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

Thank you for standing by, and welcome to the Sky Network Television Limited 2023 Annual Results Announcement. [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 2023 full year results briefing. Thank you for taking the time to join today's call. I'm Sophie Moloney, your Chief Executive, and I'm joined by Andrew Hirst, Sky's Interim CFO, who will be familiar to many of you. As is the norm, I'll start by providing an overview of what we've achieved since we reported to you in February, followed by a look at the progress in key parts of the business. Andrew will then take you through the numbers in more detail before I return to discuss the outlook for the period ahead. And at this stage, we'll cross to the operator for your questions. We had a solid set of results this year. But before we do this, I want to make a couple of opening remarks. First, on the new Sky Box. Delivering this new platform and experience was a major milestone for us. And while we remain excited by the opportunities it brings, I acknowledge that there have been some early teething issues. I'm sorry that some of our customers have got letdown by their initial experience, and I'm grateful [indiscernible] to give us the feedback we need to improve. One of the advantages we have with the new Sky Box platform is the ability to address any issues, and to continually improve features through software updates. My team is working hard to develop the test, and roll those out as swiftly as we can. We're on the right path and we will get this right. My second acknowledgment is that we're operating in an economic environment that is increasingly tough for many New Zealanders. The cost of living and sobering economic outlook is putting strain on cash flows, which we're very mindful of. Our business continues to demonstrate good signs of resilience, and at the same time, we're alive to those Kiwis who cannot afford a content subscription business. At the launch of our new free-to-air channel Sky Open last week, we're demonstrating our continued commitment to drive our strategy to maximize our content investment, and to meet New Zealanders where they are in ways that were fitting. So to our FY '23 results. It's been a busy year at Sky on a number of fronts, and with a strong team around continuing to deliver today while also investing in the areas that will see us benefit in future years. My team has worked hard to deliver for our customers across our range of products. We've strengthened our competitive position through strategically important content wins. And we've delivered on several critical projects, including organizational changes that are transforming the way we operate, along with outsource arrangements with key logistics, technology, and content center partners that have enabled us to deliver on the initial stages of the Sky Box and Sky Pod rollout. While change can be difficult, I'm proud of the way we've showed respect for our people through this process, and the way that our teams are embracing the change. Turning briefly to Slide 5. One of the sources of our competitive strength is our multiproduct offering, meeting customers where they are. I won't read off the slide, but will instead pick up on the person update through each customer product line as we move through the presentation. Before doing so, we need to start with a clear competitive strength of our unmatched content bundle. Included on the Slide 6 are instances of the way that disciplined strategy is playing out when it comes to attracting new customers and keeping existing customers engaged. Rather than traversing the details shared, I want to call out 4 key themes that underpin our strategy, and the confidence we have in managing the programming rights cost lines moving forward. The first is that we value what our customers' value, and we have a deep understanding of this value from what they choose to watch. It's a key driver for our acquisition and renewal decisions, and a great example is our deal this year with World Rugby, acknowledging the rising power of the All Blacks. Crucially, the theme sees us securing the next 2 men's and women's Rugby World Cups and other season long content for the rest of the decade. On the other side of the coin, the strong knowledge also means that we have a good understanding of what we don't need to have exclusively, and we are prioritizing our investments accordingly. The second related theme is around a strong focus on growth and capturing new audiences by understanding what may be of interest to them. This awareness underpins our strategic acquisitions to attract the new wider customer demographics, it has already been proven to be the case with the Premier League and Formula 1. The third aspect is our growing confidence and belief in the importance of free-to-air and free-to-access content delivery, whether on our own or with partners. And while in the past, that I might have had some fear of the downside of this approach, the evidence is clear. All boats rise with the tide, provided the deals are structured in a mutually beneficial way to achieve positive results for Sky and our partners. And lastly, our most recent deal, the renewal of Warner Bros. Discovery is important in many respects, but not least because this significant renewal would strike on more favorable commercial terms than in the prior period, backing the trends of the continued price inflation of the past. So turning now to our operational performance. Starting with customer relationships. This chart showing steady growth will be very familiar to you. In FY '23, the growth rate was 2.5%, bringing us to over 1 million customers. We'll deal with the migration of the Vodafone TV customers on the next couple of slides. So now, I'm pleased to note that we previously included these customers within our streaming numbers. With the platform closure in March, these customers were able to move to the Sky product of their choice. And so as at 30 June, they are counted on that basis. Overall, the Sky Box benefits from 17,000 migrating Vodafone TV customers, contributing to an improved net decline of 2.7%. At the same time, our streaming customers rose 7%, but on a like-for-like basis, the Sky Sports Now and Neon, the real increase was 15%. The Vodafone TV customer movement to Sky Box is shown in more detail on Slide 9. Other box acquisitions were lower than would have liked due in large part to the delayed launch om family products and the knock-on impact to our normal run rate of marketing activity. Ex these, we now hit the product with the ability for continuous improvement, as I referenced earlier, to go after this opportunity. And when I take a step back, there's not the numbers, but the improved margin that's a key consideration. So I'm very pleased with the 43% reduction year-on-year in foregone revenue. This increase of reduction is across acquisitions and save offers. And so it's also a relative comfort to see that despite the challenges faced in capital budgets, disconnections were held wet. And we now have 79% of our customers who have been with us more than 5 years with a very low churn rate of 7%. As you'll see from Slide 10, the Vodafone TV base have been in steady decline in the past few years. And in March 2022, there were 31,000 paying customers. Approximately 1 year later, we migrated 18,000 or 60% of that original number to their chosen Sky product and 17,000 choosing the full Sky service, buy a Sky Box or Sky Pod and with at least 1,500 having opted to Sky Sports Now or Neon. May indicate the spectrum open was the right call as this customer cohort has made a positive revenue contribution throughout with the ongoing benefits on a customer lifetime value basis. Turning to the new Sky experience. As a reminder, the wider rollout began on 19th April, and by year-end, we had around 35,000 new Sky Boxes and 13,000 Sky Pods in use. Customer NPS is an important metric, and we're pleased that NPS from the customers on the new box is trending in the right direction, up 7 percentage points compared to our existing box base. The main driver is the enhanced customer experience, such as the vastly improved content discovery, that's revealing the full value of customer subscriptions. And it continues to be pleasing demand for the new box with plenty of positive feedback from those customers who are loving the new experience. This interest, along with the significant savings available from refreshing the box fleet and richer data insights to inform content decisions and advertising attribution as part of our strong pace to accelerate investment in the rollout of this financial year. Moving then to Sky Box revenue on Slide 12. It's pleasing to see the continued stabilizing of this revenue line with an under 1% decline in FY '23, which is a vast improvement on the 3.4% decline we saw in FY '22. This improvement was helped by the Vodafone TV customers made in the period and the Sky Box and Sky Pod excess fee, which is included in revenue, but not ARPU numbers. Increasing ARPU by 2021 also played an important part in this effort with the contributing factors being listed on this slide, including the sports pack increases and consistent sports penetration, but also serves to give us confidence in our sports pricing strategy going forward. This improvement was also achieved despite some spend down for multi-run and higher-value entertainment packages. Now as it now stands, 48% of our base now pay $89 or more per month, which is an impressive increase of 44% year-on-year. As you may have seen, we've announced further pricing changes last week with an increase in our overall entertainment package and a change in the composition that gives additional value while simplifying the offer. This is consistent with the principles of our pricing and packaging approach that we've referenced in the past. So turning to our streaming business on Slide 13. And you'll see that for the first time, we've provided more details of Sky Sports Now and Neon. Sky Sports Now continues to go from strength-to-strength with 37% customer growth year-on-year and with an impressive 50% jump in revenue. There's strong evidence that our content strategy is doing what we intended with 41% of year-end customers coming from new acquisitions. Increased content value we're delivering supported a 12.5% less in the price of the monthly or annual passes. We also took the decision back in January to remove the free trial option, and this has had a positive impact on sales. What we're seeing in abundance is the strong year around diet of sports content attracting and keeping customers engaged, and there's plenty more in the pipeline to continue this trend. On Slide 14, you'll see the steady growth of Neon customers to 318,000. Revenue was up 19% to $37 million and ARPU increased with a 12.5% price rise in August 2022. In tandem with the price rise, you may recall we introduced a second product tier that provides customers with the option of a lower price point. This lowest bit product is attracting an audience segment and positioning us well for a potential move to introduce an ad-funded option in the second half. Neon's local curated content is resonating with subscribers with consistently strong engagement and a 24% increase in tenure. We are very mindful of the impacts caused to our studio partners by the ongoing rises and our actors strike in the United States. In simple terms, this means the potential for delays to acquisition driving titles, such as the White Lotus and Yellowstone, which are the lifeblood of an entertainment subscription service. The Neon team is working hard to mitigate the likely impact of this on our acquisition lines, but focus on the depth and breadth of our strong library. Ex these, this is the nature of the streaming business model, which we understand and are comfortable with, forming the breadth of our multiproduct offering, and the bit of our content partnerships. The call out on the next slide is the positive contribution from Sky Broadband from FY '23. The most recent accolade as the winner of the customer choice Canstar Blue, the Most Satisfied Customer award, is the testament to the quality of our plans and the technology choices that back them. Our customer growth was a little slower in the second half as we focused our resources on higher-margin activity. Even so, we delivered a 45% increase and an attachment rate to Sky Box to 5%. At the same time, revenue climbed to $20 million and ARPU was consistent with 52% of our customers choosing the 1 gig plan. And on Slide 16, the news is good for our commercial business with monthly revenue now above pre-COVID levels. And a highly successful FIFA Women's World Cup event has provided a welcome boost for many of our hospitality and accommodation sector customers going into FY '24. The 13% revenue increase includes the regular step-up and value-based care pricing for licensed premises and the first 12 months of normal billing for our accommodation providers. Our commercial business is back in positive territory and with the Rugby World Cup and the ICC Cricket World Cup around the corner, we see this momentum continuing. A reason for optimism and advertising to 9% growth on a like-for-like basis after excluding RugbyPass. And to put that in context, the total market contracted by 5%. But we're able to buck that trend with revenue market share rising to 9.5% from 8.3%. Now, I've made no secret of our view that while we're performing well in our subscription business, we haven't been achieving as well as we showed in advertising. Now I have a very talented leadership team in place to drive the growth we're seeking, and with an existing team, we're excited about the strategy they're now leaning into. FY '24 will see us lift our games further to capture a share that's more appropriate to the breadth of our content and size of our audiences across both paid and freeware platforms. We will also be expanding into the high-value and fast-growing digital space. It's still at an early stage, but the response we've had from the advertising sector has been very encouraging, and I look forward to updating you further in the future. And with that, I'll hand over to Andrew, who will take you through the numbers in more detail.

Thanks, Sophie, and good morning, everyone. As Sophie has said, we're reporting a solid set of numbers with revenue, EBITDA, and NPAT, all within guidance on an underlying basis or CapEx is slightly over. We had another year of revenue growth, driven by improved ARPU across all products, growth in streaming customers, continued stabilization in Sky Box and uplift some broadband, commercial and advertising. As Sophie has guided, we have adjusted for $6.8 million of one-off costs associated with the organizational changes made during the year. We also removed the $1.1 million net loss to RugbyPass this year with the business being sold in October 2022. Adjusted EBITDA of $156.4 million was 1.8% ahead of last year, above the midpoint of guidance. Adjusted NPAT of $56.7 million and a 15.2% improvement on last year, with most of this coming from lower right-of-use depreciation following a reassessment of the Optus lease term as well as lower depreciation on our existing Sky Box fee ahead of the new products coming on stream in FY '24. Sophie has already talked about revenue at a product level, so I will now cover off the overall revenue picture this year. As you can see on Slide 20, at a reported level, we have delivered an increase of 2.4%, a second consecutive year of growth on the revenue line. The $754 million revenue number does have some noise in it. Firstly, the impact of streaming from extending the operation of the Vodafone TV platform through the March 2023, the cost of $10.1 million netted against revenue. Comparable cost last year was only $4 million, thereby masking underlying growth in streaming of 16%. Next, you'll see that other revenue the change were more normal run rate following a one-off increase last year relating to unsold programming rights, most of which was the sublicensing of the Olympics to TVNZ. And lastly, is the impact of the sale of RugbyPass, with only $1 million of advertising revenue this year before it was sold versus $4 million last year. After adjusting for these factors, our underlying revenue growth was 4.5% on a comparable basis. Turning now to expenses where I'm happy to report that overall expenses were in line with the forecast that underpinned our guidance. Overall, we had a $15 million increase in expenses, which is net of $33 million of cost management that partly offset the cost of growth increases in programming costs. $13 million cost of growth reflects the costs of delivering revenue growth in Sky Broadband and Streaming products, along with establishing our new 3PL partnership with Pacificomm. The $35 million increase in programming costs, which is before factoring at $13 million of savings compared to the $40 million that we indicated at the time of our FY '22 results. That $35 million is split into 3 categories. The first is rights one-offs of $2 million, which is the net impact of one-offs and cyclical events coming in and out of the P&L. For example, in FY '22, we had the Olympics and the tail effect of COVID cancellation savings. While in FY '23, we had the Commonwealth Games and the FIFA Men's World Cup. Next, we have a $28 million increase for new rights and renewals. New rights include the Premier League from August 2022 and Formula 1 from January 2023. The renewals included the NRL, which came into effect from January 2023 and a step-up in the second year of our Warner HBO deal that was renewed in 2021. Part of this $28 million uplift was also the roll-off of the tail of equitable rights reductions in FY '22. And lastly, there was $6 million, which were categorized as returning content that relates to the uplift in production costs associated with the return home of New Zealand teams that have played overseas during COVID such as the Breakers, Warriors and Phoenix. As was mentioned earlier, $13 million of our cost savings related to programming costs, while the remaining $20 million was spread across most other cost lines, including savings from exiting RugbyPass, reduced marketing and lower external agency spend. Turning now to EBITDA, which, as I mentioned earlier, came in above the midpoint of guidance on an adjusted basis. I will walk you through the breakdown of the year-on-year business, not that have already covered expenses on the previous slide. Firstly, we've normalized for one-offs in both years, noting that the net $15 million last year, mostly related to the gain on sale from our Mount Wellington properties and the release of a provisioning for holiday debt compliance. We'll see the first 4 categories in the bridge show net revenue growth of $23 million across our core business. As was the case last year, the decline in Box revenues, which continues to moderate, was more than made up for by streaming revenue growth. As I pointed out earlier, if you remove the impact of a $6 million net increase in Vodafone TV fees, the underlying stream growth was actually $16 million. As covered in the previous slide, it is $13 million related to the cost of growth and the $35 million of programming cost increases is the combination of 3 categories I spoke about. At an EBITDA level, we have net cost management of $27 million, which includes the full year impact of savings implemented last year as well as new savings, which we've implemented this year. Of the $27 million, there was $13 million related to programming costs, with the remaining $14 million spread across marketing, external agency spend, consultancy costs, and the benefit of exiting RugbyPass, which incurred a loss last year. The $14 million also includes reduced people costs, only a portion of which relates to the organizational changes we made this year with the remaining benefits still to flow through in FY '24. I do note that the $14 million shown here on the EBITDA bridge is a net number as we've netted off the $5 million reduction in other revenue, most of which relates to the Olympic sublicensing revenue hit last year, which I talked about earlier. And lastly, the $8 million cost of change includes redundancies, career transition support provided to Sky leaders, consultancy costs and [indiscernible] costs for Sky and the outsourced partners as well as removing the RugbyPass loss in FY '23. Now looking at CapEx on Slide 23. As we said in through guidance and it was evident in half year, CapEx has increased as a result of the investment in our new Sky Box and Pod products, both in software development as well as hardware with growth CapEx coming in at 61% of the total. FY '23 saw CapEx as a percentage of revenue lifting to 10.2%, above the top end of our long-run target of 7% to 9% due to the investment in these new products as well as building inventory ahead of rollout to customer homes. At year-end, we had approximately 35,000 new Sky Boxes in use in customer homes and just over 50,000 in inventory in the warehouse. Our capital investment levels will remain high in FY '24 as well as into FY '25, as we now look to accelerate the rollout, which will also start to show high levels of depreciation given our existing Box fleet is largely depreciated. Quite aside from the improved interface and customer experience, there are a number of operational and financial benefits of giving customers on these new products, including our cost to serve, given a high proportion of self-install for existing Box customers and avoided repair and refurbishment costs on the old fleet. Turning now to cash flow on Slide 24, with the theme is again one of strong test generation that's enabling our investment for the future whilst also allowing us to deliver healthy distributions for shareholders. We generated $117 million of cash from operating activities, which will be in line with $120 million last year. As I said, this helped fund our increased capital investment this year, which saw cash CapEx of $71 million versus $45 million last year. We saw a $3 million reduction in leasing costs, mostly from the Optus negotiation in December 2021, albeit this was partly offset by the full year of new leases at our Mount Wellington and Central Auckland sites. We'll be at 12 months of costs this year versus only 4 months last year. Free cash flow available for distribution was $16.5 million or $24.4 million once adjusted for one-off items. When combined with our revenue cash position of $139 million, this gave the Board's scope for significant capital management initiates this year. I saw a total of $96 million of distributions and capital management activity ahead of a $70 million capital return in November, $21 million paid out in dividends and $4.5 million of capital deployed to-date on the share buyback. We finished the year with $56 million of cash on hand, which when combined with an undrawn banking facility of $150 million, leaves us with a strong balance sheet position going into the higher investment phase in FY '24, FY '25. Looking ahead now. I'll take you through dividends and capital management before handing back to Sophie. On Slide 26. As we circled in our guidance and we announced in the organizational change, the Board has adjusted for one-offs when turning free cash flow available for dividends. After adjusting for the cost of the organization change and remove the cash loss of RugbyPass this year, this results in $24.4 million of free cash flow available for distribution. On this basis, the Board has declared a final dividend of $0.09 per share, and the total for the year to $0.15 per share or $21.7 million, which is above the midpoint of our original guidance of $17 million to $23 million and in line with our updated guidance of half year of $20 million to $23 million. The $0.15 per share equates to a payout of 89% of adjusted free cash flow and the talk of the updated 60% to 90% policy range announced in November. Going into FY '24, a year where free cash flow will be impacted by the investment needed to rollout the new Sky Box and Pod. The Board intends to exclude one-off CapEx associated with satellite mitigation, which I'll cover off shortly as well as the accelerated portion of investment that has rolled out in determining adjusted free cash flow available for FY '24 dividends. This decision reflects the Board's ongoing confidence in Sky's cash generation as well as the strength of the balance sheet, which is the capacity to fund both the capital investment program, whilst also maintaining dividends for shareholders. On satellite mitigation, you can see from our separate announcement today that we've agreed a variation with Optus that provides security of supply at a satellite capacity up to 2031. This will require us to incur some satellite mitigation CapEx in FY '24 and FY '25 in order to ensure a seamless transition across various satellites. The agreement with Optus includes financial support to help us cover that cost, albeit the timing means the cash benefit of that support will largely fall into FY '25 and FY '26 and will come through a reduction in our lease payments rather than an offset the CapEx. On the share buyback, we conflated $4.5 million of the target of $15 million by year-end, with the potential for a further $10.5 million of shares to be acquired by the end of March next year. Now with that, I'll hand back to Sophie.

Thanks, Andrew. Great job. Looking ahead to FY '24, we expect the positive growth trends in customer relationships, revenue and ARPU to continue, and we'll also start to see the impact of the growth opportunities we're going after in advertising. Our FY '24 revenue guidance suggests growth of 3.6% at the midpoint. And as Andrew alluded to, FY '24 will see the last of the lockdown step-up in rights costs, including a full 12 months of the NRL in Formula 1 and the first year of World Rugby, which will be partly offset by savings from non-renewals as well as recent renewals on more favorable terms as well as the benefit of permanent cost savings delivered in prior years. FY '24 EBITDA guidance suggests $157.5 million at the midpoint compared to $156 million adjusted results in FY '23. Overall, we see FY '24 as the next installment of our transformation journey with revenue growth and cost management, offsetting the net step-up in rights and the cost of continued growth. CapEx guidance takes into account the accelerated rollout of our new Sky experience, but exclude satellite mitigation steps. The accelerated rollout will result in a steeper, but shorter period of elevated CapEx in the next 2 financial years before returning to normal run rate levels. And in FY '24, the increased capital investment, together with the timing of the satellite mitigation spend versus the cash benefit of the Optus support coming through in FY '25 may see us use our debt facility at times during the year. And finally, on this slide, you will see that we're guiding to an FY '24 dividend of at least $0.15 per share on the adjusted free cash flow basis that Andrew covered off earlier. With that guidance in mind, we set out 3 clear priorities in FY '24. Employee engagement is always a key focus for us and more so in FY '24 following a year of significant internal change. And of course, rolling out the new Sky experience to existing and new customers is a significant priority. And at the same time, we'll continue to build out our new revenue streams with our refresh Sky sales leadership team now in place. Acknowledging that FY '24 is another year of consolidation on our transformation path and to assure the Board's and management's confidence in Sky's strategic plans, we've provided 3-year targets out to FY '26. These include a revenue CAGR of between 3% and 4%, an EBITDA margin of 21% to 23% as we see the leverage effect of revenue growth, and cost control coming through to the bottom line. Contributing to this, we expect programming cost as a percentage of revenue to fall within 47% to 49%. And as we mentioned, CapEx will return to our long-run average once we get through this accelerated period of investment. We're also targeting a significant lift in both employee and customer NPS. All of which sees us constantly forecasting a doubling of the FY '23 dividend by FY '26. As these targets indicate and I hope it's now evident from the track record of delivery to-date, my leadership team and I have no shortage of ambition to Sky, understanding the unique role we play in Aotearoa New Zealand and with a clear execution plan to deliver on our growth strategy ahead. And with that, I'll now hand over to the operator to open the line for questions.

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

Just firstly, on the Sky Boxes, I mean, obviously, relatively low penetration of those new boxes at the year-end, given the delays. Can you just say how much boxes you had in inventory at FY '23 of each type?

Yes, we had -- we have still around 50,000 boxes in the warehouse at the end of June, Arie.

And Pods.

Pod is around 15,000.

Just on the guidance and just exploring some of the approach you're sort of taking, I guess, to the revenue part of that. So in terms of price changes, you've obviously directed price changes in the last year or so or a bit more to your premium content, which makes sense. Is your revenue guidance of 3% to 4% to FY '26 premised on regular price increases in that -- in the key premium content packages over the next couple of years?

Price increases are something we always look at understanding all of the input costs. And you're absolutely right. It is a super-premium offering. We're obviously looking to strike that balance. So Arie, understanding that for some New Zealanders, they're not able -- to fund that, hence, Sky Open launching and that focus on what we can do from an advertising perspective as well. But also as we look at our Sky business line as well as to kind of drive into the overall revenue growth.

Sure. And then I guess if I look at the approach on customers, I mean, if I strip out broadband customers, your customer relationships, 2023 are pretty much in line with where they sit at 2020, albeit with mixed composition shift to streaming. And the plans is the -- are you looking at customer growth? And then I guess, perhaps as part of that question -- are there changes in approach to pricing on the Sky Box coming in the future to aid with that? And I guess what I'm specifically asking is at FY '26, would you still expect to be requiring Sky Box customers to be paying $25 for the starter pack and then charges to have the box and for things like recording capability?

So look, I think customer growth, for sure, across each of the lines. I think that, in particular, when we think about the new Sky experience Arie, the Pod is a really important feature there. So that's effectively Sky without a dish. And if you couple that with broadband, it becomes pretty interesting. We're obviously -- we've done some changes on our entertainment pack to reflect some simplification for customers. And we're continuing to look at how we drive the right value across the box and obviously into the apps. So, do I think by FY '26, there will be a different shape of some of the packages, yes, potentially, but overall, we -- the ARPU on box side is super encouraging. And ultimately, Arie, it's not so much the numbers, but it's the margin that we're really interested in. So as you say, on the broadband side, it's a much lower margin product. Our interest and focus is on those -- the content driving margin that we have in this business.

Sure. And then just last one from me for now. Just normalizations, there's been a decent chunk of those over recent years. Are we sort of at the end of that phase? Or do you expect there's going to be further costs you need to normalize out in FY '24?

I think that when I look at it, we're -- I think we're coming through most of those. It's been -- it has been a busy period, but that said, if there's an opportunity to ensure that we've got the right efficiencies in this business, which means there are some one-off costs, of course, we won't shy away from that. This is all about investing for the next phase of growth for this company.

Sorry, I just said bearing in mind the normalization to last year, were largely the result of the sale of the property. So please…

No, I was looking through the last 4 or 5 years.

Yes sure.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

I had a few minor questions, if that's okay, but I'd like to start off with Neon streaming customers, if that's okay. If I understood it correctly, reading your numbers, there were sort of flat customer numbers versus the full year. That was maybe a touch light or versus what I had anticipated. So I'm just curious to first hear, if that's correct? And secondly, if you Sophie could talk to a little bit what your ambition is with regards to Neon customers over the next sort of 12 months or so?

Yes, you're right. There was -- it was flat. And we did see some softness in the second half, particularly looking at the impact of the writers and actors strikes in the United States. What does that mean? It means to sort of high acquisition driving titles not coming through as anticipated. And what I'm excited about with our Neon team and the leadership in there is that we have an incredible breadth of content. So they're now resurfacing the likes of the deep library that we have, like Breaking Bad or succession for those who like those types of premium drama. So, we're going to be really interested to see, Aaron, what that does. We're really pleased with the tenure that we're seeing in Neon. And so overall, from our perspective, there will be a bit of test and learn this year, because of the ongoing impacts of the strike. But ultimately, from my perspective, it's about the overall shape of our business, and Neon is obviously one component in that. So I hope that gives you a sense. I'm not going to give you the numbers for the next 12 months into that breakout. But we are acknowledging that there was an impact in the last couple of months, and we're anticipating that continuing. So the team are working really hard to retain those customers that love the Neon content.

And secondly, slightly more boring question. But just on depreciation and amortization.

And it's Andrew's.

Yes, exactly. Well, so do I understand your guidance correctly that you're expecting D&A in the sort of roughly around $90 million or so. And if you could just help me understand your 3-year target -- is that sort of a level you're expecting to be maintained? Or is it trending up or down depending on how you treat your depreciation, et cetera?

Yes. Look, obviously, as Sophie mentioned in the guidance, but that's pretty spot on. I think in terms of where it will be next year. The reason it's tough, obviously, is for the first time we effectively depreciating the new fleet. So our existing box fleets largely fully depreciated. So that's why stepping into '24, we will get a lift because the boxes that are due and the new ones will come on.

And presumably, that will then drift up a little bit. Is that fair to say over '25, '26 as you're rolling out the box or?

I would say -- be able, I wouldn't think you'll get the lift in '24, because it's the first time we've got the new fleet on at that point, it will stabilize. You might get smaller, but not the sort of size you're getting between '23 and '24.

And secondly, just another little detail. The New Zealand dollar is sort of misbehaving a little bit. I'm just curious to understand some of your larger content deals to what degree we should -- we need to pay attention to the U.S. dollar New Zealand cross, if that could catch you off guard to any significant effect?

Yes. So I think Aaron, we do have -- considered hedging policy, which is in place, particularly the CEO deals. But our most impressive cost is in New Zealand dollars in terms of the sense that -- through New Zealand Rugby. So and Andrew…

Yes. I think there's certainly in the short-term, next 12 months or so, we have almost 100% hedged. So, I think from that perspective, our P&L is pretty stable for the forward year anyway. So obviously, our hedging policy has a sort of 3-year look at it, for the next 12 months or so are pretty well hedged.

Okay. And final quick ones. Broadband profitability. If I look at your EBITDA bridge, it looks like revenues and costs broadly going up in tandem. And you're sort of a couple of years, I guess, into your broadband effort now. Is it going according to plan? Do you see it becoming a sort of genuine EBITDA or even NPAT contributor in the near-ish future or can we have thoughts around the broadband?

It makes a contribution. It's not a large one. We don't see it as a large contributor to our EBITDA, but it does wash its face Aaron now that it's -- I guess, through its start-up phase, it's now actually making a contribution to the bottom line.

And the other thing, Aaron, is one, an impressive customer award, because of the great value on the [indiscernible]. Yes. It is super -- that is just a customer voted one, by the way. So in the long run, I think we're going to see -- we'll have some really interesting opportunities, particularly as we deploy the Sky Pod and think about how we bundle that and deliver great value for New Zealanders.

Okay. Fantastic. Final question, sorry, from me. Just on the Vodafone TV, and this is for you, Sophie. I don't mean to be like be pointed with my question.

Go on, I know you want to see Aaron, go for it.

No, but I'm just thinking about the original sort of 100,000 or so of Vodafone TV, which you had a relation or 40 of them roughly had a relationship with Sky one way or another. And now you're left with 17. To me, that was a little bit of a disappointing outcome. But I'm just curious, do you feel like it was in line with your expectation? Do you think that some of those other 20, 25 will come in through sort of the back door into Sky Box? And what happened to the sort of 60,000 Vodafone TV that weren't Sky, did you manage to convert any of those you think? I think basically my question.

Yes. Look, I think the $100,000, I wouldn't be able to say that. There wasn't data that we had. They were obviously enjoying an IP service, which gives us confidence around some confidence around the Pods. And yes, you're right, there has been a steady decline on the Vodafone TV base. It took -- they keep the platform open. We're developing products. So it wasn't a perfect confluence of customer outcomes there. That's it, the 60% we did secure as definitely was definitely the right thing to do. What I have liked it to have been a higher percentage. Just like in my exams, Aaron, yes, I would have. But ultimately, these are important customers to us that delivered a positive contribution throughout and from a customer lifetime value basis. No question that this was the right thing to do. We have seen some of those customers that we could -- come on to Sky Sports Now and Neon. And I do think there's going to be a cool opportunity, particularly at Christmas time to welcome back some of those or to invite, sorry, some of that larger cohort of customers who obviously enjoyed IP delivery of content with our new service.

Your next question comes from Phil Campbell with UBS.

Just a few questions from me. I'm wondering, Andrew, if you could just give us a bit of a background on the Optus satellite migration. It seems a bit bizarre that it was Optus' kind of issue with the migration of the satellite. And you seem to be wearing the cost in the short-term and they're only reimbursing you kind of later on. So I'm just interested on the commercial timing of that decision. That would be good. That's my first question?

I don't see it as a negative per se. I think ultimately, the fact that they've provided financial support reflects the fact that they understand the reason we're spending the money is because of the delay in the need to cover migration. So from our perspective, yes, there's a timing difference, but ultimately, the costs are covered. And it's not an individual single year thing. So -- and the money is going to be spent over a couple of years and their support over a couple of years, it just starts a bit later. It is starting in FY '24, but not for a little back into the, yes, but the bulk of the cash flow is current '24 and '25, but covered from our perspective so.

Okay. Awesome. And then…

And by the way -- we're not spending -- it's not a huge amount of money, but it is important that we make sure that all of our customers are available -- and really sorry, and available for the migration when eventually it happens, which is what the might be spent about.

Yes. And I was just going to add that. So that's a super important factor here is to note that notwithstanding any further delays from Optus or its manufacturers in terms of their new satellite fleet. We have guaranteed coverage for this country out to 2031.

And what's kind of involved in the spend? Is it something to do with the box is it or…?

No, it's not around the box. It's really around the receiving equipment and making sure that particularly on the Sky business side, we've got the right receiving equipment, because one of the mitigation features is pointing to different orbital slots. So it's more about the receiving equipment on the outside, nothing to do with the box or the hardware in the home or the commercial premises.

And then just I had a question on NZR+. Obviously, there's been a bit of press around that. I'd be interested in getting you all kind of take on what your thoughts on that are, Sophie?

Yes. Thanks, Phil. And we had a presentation or I teamed one a couple of weeks ago and New Zealand Rugby and Sky are aligned and trying to grow the phantom of Rugby, particularly in New Zealand. But I think the real focus for NZR+ is about monetizing these All Blacks fans abroad. I mean there are some big numbers that are being talked about, who are fans and want to invest. So, I well understand New Zealand Rugby's desire to connect with them direct to get data in respect to those customers. So yes, we're -- there's some pretty cool content behind the scenes content and the great thing for as our new Sky Box and Pods. You can bring that app into the ecosystem. And I think that's one of the opportunities going forward as to see how we work more closely with New Zealand Rugby and its commercial arm to see about those content tie-ups because -- we've both got the same aim in mind of growing the levers again.

Great. And then just on the -- you talked a little bit about the possibility of having like an ad tier for some of the streaming platforms. Is that money for Neon? Or would you also have that for Sky Sports Now? And I suppose, just interested in the decision there. Is that kind of partly to do with the fact that maybe you can have a lower price point. Obviously, it's good in a tough economic environment, but also we've got -- and Netflix has obviously launched its ad tier in Australia, although it's probably not going as well as the U.S. one. But you're just mentioning your kind of thoughts the decisions around that would be quite good?

Yes, you're spot on. It's about being able to deliver great service at the right price points and the advertising side is about maximizing that investment that we've got in content. So initially, we're looking at Neon, but we also think there is a really great opportunity on Sky Sports Now. We saw that Sky Sports when it was around, I had some interesting advertising showing up there. And we kind of look across the ditch [indiscernible] what they've done with different services. So again, an ability to invite customers to or the content through our apps. And of course, through our new free-to-air channel, Sky Open for us is all about trying to meet Kiwis where they are and advertising is one way to help with some of those upfront costs.

And then maybe the last one from me, just on the kind of targets for '26. Obviously, you've got the programming expenses 47% to 49%. Is there like an assumption within that of what the Rugby rights are going to renew it?

Yes.

Yes. I mean there's an assumption across all of our program rights cost line, which is right. Phil, but also involves our production costs as well. So -- and the key thing is we value what our customers value. We know this from what they watch in those new customers that we've invited them with the likes of our strategic investment in the Formula 1. So that's what gives us confidence going forward, because now that the landscape has changed in New Zealand, we don't necessarily have to take everything. And we're going to be very clear about what we allocate our customers' money to in terms of a strategic premium, and what we're happy to hold or let go, to be honest. So there's a number of features that do go into that. But of course, New Zealand Rugby, we've got all of the games live for New Zealand until the end of 2025. But beyond that juncture, yes, I'm sure it's going to be as always a robust discussion with them. But yes, there are a number of features that go into that. So, I hope that helps.

But I think the other thing I'd say -- is the fact that the reason we can confidently point to those sort of targets and the margin expansion that comes with them is other than rugby. We have feet -- we've got no other big deals to do, right? So we just don't feel we're exposed to the renewal inflation that we've seen in the past. So with what we're calling out, reasonably steady revenue growth over the next few years was essentially programming rights kind of controlled. We feel quite confident around hitting those targets in 3 years.

So without kind of giving us the numbers I don't get the Nielsen data, but can you give us a flavor of what is the rugby viewership like? I'm assuming that the test matches are pretty high, but you see that from some of the Nielsen data, but Super sustain, what is the kind of viewership being like on that product?

Yes. So look, we can definitely share that with you afterwards, in terms of some of the numbers that we've shared publicly. I can tell you that, yes, the All Blacks are have an amazing rating power, which is why we did our deal with World Rugby. Of late, to be honest, the Warriors are the ones which led sort of top of the charts, particularly at the moment. And you were talking about Super Rugby Pacific, we saw some good growth this year with their 12 team comp. And yes, we look across the joy of what we have is being able to look across our portfolio of sports and looking to drive the best viewing experience for New Zealanders across whatever sport they're interested in. And part of the -- I've been asked earlier this morning about what do I think about TVNZ. And I -- from our perspective and for our customers who like Cricket, I'm really excited now that TV1, TV2 and Juke, which from the Sky Box delivered by satellite and now available to our customers and they can record the Black Caps again to the heart's content. And of course, we've got the ICC Cricket World Cup coming up later this year.

Great. And then maybe just following on from Aaron's question on Neon. Obviously, we got the writer strike, but obviously, Yellowstone is quite a big part of Neon. But obviously, I think Yellowstone wasn't necessarily writer strike -- it was more to do with the actors. Have you got any color on when the Yellowstone might be coming back?

Yes, you're not the only one is asking, because they're sort of partway through. And yes, I think there's a little bit of interference may be there. I don't have the latest on that, but our Neon team are very, very alive to it. And you're absolutely right. It's a great watch, and we've got all the seasons here. So my suggestion, for those New Zealanders who haven't managed to engage is catch up now and hopefully the rest of Season 5, which I think it is, will be with us before we know it.

[Operator Instructions] Your next question comes from Brian Han with Morningstar.

Just a follow-up on that 3 target for programming cost to revenue. Do you so expect the trajectory to that 47% to 49% target to begin in FY '24?

Well, I guess use is the answer, but we won't at that sort of range until FY '26 because the key thing obviously is getting it under 50%. We were higher than that in FY '23. We've got another, I guess, a step up in '24 as we've got the first year of World Rugby and sort of the tail events of Formula 1 and EPL. So the real benefits are falling out of more in '25 and '26.

Okay. And Andrew, you may have mentioned this, I might have missed this, but on the one-off CapEx for set line migration this year, can you give us a sense of how much that could be?

It's not huge numbers. It's sort of less than $10 million over -- $10 million a year over 2 years. So yes, it's obviously commercially sensitive to deal with Optus, so I can't go into any detail. But we're not talking massive amounts, but equally from our perspective. I wouldn't want to say nothing to see here, but ultimately, over time, we'll have that money effectively paid back to us through the leasing benefits and the financial support from Optus. So less than $10 million in '24 and similar in '25. But by the time we get to the end of '26, we'll have that money back into -- through our leasing benefit.

Fantastic. And can you please talk about the outlook for broadcasting and satellite infrastructure costs in light of everything that you're doing?

Sorry, can you repeat the question, Brian?

The cost line - the broadcasting and satellite infrastructure cost line, what the outlook might be?

Okay. Not to [indiscernible] B&I.

No, the actual group cost line broadcasting against satellite infrastructure?

So, I'm sure taking a few minutes. Yes. The broadband piece. Sorry, you talk about the broadband cost for our broadband business.

The broadcasting and satellite infrastructure cost?

Yes.

Maybe it's my accent, sorry.

Yes, I think that what we're just saying is that, if you're asking about what's causing [indiscernible] obviously where the broadband costs do such. So that's why there's an uplift on that line if that's what your query is about -- but we're happy to answer it offline as well if there's not enough detail from you from the team.

Okay. My last question is, Sophie, on streaming, how much of the streaming ARPU decline do you think was due to the introduction of that second basic tier for Neon?

Yes. Well, look, any time you introduce a lower price point that will have an impact on the blended rate. But in terms of the Neon, it's around 12% of the Neon base that are sitting on that -- sitting on the $12.99 lower speed product. That's all part of the overall plan, Brian, is obviously to look at the overall story. And if that's the right place to keep customers with us and they're happy to go with the lower speed, then obviously, we want to do that. And we accept that there might be so -- the ARPU -- slight ARPU degradation in that mix going forward.

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

Thank you very much, Ashley. So as I think you all have heard, it's been a big year. We've got a big year of continued delivery ahead of us, and I really do look forward to updating you all on our progress. So just from me to say thank you all for joining the call. And we look forward to catching up with as many of you as possible over the coming days. Thank you.

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