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

Thank you for standing by, and welcome to the Sky Network Television Limited FY '25 Interim Results. [Operator Instructions] I'd 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 2025 interim results briefing. I'm Sophie Moloney, your Chief Executive, and I'm pleased to be here with Andrew Hirst, Sky's Interim Chief Financial Officer, who will be known to many of you. I'll start today's presentation with an overview of the first half, including an update on our important satellite migration project, simply called Project Migrate. That will be followed by a look at the performance in key parts of the business. Andrew will then provide a more detailed walk-through of the numbers, before I take you through the outlook for the full year. We'll then hand back to the operator to open the lines for your questions. Optus advised us in August of last year that our migration time line needed to accelerate by 7 months from December to May. Given the significantly accelerated time line and the complexity of this project, it rightly became the #1 priority for the company. This interrupted our original FY '25 plans, including some revenue-generating initiatives. But more on Project Migrate shortly. Another key call out for reviewing our results is the need to focus on the underlying performance of the company, acknowledging that we have a number of one-off impacts, the most significant of which are either noncash or largely cash neutral. And in all cases, the dividend is protected. So to our headline results. With this backdrop in mind, as foreshadowed in November, the interruption caused by Project Migrate in combination with the economic climate we've been operating in has had an impact on our revenue line. Also, as previously signaled, this year our programming cost profile is heavily weighted to H1. These factors have impacted underlying EBITDA in the first half, but it's important to note that programming costs will be significantly lower in H2 when savings that are already largely locked in will take us back to run rate levels for the full year. Crucially, the Board's confidence in the full year outcome means that the interim dividend remains in line with the expectation of paying at least $0.21 this financial year. Turning to Slide 4. In confirmation, we're on track to migrate to the new preferred satellite in early April. This is now in place at 160 degrees east, which is the same location as the current satellite. From a financial perspective, the existing support agreement already in place with Optus will largely offset CapEx costs by FY '26 through the leasing line. And we've had constructive conversations with Optus to discuss further support for any additional impacts, and this has been agreed in principle. The final cost is still to be determined, but importantly for our investors, we remain confident the program will be largely cash neutral by the end of FY '26. Ensuring a smooth transition has always been our primary objective and around 95% of our customers have not experienced any issues. However, this means up to 5% of our Sky Box customers have experienced unexpected reductions in signal strength due to the inclination of the current D2 satellite. The interruption in viewing led to a significant uplift in calls into the contact center and subsequent technician call-outs, some of which were rescheduled several times without clear or sufficient communication. This isn't an acceptable level of service for our customers. To provide context on the scale of demand, the inbound technician calls to our contact center increased by over 60% in January and service call-outs more than doubled to over 500 per day. Now where appropriate, we provided credits, which, based on current assessments, have totaled just under $200,000 in the first half. In recent weeks, alongside our partner, Optus, we've been able to implement several technical fixes that have successfully improved signal strength, significantly reducing customer call volumes and thereby technician call-outs. We've also fast tracked the implementation of IP switchover capability for the new Sky Box, meaning this product now seamlessly switches to Internet delivery in the event of rain fade or signal disruption for those with good broadband connectivity. This is a real game changer for our new Sky Box customers. Many on this call will be happily using IP-based products such as Sky Sport Now or Neon, but for many of our customers satellite connectivity remains important given New Zealand's geographic challenges, coupled with customer preference. For Sky, therefore, satellite remains important to our multi-platform strategy and is part of a suite of products that offer customers choice in the way they connect with Sky content. As I mentioned in my letter to shareholders, I look forward to completion of Project Migrate so we can focus on what is on our screens, not how the content signal gets there. And to that point, our content lineup in H1 was impressive. In sport, that included the Paris Olympics, the All Blacks Northern Tour and a significant jump in viewership with the inclusion of AFC and the A-Leagues. And in entertainment, the content pipeline strengthened. Yellowstone, in particular, did well across all products. We also confirmed Sky's position as the exclusive home of Max in New Zealand through an expanded deal with Warner Bros. Discovery. Turning to Slide 7. From an entertainment perspective, H2 is even stronger, including high-impact titles like The White Lotus, The Handmaid's Tale, Yellowjackets and The Last of Us. I'm also happy to report the return of Vera, a much loved cozy crime drama for our Sky Box base. In sport, we've had great content available over the summer, taking us through to the winter sports season. This kicked off last week with the return of the first round of Super Rugby Pacific and the NRL Preseason. Our mix of international and local content across sports and entertainment is unmatched in this market. That said, there will be difficult choices required to achieve the margin targets we've set. This is both the revenue and cost equation that rich data insights are enabling us to carefully navigate. The key call outs on this next slide are the increased take-up of new products with a much higher NPS attributable to those customers and the slowdown in customer loss from the cyclical impact in H2 of last year. While revenue is down, much of this relates to the lower opening customer number, and we're seeing good growth in ARPU, including increased sports penetration that's partly offset this. More evidence on this next slide with annualized churn returning towards run rate levels across all tenure groups. This means that 83% of customers who have been with us for at least 5 years have average churn of just 8%. And while discounting is up against the prior period, this is well below the levels recorded even 2 years ago. And activations were just 300 shy of last year's H1 total. Moving on to the first of our streaming products on Slide 13. Sky Sport Now has had another impressive half, including a record revenue result. Remembering that in the prior period customer number included the tail end of the Rugby World Cup, we are pleased with the numbers we've achieved this half with a 6% increase in unique customers year-on-year. We made the strategic decision to remove the weekly pass at the start of this calendar year to ensure consistency with all other streaming products, and we're very happy with the early results. As communicated during the week, pass prices will rise in mid-March to reflect the value Sky Sport Now delivers, with a separate price rise on the Sky Sports package to follow post the satellite migration date. Turning to Neon. And while we've seen customer growth of just over 2% over the past 6 months, this is slower than expected. However, we've seen good growth in the basic with ads tier. Netflix took 2 years to reach 22% in its ad tier, so Neon hitting 19% in less than 12 months is an impressive result. The revenue comparison is largely due to there being a 16% higher average base in the prior period as it came down from FY '23 highs. There is more work to be done and with the pipeline of content ramping up in H2, we'll continue to work with our partners, Warner Bros. Discovery, to showcase the deep library of Max content on the platform. Sky Broadband has grown to over 44,000 customers. As well as being EBITDA positive, the bundling effect means there's also a positive impact on Sky Box retention. For Box customers with more than 5 years tenure, it's driving a 23% improvement in churn. Turning to Sky Business. Sections of the commercial sector have come under pressure due to the current economic cycle, and with tourism still in recovery mode, this has directly impacted our accommodation sector customers. Nevertheless, this part of our business is delivering consistent results by focusing on value-add services that help our clients differentiate for success. And with our licensed premises, demand for our product grows during challenging economic conditions, attracting patrons that still want to enjoy the key sporting and entertainment moments. Turning to advertising. Sky's share of the high-margin linear advertising revenue pool increased to 14% during H1 and has increased by 39% since we first accelerated our focus. Revenue growth of 2% was against a period that included several World Cup events, including a 6-week Rugby World Cup. And in the current period, we've added a new revenue stream from dynamic ad insertion on Sky Sport Now in October. As expected, there's been strong demand from advertisers for this high attention content. And on that positive note, I'll now hand you over to Andrew, who will take you through the numbers. Thank you, Andrew.

Thank you, Sophie, and good morning, everyone. Before I start, I would just like to say that it's great to be back here at Sky. It's a business that I'm very passionate about, and I'm really excited to be back again working with such a great team. Starting with the headline numbers. And as Sophie has mentioned, there are a number of one-off items in the result. So it is important to look through the reported numbers to the adjusted or underlying figures. I will go through the adjustments in detail on the next slide, but at a high level, they relate to the cost and revenue impacts of satellite migration, transformation costs, accelerated content amortization for Neon and other income from a satellite lease term modification. Overall, the 2 key factors in the underlying story for this half were slightly lower revenue as a result of the tougher economic climate and delays in the revenue initiatives and programming costs that were heavily weighted towards H1. These were up $12 million year-on-year. But the good news is that this reverses in H2 to get us back to run rate for the full year. These 2 factors meant that the EBITDA result of $60.7 million was down 25% year-on-year. But importantly, we have the tailwind on the horizon from significantly lower programming costs in H2. So digging into the detail, I'll walk you through the one-off items that we're adjusting for. Firstly, for revenue and other income. We had about $200,000 of revenue impact from discounts provided to customers as a result of service interruptions. We expect these discounts will continue in H2 ahead of switching to the new satellite in early April. And while not part of our reported revenue figure, we also had a one-off noncash benefit of $4.9 million coming through as other income, which is the result of a modification to the lease term for our existing satellite lease. For operating costs, the programming line includes an $18.3 million noncash cost from accelerated content amortization following a change in our methodology for amortizing Neon content to better reflect viewer behavior. This change shortens the amortization period for new content from being evenly spread over the license period to now being amortized over 2 years, but importantly, with 80% of that in the first year and only 20% in the second. This change excludes our library content, which continues to be amortized on a straight-line basis over the license period. Operating expenses also included $2.8 million of transformation costs, which were mostly redundancy costs associated with organizational changes across the business, and we had $1.1 million of incremental spend related to satellite migration. There will be a bit more of this to come in the second half. And in the CapEx line, we had $4.7 million of satellite mitigation CapEx and $0.6 million of accelerated spend on Sky Pods. As previously communicated, in relation to our satellite mitigation costs, both the P&L and CapEx impacts are expected to be largely cash neutral by FY '26. This is due to existing support from Optus for CapEx that's coming through the leasing line. And for the OpEx costs and revenue impacts, we've agreed in principle with Optus that these will be reimbursed, albeit we are still working through the mechanism for this. So now looking at revenue. Overall, revenue was down 2% year-on-year, noting that this was against a very strong period last year that included the Rugby World Cup. This drop in revenue is largely for the reasons I've already mentioned, being the distraction that satellite mitigation has caused as well as a tougher economic climate. That is particularly the case for Sky Box, where both these factors played a part as there were a number of revenue-generating projects that were delayed and the economic headwinds in the second half of FY '24 that we opened this year with lower customer numbers. With that in mind, however, we have seen the benefit of our portfolio business coming through as the revenue growth engines of streaming, advertising and broadband all delivered good uplifts that have helped to partially offset the softer performance in Box revenue. These 3 growth categories continue to increase the diversity of our revenue, delivering a 6% increase year-on-year or 21% growth against the second half of last year. Turning then to costs. Adjusted expenses were up $14.5 million year-on-year, most of which came through the programming line, which was up $12 million. As we previously signaled, FY '25 was always going to be a year where our programming costs would be heavily weighted towards H1. The largest components of this $12 million increase included the rights and production costs for events such as the Olympics, for All Black matches, for inbound tours, the Rugby Championship and the end of year Northern Tour, all of which were either abbreviated or didn't happen in the prior period due to the Rugby World Cup. And we also had an uplift from the expanded BBC renewal, which now includes BBC First. These programming cost increases were partially offset by sporting events that occurred in the first half of last year, such as the World Cup for FIFA Women and the ICC ODI cricket. And we also realized some opportunities to optimize our content portfolio and we were able to negotiate better pricing on a number of renewals. Outside of the programming line, we had a $5 million increase in broadcast and infrastructure costs, most of which was to support revenue growth in broadband and streaming. And countering this, our subscriber-related and other cost categories both came back by $1 million year-on-year, largely as a result of continued transformation initiatives. And now turning to CapEx. We've continued our focus on growth CapEx with investment of $21 million in H1, which accounted for over half the non-migration CapEx spend. This growth CapEx included Sky Box and Pod hardware purchases, which are now largely at replacement levels following the accelerated inventory build over the last couple of years. As usual, this also includes capitalized installment costs for new customer acquisitions. And we also continued to roll out software upgrades to enhance the new Sky experience. So for example, the recent development of IP switchover for Sky Box. And finally, we've invested in ad tech to support innovations like digital ad insertion on Sky Sport Now, which can be rolled out to other platforms. Satellite migration spend was $4.7 million and included capitalized costs from technician visits, dish hardware, as well as spend on infrastructure required to support the migration. Migration CapEx spending will continue in H2 ahead of switching to the new satellite, and by year-end, is expected to be within the $10 million to $20 million range, albeit at the mid to upper end. And as a reminder, migration CapEx is excluded from our CapEx guidance and also from our definition of free cash flow for dividend purposes, where it is being offset by the cash support from Optus through the leasing line. As Sophie has mentioned, we expect migration CapEx costs will be largely cash neutral, albeit the timing of the support from Optus is not completely aligned. In terms of what all that means for free cash flow, our reported free cash flow from operating activities was $63 million, broadly the same as last year. The cash flow from operations component of that was $76 million, which was up $5 million on last year despite the lower trading performance and $4 million of cash costs for one-off items. This was due to a positive working capital movement of $13 million, the largest component of which was the unwind of our prepaid rights for the Olympics. We've made tax payments of $12 million in H1 versus $7 million last year simply due to the timing of provisional tax payments. As communicated in October, free cash flow included a cash receipt from Warner Bros. Discovery for content that was prepaid at the time of the new partnership. This cash amount ended up being slightly lower than the $4 million to $5 million we had communicated back in October, but that was simply due to the final prepaid position at the 30 October launch. Our leasing cash flow reflects the net cash cost after Optus support for Migrate CapEx spend. And finally, the $18 million returned in dividends in H1 was up against last year's $14 million, reflecting the increased final dividend of $0.12 per share for FY '24 versus $0.09 per share for FY '23. Liquidity remains very strong with a closing cash balance of $28 million and our $100 million bank facility remains undrawn. Following on from that, in terms of capital management and interim dividend then. The continued strong cash flow generation supports our confidence in dividends and the pathway to the $0.30 per share target in FY '26. The Board has approved an interim dividend of $0.085 per share, which equates to approximately 40% of the August guidance of at least $0.21 per share. As communicated at our Annual Shareholder Meeting in November, the share buyback program was paused as a result of the ongoing negotiations with New Zealand Rugby. While there's still a further $7.8 million available to deploy before the program expires on the 31st of March, we will remain in pause given that New Zealand Rugby discussions are continuing. As the Chair has repeated in his letter to shareholders, the Board will consider further capital management initiatives, including the potential to introduce a prudent amount of leverage into the balance sheet once we have completed the satellite migration project and concluded discussions with New Zealand Rugby. I'll now hand back to Sophie to cover off the outlook and FY '25 guidance.

Thanks, Andrew. Great job. Looking ahead, our focus for Q3 and into Q4 remains on the successful satellite migration, and this will continue to have some impact on revenue-generating activities. And as I've said, our programming cost line will step down significantly in H2. We have reviewed FY '25 guidance, and consistent with our earlier advice on revenue softness, we have narrowed and reset the guidance ranges for revenue, EBITDA and NPAT. Our CapEx guidance remains unchanged, and our confidence in our ability to generate free cash flow means dividend guidance of at least $0.21 per share also remains unchanged. We've provided a bridge to the midpoint of EBITDA guidance to step you through what's driving the step-up in earnings in H2. Essentially, the reason for our confidence is the significant programming cost savings that are already largely locked in. Looking at the key movements between the 2 halves, we are forecasting revenue to be down $10 million on H1, noting the first half included revenue from the Olympics. And in programming, we're forecasting a very achievable $30 million improvement. A large portion of the reduction is due to events in H1 that aren't repeated in H2 such as the Olympics, All Blacks matches across inbound tours, the Rugby Championship and the end of year Northern Tour. We've also agreed equitable reductions in rights costs from changes in competition formats, and we'll have a step down in costs as ESPN moves to co-exclusivity. Also, in recent data-driven content renewals, we've made decisions to improve pricing and to not renew certain content. Finally, on the overhead front, a disciplined cost management focus means we expect to capture further overhead savings in H2. And with that, I'll now hand back to the operator, and we look forward to your questions.

[Operator Instructions] Your first question today comes from Rob Morrison from Craigs.

Congratulations on securing the cricket.

Thank you.

So using the midpoints of your revenue guidance in FY '25 and '26, it looks like you're expecting 4% revenue growth in FY '26. So with FY '25 growth to be down, it looks like a decent acceleration. Could you give us some comfort around how you're going to get to that 4% growth in FY '26?

Yes. I don't think we've obviously given guidance, Rob, in terms of the '25 outcome. We haven't actually updated or provided any guidance around '26 other than the comment that -- in terms of the 3-year targets. That's the one area that we don't think we'll be able to hit in terms of the revenue growth. So I'm not quite sure the 4% is the right way to look at it.

Yes. I think the key confidence point is really the programming as a percentage of revenue, that should be -- particularly, as we've given that H2 bridge to give that sense and confidence of how we're going to manage towards those 3-year targets. Is that where your question was coming from, Rob?

No. Well, just -- so if I take the midpoint of your FY '25 guidance that you've just given and then the midpoint of the FY '26, 1% to 2% CAGR, I just mean it looks like there's going to be -- at the midpoint, you're expecting some decent revenue growth. I'm just wondering what the drivers of that will be over and above FY '25?

Yes, I think the 1% to 2% CAGR and the 3-year targets, at this point, we're calling out that we won't get over that 3-year period. That's the issue, because obviously our revenue is down this year.

That said, in terms of those -- in terms of the portfolio effect of our business, we've been really clear that, that is our focus. And so you've seen the growth engines across streaming, advertising and broadband, albeit broadband is lower margin. And you mentioned the cricket. That's going to be in FY '27. But we are excited about the slate of content we have and the way that our data is working. And our ad sales team is starting to get great traction. So those are factors that will go into the revenue profile for '26. And what we're planning to do is to give the fuller update, obviously, at the full year on how we see those '26 targets playing out. So hopefully, that's when you'll get that clarity. But just suffice to say that we're on track with our overall portfolio strategy in terms of driving margins so we can deliver that to shareholders. And the piece for me, notwithstanding where our Box numbers are, to be able to confirm the interim dividend and in the full year and looking ahead to the $0.30 in FY '26, we hope shows you our confidence in how we operate this business.

Great. Great. That's super helpful. And then kind of on that as well, really high level -- so I guess given what you've just said, the supply is a bit less. But it looks like there's a decent drop -- you're expecting a decent drop in FY '26 programming costs. How much of this is locked in already?

Yes. So we've got -- we've talked about H2, the moves that we're making there already, which are -- it does require some difficult choices that we're making based on our data and understanding what our customers really value and seeing how we can value up those rights. So we've got line of sight to what we need to do. And obviously, FY '26 will have a half year of any new rugby deal that we managed to strike with New Zealand Rugby. Just to say on that, we don't have any news to report. We have a very passionate team. We care deeply about the game. And we're hoping that we can find a path that's going to work for us in New Zealand Rugby, also understanding there are -- free-to-air has a component and there will be other interests, and there are plethora of rights, which have been referenced in the media of late. So there will be 6 months of that. But otherwise, I hope you can see -- and the confidence is coming through when you look at H2, how we're really committed to driving that program as a percentage of revenue, which in H2 is sitting at the...

47%.

Yes, 47%. So giving, hopefully, good confidence, therefore, in that 3-year target. But it does result in some difficult choices. Equally, we know how painful it was when we lost the cricket in the last round. And to welcome the Black Caps and White Ferns back to Sky Sports screens and also potentially Sky Open, it's going to be thrilling from FY '27 onwards.

Okay. No, that makes sense. And so obviously in the midst of New Zealand Rugby negotiations, as you said. So this is -- you know what I mean? I don't want you to reveal anything you don't want to. So you and New Zealand Rugby obviously need time to prepare for the 2026 rugby season after the contract is locked in. So what's the shortest amount of time you need to prepare for that?

I mean, look, from a Sky perspective, we have an incredible team who have been covering rugby for 2.5 decades or close to. And so we do have the infrastructure and capability. But also acknowledge that for New Zealand Rugby to the extent they want to think about other ways to monetize rights, they'll be probably wanting to get to a place sooner than the end of the year. But to be honest, from a Sky perspective, we have the team and can be ready to go after the rugby. And what I would say is we're really excited with the viewership of Super Rugby Pacific. Incredible first round of Rugby. So that bodes well. And we do hope that we can get to a good place soon with our partners, New Zealand Rugby. But obviously, that will come to the market as and when it gets confirmed.

Okay. Yes, pleased to hear that. Final question. So obviously, the rollout of your Sky Box will impact your CapEx spend. And so could you give me an indication of what level of penetration for the new Sky Box you need to get to, to get to your CapEx spend target range in FY '26? So just based on -- I think you did. You were at 21% at the end of the last financial year. Then at the last result, you said you're hoping to get to 35% end of this year. So I guess that will be about 50%. Is that right?

Yes. We were at 30%, I think, at the end of December. So obviously, that's growing all the time. So what I would say is that our CapEx profile around the new boxes, as I said earlier, are back into the, let's call it, yes, normal mode as it were. We did a heavy rollout, obviously, in the last couple of years. We were back into heavy mode. But we're 30% at December. Yes, we'll definitely grow that number by the end of the year. So I don't want to call out a specific penetration level for next year, but it's increasing all the time at quite a healthy rate.

Yes. And the joy is the -- I referenced in my update this IP failover mode for the new Sky Box. That really is a game changer, because rain fade was always the issue that people used to call out with satellite connectivity. And so we're excited and hoping that, that percentage will increase quite significantly once people realize the benefit of this new technology that we've expedited to help with our satellite migration project. But as Andrew said, we're totally comfortable with the amount of CapEx. And it's going to flow through our forecast. But we'll do an update at the full year on our aspirations around percentage attachments at that time.

And just to close that out, I think, yes, very comfortable with the 7% to 9% CapEx target for next year, which is in our 3-year target.

Yes, spot on.

Which...

Okay. Pleased to hear that. Oh, sorry. Go on.

I just said that obviously includes what we're doing around the rollout of the box, that 7% to 9%.

Your next question comes from Arie Dekker from Jarden.

Yes. Firstly, just the reference to the price increase for the sports tier on the main platform post migration. Should we expect that to be a circa 10% price increase? Just a bit of color there.

We're looking to do -- yes, do a $5 price increase on the sport pack.

$5, yes, great. And then just in terms of a bit of -- there was a reference to the penetration of sports on the tier, but something we don't get a lot of visibility on is just, I guess, that absolute level of sports subs that you have across the streaming and box sports tier. Over the last few years, has that absolute number stayed stable? Has it been growing, a moderate rate of decline? Just some color there.

Well, we do talk about the -- you obviously see our Sky Sports. So when we give our percentage of penetration of our box numbers, which is currently at the 73% level, which is -- I'm really happy with it. It's up from where it's been previously. So it's interesting...

Yes, but penetration on a declining absolute number. So like I said, I'm just keen -- if you took your sports tier numbers today, which like you say, we could take a view on, is that absolute number in line with where it was 3 years ago, say?

Well, it's a good question. We'll come back to you on that one just to have a look at it. I suppose what I would say is we're really comfortable with -- customers have choice. If they want to consume on Sky Sport Now, they readily can. And obviously, we put a $5 price increase -- probably that should be going through in March -- on the monthly. Probably they're going to be on the box with all the other services that brings -- and that's all good. So let us come back to you on that one, Arie, in terms of that question about the overall view.

Yes. And I think I might have missed it in my first pass-through, but just on the cricket rights, just confirming you're not taking the domestic cricket rights?

Yes, that's correct. We've got the Black Caps and White Ferns. And it's obviously -- it's -- it will be in FY '27. So it's the start of the '26 season.

And you're not in active negotiations, like you're not looking to secure those rights?

No, we're in a -- this has been a -- I had a great conversation with Scott, who I know well, the Chief Executive of New Zealand Cricket. And we have got the data and looked at what made sense for our business, and we talked before with Rob about how we're driving that margin through that program as a percent of revenue. As you well know, production costs feed into that and production costs around cricket are pretty impressive. I suppose we were very clear about the impact of the loss of domestic cricket, particularly the internationals on our business, and it has fed into the discussion. So no, those -- the domestic rights, I think Scott is very keen to ensure have a continued home. And also, we're really upfront that free-to-air will be a component of what we're doing, because, as you know, we've got an advertising business as well to support our portfolio approach going forward. I hope that helps.

So just turning to the rugby rights then, like are you looking to do something similar there and perhaps sort of avoid the higher cost, lower value domestic competitions?

Look, I think that ultimately New Zealand Rugby is the rights holders. So how they decide to potentially take rights to market in different packages is obviously with them. We understand the importance of the NPC to the provincial unions and -- but certainly part of the discussion for us is how do we make this work and what's the role of free-to-air and potentially other partnerships and market. And we've been really upfront, as I hope you recognize, that we are comfortable with co-exclusivity or even nonexclusive rights. What we're trying to do is drive great outcomes for our customers and also our shareholders. And that does mean we obviously need to look at production costs and how we manage those going forward. So ultimately, that is a question for New Zealand Rugby. But we are here and keen to keep delivering rugby for our customers just as long as it makes economic sense.

Yes. And then we've talked a little bit about the implications of sort of, I guess, the revenue guidance targets. And I guess that started out at 3% or 4% -- 1% to 2%. And that might be sort of challenging given FY '25. I mean, can you just sort of talk a little bit about -- because you've obviously held the programming percentage target on, I guess, a revenue target that's going to come in well below given the compounding impact of what you were going for. So I mean, these rugby rights, there's obviously tension in a negotiation like that. Are you very clear that rugby is obviously your largest cost, but that there are rights over and above rugby that you are making cuts on and not looking for rugby to sort of, I guess, absorb a disproportionate portion of your targets?

Look, that's spot on. And as I referenced as we stepped through, we are making some difficult choices about rights. And just for clarity, obviously, sport is super important for us and our customers, but we also spend on entertainment. That is part of the overall programming as a percentage of revenue. And again, the critical feature in the last year or so is the data that we have been utilizing to value our sports rights is readily applicable across entertainment. And that's been quite revelatory to us around the rights that we have. And so we were in a process there of getting to better outcomes with the studio partners as well. So yes, it's a long way of saying this isn't just about rugby, which is an important partnership for us and valuable to our customers, particularly on the Box side. We have a lot of different rights that we're in the process of looking at. We're in renewal phases all the time. That is the nature of what we do. The great thing is we've now got the data and confidence to deploy that in market. So more to come on that front, particularly when we get to the full year and into '26. So I'd be happy to talk further about it then.

Okay. Yes, I was going to ask if you could give some examples. But okay, that's fine. Just on the second half costs associated with migration, you called out the OpEx, the CapEx and, obviously, a very modest amount of revenue. Given where you're sort of at, do you expect the second half costs on that migration to be higher than the first half or lower in some areas, higher in others? Could you just give a little bit of color on that?

Yes, happy to do that. I think they will be a little bit higher in the second half. I think -- but again, on the CapEx side, we've talked about the $10 million to $20 million number. We're kind of mid to upper end of that. And the $4.7 million of that, we already see -- we're going to figure out what this means in the second half. On the OpEx and revenue side, they will be a bit higher. But again, importantly, pretty comfortable that, that will all be largely funded through our partner, Optus. So we've treated them as add-backs for that reason. We've got a good discussion around the CapEx. It's already in place. And in principle, agreement around how we're treating the revenue and cost side. So yes, they'll be higher. But from our perspective, we're kind of neutral to it. Obviously, we'll manage them as best we can. But it's not like it's affecting our underlying result.

No. And so those total costs could be sort of in the order of $20 million to $30 million, say. Will we see any of the cash benefits come through the FY '25 lease cash payments? Or will it be heavily loaded in FY '26?

Hoping that the OpEx or P&L impacts will be kind of largely immediate. I think -- by the way, it's a bit towards the lower end of your $20 million to $30 million. But we're hoping the P&L benefits will be somewhat year on year on year, I suppose as -- we've already signaled the leasing ones are a little bit different. The profile of those lease credits comes through a little bit different to our spend. It's coming through in our minds in the leasing line. It's actually part of working capital unwind, because you would have seen in June we had a $6 million receivable -- $6 million receivable from Optus which deals with that credit piece. So that's the cash impact that we've had in the first half. But the timing of those credits and the way they work, we get the cash essentially largely in the first half of each year. But by the time we get to the end of '26 and you look at the overall spend, we're still comfortable it's largely cash neutral.

Cool. And then last question, just -- I mean, a slightly different way of sort of framing it. But on the Pod and the Sky Box, can you sort of confirm whether you're running any material inventory of those pods and boxes at the moment? Or if you're in a position now where you're sort of ordering to match rollout?

Yes, we're in good shape, ordering to match rollout. So no concerns from that perspective.

So you've seen in the last couple of years, we have been accelerating that. Obviously, we're building towards and dealing with in terms of normalizing CapEx. But we're not in that mode now. So it's very much a sort of as we need basis.

[Operator Instructions] Your next question comes from Aaron Ibbotson from Forsyth Barr.

I just had a couple of small questions. I know you don't like to talk numbers when it comes to these content rights. But I was just wondering on the nonexclusive -- going nonexclusive with ESPN, if you could give some sort of magnitude of delta in percentage terms, if you don't want to give it in dollar terms? Are we talking sort of not an increase that you otherwise expected? Are you talking 25% down, half? What type of magnitude delta are we looking at when we see these nonexclusive rights?

Yes, co-exclusive would be a nice term.

Yes. Sorry. Yes.

But -- and as we -- I don't know if you recall, but when we did our -- a couple of rounds ago when we did the Discovery deal, obviously, which we talked about, [indiscernible] met around the 30% mark. And I think that's broadly consistent in terms of the ESPN rights.

Okay. And then...

Percentage term.

Yes, very good. And then I was just thinking could you talk to us -- now you talked to your good data of viewing and what you're having. Could you talk to us a little bit about sports viewing trends, which codes are sort of taking share, which are losing? Obviously, I'm particularly interested in domestic rugby in that. But could you talk to a little bit international like NBA and those type of sports versus domestic sports? Is there any interesting trends you're willing to share with us?

I mean I think -- well, I think that -- what I would say is we do see differences across different product types. So Sky Box and Pod viewership -- well, particularly Sky Box, different to Sky Sport Now in terms of which sports are potentially more attractive, and you can think about that in terms of potentially some more of the traditional viewing versus the content that the young audiences may enjoy, which tend to sit in the apps. And that's quite an interesting mix. I mean I think that -- interestingly, NBA is one of the sports that has been struggling a little bit of late. I don't know if you've read any of the international press about it. Whereas, obviously, something like the NFL as a -- and the Super Bowl is the Super Bowl for a -- named as such for a reason, continues to get big audience. I think the joy of what we have -- and I'm not going to give you specifics on sports or not. The joy of what we have is we can actually see and share with our advertising partners as well which are the sports that are getting the highest attention. And that does drive the deals and things that we renew. And certainly, last year, just to give you a little bit of color, though, on that front, the NRL, particularly the Warriors, had an impressive rise in viewership and interest. And that's feeding into the interest from advertisers too as we look to secure sponsorship across these important properties that are high attention for our customers.

And final question, which -- if you look back a few years, you obviously talked to stabilizing the core or stabilizing satellite subscribers. And I know you've had a sort of difficult 6 months with the satellite issues. But do you see any reason why we shouldn't expect you to continue to lose about 15,000 Sky Box subscribers per interim? Do you have any initiatives to increase that 10,000 for 6 months activations? Is there any trends you see? Because it's been very stable, but maybe not in the way you envisaged it to be stable.

Well, I think -- and I'm grateful you brought that up because we were looking at that in FY '23 start '24. You're right. Particularly from a revenue perspective, we're pretty close to stabilize. I think that's where the -- the key focus for us is around that portfolio and thinking about, yes, how we can drive margin. But to your point, I think it's going to be interesting once we get through migration and obviously the economy, hopefully, for all of us starting to improve in FY '26. Just to see -- given the investment we've made in our new Sky experience and the new features and functionality that are coming through that device, which also sit on Pod and power Sky Go as well -- just to see what that mix looks like, because actually if you like -- you've got a household and you want to have some different viewing opportunities, then the Pod or the new Sky Box are a great option because you also get Sky Go with 2 current streams, albeit you can only watch one sport and one offline. So it's going to be interesting to see with the economy returning and once we're through migrate, given the release profile and the improvements we've made on that experience, Aaron, what that might do. I'm not going to sit here right now and say we're going to return to x amount of growth. But a long way of saying, I think it's going to be important to see by the end of FY '26 what that looks like. And it is now about portfolio. You won't be hearing me talking about necessarily stabilizing those Box and Pod numbers, because ultimately, it is about customer choice. And that's where our pricing and taking price on Sky Sport Now, as we're doing, reflects the value we're driving. And that's going to be an important feature for us going forward, too.

Makes sense. Maybe just one final one with this ESPN deal. Could you share at all roughly what proportion of your current sports viewing maybe on Sky Sports Now or on the satellite that relates to sports that's now part of this co-exclusive agreement? So obviously, with Disney launching ESPN on their app here in New Zealand, how should we think about that? Is that 10%, 21%? What are we looking at here?

No, I think -- to be honest, I don't have that data immediately at hand. But the reason -- just for clarity, the reason we went into that deal and agreed an approach with our partners was because we were really comfortable with ensuring that our base could still have access and that if they wanted to go direct, they could do that. And so we took that into account when we did the deal. So hopefully, that gives you some confidence on how we priced it up. But the great thing about the bundle of sports that we offer and across the different platforms is there is just a plethora of choice for customers. And there are a number of sports, particularly golf on the Box, which remain incredibly important. And a long way of saying we're not concerned. And we were super open about that when we did the renewal many years ago now. So yes. The landscape will continue to evolve and change and there is fragmentation. The key for us is just to try and make it easy for New Zealanders who enjoy their sports to consume that whether it's through the Box, Pod or Sky Sport Now. And that's what we're going to continue to do.

Your next question comes from Phil Campbell from UBS.

Just a couple for me. The first one was, I wonder if you can give us any color just in terms of, obviously, the inbound calls to the call center through the migration process. Kind of what they were at their peak and kind of what they are at the moment, because, obviously, there's been some improvements there, so.

Yes. So look, we -- you're spot on. During the peak, we had a 60% uplift. And we do get lots and lots of calls every month. I don't know that we've actually disclosed how many -- I mean, the externally previously. But what we might look to do is do that, because there's a fair bit of cost that goes in serving our high ARPU customers on the Sky Box side. What I'm really happy to say, Phil, though, is that given the signal strength improvements, including as of this week, calls related to T100 through satellite interrupting are massively back. So that's -- that is good news. But overall, we've put lots of improvements through. We've added capacity. But our customers do like to call us as opposed to being told to go to apps or different places to solve issues. And that's totally fine. What I'm really happy about in the partnership we have with Probe is that we can keep managing the capacity, but also growing the quality of the engagement and looking at other tools, including AI tools with our partner, Salesforce, to actually improve that going forward. So a long way of saying, yes, significant uplift, but it's now back to more normal levels just in terms of anyone calling about issues they've got. And we'll continue to -- we'll think about actually doing a bit of an update on the total numbers, because I think it is important that people understand the amount of capacity we have and demand going into the contact center.

Great. And just the second one was just on the slide that talks about the noncash amortization on the Warner Bros. deal. So was that -- just so I understand, so that was included in the EBITDA that was reported. Is that included in the guidance -- the new guidance as well, is it? Or was it already included in the previous guidance?

We got -- it's, obviously, on an underlying basis. But yes, it's in the reported result, Phil, but it's obviously a noncash one-off item. So when we're talking about the underlying result, we've backed it out. And obviously, it's only in the first half. It's not going to be there in the second half. So the guidance ranges we provided are on an underlying basis.

As there are no further questions at this time, I'll now hand back to Sophie Moloney for any closing remarks.

Thank you very much. Thank you to everyone who joined the call. It's -- one of my son said to me recently, "Pressure is a privilege, mom." And I'm reminded of that of late. But what I just wanted to note is we've got an incredibly hard working team that I'm immensely proud of, and we really are going to keep delivering and look forward to engaging with our investors, our owners in the coming days. So thank you all very much for your time.

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