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

Thank you for standing by, and welcome to the SKY Network Television Limited Interim Results Briefing 2023. [Operator Instructions] I would now like to hand the conference over to Sophie Moloney, Chief Executive Officer. Please go ahead.

[Foreign Language] Hello, everyone, and welcome to Sky's 2023 Interim Results Call. I'm Sophie Moloney, your Chief Executive here at Sky, and I'm joined by Tom Gordon, Sky's Chief Financial Officer. We have a solid set of results to take you through, but before we get started, I'd like to acknowledge the recent extreme weather events that have and are impacting the lives of many New Zealanders. To those of you on the call who may have been impacted or had loved ones who are, our thoughts are with you at this very difficult time. I also want to acknowledge upfront, as we'll touch on later in this presentation, that on Tuesday this week, we announced a series of proposed changes that, subject to consultation and feedback, could result in around 170 of our crew leaving Sky. As we set out in our announcement, the proposed changes relate to the need to aim even higher as a business and to ensure we can deliver excellent experiences for our customers as efficiently as possible. On a personal level, as Chief Executive, these are never proposals you want to have to make, especially when you know how much that Sky can care about doing their best to deliver for our customers, but the focus has to be on the sustainability of the overall business into the future. To the shape then of our H1 results presentation today. I will begin by providing an overview of what we've achieved since we last reported to you. We'll then take a look at how key parts of the business are tracking, including from a revenue perspective. And Tom will then take you through the numbers in more detail, including an overview of the additional capital management measures announced today. I'll then take you through the outlook for the period ahead before we move to Q&A. The first half highlights demonstrates that we're building momentum from the positive inflection point we reached a year ago. We had more customers. We've grown our revenues. And while expenses are up, as anticipated, we're on target to deliver full year results within guidance. Importantly, we've also returned $83 million of capital to shareholders, including last year's full dividend. And today, we've announced the 16th interim dividend as well as our intention to buy back up to $15 million of Sky shares. So all in all, a solid performance. Before getting into the results in more detail, first, a reminder of the strength of what we have to offer, which earns a truly unmet depth and breadth of content with all of the support of entertainment New Zealanders love across every genre. Armed with the competitive advantage of rich insights and to watch TV audience's value, we've made disciplined choices to procure the contents as targeted. In this half, that's seen us enter a 7-year partnership with World Rugby through to 2029 and an important strategic win of Formula 1 rights as well as key renewals for our news and entertainment content. Our strengthened positioning as New Zealand's leading aggregator of sport and entertainment content is an attractive story for the customers as well as for our partners as part of our competitive advantage now and going forward. Another key component of our competitive strength is our multiproduct and platform play which enables us to reach every New Zealander, giving them the choice to access Sky in whatever way it would experience for them. And our products are continuing to evolve in this half, and that's included a reset for our free-to-air channel, Prime, acknowledging the important roles an ad-funded environment has to play and maximizing the value of our incredible content. That has also involved the introduction of the lower price point options, Neon and an important platform upgrade for Sky Sport Now. And while acknowledging the delay in getting to this point, which has been disappointing from both a customer and financial perspective, I'm very pleased to say we've begun targeted selling of the new Sky Box experience. This is Sky Pod which is soon to follow. Getting into the detail now, beginning with a closer look at our operational performance across key parts of our business. This will be a familiar slide to you, tracking the growth of our customer relationships. Its consistent rise has continued from 6% year-on-year growth, taking us to the total of more than 1 million. 17% growth in streaming was a standout. And if we adjust this for the sale of RugbyPass to World Rugby, the growth would have been 24%. Sky Box customer relationships were down year-on-year, but with a positive trend from an improved half-on-half result. Sky Broadband relationships more than doubled to over 23,000 and commercial customer numbers remain stable. A closer look at Sky Box movement shows that the acquisition strategy reset is delivering on the quality improvements we're looking for, with foregone revenue improving by 38% year-on-year as we cycle out of the deep discounts that were attracting customers, but leading to a washing machine effect that maintained to the end of the deepest discount periods and with the additional benefits from an 11% attachment rate on broadband to new acquisitions. The lack of an uplift in acquisitions follows the fact that we reserved proactive marketing in respect of Sky Box to coincide with the launch of the new Box and Pod. But at the same time, we've seen a 13% improvement in customer churn against the previous half year. And while that's promising, it's an area we've targeted to further improve on. Turning to Slide 9 and a reminder that we have a significant Sky Box customer base with high tenure and significant average recurring revenue per user. 77% of customers have been with us for over 5 years. While average churn across the base is low at 9.8%, the rate for these customers is exceptionally low at 6.8%. This is a valuable base with 85% in the $50-plus ARPU category and over 1/3 pay more than $89 a month. Turning then to Sky Box revenue, and you'll see we've achieved the important milestone of half-on-half revenue growth for Sky Box for the first time since 2014, and with a $2.33 lift in ARPU to $81.09. The factors driving this include sports penetration averaging above 70% during the period and the $3 sports price increase we put through in May last year, and that's on top of the reduction in foregone revenue that I mentioned earlier. And of course, we've announced a further $3 sports pack price increase in January that takes effect from next week on 1 March. Having foreshadowed the arrival of the new Sky Box for some time, I'm very happy to report that Sky is underway for this new product. We've been really encouraged by the positive customer feedback that's coming in and we'll be underway with the Sky Pod sale very soon. Understandably, our initial focus was on the migration of VTV customers from the closure of that platform on 31 March. From there, we'll be welcoming existing and new customers to the new Sky experiences. We see huge opportunities for both products and in particular, see great opportunity for the new Sky Pod that will make any TV a smart TV without the need for a dish. We've included the pricing details for you on this slide and note that there will be tiered senior-based offers available for our most loyal customers by Sky Rewards. The EV sale in-store process and our new logistics partnership also means a lot of costs are served with these new products. And to confirm, there is no forced migration with a decent tranche of our customers expected to opt to keep their existing box. Turning now to our Streaming business, starting with Sky Sport Now on Slide 12. You'll see that for the first time we've included our win-pack pool alongside the video on active customer relationships. This pool follows the customers that have been with us in the last 18 months, but weren't included in the balanced state numbers. Attracting win-back is an opportunity for low-cost acquisitions for both Neon and Sky Sport Now through direct marketing targeted towards the content we already know they love. So with that in mind, the first highlight to point out for Sky Sport Now is the phenomenal growth of 68% and with a 48% increase in the win-back pool. This clearly demonstrates the acquisition power of our recent content investments backed up by the year round diet of week-in, week-out actions that's keeping customers entertained as part of the recurring base. As an example of that acquisition-driving investment, 44% of customers that joined for the Premier League were brand new to Sky Sport Now. The first thing to note for Neon is the customer growth, up 15% year-on-year, which notably has continued since we put through the August price rise. At the same time, we introduced the basic care service and that's certainly driven a purpose by giving customers a choice at a lower price point, although the standard packet continues to be the new customers' first choice and [indiscernible] or returning to Neon. The other factors to note on this growth is that a higher percentage of customers are coming direct, which has a positive impact on margins. We're also encouraged by the positive trend in tenure and increase in annual passes, which is proof that Neon is keeping its customers for longer and with more of them trending towards a continuous subscription. Looking at Slide 14, you'll see that clearly, the delay in launching our new products has had a $7 million impact due to extending the operation of VTV. Streaming revenue growth of 7% would otherwise have been 22%, if not for the impact of these fees, which are netted out against streaming revenues. As mentioned earlier, our final date of 31 March has been negotiated for the shutdown and this will bring an end to this cost. And as I've mentioned, the migration of VTV customers to the new Sky Box has started and we look forward to welcoming the remaining customers to their [ new Sky Box ] over the next few weeks. Looking more closely now at the underlying revenue gains. Sky Sport Now's revenue rose by 48%, mostly due to significant customer growth and a more favorable mix of higher-priced passes; while Neon's increase of 19% was driven by customer growth, the August price rise and the customers' [indiscernible]; and looking ahead, against the $5 monthly price increase coming through for Sky Sport Now from 1 March. Sky Broadband's growth continues, with customer numbers and revenue both showing healthy increases. We now have over 23,000 customers on board and we've reached an attachment rate of 4.3%. And a reminder here that our attachment on new acquisitions is 11%, so there's still plenty of room for growth. Customer satisfaction rates continue to be high, and we've seen a jump in customer consideration of Sky Broadband to 32% from 22% a year ago. After a difficult couple of years for some of our commercial customers, I'm pleased to report that revenue increased by 18% and returned to pre-COVID levels. There are 2 main reasons for this: the aggressive impact of the value-based tiered pricing strategy for licensed premises; plus the return to normal billing for accommodation customers from 1 July. Now that we've recovered to the pre-COVID run rate, we're still seeing room for growth. Advertising revenue was also back in line with pre-COVID levels, and in this case, was up 12% year-on-year. We've split out the impact of RugbyPass advertising revenue so that you can see the impact following the sale of RugbyPass World Rugby. And you've heard me talk before about the opportunity we see in this space. We're only in the foothills of this initiative, and you'll see more on this front in FY '24. Suffice to say, we're pleased to have made progress on maximizing the value of our superb content during the half, with Sky taking 9.5% revenue market share, up from 7.9% a year ago and against the backdrop of a 1% decline in total market spend. And with that, I'll hand you over to Tom, who will take you through the numbers in more detail.

Thanks, Sophie. Thank you, everyone. Let's start with the headline numbers and at a high level, the story is one of staying on track while we move through a short-term investment cycle to position the business for future growth. In the first half, we've again delivered growth in revenue, which Sophie has taken you through in detail for each of our core business areas, and this was despite the one-offs from VTV fees that Sophie mentioned and changes in other revenue that I'll take you through in a minute. Operating expenses were up as expected. We'll look at the details shortly, but this was mainly due to a rise in programming costs that we've previously signaled and the cost of the revenue growth partially offset by cost-out initiatives. EBITDA was down at a headline level, although adjusting for the impact of the one-offs in the prior period and the impact of VTV costs, would have shown growth year-on-year. For the same reason, NPAT was also slightly lower. CapEx was significantly higher in the period, more than double the spend of the prior period. We had guided for higher levels of CapEx and ahead of the launch of the new Sky Box and Pod, that's been weighted to the first half as expected. That, along with some accelerated payments for rights, are the key drivers of the lower cash flow number, which in this year's case, is heavily weighted to the second half. That said, our confidence in Sky's cash flow generation is behind the $0.06 interim dividend, fully imputed, which is based on a policy of paying between 60% and 90% of free cash flow for the full year and with 40% paid out as an interim dividend. Getting into the detail now. And as Sophie mentioned, every core revenue line, including Sky Box, has increased versus the second half of FY '22. On that basis, revenue was up 4% and that's despite the impact from VTV fees. If we compare revenue to half 1 of FY '22, we're still in growth, up 2%. And if we adjust for the VTV impact, underlying growth year-on-year would have been 4%. Finally, as we detailed in H1 FY '22, other revenue for that period included some one-off for unsold rights. On the next page, once again, we've provided quite a bit of detail for you on the cost slide. At a high level, there's been an expected step-up in programming costs and to accommodate our revenue growth but we've been able to partly offset that with $15 million of savings that are spread across each of our cost lines. The increase in programming is partly due to winning the EPL plus some rights inflation for renewals. And while we're very pleased to see the last of our New Zealand teams return to playing at home, this has meant an increase in the production costs associated with the Warriors, Phoenix and Sky Sport breakers. Nevertheless, a significant portion of the savings we've made in this half are in programming, with $5 million of permanent savings netted off against those increases. The other area where we've made significant savings is in subscriber-related costs, which are down $7 million on a reported basis. This includes the savings Sophie mentioned earlier from the Sky Box acquisition reset, reduced discretionary spend and enhanced procurement, driving underlying savings of $9 million. We will also see more savings coming through from our new logistics partnership with Pacificomm. Broadcasting and infrastructure costs were up $5 million year-on-year, but this included a $6 million increase for the cost of customer growth in Sky Broadband and Streaming that we were able to partly offset through savings. Other costs would have been lower by about $1 million year-on-year if we remove the impact of the Holidays Act provision release in the prior period comparative. And finally, on this slide, depreciation and amortization was down $7 million, partly through the renegotiation of the Optus lease, the recent IFRS Software as a Service adjustment and also due to lower capital spend in 2022. On the next slide, you'll see that we provided a look back at the work we've been doing over the past few years to reset our cost base. Clearly, we were stepping into a period of increased rights costs as we consciously invested to retain or regain key content, and therefore, needed to make changes to our cost base, and those have been adding up. Over $81 million of costs have been removed from the business over the past 3 years to fund reinvestment for growth and to support the return to paying dividends. And FY '23 will include the $15 million of H1 savings we covered on the previous slide, together with those we deliver in the second half. These savings have come from both programming and non-programming, and we've included examples on the slide. We have focused in on every cost line and progressively identified new opportunities, and there are more potential savings available for us to go after. Sometimes, it's meant we've stopped doing things that didn't add value for either our customers or for Sky. More often, it's meant we've found more efficient or cost-effective ways to do the things we must, like our logistics partnership with Pacificomm. Every time, it's meant looking at our business through a customer lens to make sure that the changes we're implementing outcome at the cost of customer experience or revenue. Turning to Slide 23 and EBITDA. The impact of one-offs in H1 of 2022 clearly account for the difference in our EBITDA line. As we explained earlier, FY '22 comparative was impacted by one-off items such as the Holidays Act provision release and the net impact of COVID. In addition, the delay in delivering the new Sky Box and Sky Pod has had a financial impact. And if not for this and the FY '22 one-offs, EBITDA would have been up year-on-year. The combination of revenue growth and cost out of $30 million is outpacing $28 million of cost associated with the revenue growth and the increased programming costs. This delivers an underlying growth of $3 million compared to the prior year. On Slide 24, we've provided some additional detail on our CapEx spend to give a bit more clarity. First half CapEx has been strongly weighted to growth initiatives, with 65% of spending allocated to growth. In the short term, that's just above our target of 50% to 60%, but does include 45% for new products ready for launch. We have previously guided to between $60 million and $75 million of CapEx in FY '23 as we build up inventory of our new Sky Box and Sky Pod. Most of this buildup happens in the first half, so although CapEx spend in H1 is above our 2-year target range of 6% to 9% of revenue, this is expected to fall back in line by year-end. Finally, we've provided a bit more clarity on the implications for depreciation and amortization, as we move from a situation where our current boxes are fully depreciated to one where we're rolling out new boxes and begin to amortize the development costs. Turning now to cash flow, with $56 million in net cash generated in the first half, which compares to $67 million in the prior period. As we've already covered, first half CapEx is higher and front-loaded to half 1. Whereas leasing costs are $3 million lower than last year as we've had the full 6 months benefit from the December 2021 Optus lease renegotiation, balanced against property lease costs following the sale of the Mt. Wellington site. In total, we've returned $83 million of cash to shareholders through the court-sanctioned capital return and the full year dividend payment, consistent with Sky's commitment to return surplus cash. As a result, we finished the first half with net cash of $56.6 million and with an undrawn banking facility of $150 million. So a strong balance sheet with a positive outlook for future cash generation, which segues nicely to my final slide on capital management, where Sky's strong position is providing the Board with optionality to take further action beyond the decisive measures already taken. As the Chair stated at the annual meeting, the Board believes Sky shares are significantly underpriced and yet to reflect the company's improved results. Based on current multiples of 2x EBITDA and 6.5x earnings per share, that view still holds true. As signaled, the Board, therefore, intends to initiate a buyback for up to $15 million of Sky shares or 6% of the current shares on issue. At Tuesday's close price of $2.56, that would be expected to deliver a 3.3% uplift in earnings per share. The buyback is intended to commence next month with the exact timing to be communicated to the market in due course. And with that, I'll now hand back to Sophie to cover the outlook and an update on guidance.

Thanks, Tom. We remain on track to deliver on the FY '23 guidance we provided at the time of the full year results. And today, we've moved to tighten the ranges to slightly lower than midpoints for revenue and EBITDA, though importantly for our shareholders, with higher midpoints for NPAT and dividends. The guidance is before any potential impact from factors, including recent significant climatic events and the proposed organizational changes we announced earlier this week and that I touched on earlier. If implemented in full, we would expect the proposed organizational changes to deliver a multimillion dollar benefit within the next 2 years. We won't have a complete picture of costs and any savings until we've completed the consultation process and final decisions have been made, and we intend to provide an update at that time. We are currently consulting with potentially impacted crew, and our first priority is to hear from them. Looking ahead, we expect customer and revenue growth trends to continue as well as the delivery of additional permanent cost savings. Before handing back to the operator, I can share that my team and I have made a confident start to the second half, and we're determined to deliver on the key work streams ahead. And with that, I'll hand the call back to the operator to open up the line for Q&A. Thank you.

[Operator Instructions] The first question today comes from Arie Dekker from Jarden.

Just a few quick questions really. Just on the Vodafone TV extension, what sort of costs are you expecting in the second half associated with that?

So we are expecting that the platform will close in March. So you will see -- at the end of March. So you'll see roughly 50% of the level of costs that we saw in H1, which had a full 6 months of platform.

Great. No, that's good. Just in terms of your outsourcing partner, can you just sort of give a little bit of comfort around, I guess, your diligence on that partner, I guess, just local reference points perhaps in terms of who they do work for in this part of the world? And that's on the customer care, yes.

Yes. So the proposed supplier that we're looking to work with, we actually already work with them onshore, but we have done a significant amount of due diligence and are really comfortable with that selection. Probe do work for other companies here, I can get that for you after this. I don't have it readily in front of me. But what I can safely say is that the team is stepping through this with a significant amount of care. A key step to remember is that we are, if the proposal goes ahead, looking to retain a core team of 100 crew onshore, who'll be dealing with the more difficult customer queries. We know how important it is for our customers. In fact, I got some great feedback recently from a customer saying that our care center agent managed to resolve the issue before he even asked the question. We're definitely looking to retain that IP onshore. So be rest assured, we're very focused on delivering the right outcome for customers.

Great. Just on CapEx. I mean there have obviously been delays on the set-top box and pod just as you make sure you absolutely sort of nail it down and perfect it. Has there been a significant increase in the level of costs associated with the upfront on it? And within your guidance, can you just give like to tens of thousands, I guess, but just the level of inventory of pods and boxes you're acquiring in FY '23 on your guidance?

To take the second part of your question, Arie, no. No, we wouldn't disclose that level of information. In terms of the first part of your conversation, no we -- I'm sorry, the first part of the question, no, we haven't seen a significant increase in the cost of those devices, which is why we're able to confidently confirm the full year CapEx guidance that we gave at the start of the year.

I guess put it another way then, because I mean there is some materiality in this, the delays presumably mean you're clearly going to roll out less of them in this financial year. In terms of the inventory levels for those devices that you've sort of got in your CapEx guidance, do you expect those to take you a decent way through FY '24?

I mean, I think we're certainly going to be well catered for, for this financial year. I'm pretty excited now that we're rolling with the new Sky Box and the Pod to follow shortly, I'm very keen that our Chief Customer Officer is looking at what we're going to deploy once we get on the Vodafone TV customer cohorts across on to their chosen product. But yes, we've got some good cover for the start of FY '24 would be my response, but anything you'd like to add?

Yes, just briefly, Arie, the volume of devices that we're acquiring hasn't materially changed in terms of our expectations this year. So even though we're launching slightly lately, it hasn't materially changed.

Okay. Just on streaming, I mean, like that's a really great outcome. I mean as you appreciate, the numbers, sort of from period to period, or at least in terms of the growth, still but variable and our visibility is sort of low on the mix. Can you just sort of provide some commentary, I guess, on what you saw at the back end of the year and since balance date on streaming customers and what your expectation is with regards June year-end streaming customers? I mean is there any prospect this could be lower than the 506? And what sort of growth in the second half are you anticipating, if that's not the case?

We have had a very strong finish of the year and have started really confidently. I mean the FIFA World Cup with Sky Sport Now was obviously pretty significant and really happy with Neon, particularly with The Last of Us. If you haven't watched it, Arie, and you like your zombies, you should check it out. It's delivering and continuing to see that growth. We haven't given guidance on where we're going to land, but we still have really good, as I said in my previous statement, confidence starts in terms of our customer relationship growth as we've started this H2.

Yes. I'm waiting for Succession to get my escapism. Just on the Sky Box customers, yes, what have you sort of seen in the first couple of months of the year on that?

I think we're just -- we're trending in line with expectation. We're obviously excited to have the new box, but we do have a pretty impressive offer out in terms of welcoming people back to sport, with Super Rugby back this Saturday and Super Rugby Aupiki as well. So yes, trending in the right direction across both the acquisition and [ tune ] side. But I'm just super excited that I'm not talking about the new box coming, that's here, and that's being deployed and the early feedback from customers is that it's combining the best of our box with the best of VTV in one, so we're excited about it.

Great. And then last one, Tom, just programming costs. Obviously, some ins and outs, but second half, similar quantum to first half? Or is there something meaningful to call out that we'll see it different?

No, we haven't seen anything, Arie, that would suggest that we're going to be different to what we guided at the start of the year in terms of the increase year-on-year in programming costs. So nothing new there.

The next question comes from Aaron Ibbotson from Forsyth Barr.

I've got a few, if I may. Just if I could start with...

Aaron, sorry, you're quite quiet. Do you mind -- yes, you're quiet.

Does that sound better?

Yes, much better.

Okay. Sorry about that. I wanted to start with Vodafone TV, if that's okay. Firstly, do we have any like new satellite subscribers in the numbers you presented today? Or has the rollout started sort of in the new year? And then I think you've sort of danced around numbers, call it, 30,000, 40,000 or so Vodafone TV customers that are currently on Sky. Is that roughly right? And can you talk anything around what your early conversion ratio looks like?

We have just started selling to the Vodafone TV cohort, and there are a tranche of those customers who do want the satellite option. So yes, we're underway, but it's from this -- from H2. I don't think we've ever talked to that level of numbers. It is a first within Streaming. And what I can promise you, Aaron, is that come full year, you'll be able to get visibility of what those Sky customers on the Vodafone TV platform are because we'll be splitting it out so you'll be able to see it.

Good enough for me. Secondly, just on streaming ARPU, very strong numbers on the revenue line and obviously, very strong on the subscriber line. But I'm just trying to understand the dynamics a little bit better. It seems to me that Sky Sport Now is growing a lot faster than Neon. So -- and you pushed through some price increases. So I'm just trying to understand why our ARPU is not moving. Is that sort of a mix shift towards this low new lower price point within Neon? Or is it -- am I just -- is it kind of come through later? Or am I missing some dynamic here?

I think the first point, Aaron, just to make sure you're taking into account is the VTV fees that are netted off against the streaming numbers. So your ARPU calculation needs to adjust out the netting of those [indiscernible].

I haven't done any ARPU calculation. I've just taken the numbers you've given. You've written 18 on the slide, and I've used that. But is that incorrect then? Are you -- is that not the right ARPU to work with?

No. That's correct. That's correct. It just includes the netting of the $7 million of VTV fees. So on an underlying basis, we need to add back that $7 million. The dynamics within the Sky Sport Now ARPU are -- as you say, the growth is very strong in Sky Sport Now. We have different passes that our customers are taking, whether it's weekly, monthly or annual. And as you said, we're shortly putting through a price increase of $5 on the monthly pass, and you will see that ARPU growth going forwards.

So just to be crystal clear then, I assume the accountants haven't made you put the $18 on the slide, but the actual ARPU is then $19 or something like that, $19.50?

Correct. Yes. The actual ARPU will be higher once you adjust for the $7 million of VTV fees.

Okay. Sort of a broad question, and I guess you sort of semi answered it, but if you could be dwell on a little bit, that would be great. Your revenues, as far as I can tell, or relative to my expectations, seems to be coming in pretty strong across the board. I'm just trying to understand basically why you've downgraded your sort of upper end of your EBITDA. What has changed relative to your expectation? Is it the slow rollout of the Sky Box? Is there anything economic? Is it just accounting of the VTV? Or what's changed relative to what you expected that made you take down that upper end?

Thanks, Aaron. The key change really is the extension of the launch date for new Box and Pod, which has meant, as we alluded to in the presentation, we've incurred those additional VTV fees for longer than we had originally planned, and so our original guidance didn't cater for the extent of those VTV fees.

But it did cater for quite significant conversion then presumably on the revenue line?

Yes. And I think, look, overall, it's our delay is disappointing from a customer and financial perspective, as we see it, but from 31 March, that cost goes away. And to your point, it is strong revenue performance, which we're excited about. So yes, looking good as we move forward, Aaron.

I do have 2 quick more questions. So your $35 million cost saving that you sort of guided for, for this year, permanent cost savings. If I look at the $80 million you've delivered so far, I think it's fair to say that quite a significant proportion of that have been sort of reinvested. It's been difficult to see it on the OpEx line even excluding programming content costs. I appreciate there's some broadband and stuff in there. But how should we think about this $35 million in relation to your non-programming rights costs? Do you expect the absolute number to be down 1/2 of that or on a sort of steady-state basis as you exit the year? Or are you reinvesting most of it in new growth initiatives?

Thanks, Aaron. So to say, look, with $35 million of cost out guided this year, we're on track to deliver that. We're certainly in the half year in half 1, we've delivered where we expected to be, and we've got good line of sight to the second half of the year too and beyond that, so into next year and beyond. Those cost savings, as you mentioned, have given us the flexibility to invest in the things that we know our customers love but also will grow future revenue such as growing Broadband and Streaming growth. I think the slide or the graph on Page 23 illustrates in the first half, of the cost out that we generated a $15 million in half 1. About $8 million of that was reinvested into growth outside of programming, so that's the Streaming growth and the Broadband growth. So I think that's -- if your question is how should we think about it ex Broadband costs, I think that's a good way to look at it.

But if I can just probe how you account for things. So if I -- as an example, say, if somebody leaves your, call it, multiroom sales department, because you don't need that anymore and joins your Neon sales department or something like that, is that a permanent cost saving and an investment for growth in your books?

No. We wouldn't classify that as a cost saving.

So the cost -- so the growth bit, that's, for instance, Broadband and things like that. Or what's in that $8 million?

The main part of the cost growth is the, I guess, the wholesale access for driving our Broadband growth. So the fees have been paid to the [ LFCs ], the local cyber companies to deliver the fiber inputs to our Broadband customers.

Perfect. That's very clear. Final question. Encouraging that you announced a 15 million share buyback. What made you end up with that number? I think I've also seen some similar question last time. You're sitting on $60 million of cash. Your dividend is paid out. After growth CapEx on a forward-looking basis, you're not targeting to be net cash. What is the intention with the remaining cash? Or why are you not using it all to buy back shares?

Look, I think, Aaron, you should think about this in conjunction with the entire sort of portfolio of capital management actions we've taken. So it's clearly a sizeable $70 million return of capital in H1. We've just returned to paying dividends and a good healthy dividend. We still believe we are undervalued, as I said in the presentation in terms of our share price, and so 15 million is a good start point, we believe, for initiating a buyback. We have the flexibility to potentially go forward. But at the moment, we think 15 million is the right place to start.

The next question comes from Phil Campbell from UBS.

Just a few quick questions for me. Just interested, Sophie, just on Streaming and Neon in particular. Like with Netflix introducing kind of a crackdown on password sharing, just wondering if you have any thoughts on the impact on Neon as a result of that.

Yes. Thanks, Phil. Well, here the [indiscernible] was saying, go to Neon, not Netflix. We like that. As it stands, we're not needing to make that level of change. It wasn't something that Netflix went out with as a bit of a sales point when they launched. We're really comfortable at this stage with the user profiles and concurrent use on Neon. So no change at this stage. And obviously, the content slate is very, very strong.

Great. Just on the call center announcement, my understanding is there's quite a big shortage of call center staff in New Zealand, so I'm just wondering is part of this announcement tied up with that? Because when you read it, it doesn't seem to imply that, but I'm just wondering if that's also part of the reason why you've done it, because obviously, we've seen 2Degrees had to outsource quite a lot of people to South Africa because they couldn't basically get any staff, right so?

Yes look, I mean it's part of the reasons for the disposal. We think we need a 40% boost in contact center care crew to deal with the demand going forward. And so to give you an example, last year, as we started to recruit, we had about 1,000 applicants. We screened around 500. We interviewed 275. And after attrition, after a short period, we ended up with 36. And the one complaint I tend to get in e-mails from customers is out of pure frustration that they can't get through. And that's not because we don't have people who care. They care deeply, it's just that they can't get to the call. So absolutely, this is about proposal which we're getting feedback on. It's about ensuring that we can actually meet the demand of our customers and to [ converse ] them as they should be delivered, given the service that we offer.

Right. Okay. That makes sense. And then just one for Tom, just on programming costs. Like obviously, the kind of Strategy Day numbers, you were targeting kind of programming costs kind of 45% to 50% of revenues. I'm just wondering if that's still the plan. Obviously, this result's slightly higher than that, but it's obviously some timing issues there, but just wondering if that's still the target to get down to that level?

Yes. I think it certainly feels that's where we see our aspiration. There are a little bit of a spike as we have a couple of one-off events this year. We obviously had the FIFA World Cup and the Commonwealth Games in the half 1 result, but certainly, between 45% to 50% is our medium-term ambition.

And maybe just the last one, Sophie. I think you've already touched on this, but just we know you've got quite -- this calendar year, there's quite a lot of kind of World Cup content you've got. So I'm assuming that we should see that coming through in terms of the Sky Box possible deactivations or the new box or even Sky Sport Now, we should see those numbers being reasonably good this year. Would that be the general view?

Well, certainly when you've got 5 winning cups on offer, we would hope so. And having watched a bit of the Six Nations, think about the Rugby World Cup, which is in next financial, which is another spike as Tom said, in terms of cost, yes, I think that's going to be full on. And we do think we've got an incredible array of sporting content. If one starts again on 3 March and [indiscernible], so having that on our screens as well for Sky Sport Now and for Sky Box, particularly in the new Sky Box, you say, and the Pod, yes, we're really excited about that opportunity.

The next question comes from Brian Han from Morningstar.

With the price increase that's about to go through for Sky Sports, what kind of sub loss or churn are you budgeting for? And will the price increase be a hard price increase? Or will you guys be offering freezes or discounts for those who complain enough?

It is a price increase that applies to all of our Sky Sport space on the box, and we also have it on Sky Sport Now. When we do this, we do it with care. We look at the elasticity as we talk about. And at this stage, we're really comfortable with what we're seeing. We're really mindful though that people are -- there is a cost of living crisis. So that's why thinking about what we put on Prime and our free-to-access option is very, very important now as we move forward. So you'll see more of our sport on Prime for those who maybe cannot afford a Sky Sport Now weekly or month or annual pass or on the Box. So -- but yes, at this stage, we're comfortable with what we're seeing.

Okay. Tom, on the EBITDA guidance for the full year, just trying to make sure that I get this right. That's based on first half reported EBITDA of 74, right, not the normalized 86?

Correct. Correct.

Okay. And my last question was, Sophie, I was hoping you could help me with some rough guidance on content costs. Let's say you guys lose your exclusivity to HBO rights, what do you think will be the percentage decline in cost if you guys still manage to hold on to HBO without exclusivity?

Well, I think there is opportunity there, as you say, and that's part of something we've talked about not having to hold everything exclusively because there is a premium that's attached to that. But they're a key partner. That is commercially sensitive discussions or will be in discussions in due course. So yes, I can't give you any specific guidance on that, but we're very aligned to the opportunity of seeing how we can rationalize that programming rights cost line by only taking exclusive what we think is very important to take exclusively and being comfortable with the co-exclusive or even nonexclusive in some instances. So yes, we're very aligned to that with that proven rights cost of the moderation going forwards.

[Operator Instructions] The next question comes from Micah Barr from Craigs Investment Partners.

Yes. I just want to touch on that question about the programming cost as a percentage of revenue target, about 46% to 48%. You mentioned you see that as a tail wind in the medium term. What do you sort of consider the medium term? How many years might that be?

Yes. I think as Sophie mentioned just before, there is expected to be a spike -- a little spike next year with the Rugby World Cup happening in France. I think beyond that, so 2 to 3 years is our medium-term aspiration.

And it's the 45% to 50% range.

Right. Got you. And when you sort of forecast that out, I appreciate you might not be able to disclose this. But what is kind of the weighting towards revenue increases and I guess, programming costs staying the same or potentially declining as you do more co-exclusive stuff? What -- can you talk about the weighting of that a little?

No, not at this stage. We can think about how we might be able to give you guys a bit more color on that going forward. But obviously, for me, it's about that -- at the overall numbers that we deliver. And as I think you can see, we're very clear on driving where we get the best margin from the content that we're offering. So we'll reflect on that. I can't give you anything specific at this stage.

No worries. And just on Neon, we've recently had Disney+ quite a big price rise in the half, [indiscernible] TV as well. Do you see any change in behavior when those competitors change their prices like to your churn or is Neon's sort of customers sort of ignoring those other price increases?

Look, we super counsel with where we are with Neon. We have a -- we do have a lower price point for those customers that want to go to that level of service. We are really comfortable with the price increase we put through in August in terms of the growth that we've continued to see. And actually, as we've talked about in the presentation, that's that continuous subscription that we see with them. We, of course, look at what others are doing in the market. But to be honest, in terms of [indiscernible] New Zealand and our content slates, given our partnerships with the studios, we do think it's incredibly compelling. So yes, no direct correlation, albeit, as was referenced earlier, I do think there is a bit of negativity towards Netflix given the change in approach on password sharing and people doing some reconsideration based on some of that feedback. So we think that's just going to be positive for Neon at this stage.

Okay. Cool. I've just got one more quick question then. You mentioned the technology and content operations team, that's where, call it, 90 people were leaving. Can you give us an idea of exactly what kind of products they are working on? And how big does that seem currently if 90 are going overseas?

First and foremost, it's a proposal. The teams who are impacted are having a look at what we're proposing and giving their feedback. To that end, it's not appropriate to be talking in more detail. But what I can safely say is this is about trying to access the resources that we know that we need as efficiently as we can to meet the customer demand. And yes, we're just taking care with that process. So it's not really appropriate to go into any further detail at the time. What we will be doing is once we have completed that process and made final decisions, be coming back out to the market just to confirm those financial impacts. But suffice to say, we're taking due care. We're very, very mindful about being able to deliver for our customers. And so there's no change in that approach.

At this time, we're showing no further questions. I'll hand the conference back to Sophie for any closing remarks.

Look, thank you very much. Really appreciate everyone that's dialed in today and given us your time. We appreciate the interest and support. And obviously, Tom and I and the team look forward to engaging with a number of you in the days to come. So yes, thank you for your support, and see you soon. [Foreign Language].