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

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

[Foreign Language]. Hello, everyone, and welcome to Sky's 2026 Interim Results Briefing. I'm Sophie Moloney, your Chief Executive, and I'm very happy to be joined today by David Mackrell, Sky's Chief Financial Officer. David has been with us close to 7 weeks and is already having a significantly positive impact on our business. Now we've got a lot to share today. And to aid with that delivery, we're going to change up our approach. I'll start with the overall highlights of the first half, including an update on the Sky Free acquisition and what it means for our business. David will then get straight into the numbers and operational performance drivers. I'll then share some detail on the way we are reshaping the business, including our significantly refreshed entertainment strategy before concluding with the all-important outlook for the full year. And as usual, we'll take your questions at that point. So to the highlights. Our double-digit EBITDA growth is a testament to the hard work of the team, a relentless focus on margin and the resilience and diversity of our business in a difficult consumer market. Our content bundle remains a critical competitive advantage, strengthened in the half by disciplined delivery, enhancing the value for customers and shareholders alike. It's not often you get to communicate a nominal price acquisition that strengthen the balance sheet and enhance cash flow, but that's exactly what's been achieved here. After 7 months of ownership of Sky Free under our belt, the strategic and financial rationale underpinning this acquisition remains apparent through a $34 million gain on bargain purchase that recognizes the fair value of assets that were acquired for just $1. Together with strong cash generation from operations, the favorable acquisition terms have driven a significant increase in free cash flow. And nearly 3 years on from seeking this ambitious target, we remain on track to deliver a dividend of at least $0.30 per share in FY '26. Turning now to the acceleration of our advertising strategy by the acquisition of Sky Free. As we said at the time, the strong strategic fit and complementary strengths make this a compelling opportunity that Sky is uniquely positioned to realize. It gives us immediate scale in advertising and digital. It lifts our share of advertising spend, creating a stronger market position. It expands our digital audience to 1.2 million unique viewers each week, and it brings a younger and more diverse audience into a relationship with Sky, including a 71% boost in the 18- to 24-year age group and an 87% increase in female audiences. The result, therefore, is a dramatic expansion of our reach and commercial impact, achieved in a capital-light way with a strong start made positioning Sky for further earnings accretion in FY '27. So to our headline results. Now given the number of significant one-off items flowing through the accounts, such as the gain on bargain purchase, we have adjusted for these to allow for a like-for-like comparison of underlying performance. Clearly, there's a lot going on at Sky with a complex integration to deliver. Notwithstanding this, we've delivered a strong set of results with the stand-alone Sky business performing well and the Sky Free business providing an added boost. That's delivered an overall revenue increase of 8% for the combined group with an impressive 29% increase in underlying EBITDA, moving through to a 77% increase in underlying NPAT that demonstrates our strong execution across the business. And with that, I'll now hand you over to David.

Thanks, Sophie, and good morning, everyone. It's a pleasure to be presenting to you as Sky's new CFO. In these first few weeks, I've been learning a lot, and I'm really enjoying the excitement and the pace here at Sky. So turning to Slide 7 and a look at the drivers behind the 29% increase in underlying EBITDA that Sophie just mentioned, the most significant is a 6.7% reduction in the Sky stand-alone cost base. This is largely in the programming line, where we've continued to make disciplined negotiation and spending decisions and also saw the benefit of lower costs for one-off events. The direct costs associated with growing the broadband business increased by $4.2 million, and the balance of other expense items came in $2.2 million lower as a result of a focus on cost management throughout the business. The reduction in costs significantly outpaced the 1.3% revenue decline of the Sky stand-alone business. Moving to Sky Free, which delivered a better-than-expected contribution of $1.7 million in its first 5 months under Sky ownership, achieved through a lower cost base than anticipated. Turning to Slide 8 and what is a solid underlying revenue result given the difficult market conditions. I'll cover off the revenue numbers at a product level shortly, but the key points on this slide are the continued growth of streaming and broadband revenue offsetting a large portion of the Sky Box revenue decline. And secondly, the additional $35.6 million of Sky Free revenue over that 5-month period in the half. Now taking a look at revenue performance by product and starting on Slide 9 with Sky Box. Pleasingly, there was -- there has been a marked improvement in customer churn back to below 10% combined with a higher ARPU that includes improved sport penetration and sports pricing, which has slowed the revenue decline. However, discounting has continued at an elevated rate following project migrate and as we have supported customers through this difficult time. Suffice to say, we're taking action to mitigate this revenue decline. Adoption of the new Sky experience has increased to 40%. We continue to prioritize this transition as a key driver of improved customer experience with clear evidence that it lowers churn. Sky Sport -- now revenue continues to grow with a 17% growth in customers and ARPU up 8% following a 10% price increase in March of last year. The Day pass, which was introduced in May last year, has been incredibly successful in attracting new customers and with good conversion to recurring monthly passes. It's a game of 2 halves in the streaming land with an 18% fall in Neon customer numbers back to levels not seen since December 2020. This has been driven by a lack of acquisition and retention driving content. And while improved ARPU provided some offset to increased top line revenue, the result was disappointing. You will hear more about the way forward from Sophie shortly. Turning to broadband on Slide 11, which is another product firmly in growth with an impressive 37% increase in revenue and a 27% increase in customers despite a highly competitive market. A change in product mix meant ARPU was relatively stable even after passing on a local fiber company price increase. Margin remains positive. Sky Venue maintained a stable revenue in a challenging market. On the whole, license premises are going well, but some retailers are doing it tough. And while the accommodation sector is inching towards pre-COVID tourist numbers, it's not back there yet. In the face of this, the [ team ] continue to innovate, recently launching the business edition of the new Sky Box and they soon to open up highly targeted digital advertising to reach hundreds of thousands of Kiwi fans watching Sky in commercial premises. That leads nicely to advertising, where we have continued to expand and evolve Sky's capability over the past 2 years. In that time, we've lifted market share and growing digital advertising from nothing to 16% of Sky's stand-alone revenue. Now with Sky Free included, our linear advertising revenue market share has doubled to 35% and the fast-growing digital segment now represents 20% of advertising revenue. The addition of Sky Free has brought added diversity to our revenue profile with 15% now coming from advertising. Having now combined as a single advertising sales team representing all Sky products, we are confident we've got the ingredients to accelerate advertising revenue in the future. We'll now take a closer look at the underlying expenses on Slide 13. Disciplined cost management has been the mantra across all areas, with the most significant being the $23.8 million reduction in Sky stand-alone programming costs, returning this category to be in the target range as a percentage of revenue at 48.8% for the first half of the year. Lower marketing and people costs reduced subscriber-related costs for the 6 months, while the increase in broadcasting and infrastructure included higher costs from increased broadband customers and additional technology spend. Advertising costs were broadly in line with the revenue result. Lastly, Sky Free added $33.9 million to the cost base for the first half, which includes advertising, programming, broadcast and infrastructure costs. Underlying CapEx expenditure for the 6 months of $26 million for the Sky stand-alone business was $13 million lower than the prior period, largely due to last year's early replacement of transmission equipment to support the satellite migration and a lower spend on customer devices following a period of accelerated investment to build inventory. As a result, capital expenditure was just below the target band of 7% to 9% of revenue. Turning to cash flow on Slide 15 and a strong result for the half with $55 million generated from the core business. The cash balance was boosted by one-off items, including $25 million of cash acquired through the Sky Free transaction and $8 million of compensation from Optus. That contributed to a very healthy closing cash balance of $100 million. Operating cash flow benefited from improved earnings and favorable working capital movements. It should be noted that we expect that some of the working capital movement will reverse in the second half, including some of the cash acquired with Sky Free as a contribution for integration costs and to settle outstanding payables. As a result of the strong cash generation, the Board has decided to pay a higher percentage of the expected full year dividend at the half year. At $0.15 per share fully imputed, this represents approximately 50% of the full year guidance and is a 76% increase in dividend on last year. Sky intends to review capital management options following the successful integration of Sky Free, and we will provide a further update with the FY '26 earnings announcement in August. And with that, I'll hand you back to Sophie.

Thanks, David. Excellent job. Two days ago, my team and I addressed close to 700 advertising clients and business stakeholders at our first unified advertiser upfront. It was an important moment to demonstrate the power of our new combined portfolio where audiences and attention in New Zealand reside. We talked about the scale and strength of Sky's premium sports and entertainment, our refreshed entertainment strategy that puts us in control of our content destiny and how we use our rich data to not only make disciplined content choices, but also to create value for our advertising clients. And today, I'm going to give you a condensed version, spending a few moments on our content strategy before touching on the numbers associated with that combined portfolio. First then to sport. We're firmly in control of our premium content destiny and destination here by securing long-term agreements with staggered content renewals. And now with more events being delivered in stunning 4K UHD, we're bringing fans closer to the action than ever before. This confidence in our year-round offer and steady diet of headline grading sports has supported our recent annual sports price rise. As you're aware, our sports strategy is underpinned by deep viewership insights, which guide disciplined decisions that align with what our audiences value and what also makes sense for our shareholders. The reset of our NZ Rugby rights agreement with improved economics and an expanded content slate is a good example as is securing the Olympics through to Brisbane 2032. And as you can see on this slide, our year-round sports bundle is unrivaled across international and local competitions. An increasingly important part of Sky's sport offering is where we take fans beyond whistle to whistle with shows like League Lounge with Shaun Johnson, The Breakdown and Crowd Goes Wild as well as fly on the wall Zocos like the excellent Forever Auckland SC, which we've just commissioned the second season of. We don't just deliver the live action, we drive the conversation and fuel the fandom. And as a result, we remain the best choice for content partners. If you want to be where the most Kiwi sports fans are, then there's no better place than Sky Sport. Now the joy of Sky is that we get to combine that sport with an incredible array of entertainment shows for our audiences to enjoy. And over the past 12 months, we have carried out an extensive data-driven review of our entertainment content to understand exactly what our customers watch and value. And we've taken deliberate steps to redefine and strengthen our content pipeline, and we're excited by the opportunities this unlocks. Our recent announcements of the new expanded deal with both Paramount and Sony are clear proof points of our strategy in action. And this review also led us to the strong conclusion that not renewing the HBO rights on a co-exclusive basis is the best decision for Sky's customers and shareholders. The way we've structured our agreements has also evolved, moving away from output deals to create more flexibility to respond to evolving trends. This means that when a global breakout series lands like heated rivalry, we are more agile and can bring it to this country while the buzz is still live. That focus on flexibility means we have also replaced some of the pass-through channels with options that we can curate ourselves with less repeats, including Sky Comedy and Sky Kids. I did want to take a moment to have a chat about Neon and our plan to give it a new flow. Neon has always had premium content, but it also needed a premium strategy to match. The drop in customer numbers that David referenced reinforces the strong call to action by my team. Through the work of our refreshed entertainment strategy, 2026 and beyond is about delivering a steady drumbeat of key titles across the year. At the same time, we have rebalanced the proposition to move from leaning heavily into the dark and intense to embracing a more premium mainstream approach with broader appeal. What Neo customers will also see is a refreshed identity, a clearer content strategy and a much more consistent content cadence. This balance is designed to give us something powerful, consistent and more predictable performance. So this is definitely a space to watch. Looking across our full entertainment slate, what we have is a strengthened pipeline of high-quality entertainment from a multitude of studio partners. This includes big noisy event titles that drive acquisition, recognizable returning franchises that drive retention and library content that drives hours and loyalty. Now I do want to draw out some of the Taylor Sheridan work that is taking the world and our customers by storm with the upcoming Marshals from the hugely successful Yellowstone series and also The Madison. Our homegrown Kiwi content fits seamlessly alongside these titles. And in 2026, we're commissioning even more local prime time titles for more New Zealanders to enjoy. Turning then to the power of our expanded portfolio. What we've built is a content slate that works across our products for maximum audience reach and return on our content investment. We're now connected to a much wider audience as well, reaching over 2.6 million on broadcast each week, 1.2 million weekly on digital and with well over 3 million followers on social. Across the board, premium paid, free and streaming, our ecosystem works together, amplifying one another to build on this reach and to drive audience engagement. Every Sky platform has a clear job to do. And together, they give us an unmatched position and huge opportunity to grow audience attention and advocacy. Turning to our outlook and guidance. We're expecting economic conditions to remain challenging, and this is expected to have an impact on near-term revenue. We also expect programming costs to moderate slightly in H2. And as before, we will continue to focus on managing costs throughout the business. And with the integration progressing well, it's appropriate now to provide our guidance on a combined basis, including 11 months contribution from Sky Free. This sees combined group level guidance of revenue of $820 million to $835 million, EBITDA of $145 million to $160 million and CapEx of $62 million to $68 million. And there's no change to dividend guidance of at least $0.30 per share as we deliver on the FY '23 target to double the dividend in FY '26. Looking further ahead, we expect earnings growth to continue in FY '27, and we remain confident of delivering at least $10 million of incremental EBITDA from group-wide synergies by FY '28. As you can see, there is much opportunity ahead for Team Sky and its shareholders. And with that, I'll now hand back to the operator, and we look forward to your questions.

[Operator Instructions] The first question today comes from Rob Morrison from Craigs Investment Partners.

Congratulations on a great result, and welcome to David. I'd like to start off on the underlying free cash flow of the core business. So that is excluding Sky Free. And it's pretty important to understand that so that we can assess the sustainability of the dividend. So there was obviously a great underlying free cash flow result for the core business of $55 million in the first half. I understand there was a bit of a boost from some unusual things like working capital movements. So what was roughly that with that -- please go on.

So yes, so the -- I mean, it's a very strong flow. Most of the working capital reversal will come from things that relate to the integration of Sky Free and the payables associated there. There are some which you would consider relate to the normal business, the tax cash flow in the first half was low and it was reasonably high in the comparative period. And so the core earnings is something that should continue to show through. And so as I said, most of that reversal will come related to the Sky Free acquisition.

Yes, I understand that. That's helpful. I just want to understand the magnitude of that reversal. So was it like just eyeballing, it looks like maybe there was an extra, say, $20 million or $30 million boost from the one-offs to the $55 million in the first half and that might reverse in the second half. Is that fair?

Well, the $55 million excludes the $25 million that came through with the acquisition of Sky Free. And it also excludes the $8 million that came through from Optus, which relates to costs that were incurred previously. So there's no reversal on that $8 million. So most of the reversal relates more to the $25 million and the contribution that was made towards the integration costs and the payables that sat within that Sky Free balance sheet. There is a little bit of working capital reversal that will sit within what you would have called the stand-alone Sky, but it's not significant.

Okay. So just to be clear, we might expect, say, a $20 million to $30 million working capital -- or sorry, one-offs, right, headwind in the second half. Is that right?

Yes. I mean I would think it would be at the low end of that range in terms of the revision.

So at the midpoint of guidance, again, exSky Free, I think it implies flat revenue growth year-on-year in the second half. So can you tell me what gives you confidence for that projection? Like I think core revenue has been declining year-on-year for the past 4 halves, and you said the economic situation is expected to remain challenged.

Yes. I mean I think it's the joy of our business now is that diversification of our revenues. So we -- you're right, it is the economic uncertainty and challenge remains, and we have guided with that in mind. But if you think about our half year performance, seeing growth in Sky Sport -- now and broadband. And yes, you're right, Box and Neon customer numbers are not where we want them to be and the Box revenues decline. So there is that broad offset in terms of the subscription, but largely around advertising. Again, the softness in the linear side. But when you put it all together, yes, that's what gives us the confidence, albeit it has moderated just given the economic environment. Anything you'd add, David, to that?

No, I think we've seen a tough advertising market that's showing out in the marketplace. And as we see business confidence and consumer confidence recover, we'd expect to see some recovery in that market.

Sorry, so you'd expect to see the macro recover in the second half. Is that part of the assumptions...

Yes, it is. And look, we've seen it being a little -- I guess, that recovery has been later than everyone expected, but we still -- we're seeing -- if you look at the most recent sort of consumer confidence, business confidence, we've seen a little bit of an uptick, which could start to play out in the last quarter of our financial year.

Okay. But to be clear, you're not seeing that kind of either flat revenue or revenue growth in 2H '26 to date?

Not yet.

So excluding Sky Free, the guidance implies a pretty sharp step down year-on-year in EBITDA in the second half. But it looks like that's driven by the step-up in nonprogramming costs you flagged at the last result. Is that right?

I think the cost base in the second half of last year was, I'd say, unusually low. There was...

Yes. We obviously had to manage a pretty tough environment in H2. So we did any and all discretionary spend we took out, as you know, to deliver on our promise to the shareholders in the market. And so as we said at the time of guiding, we are putting a bit more money back into the particularly around people, marketing and a bit into tech. So that's what we're seeing in the come through in H2. But obviously, as you know, if revenue isn't performing, we do know how to operate our business to manage costs right across the piece and the team really understand that. But you're right to call out that there is a bit of a step-up in H2. Certainly, half-on-half as a comparison. That's the reason why...

No, that makes perfect sense. Final one for me. So I think prior guidance for Sky Free in FY '26 was for $1 million to $4 million -- sorry, I think it's free cash flow, right? But the point is it assumes $3 million to $5 million of synergies and you've already done $3 million of synergies in the first half. So should FY '26 be at the top end on that basis of the free cash flow?

Look, certainly, we're expecting to deliver at the top end of that synergy level. And as I said, we're still working through the Sky Free integration and there's a little bit of a road to travel yet. But so far, it is going well.

Yes. And just as a reminder, it's the transition services arrangement that agreement concludes at the end of July. So the team are working hard to make sure we get through all of that complex technology integration by that juncture. But as you can see, yes, we've performed well in the first 5 months in terms of capturing those cost synergies. So I'm confident that we will be in a good place, but we also just have to be mindful that until we get through that integration and the complexity of it, you just -- there might be some unknowns we have to grapple with. So we're just mindful of that in the guidance that we're giving.

Yes, for sure. I guess there's been some stuff in the press about maybe revenue expectations were a little bit for Sky Free. Revenue delivered has underperformed expectations a little bit. So I shouldn't read that as even though you're doing better on the costs, the revenue is worse. So you're still -- you ought be at the midpoint of the free cash flow guide?

Yes. I think we've been upfront that the -- particularly in the linear revenue side is certainly softer than we had anticipated at the time of the acquisition. But we -- having just undertaken the upfront, I feel really confident about the opportunity going forward right across our business. So -- but yes, in H2, and as David was saying, it's still -- we're hoping there might be a little bit of an uplift in consumer confidence come Q4. But at this stage, it is still feeling pretty challenged out there for New Zealanders and therefore, the retail brands looking to serve them.

The next question comes from Ben Crozier from Forsyth Barr.

Just a first question on Neon. And sort of if we fast forward 6 months and you've a couple of months past the Neon -- the HBO contract, what do you think success looks like for Neon without HBO? Is it sort of subscriptions and revenue flat on what they are now? Or do you think there will be expectation to moderate, but then you get some cost savings on other side? Just keen to flesh out your expectations.

Yes. Look, I think yes. So certainly, the goal first and foremost is to make sure that we've got the sort of steady diet of titles that actually will keep those customers happy. But certainly, as you know, with our disciplined deal making, we're going to be certainly going for margin accretion. It's too early to say what we're expecting in terms of what it looks like at the full year. But what I can say is the titles that we've got coming through over the next few months do give us confidence in seeing better acquisition driving content. And then the job for my Chief Customer Officer and her team is to make sure that those customers feel the value and stay on the service. So right now, I am comfortable that we have made the right strategic decision. And now the job to do is to make sure we're communicating that, that we're refreshing the brand a bit to what we've had to date and that we're marketing that service in the right way. And we'll obviously have to wait and see what happens in the market, what HBO Max looks to do, and we'll be looking to respond as appropriate at that time. But so it's probably more of a full year conversation at that stage to give you the guidance that will be helpful. But as it stands, we're feeling very good about the path ahead.

And second one, just on -- you talked about reviewing capital management options at the full year. I think, obviously, if you look at that position -- net cash position even if some of that unwinds and even stepping up the dividend, is that sort of indicating maybe there's a special dividend or some sort of return on capital to shareholders? Is that what you're sort of indicating?

Well, we're not actually indicating any specific option at this stage. We're just really mindful of, as you say, a positive cash balance and therefore, making sure we're doing the right thing by the business in terms of investment, but also shareholders for their loyalty. I do think it's upping to the 50% of the full year at the half year should show the confidence we have in looking to deploy some of that capital in the near term back to shareholders. That said, we do have this complex integration to get through. We do have an economy that is challenged and we're in an election year. So we are mindful of that. And we're always struck by the different options we get to with investors. So we'll be -- we'll definitely be taking sound things at the full year and be making sure that we're doing the right thing for the business and investors at that juncture. So any and all options will be no doubt traverse with the Board.

Yes. And then last one, just on Sky Free in terms of the cost synergies achieved, it's obviously been a pretty good cost out side of the business if revenue is going softer. Like where have those sort of come from? Is it just sort of the easy low-hanging fruit to date and then the path from here will be a bit tougher to seeing? Or have you got all of this cost out over the next sort of 18 months or indicated exactly where it's coming from, and it's just a matter of acting on it?

Well, look, we said at the time, we had structured the deal to give ourselves the room and it was high uncertainty cost synergies. And I think we're showing that, that was spot on, but it's not in one place. It's right across the board, right across broadcast infrastructure, tech, some in people, thinking about systems and operations. So what I would say is, yes, we are looking ahead and the deal that we did in deep due diligence at the time is giving us that confidence, but it's right across the board.

The next question comes from Arie Dekker from Jarden.

Just a couple of questions on Neon firstly. Yes, I mean, it seems to me like removing that HBO content from Neon is a bit like removing the [indiscernible] test matches from the sports package. So I guess first question is, is there a refresh in pricing coming downwards for Neon?

No, I disagree with that reference, Arie. I think you're right to say that there isn't anything substitutable with the [indiscernible]. I think that's fair and sport. I don't think it's right to say that around the entertainment space. As we've shared, last year for us, Yellowstone was the outstanding performer and therefore, leaning into that Paramount deal for premium U.S. scripted drama and thinking more broadly about the substitutability of that content, we think is going to drive the right outcomes Neon. But ultimately, customers get to choose. So -- and don't think for a second, I'm not saying HBO Max doesn't have premium content it does, but they're not the only provider in the market. So at this stage, there's certainly no change to pricing. Obviously, as we get closer to year-end, we'll be having a good look at where we're at and what the customer response and feedback is and be looking to respond accordingly. But we -- the slate that we have, we think is going to be more compelling for our customers.

Okay. And then I guess just with regard to your comments regarding a continuation of earnings growth in FY '27. And obviously, I understand that at the front end of the beyond FY '26 period, you've got the Rugby benefit coming through and potentially some earnings accretion from free-to-air and time. I mean, I guess the business is constantly evolving and you'll have NRL rights. If I look at the rate of Sky Box revenue decline, it's still pretty chunky, not quite double digit, but pretty high. What's sort of your view at this juncture on sort of your medium-term sort of outlook for earnings? And if you're not in a position to sort of comment on that at the moment, is your intention coming to the end of this last 3-year target period to set targets to FY '29 when you report the FY '26 results?

Yes, you're right that we are coming to the end of the 3-year target delivery and feeling good about that. As I said earlier on the call, I think that -- the joy of our business now is that diversification of the revenues. And so you're right to call out the softness in Sky Box, but we have significantly reduced our exposure to that in terms of particularly with the acquisition of Sky Free. What gives me real confidence is our program as a percentage of revenue, obviously, a vitally important target that we are delivering on and on target to deliver on for this year. And that's obviously across sport and entertainment as we've just been talking about, making sure we're striking the right balance of the value we can give to rights holders, but also for customers and therefore, shareholders. And I do have real confidence in what we're doing in that space. And then across our business, there will be technology that we need to invest in. We've obviously got a number of platforms that's been talked about the back -- but again, we've got room in our CapEx profile. I mean, to note that we're actually below the 7% to 9% -- there's obviously a green tick there. So it really is the ability to invest once in content that we can then manage right across audiences throughout our business, and we showcased that at the upfront this week with advertising clients. And I think the enormity of that opportunity came through. And so I sit here going, well, it's not going to be one thing. And probably 10 years ago, it was one thing, right? But you're spot on that we've massively evolved our business. We do know how to drive earnings accretion. And with David here, I have high confidence that we're going to keep on that path.

Yes. But I mean the reality is EPS is sort of broadly in line with where it was at the start of the 3-year period. And if anything, EBITDA looks like it's going to be slightly down on FY '23. So I mean, you've definitely demonstrated your ability to stabilize the business. But like on those measures, the earnings, given these pressures ongoing in revenue haven't really shown through yet. I guess just to the last part of the question then and because the business is actually, in some respects, getting more complicated with that diversification. I is the intention to put new 3-year targets out to FY '29 when you present FY '26?

I think we will definitely be having a good look and to that point, be thinking about what is the actual -- what's the most important measures that we might want the market to assess us on. So yes, we're in a process at the moment, Arie, of having a look at what the next pathway looks like. And I think with David here, we'll be having a good look and at the full year, be able to update you. If you have any feedback, which I'm sure you will, we'll happily hear from you because I am determined to get you to a place where you actually do have the positivity about the outlook that I do for this business. And I think we have -- yes, it's been an incredibly challenging consumer market, no question. But I think we are in control of our content, and that's not just about what we acquire, right? With this acquisition of Sky Free, there's a significant uplift in our commissioning of content. And you're also seeing in the sports space. We've now got a team who are fueled up to actually deliver beyond whistle. And so when I put all of that together, being able to control that content destiny, maximize that investment right across all audiences across our platforms, I think we're really well placed to come to the full year and think about, okay, what will it look like by 2030? And what do we want the market to mark us on. But that's all to play for Arie, we'll get your feedback when we meet a little bit later.

That's great. Just on Discovery, it's early days. And I guess you would have sort of expected a soft advertising market when you sort of acquired it and looked at the base revenue. I mean it is a little concerning to sort of see the revenue outlook sort of downgraded by circa 10% for this year this early on. Can you just sort of -- I guess I've got 2 questions. The first one is that seems to be -- but you would have better market data than I can access in real time. That seems to be a bigger scale back in revenue than the soft TV ad market. But let me know if that's not the case. And then also, like if that -- and you have had a positive surprise in terms of the incoming cost base, but are you confident that if the outlook for free-to-air TV spend -- ad spend doesn't improve that you can cut costs fast enough given this initial trajectory sort of highlights that things can move pretty quickly in this free-to-air ad space?

Yes, I do have confidence, and I don't think it's correct to say that our projection is higher than the market projection. It is about the linear side. But when -- as we communicated at the time, we did a huge amount of revenue sensitivity analysis to ensure that the Board was comfortable that this was the right acquisition for us to proceed with. And so yes, I do have confidence. But I think the other piece of this is to say that it's that diversification across the digital side, but also in terms of branded content and sponsorships that, again, with our world-leading sport bundle and the attention that, that means that gives us confidence in terms of thinking about how we're going to price it in the CPMs that we can generate. So again, yes, the linear market is softer than we anticipated, but am I concerned about driving earnings despite that? No, I'm not.

And then last question, just back to the Sky Box. And obviously, you've gone through this period where you've had to rebase the Sky Sports package on the box. We've had several years of double-digit or near double-digit price increases. And that's partly been to bring it into line with the value you're offering through it and then also to sort of the extra content you've acquired. But we -- as I referenced, Sky Box revenue declines are ongoing. Are you at a point now where you're going to look to sort of, I guess, try and stabilize those revenues perhaps look at the total sub numbers over sort of ongoing price increases. Just interested on whether we're going to see what the next evolution of the pricing strategy on Sky Sport is in particular, given those revenue declines remain reasonably meaningful.

Yes. Look, I think that ultimately, how customers choose to consume their sport is up to them, and we'll keep meeting them where they are. Our Box business remains vibrant. The new Sky experience, we know that we get the benefit in terms of churn and Net Promoter Score with that, particularly as customers enjoy 4K UHD. But just to give comfort that we have -- yes, you're right, we have been putting in price increases around our sports because of the investment we're making. And just to note, we obviously have the Black Caps touring in October with that cricket returning to Sky, there's a cost to delivering that for customers. So that's also reflected and goes into our thinking. But we are still growing sports subs. And so that's an important market for us. But more broadly, to your question, yes, we know we need to think about the overall opportunity both in sports and entertainment. I do want to make sure that there is -- on the app, if you're choosing to be there, you do have the Day pass, you can get a great deal if you do the annual, you'll always get a better deal at that juncture. But there is some delta between that and the box side. Now the box comes with other benefits of recording and a starter pack that we've actually put more value into with Sky Comedy and Sky Kids. So we are really conscious of trying to strike the right value and make it as easy for customers. But ultimately, Arie, they can choose how they want to engage with us. I'm not going to be talking about stabilizing revenues here and there because I don't think we need to talk about that anymore. We need to talk about in time, I think we need to talk about blended ARPUs across our business. And we will look, I think, as part of our full year to start to potentially move some of that or you might expect to see it as part of the look forward. And so a long way of saying we're really comfortable with the way that we're progressing on our sport pricing. We're really mindful of where customers are, but we do think it's incredible value. And I highly, highly recommends 4K UHD for those customers who like this war.

[Operator Instructions] The next question comes from Phil Campbell from UBS.

So just a few from me. Just kind of following on from that topic. Sophie, I noticed on the Sky Box, you've now got 74% of the base on sport, which I think was up. I'm assuming that the churn profile of sports customers is quite low. So I'm just wondering, as that percentage starts increasing, at some point, do you think we get to an inflection point, which we did get, I think, a few years ago. But at some point, I'm not sure whether we have to wait until the subscribers get right down to the -- so sports customers are 100% of the base or whether it's a higher number when you start seeing the churn actually being kind of abating, possibly even going positive?

Yes. I mean I think it's encouraging to see our overall churn below the 10% -- and you're right to note that, that sport penetration is powerful. I can tell you, though, the best churn metrics we have is where we have customers on sport and entertainment. The more utility, the more engagement, the happier customers are. So I don't -- that's a really important part of that churn mix for us. And as you see, we're not -- we haven't been putting out entertainment pricing. It is about the sport. But it's a combination of that on our -- on the box side where we see the most churn benefit. And so I don't think there's any -- we're not in a place at the moment where we're forecasting what you're referencing because actually that entertainment offer for those customers is really valuable, including the pass-through news that they get through it. So yes, it's -- we're a long way off getting to what you're indicating. But obviously, at the full year, we can talk more about the projections for potentially the next few years, but we'll see.

Okay. No, that sounds good. Just the second one just on Sky Free. So my understanding talking to industry participants is that the first quarter of '26, the ad market in New Zealand was terrible. And then the second quarter got a little bit better. Can you give us -- because obviously, I think you bought the business in that first quarter. So can you give us any color on kind of what was driving that first quarter outperformance and why it was so bad? And then what happened in the second quarter?

Well, I mean, the linear TV market certainly hasn't been improving. It has been under more pressure. And so -- and you're right, we did acquire at the end of the first quarter. And of course, as you do this, when you acquire an asset, there is a big integration. It is disruptive for those involved, and we've been trying to minimize that distraction. I think what we're what we're excited about is the -- and really encouraged about is the response to our upfront this week about that opportunity of this combined portfolio. And so as we look forward with the team, particularly the Q4, as David indicated earlier, particularly if consumers feel a little bit more buoyant with their household wallet, we'd be hoping to see a bit of a recovery on the linear TV side. I don't know if there's anything you'd add, David. You're obviously sitting across the way at that stage.

No. Look, I think clearly, the first quarter and the second quarter didn't see much recovery in the linear TV market from the data I've looked at. And we haven't seen a lift yet as we look through into the third quarter. But as I said earlier, we are seeing positive signs on that business and consumer confidence front, which tends to be a lead indicator for advertising spend in general.

And what about -- you do get some forward bookings, right, for the calendar year? Is there any comment on how those are looking?

No, we're in -- the team are out there now with this combined offer and good conversation off the back of the upfront with agencies and clients. I think there were some who wanted to sponsor the goes wild off the back of the event. So that's really positive. But no, there's nothing further we're going to be able to give you in terms of that. Obviously, it's a full year update that we'll be able to talk to you about the actuals that we've delivered.

And just in terms of that services agreement with Discovery, what happens if you don't make the end of July deadline? What's the implications of that?

We've got a team who will make sure that we do, we'll be able to have a conversation at that stage we need to. But I'm confident with our match technology team in particular, that we're going to be in good stead at that juncture just given the way that we have structured the transitional services arrangements. We have a weekly with the teams and all the various work streams are planning for this. The joy of it unlike migrate, it's not a big switch over. There's ability to sort of parallel run or dual run or deliver in a way that makes sense. So we're not anticipating any issues, but we obviously did provide a bit of room if we needed to go beyond that. What's critical for us, though, is that we actually do really want to get on with delivering on the benefits of this transaction. We did it on the basis of cost synergies, not revenue in terms of the way we assess it, but we do see that combined offer. And therefore, the combined guidance, I'm really excited about that being in market now. So it's one team and one delivery. So yes, more to come, no doubt at the full year.

And just, I suppose, looking at the note to the accounts in terms of the acquisition of Discovery, it looks like there is a deferred tax loss asset in Discovery, it's $78 million. Is that -- because obviously, you didn't pay any tax in the half. Like -- so is there a situation where Sky won't be paying much tax for the next few years? And what are the implications for that in terms of the imputation credit balance?

So just in terms of -- we're working through, obviously, the acquisition brought with it the history of that Discovery business in New Zealand, and there is various abilities to utilize those tax losses within that business. So we're just working through how that will play out. I wouldn't want to comment yet on future tax liabilities and how that might roll out. But at this stage, we've got plenty of imputation credits to pay dividends. So nothing more to say at this point.

The next question comes from Warren Doak, from Macquarie.

Congratulations on the great result. Look, I just had one question really around your approach to the dividend. So if we assume that $0.30 is a number, I know it's at least $0.30, but $0.30 sort of implies a 50-50 first half, second half dividend split, which is a departure from your normal 40-60 split. And I noted in the presentation pack there, there's a comment that we could expect you to revert back to that split 40-60 split in future years. So given the fact that companies really like to pay a dividend below the PCP, that would sort of infer on a 40-60 split, the 2027 dividend of closer to $0.38 a share. So I was just sort of wondering, had you considered the prospect of paying a lower dividend in the first half '27 if you reverted back to the 40-60 split or whether the $0.15 is a new base for a first half dividend?

I mean I think the 50% is just in recognition that it's a very strong free cash flow delivery cash on hand. And so that was really the Board acknowledging also that it's tough out there, particularly for our retail shareholders. So just wanting to uplift that, but it doesn't -- it shouldn't be a read across to future years. Obviously, we will be assessing and guiding at that time. So Warren, I wouldn't want you to make any other assessments other than just to acknowledge the strong cash balance and therefore, a desire from the Board to share their confidence and a bit of an earlier dividend payout for our shareholders.

There are no further questions at this time. I'll hand the conference back to Sophie for any closing remarks.

Thank you all very much for joining. It remains a real privilege and pleasure to lead this company and deliver what we do for New Zealanders and more importantly, for our shareholders. So thank you for that support, and we look forward to engaging in no doubt robust conversations in the days and weeks ahead. Thank you.