parts of the business or is adjacent to the business you're looking at? And then, I guess, specifically, also, would you consider a deal with Spark on sports similar to the one bid on Lightbox as part of what you're looking at?

Arie I mean, to take the latter first, we're always open for partnership conversations and mindful, obviously, of the competition laws in this country. But Spark in terms of our Neon partnership continues and is very strong. So yes, always open to partnership conversations that make sense. And to your other question around providing more color, not at this stage, we're very happy to be sharing a dividend policy with -- and we're very conscious about the fact that we are generating further free cash flows. And as the Chairman has set out in his letter we just want a little bit more time. I've just got my executive team together, as you'll appreciate, to really explore the opportunities not just to supercharge our current growth, but really think about what is, it going to look like for the next -- as we reset and revisit that overall 5-year plan from a much stronger base. So it's an exciting place for us to be. We're very conscious of the responsibility to shareholders and that capital management. And so that will be a conversation we're looking to have with investors in the coming days as we update, but also providing further updates to the market in due course and certainly by Investor Day in June.

And just as a follow-up on the Spark Sport and you're sort of highlighting the competition speak of it. I mean would it be -- in terms of -- I mean you've got a good idea of what those rights are worth than that. And I just sort of wonder would it be helpful from that perspective, do you think that you'd actually see them making a payment to you to take on their obligations for rights and production on cricket in particular?

Look, I think to be getting into that level of commercial detail at this stage, Arie, I appreciate the way you're asking it. And we are -- but you make a good point, cricket is not just about the rights. So those production costs are significant. And we're always open to having a conversation. And I do note, as I've talked about before, the joy of the new Sky Box is the ability to support apps and find ways to deliver that to customers in a cost-effective way. So that might be an opportunity, but we're very happy to have that conversation in due course with Spark direct.

Great. And last one and probably one for Tom. Just on second half implied EBITDA, I mean you've maintained your guidance. The implied second half EBITDA is sort of at midpoint, $70 million. Your rights costs have largely sort of stabilized. Can you just sort of -- I know there's a lot of moving parts and a lot going on in the business. But can you just sort of talk to what are the deltas on that sort of smaller second half implied EBITDA?

Yes Arie, happy to yes, as you said, there's a few moving parts here, so I'll give a little bit of color on those. In the second half of the year, you would expect to see a cost-out momentum build as we move into execution phase on a lot of the stuff that was part of our updated market guidance in December so that's, I guess, a driver or a lever that's pulling EBITDA up. Offsetting that, the first half also had a number of credit notes and coded benefits from canceled or postponed sporting events, which we've previously mentioned. And you're also in that scene, the one-off benefit we got and we talked about it on one of the earlier slides around other revenues of the unsold Summer Olympics rights, which happened in half 1, but clearly what happened in the second half of the year. As you say, a few moving parts there, but we're happy with our guidance and reaffirming our guidance for the full year.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

Aaron?

Apologies, I've got a very bad line here. So I was trying to listen online instead. But I'll start off with Vodafone TV and just if you're willing to share any expectations around that? And now on it's gone a few months if you work through your strategy and if you can share with us what your expectations are?

Aaron, Vodafone TV, look, we're in the -- we agreed the arrangement with Vodafone and very focused on bringing those Sky customers consuming by Vodafone TV first and foremost, across to a billing relationship with us, which we're well underway with. And then, of course, Aaron, it's about making sure we can deliver the right product to those Sky homes. The first box is a hybrid satellite IP delivery, which may work for some of those customers, but to follow swiftly after that will be an IP-only version. And so that's very much part of the delivery we're looking to and to welcome those customers across on the right product for them before Vodafone closes off that platform later this year.

Okay. But if I understood it correctly there's maybe 100,000 or so of Vodafone TV customers and something like a little bit less than half of that are current Sky customers. So you had a really good conversion of your other sort of migration. Have you any thoughts on how many of these you expect to convert?

So in terms of those overall numbers, the 100,000 is yes, the Vodafone TV, a significant proportion of those are just watching free TV. There's no pay TV or subscription relationship there. So our focus is on those who are already Sky customers enjoy our content. That's throughout our focus is at this stage and where the deal with Vodafone has been struck. Of course, if there are some of those 100,000 who like the look of a new IP connected box. And later this year, we will be talking about new pricing and packaging. Then of course, we're very, very keen to have a conversation. But at this stage, Aaron, for your benefit, we're just -- we're very focused on those Sky customers and bring them across the sky.

Okay. And apologies if I missed some of the news here but on programming costs -- if we look at the half, just delivered, which included Summer Olympics specifically, fully loaded, Rugby, et cetera. Should we think about this as sort of a reasonable level to work from on a 6-month basis going forward? I guess, Winter Olympics coming in, Summer Olympics dropping out, then you got some EPL coming in, et cetera? Is this -- there's been quite a lot of big moving parts as of late on -- and then you have your announced cost savings, but then you have these rights coming in, et cetera, et cetera. So if we just look at absolute numbers, the ones that you just delivered, is that a reasonable base to think about as a 6-month run rate or is, there any big moving parts that I'm not aware of?

Aaron yes, I can take that one. So I think for the next 6 months, yes, absolutely, I think your assessment is about right. The only thing I'd just highlight on your thinking is that the EPL contract will start from next season. So that's from August 2022. So that's outside of this next 6-month period. But I think in terms of your conclusion around the overall sports write-down, I think that's about right.

So, if I think that EPL roughly replaces the cost of the Olympics, that's not too wide of the mark?

Yes, I think roughly, that's about right. We're not going to go into individual amounts. But yes, roughly, that's about right.

Okay. The third question, just on -- and I appreciate this is primarily a Board decision and that you sort of slowly moving your way back into cash distribution. But 50% to 80%, while I think it makes total sense, obviously, considering where you guys are coming from and is a clear positive sign. I'm just trying to be -- to understand a little bit given your very strong cash position, what sort of -- what factors would make you be at the lower end of that guidance? And is there anything in particular that you or the Board are worried about for fee that do you think that you need to retain as much as half of your cash generation in light of what is and extraordinarily strong cash position already?

Aaron, look, I agree it's a great position to be in. And no, I'm not -- there's nothing from my perspective that I'm worried about at this stage. We're very focused on execution and delivery. And you're also right. It's a conversation at the Board level on behalf of shareholders to make sure that we get to that right level. So there's nothing of concern at this stage. What I would comment on is that we're, it's -- as you say, it's a positive inflection point and significant turnaround for Sky. And what I'm keen to do just over the next few months as carefully look at how we might be able to supercharge some of our core growth and also be having a think about what else could make a difference for Sky as we plot to the and reset and refresh with Tom support our 5-year plan and broader outlook. So, nothing to be concerned about that's going to be a live conversation with the Board and is ongoing. And as the Chair set out in his letter, if a capital return is the right thing to be doing and as appropriate, and of course, that is one of the options that the Board will consider at that time.

That's very helpful, apologies for many questions. But I just wanted to pick up on one of your comments earlier around the fewer customer acquisition from Sky Box, and it's a pretty clear trend that you are having fewer disconnections, but I was a little bit surprised that you called out COVID for the reason for fewer customer acquisitions? If I look broadly at sort of various restrictions we've had over the last sort of 3 or 4 half year period, I wouldn't call out the last 6 months has been particularly difficult? Or do you have an unusually large connect concentration in Auckland, which would surprise me or could you add some color. I would have thought it -- was something like that was the key driver?

Yes so look, it was very challenging and I think we've been in Auckland. So I think you understand, certainly from late August, we went into the further restriction period, it was very challenging to be able to make installations. And so, we did toggle off in terms of marketing and pushing out on acquisition. I'm not saying that's the sole reason. I'm just saying it did certainly have an impact. And why Auckland, well yes, just look at the population numbers in terms of where a tranche of our acquisitions would always be coming from. Tamaki Makaurau is obviously a key market. So but equally, as I talked about, we are becoming much more focused and making sure that we've got the right offers and market and that we're bringing customers on the right product for them. And as I look ahead, and we'll be talking about this further as we come into no doubt Investor Day then into FY '23, having a really good look at pricing and packaging, particularly around the entertainment tiers to make sure that we've got a broader offering for a broader base of New Zealanders as a key focus for me and my team.

Okay. Last question just on broadband and I'm sure there's no secret that from our side of the fence, we're a little bit disappointed that you've included broadband in the general subscriber revenues and costs. But I just wanted to know going forward at some stage, are you planning or expecting to break that out? And I guess related, if I not asked you before when, if at all, are you thinking that broadband will be a net neutral or even a contributor to EBITDA? Is that a 2025 or is it something sooner than that type situation?

Aaron yes, I appreciate that. And there's an element for me where I'm also a little bit disappointed but I wanted to be interrupting the strength of our core business in terms of returning to revenue growth. But certainly, at the full year, Tom is very focused on extracting out those numbers and making sure that -- that's shared with the market. And as we've said from the outset, we are -- we didn't go into this as a loss leader. We went into this to be margin accretive, and we are currently on target with our attachment rates over the next few years. And I think we said previously, it's around next year or is it 2024 I'm just looking at team, what we've talked about in terms of what we not talked about. No, Aaron, we haven't shared that more broadly so but, we're very comfortable with where we are in terms of the attachment rates and getting to our targets, and it will be margin accretive.

So Aaron, I can probably add that we -- as we mentioned that the guidance update on December the 7, there's a significant amount of momentum building into our cost-out program, and that includes both sort of short-term and cost initiatives, which we -- you're seeing come through in the guidance update for FY '22. But also a number of more medium-term cost-out initiatives and one of which I'm particularly I guess, passionate about or experienced and is obviously -- telco margin and our opportunities around accelerating that transition to margin accretive and so I'll be pushing hard into next financial year if we can, to get that back.

Your next question comes from Brian Han with Morningstar.

Can I please clarify your nonprogramming operating cost guidance. On Slide 5, it says you're targeting $22 million to $27 million in savings on that front. Is that an upgrade from the $17 million you said back in December? Or are you lumping CapEx savings in that $22 million to $27 million?

It's not an upgrade, but I'll let Tom just talk to a little bit of the detail, Brian, nice to hear from you.

Brian, yes, no it's not an upgrade. The original guidance already included $5 million to $10 million of cost savings. So the uplift is on top of that, which gets you back to the number there that we're talking about.

All right, so I must be confused by the actual labeling because you're saying operating costs, you're including CapEx in that $22 million to $27 million?

No, we're not. So just to be clear, we're not -- we're including what was in the original sort of guidance, which is $5 million to $10 million. And then on top of that was the additional savings that we talked about in December at the guidance update.

Tom, while I have you there, on the dividend front, can you shed some light on the imputation credit to be attached to those dividends when they come?

Sure, we've got a sizable imputation credit balance and so we expect these dividends to be fully imputed.

And Sophie, you mentioned a few months ago that there were some external interest in Sky and the things are sort of quietened down a bit since then. Can you please update us on what's happening on that front and what consolidation in the Kiwi telco space means for Sky going forward?

Brian, I mean, to take that first -- the last query first. No change for us in terms of that consolidation. Vocus is our wholesaler in terms of our fixed broadband business and that partnership is very strong, so no interruption to that. And then in terms of the broader conversation, Jarden remain appointed. And for me and my team to be honest, we're just cracking on and delivering for our shareholders. So obviously, if there was anything that needed to be disclosed to the market, Brian, it would be. But at this stage, we're cracking on Jarden remain appointed. And of course, if there was something of, interest to the Board that would be shared and considered.

Okay. And just last one, just a small query. The attachment rate you talked about for Sky broadband -- what is it attaching is that attachment rate to Sky Box customers or attachment to your total subscribers?

Sky Box customers because that's the focus of this product so it's giving value back to our Sky Box customers with a great reliable service so, the attachment rate to Sky Box numbers.

Our next question comes from Phil Campbell with UBS.

Just a couple from me. So I was just wondering on the EPL rights, if you could maybe give us a little bit more color as to -- obviously, it's a pretty good win for you guys and quite long tenure. Just maybe if you can give us some color on kind of what was the key reason you think that you ended up winning those rights, obviously, it could be price, but I'm just wondering if there's other factors that might have been a play there? And then the second one was maybe the second one was just on the capital management and reinvestment. I was just wondering if you can give us a few more details on possibly. Do you know at the moment what kind of size of reinvestment you would possibly be considering? And then obviously, there's a range of things you could use the funds for like obviously, internally, as broadband is accelerating the box, et cetera? And then obviously, externally, as Arie said, it could be Spark Sports or possibly overseas acquisitions kind of be quite good to get your guidance and kind of what's in and what's out when you're kind of considering this reinvestment and possibly the size?

Yes, no, I am -- well I wouldn't -- I think your thinking is aligned in terms of what would be looking to kind of accelerate when I say supercharge. And obviously, our new Sky Box is a clear opportunity that we see would be building in more CapEx, but we think that could make sense. And in terms of other opportunities, that's what we're having a look at in the coming short while. And obviously, things like the EPL for us, key content. We're a content company, Phil, as you know. And so, we're always alive to those sort of opportunities. In terms of that deal, I do just want to give comfort to our shareholders that we approach that as we do every content rights deal, looking at our data and our insights to see what we -- what made sense and to ensure that it is margin accretive, which we've done. And as you say, over 6 years, it gives us a real opportunity to work very closely with the Premier League. Particularly on the digital side because that's where we see opportunity for Sky Sport Now and I do just have to do a big shout out to Jonny Errington and Adam Crothers and our team who did a superb job. So to your point, as with the NRL, I don't think it was just about the size of the check -- it was about the whole partnership approach. And the team did a superb job and conversation, hence the great quote that we got from the Chief Media Rights Officer over at Premier League saying they're very happy that the EPL is back on Sky in New Zealand. So just for clarity, we bid at the right level that's going to be margin accretive for us, but it is the whole partnership approach. In 6 years is going to give us an awesome opportunity to maximize that value.

There are no further questions at this time. I will now hand back for closing remarks.

Great, thank you everyone for your time. I hope you can hear and maybe you can hear a little bit of tiredness in the voice. We've been running at this hard. We're really excited about the opportunity in front of us, and we're very, very mindful that this is about generating those sustainable greater returns to our shareholders. So on that note, we look forward to conversing with each of our investors in the coming days and welcome any feedback from anyone on the call. Please feel free to reach out, and have a great day, everyone. Thank you.

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