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

Thank you for standing by. And welcome to the Sky Network Television FY '22 Results Webcast. [Operator Instructions] I would now like to hand the conference over to Ms. Sophie Moloney, Chief Executive Officer. Please go ahead.

[Foreign Language] Hello, everyone, and welcome to Sky's 2022 full year results call. I'm Sophie Moloney, your Chief Executive here at Sky, and I'm very pleased to be joined by Tom Gordon, Sky's Chief Financial Officer. We have a strong set of results to take you through today, including positive news on the capital management front. So, let's get into it. Before we do, a quick rundown on the agenda. I'll begin by providing an overview of what we've achieved in the year. We'll then look at how key parts of our business are tracking. Tom will take you through the numbers in more detail, including the capital management strategy before handing back to me on the outlook. And as usual, we'll make sure we have time at the end to answer any questions that you may have. Today's results build on the trend in the first half when we talked about reaching a positive inflection point for Sky. I'm delighted to confirm that we have produced a strong result that includes customer and revenue growth. And while we've taken an expected step-up in rights costs, very importantly, we have achieved the permanent cost savings we promised to deliver. At the same time, we've continued to secure the key content for our existing and future customers, including the rights to the Premier League, which we welcome back to our platform for the next 6 seasons. We had a firm focus on execution in 2022, including an extensive cost review, the sale of our Mount Wellington site and the development of our transformational new Sky Box. And as you know, we also explored capital investment opportunities as part of our capital management review and all the while continuing to deliver for our customers 24/7 during a pandemic. You'll find the usual detailed snapshot of performance against our stated targets for FY '22 in the appendix. A number of these were superseded during the year as we exceeded our own expectations. I'm very proud to be leading a team that is determined to deliver for our customers and our investors. That strong focus on execution has seen the benefits flow through to the bottom line with strong growth in net profit after tax and free cash flow. As a result, we finished the year with a significantly increased cash balance. We'll cover capital management in more detail soon, but suffice to say that we've achieved a significant turnaround in Sky's financial position. It's pleasing to be confidently returning to paying dividends with a final dividend of $0.073 per share announced today. Let's now dive into some of the detail on how the business has been performing in FY '22. Starting with a brief reminder of why we're here. It's about connecting New Zealanders with the sport and entertainment they love. There is an incredible depth and breadth to our unmatched content offering as this slide shows. This is certainly true across sport, entertainment, across drama, news, documentaries, kids, reality and movies. We're the ultimate aggregator of the biggest bundle of content in Aotearoa New Zealand. And how do we connect New Zealanders with the huge array of content? Well, we do it in ways that work for them right across the country. As this slide shows, we truly offer the full spectrum of options from the powerful reach of our advertising supported channel, free-to-air channel, Prime, through to our commercial customers, including pubs and clubs, hotels, motels and gyms, offering another way for New Zealanders to discover and enjoy Sky content. Of course, there has been the ease and the reliability of our existing Sky Box as well as the impending arrival of our exciting new Sky Box with its transformed viewing experience for those who are already comfortable consuming via apps. Not repeating for one moment, of course, our streaming product, Neon and Sky Sport Now, which are continuing to go from strength to strength and to attract new audiences. As we look across this range of options, it's a great reminder of our unique ability to maximize our content investments to meet a broad range of customer needs. We clearly see opportunity ahead of us. This content and product range is delivering growth in customer relationships. In 2022, we saw a 4% growth year-on-year, which has obviously flowed through to 4% growth in revenue. It included 11% growth in streaming customer relationships and without wanting to overcomplicate things, it's worth noting that the growth would have been 18% if we take out the impact of the declining RugbyPass space. And as you'll be aware from our financial statements, RugbyPass is an asset held-for-sale, given that it forms part of a wide-ranging partnership deal, we're in good discussions with World Rugby about. The key point on this slide is that with normalized 18% growth, both Neon and Sky Sport Now are really starting to deliver. Sky Box customers are down year-on-year, but with further stabilization and churn and ARPU, which I'll speak to shortly. We were pleased to welcome retransmission customers being those of our customers who receive Sky through Vodafone TV to a direct billing relationship with Sky in March. And in the coming period, we will offer these customers new Sky products, noting that for some, their preference is for IP delivery. Commercial customer numbers were relatively stable at close to 7,000 after what's been an incredibly challenging period. At interims, we promised to break out our Sky Broadband numbers. And here, you'll see that we've followed through on that promise, and we're reporting an on-target 18,000 at the end of the first full year in market. Looking then through to the detail on Sky Box and you'll see the breakdown of acquisitions and disconnections. The first call out is to acknowledge that acquisitions are down year-on-year. This was partly due to the first half impact we told you about in February, where COVID lockdowns hampered our ability to carry out home installations. And in the second half, we've taken deliberate steps to change our acquisition strategy in ways that we are confident would deliver better long-term results and we're already starting to see that play out. We knew there was room to improve and we've honed in on the sales channel mix to identify significant opportunities to reduce acquisition costs, lift the revenue profile and improve early 10-year churn rates. This means that we've made the considered shift away from sign-up offers that create the appearance of short-term wins, but largely result in a washing machine effect on the other side, with disconnections clearly linked to the end of deeply discounted contract periods. Already, year-to-date, the new approach has brought about a 60% reduction in third-party costs and more than 20% savings in foregone revenue. The other positive is the improved quality in our acquisition profile, attracting customers to the right package for their household wallet. And on this front, we're excited to see the Sky Broadband attachment rate for new Sky Box customers is 10%, well above the attachment rate for our existing base. And of course, we've talked a fair bit about our new Sky Box, which we are confident will have a positive impact on acquisitions going forward, while acknowledging that the rollout will be phased as we focus on our loyal existing customers first. Turning now to the other side of the equation, and you can see that disconnections are following the positive path of recent years and has actually come down by another 22% this year, continuing the trend to stabilization. One final thing to point out before we move on is to let you know that as we look ahead to our half year reporting, the retransmission customers moving to a Sky Box product will be treated as acquisitions. On Slide 9, you'll see where the changes to our acquisition strategy are going to be playing out. We have a significant cohort of long tenure Sky Box customers. They now make up 76% of the base, where 4 years ago, it was 66%. And this customer group also has an incredibly low churn of 6.5%. That's an improvement against last year's 7%. What we're leaning into here is the lower 10-year churn rate, partly through the new acquisition strategy, but also through a number of other initiatives designed to keep our customers happy that I'll touch on shortly. You can see from the chart that we've made significant improvements in our 0 to 1-year churn, which was close to 40% 4 years ago. And while it's improved to 23% this year, we know we can do better. And the same goes for our 1- to 4-year customers, we have made a 7% improvement this year. All in all, we have reduced total annualized churn to 10% in FY '22. That's down from 12.2% in the prior year, which is an impressive result, particularly when compared to global players. Some of that improvement is down to other initiatives such as Sky Broadband. And more recently, the highly successful launch and deployment of our Sky Rewards program, which is already shown through an improved net promoter and customer satisfaction scores as well as an incremental reduction in churn across all tenure groups. Turning to Slide 10. And here, you can see the progress we've made towards stabilizing Sky Box revenue. While the result was down 3.4% year-on-year, this was a significant improvement compared to the previous year, where revenue was down by 8.6%. In dollar terms, that's a reduction of $18 million this year compared to a $50 million reduction last year. And it's also important to note that this year's revenue was generated from a starting point that was 20,000 customers lower than the year before. Increase in ARPU is part of the reason for the improvement. This was $0.44 higher this year at $78.84 with a number of factors playing into this. These include, first, the unwinding of the first month free offer we made to reseller customers when they've transitioned to Sky in the prior year. Second, the positive impact I mentioned earlier from lower levels of discounting as well as the higher retention rates, supported by initiatives such as Sky Rewards that mean more of our high-value customers are staying. And finally, the other factor that made a small impact in FY '22 was the sports pack increase of $3 that we put through in May, which was the first Sky Box price increase in just over 3 years. Looking ahead, this will deliver a bigger contribution over time with 70% of our Sky Box space subscribed to sports at the year-end. You'll also see from the lower chart that 85% of the base now has ARPU above $50 per month. So overall, we're heading in the right direction. Turning then to Slide 11. Yes, it's our transformational new Sky Box. I say transformational because the viewing experience is transformed as the imagery on the slide readily depicts. It's also transformational in terms of the data that the new box can get us, helping us to refine our content and customer propositions even more and in terms of the cost to serve with self-installation and more self-service where customers prefer that. It's undoubtedly been quite the journey to get here being a product developed with our customers for our customers and we're looking forward to kicking off customer trials very soon. We will be communicating directly with customers on our go-to-market plans in the coming weeks and I look forward to sharing them with you then at that juncture. Turning to Slide 12. And as promised, we've provided more information on Sky Broadband. We are reporting that after the first full year market, we have 18,000 Sky Broadband customers. That's an attachment rate to Sky Box of 3.3%, so within our FY '22 target range. But having already achieved a 10% attachment rate for new acquisitions, it's clear we have a significant runway with new and existing customers. So, you'll see that we've generated $8.8 million in revenue in the first full year with strong ARPU of $72.13, excluding GST. Importantly, we've achieved this growth in the way we set out to based on a quality product offering that really stacks up with a great user experience and with highly untelco-like satisfaction scores. And as expected, the bundled offer is having a positive impact on customer churn, which is 2 percentage points lower than average for customers with Sky Broadband. Turning to Slide 13 and our streaming customers, we start with Neon. As I mentioned earlier, customer numbers have continued to climb, up 14% year-on-year. And while the growth rate was more moderate this time around, it's delivered a 47% increase in revenue with the full year impact of the May 2021 pricing increase also playing a part in this. Engagement, a lead indicator on retention remains high and tenure, the cumulative months of active customers is also rising with a strong lineup of content hits hopefully, keep our customers happy. And less than a fortnight ago, we introduced new pricing for Neon at $17.99 per month, along with the new basic plan to provide optionality at $12.99. While we're still [ zeroing ] our full Neon service, we believe there's also a market for a lower tier offer. And on the next slide, you'll see the phenomenal growth in Sky Sport Now, which is clearly hitting it out of the park with 53% growth in customer relationships and 87% growth in revenue in FY '22. As time passes, we're understanding more about the mix of regular and casual sports fans that are attracted to Sky Sport Now, and we're very alive to the opportunity in the growing win-back pool. The latest platform upgrade, which happened earlier this week, introduced a number of new features like watch from the start or restart, which can be particularly popular sports fans watching live events such as the Premier League from other time zones and multi-view, which can display up to 4 channels or live events on screen simultaneously. Combining great content with a great user experience is working for Sky Sport Now, and it's the clear market leader in sports streaming in Aotearoa of New Zealand. Looking now at streaming revenue as a whole. This was significantly higher at 27%. And importantly, that included 47% revenue growth for Neon and 87% growth for Sky Sport Now with Sky Sport Now benefiting from customer growth and the success of shorter-term event passes, while Neon included the 12-month impact of the 14.6% price increase from May 2021. The other point to note is that the blended ARPU was also higher at $18. Turning then to Slide 16 and our commercial customers. It's very pleasing to be able to finally report that from the 1st of August, all of our customers have now returned to normal billing after a period of well over 2 years where we supported those affected by COVID with discounts. These discounts have been rolling off progressively and that's contributed to an 8% rise in commercial revenue in FY '22. And there's plenty of room for optimism in this part of the business with the recent reopening of New Zealand's borders and return of international visitors, a welcome boost for our accommodation and hospitality [ free-to-air ] customers. And on top of this, the work we've been doing in value-based tiered pricing for our licensed premises customers, which started back in February 2020 has created a runway for further revenue growth. The latest step up, which came in June 2022, means that without the impact of COVID subsidies, ARPU would have been 16% higher than when this program was first launched. Looking now at advertising. And here as well, we see a return to growth with revenue up 6% year-on-year. It's pleasing when taking into account that FY '22 didn't have any contribution from advertising on the Discovery pass-through channels, with the revenue from those channels having moved across to Discovery from the latest deal in February 2021. And with that, I'll now hand over to Tom to take you through more detail on the financial side.

Thank you, Sophie. I will now take you through the financials resulting from the operational performance that we just walked through. I'm very pleased, particularly in my first full year results as CFO to report that we've delivered on our FY '22 guidance across the board. And with that comes the increase in free cash flow that's behind Sky's confidence to return to paying dividends. For the purposes of comparing our reported results to guidance, we have excluded the benefit of the sale of the property and an accounting adjustment for SaaS capitalization. This makes it like-for-like with the basis of our guidance provided earlier this year in December. As we go through the scorecard, revenue landed at $736 million, above the midpoint of our guidance. On an adjusted basis, EBITDA landed at $156.7 million and it's important to remember that's significantly above our original guidance of $115 million to $130 million, which is proof that the cost-out program we revealed in December has been successfully executed. And then with an excellent result in NPAT landing at $48 million at the top of our guidance range and 10% higher in the previous year -- than in the previous year. A simplified CapEx road map and some timing underspend against our plans for the new Sky Box has meant that we landed within but at the bottom of our guidance range on an adjusted basis. The result is a $24.2 million or 128% increase in our free cash flow year-on-year. And this has enabled Sky to confidently pay a final dividend of $0.073 per share based on a 60% payout of the smooth cash flow across the year. Moving to Slide 20. I'll now walk you through some of the details, starting with revenue. Here, you can clearly see the inflection point in revenue as we move to 4% growth this year from a previous trajectory of a 5% CAGR decline. Following on from the positive news in the first half, Sky has delivered a strong return to revenue growth for the full year. And pleasingly, it's being driven by our core subscription revenue, including the increased ARPU that Sophie walked you through on the earlier slides. That's led to an overall $25 million increase in revenue, excluding the sale of the property. The increased ARPU across Sky Box and streaming highlights the strength of Sky's content and the improvements that we've made in demonstrating value for our customers. Importantly, the sustained growth in streaming revenue of 27% is more than offsetting the improved, albeit still declining Sky Box revenue. As Sophie also mentioned, we're seeing positive trends coming through in our other revenue lines with both commercial and advertising revenue bouncing back. Finally, other revenue rose by 46%. This is partly due to unsold programming rights we told you about in the first half as well as good strong revenue from our Sky Box and Sky Broadband installations. Now taking a closer look at our cost story, we move to Slide 21. We talked about having a firm focus on cost control and it's really pleasing to be able to report that it's having a meaningful impact on our overall performance. We've delivered on the permanent and one-off OpEx savings during the year when compared to the guidance we gave at the start of the financial year. This meets our 7th of December guidance update, which identified a further $35 million of OpEx savings across the various categories of programming and non-programming costs, and therefore, an implied operating cost target at our guidance of $582 million. The permanent savings of $29 million have been delivered through data-led rationalization of third-party spend and a deep focus on discretionary cost areas across programming, subscriber and broadcasting and infrastructure costs. Those savings have absorbed the increases we've experienced as a result of the nonrepeat of COVID rebates to the level we experienced in FY '21, together with the growth in programming costs from new and returning content. We have also seen growth in our broadband and streaming costs as a result of the strong growth in those revenue lines. On the next slide, we bridge the year-on-year movement in EBITDA and step you through the changes that get you from FY '21 to our underlying FY '22 performance. Firstly, the $7 million we called out due to COVID-19 is the net impact in FY '21 from the $14 million impact on revenue, which was more than offset by the $21 million benefit in equitable reductions in rebates across content rights that was outlined in the previous slide. The next thing to point out on this slide is that at an EBITDA level, streaming growth is more than offsetting Sky Box, driven by the operational drivers Sophie outlined earlier. It's also worth noting that the Sky Box EBITDA impact includes marketing investment ahead of the new Sky Box, meaning the benefit will be realized in future periods. While we've seen growth in our content rights line, we've been able to offset this to a large degree through the permanent savings of $29 million that we highlighted previously. The growth in our content rights is a result of stepping into the full year impact of the NZR agreement, the rights costs associated with the Summer and Winter Olympics and the men's T20 Cricket World Cup. A number of those won't be repeated into 2023. That gets us to our underlying EBITDA number of $154 million, which will be the basis of our FY '23 guidance slide later. From there, we've added in the one-offs, which include the $14 million gain from property sale, a small adjustment for content impairment and $3 million from the release of a Holiday Act provision that is no longer required. This gets us back to our reported number of $169 million. Now turning to capital expenditure on Slide 23. You will recall our focus over the past few years has been on working within a CapEx envelope of 7% to 9% of revenue. And from FY '22, we've been targeting 50% to 60% of our spend to be on growth initiatives. While we've achieved the CapEx profile of over 40% focused on growth, the actual spend level came in at 6.1% of revenue and towards the bottom of our guidance range. This is due to the chipset shortages and global supply chain delays, which have impacted our Sky Box investment. We now expect some of the spend to carry through into FY '23. Our previous investment and focus on the lighter capital model has positioned us well. It's meant that the spending on the new Sky Box has been achieved in a more capital efficient way than would have previously been possible, allowing us to land at the lower end of our CapEx envelope. The rollout of the new box will see a step up our CapEx spend in FY '23 and FY '24. But once we're through this investment cycle, we'll return to a later CapEx run rate. Moving now to cash flows. What's clearly evident is that the business has generated a significant amount of cash in FY '22, $104 million for the year compared to a net outflow of $76 million in FY '21, which you'll remember included the repayment of our $100 million bond. Our cash flow from operations was $119.6 million in FY '22, up 18.2% year-on-year. The March '21 bond repayment meant that net interest was slightly lower year-on-year. And as we've already covered, outflows for CapEx and lease liability were lower in FY '22 due to a lighter and more focused CapEx profile and the Optus lease renegotiation. As we step through the bridge, you'll also see one-off items, including the second installment relating to the OSB sale and the net proceeds from our property sale of $56 million. As a result, we closed the year on a very strong footing with $139 million of cash on hand. This is certainly a good position to be in and leads nicely to the next part of the discussion on capital management. Having achieved this turnaround, we have the opportunity to explore capital management options. As you will know, this included the opportunity to consider an investment in MediaWorks. And while we reached the decision not to proceed with the transaction at this time, the learnings about our own business through that process were valuable as is the chance to get feedback from our investors. And so as we signaled in June, we have been exploring options to return capital to our shareholders and accelerate organic investment in the business to drive further growth. The capital management strategy we're announcing today provides for both these outcomes while also providing a growing return to our shareholders through regular dividends. At a high level, the immediate path involves returning the majority of cash to shareholders, $70 million or an estimated $0.40 per share. This will happen via a court sanctioned return, more detail on this in a minute. In addition, we also returned $12.8 million or $0.073 per share as a final dividend. That's on the basis of a 60% payout for the half, calculated on a smooth free cash flow basis over the 12-month period. In terms of future dividends, we're also signaling today that we expect to pay approximately 40% of the annual sum as an interim dividend going forward. As we've indicated, we will be investing for future growth, subject to the right criteria, again, more on that in a moment from Sophie. Finally, we'd like to highlight that within the scope of our 50% to 80% dividend range, we'll look to return excess cash to shareholders when there aren't opportunities to reinvest. We aren't ruling out the use of buybacks and we've indicated here that we would consider using these in future where this gives us an opportunity to deliver a better outcome for our shareholders. And taking into account all sources of funds available, we've included the $150 million facility from our banking syndicate and also set out our thinking around debt levels. Moving to the next slide, we've included some detail on the capital return. And I'll start by saying that the full range of options was considered and with the feedback provided by many of you taking into account through this process. Of course, sanctioned return was decided on the most appropriate way to return such a large sum as it's the most fair and efficient way to do so. The return will be conditional on court approval and 75% approval of the shares voted on this resolution at our 2nd of November Shareholder Meeting. Based on this, the payment is expected to reach investors around late November. And on that note, I'll now hand back to Sophie who will take you through the investment opportunities we have in our sites.

Thank you, Tom. Great work. To pick up then on the thread of why we were interested in undertaking the due diligence of MediaWorks, a core driver of the interest was to maximize our content investment and further diversify our revenue streams. Those drivers still hold true. And on this slide, I've captured some key areas of further investment. As already referenced, our new Sky Box is built on our digital platform that already powers Sky Go. And further to feedback from some of you, we also see real benefits in reserving some firepower to accelerate that rollout and to speed up the delivery of additional IP-based products, particularly as we look to meet the needs of the Vodafone TV customer cohort. Second, it's salient note that the advertising market in New Zealand was reported to be worth $3.2 billion in calendar year 2021. So, we see a real opportunity to go after the significant revenue price with some considered investments in our capability across data and technology. In each of these instances, we have a commitment to partner where it makes sense with a focus on working with providers who have deep experience and the expertise to help us go faster while also allowing our internal teams to continue to deliver every day for our customers. For comfort and clarity as things stand today, the only aspect of what I'm outlining on the slide that is not already within the guidance range is the further acceleration of the rollout of the new Sky Box and other products on the roadmap. All other reinvestment buckets are captured within the FY '23 guidance. With that, we now look ahead, beginning with our outlook and guidance for the rest of the financial year. While we remain very alive to the financial headwinds facing New Zealanders and our economy, we've entered FY '23 with a continued focus on customer and revenue growth and an unrelenting focus on uncommitted costs, which is coming through in our guidance. So while programming costs will increase, we will partly offset this against the permanent savings made in FY '22 plus the new savings we have in our sites. As already mentioned, CapEx will be higher as we roll out the new box. And Tom will walk you through a detailed EBITDA bridge from FY '22 through our FY '23 guidance in just a moment. But you'll also see that we're guiding to NPAT of $50 million to $60 million. And to note, for everyone's awareness, our guidance excludes RugbyPass given that it's held-for-sale. And based on delivering this guidance, the Board has indicated that it anticipates paying FY '23 dividends at the upper end of our guidance range of 50% to 80% of free cash flow with total dividends expected to be in the range of $17 million to $23 million. Over to you, Tom, to give a run through the EBITDA bridge.

Thanks, Sophie. On a like-for-like basis, we're forecasting EBITDA growth of 4.1% at the guidance midpoint of $160 million. This is driven by continued revenue growth as well as cost control, which more than offsets the cost of rights renewals and new content. So, on this slide, you'll see we've started by reversing $16 million of one-off impacts on FY '22 EBITDA, getting us back to the normalized EBITDA number of $154 million. From there, we show expected revenue growth of $26 million, along with the incremental costs associated with delivering that revenue growth. FY '23 will include a step-up in rates associated with new and renewed content deals, but partly offset by the full year benefit of FY '22 permanent cost out as well as the next phase of cost-out measures that we're leaning into in FY '23, which we expect to deliver a further $10 million to $20 million in savings.

Before I hand back for questions, as the Chair noted in his letter, we really appreciate the ongoing support of all of our investors and of course, of all of our customers and partners. This continues to be a team game for all of the Sky crew, and we are determined to deliver for all of you. Thank you. That now concludes our formal presentation. And so we look forward to your questions. I'll hand back now to the operator to get us underway.

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

Just firstly on capital management, I mean, we've already signaled the dividend policy approach. You've decided to retain half of the cash and you're retaining sort of -- or you're paying out 50% to 80% of free cash flow. Can you just talk to some of the key factors that I guess is driving at this point an element of conservatism in the capital management?

Arie, good to hear from you. I don't think about it as being conservative. As we've said, this is a big year of delivery for us and we really do, as I noted, just now, want to see about investing that having the firepower to invest further CapEx for growth, particularly with the new Sky Box and other IP-based products that we're looking to deliver this year. We've taken into account feedback from shareholders post the MediaWorks -- looking at MediaWorks, and this was consistent actually with the views we actually took direct from our investors. And also, we are conscious of the economic headwinds in the market. But just to be clear, this doesn't reflect anything around our confidence in terms of moving on with the momentum from this positive inflection point in terms of customer and revenue growth and we're really excited to be able to keep delivering. And as Tom just said, Arie, to the extent that we cannot invest that capital, we will look to other ways to distribute in future.

And just on, I guess, so is what you're suggesting there that there's potential that you could invest over and above the CapEx guidance, is that what you're saying?

Yes, that's correct.

And then just on the point within the policy framework as well that free cash flow will exclude one-off items. Is there anything under active consideration at the moment that would meet that definition of one-off outside of accelerating the box or IP delivery devices.

Not at the moment, Arie.

Just on to the next one, sub momentum. And I guess I just look at a top line level and acknowledge there's a bit happening with reseller RugbyPass and also you've obviously absorbed Lightbox wholesale. But over the last couple of years, as you -- particularly if you exclude the broadband numbers, it has been broadly flat. I mean we know Sky Box has come in. You've clearly got the content. Can you just sort of give a bit of an update on what if any plans you have in the packaging and pricing of content and whether the ambition is to sort of -- for another step-wise increase in content customer relationships, I guess, and driving up household penetration, noting through the period as well that household growth has been pretty strong?

I think Arie, look, we're feeling really good about where we are. Obviously, on the Sky Box side, we changed our acquisition strategy to make sure that we're improving in the longer term. As we look ahead, you're right, we have talked about trying to get to the right package for the household wallet. We remain determined to deliver on this next calendar year. And we do think that we'll see more growth on the box side as a combination of not just the new box experience and other IP delivered versions, but also thinking about packaging the content in ways that works, for example, for younger families as opposed to connected nesters. So ultimately, it's about trying to deliver to those different customer segments. And of course, Neon and Sky Sport Now we are expecting to go from further strength to strength this financial year. The content slate for Neon is phenomenal as it is for Sky Sport Now. So yes, we're feeling good about where we are and definitely see further growth on all of those customer relationships.

And then just the last one, just on the revenue growth in that bridge, Tom, that you went through. So $26 million there of revenue growth. Would it be fair to say that the vast majority of that sort of comes from broadband and some of the rebounds still to occur in sort of commercial advertising? I mean, within that guidance number, is your assumption that streaming and Sky Box revenues combined are sort of broadly flat?

No, no, we're still expecting a continuation of the net growth into next year between streaming and Sky Box. There is a contribution from broadband and from an ongoing recovery in commercial, but we're still expecting the streaming and box to grow.

Yes. It's growth in the core, Arie. And you know, that the ARPU -- positive ARPU trends on the box side are continuing which we're very happy about.

Your next question comes from Micah Barr with Craigs Investment Partners.

Can you hear me okay?

Yes, all good.

Just a couple questions on pricing for me. The May $3 price increase for Sky Box, that was the first time in a while. What was sort of the rationale for that? Are you sort of capitalizing on a reduced period of churn? Or is that something you plan to continue with or?

Look, you're right. It was the first time in 3 years. We all suffered through COVID particularly on the sports side. But at the same time, we did step into significant sports rights cost inflation. And so we had a very good look at it. We looked at our research and we determined that the $3 price rise was the right level. And if you look at the array of content that's delivered to our Sky Sport customers on the box and via Sky Sport Now, it is a huge array. So, it was really about thinking about those input costs and just making sure we can continue to deliver for all of our customers. So, we look forward to seeing the full year impact this year of that $3 price increase. And just for your awareness, 70% of our Sky Box base are Sky Sport customers.

And then just on the recent Neon price increase as well, up to the sort of $18 mark, I appreciate it's only been about a week since that happened. But have you seen any sort of difference in customer behavior towards that pricing in the last week?

Yes, it's pretty early. And it has coincided with one of the biggest entertainment shows on planet right now, House of the Dragon delivered by our partnership with HBO. So, it's too early to give you any indications on that. But what we would say again, is that we approached it looking at our -- with our data and insights, we do have the $12.99 option, which is a -- it's not the old singing or dancing, but we saw an opportunity there. So again, it's about trying to give customers options that may best suit them.

And just the last one for me. Just generally, with the streaming business, how much operating leverage are you starting to get from that? Its revenues are up sort of 27% year-on-year as your cost of sales staying relatively flat and most of that coming through is incremental margin? Or is there still a bit of cost creep in that?

I think the way to think about it is across a sort of full cash perspective, not just from a P&L perspective because we -- those streaming products don't attribute the same level of capital investment to install and service a box, for example, or a satellite on a house. And similarly, you will also not have the same level of investment in your CapEx to manage multiple platforms. So, as we see the shift towards those streaming products, we can see more of a digital platform strategy, which reduces the overall CapEx envelope. But you can see coming through in our capital intensity.

And the only thing I would add is in terms of the programming rights, the power we have is being able to monetize across all of the platforms. But the Sky Box ARPUs are still the most significant and are really important in terms of being able to secure that great content for each of those platforms, the streaming platforms then get benefit of.

Your next question comes from Aaron Ibbotson Aaron Everson with Forsyth Barr.

Congratulations on delivering some revenue growth. I have a few questions. My first one relates to programming costs for -- in the bridge to FY '23, which I guess was quite a bit higher than I had in mind. And I guess my question is, a, isn't quite a few things dropping out as well, like the Olympics. You too mentioned men's T20, women's cricket. It seems a little bit to me that whenever you sign a new sporting code, it's just -- it's an incremental add-on, but nothing ever gets dropped out. So first of all, what is the gross if you have that number? And secondly, what is the sort of return on investment for in particular English Premier League and I guess, the Rugby League? How do we as owners figure out whether this is profitable or not?

Aaron, I'll go first and just talk about the fact that you're right, there has been a step-up in those rights costs, but it's not just on sports. We announced Warner Media deal, which includes HBO. Like from across the ditch there was some good local competition around that. So, we did see a step-up in those rights, quite a significant one. It was very important for us to secure that because we know it really matters to customers and Neon are enjoying that now as well as on SoHo in the box, so with House of the Dragon. So, I just wanted to note this is not just about on the sporting side. And you may recall that I have said in prior periods that we do think on the sports side that this is a bit of a zenith in terms of those programming rights costs with competition that we've had in the market. And again, we're really clear that we needed to secure those rights for our customers. So, whilst we acknowledge there is that step up, we have the permanent cost savings that we're looking to secure elsewhere. And I think I just want to remind that as we look forward over the 3- to 5-year horizon, we do think there's a real ability to look at that programming rights cost line. Tom, anything that you want to add on not that we can go into specifics Aaron, which you appreciate.

I think the only thing I'd add, Aaron, to your question about how we ensure there's a return, return on that level of investment, you should feel reassured that we, as owners, as shareholders, we do a very sort of deep detailed analysis of each of the acquisition or renewal opportunities that we have, looking at what that return looks like over the period of the renewal or the acquisition. And using the Premier League, for example, we did exactly that over the 6-year period that we've secured the rights for, and you can rest assured with the data-led approach, that does have a positive return from the business.

It's just -- it's difficult to get my head around the magnitude here. So, $40 million step-up that's 100% of the free cash flow you generated last year or the average you've generated over the last few years, so it must be very significant, I guess, when it comes to acquiring new sports subscribers or something. Just hoping that you'd had some more details. Second question, just on how we should think about dividends. Maybe you've done a quite clear guidance this year. But if I think sort of moving forward, picking up from Arie, you still have a quite conservative balance sheet. You're talking to paying out 60% to 80%, so saving something for growth. So, I guess I was under the impression that your dividend was going to be more focused on your sort of underlying free cash flow generation or your cash generation, excluding some of these growth initiatives, but it seems like your guidance for this year implies that we should deduct any additional growth CapEx as well. Is that correctly understood? Or how should we think about dividends, say, in '24-'25?