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

Thank you for standing by, and welcome to the Sky Network Television FY '26 Annual Results Call. [Operator Instructions] I would now like to hand the conference over to Sophie Moloney, Chief Executive Officer. Please go ahead.

[Foreign Language]. Hello, everyone, and welcome to Sky's 2026 Full Year Results Briefing. I'm Sophie Moloney, your Chief Executive, and I'm happy to be here with David Mackrell, Sky's Chief Financial Officer. Let me take you through the plan for today. I'll begin with the full year highlights before reviewing performance against the 3-year target set in FY '23 and the strategic delivery this year. David will then take you through the financial and operational performance. I will then share the outlook, guidance and capital management, along with our strategic position as we take a moment to look ahead to FY '31. We'll then open the line for your questions. So looking at the highlights. FY '26 was a year of strategic wins and strong financial performance despite a difficult market. We delivered solid earnings growth supported by greater scale and diversity and disciplined cost management. Strategically, the most notable wins were in programming and the integration of Sky Free. Over the past 12 months, we've strengthened our unrivaled sports rights portfolio through successive announcements of key long-term deals and we've progressively implemented the radical refresh of our entertainment strategy. We also completed the technical and operational integration of Sky Free while continuing to deliver for audiences. As well as being a strong strategic fit, the acquisition delivered a $31 million bargain gain on purchase, synergies ahead of target at $8 million and a cash flow positive outcome in year 1. We also continue to generate strong free cash flows that underpin the FY '26 fully imputed dividend of $0.32 per year. The Board's ongoing confidence in a cash generation profile, combined with a healthy balance sheet is behind the dividend projections. To our headline results, which we have adjusted to allow for a like-for-like view of underlying performance given the number of significant one-off items. We delivered a strong result with Sky Free adding revenue momentum, while our cost discipline continued across the business. This means that group revenue increased 9% and underlying EBITDA was up 6% towards the top of guidance. Underlying CapEx reduced by 9% and normalized free cash flow increased 60%, supporting dividend growth of 45%. Three years ago, we communicated bold targets for the Sky stand-alone business to allow the market to check our homework. For most of those 3 years, we've faced a prolonged economic downturn. We also navigated an accelerated satellite migration, acquired a strategically and financially valuable business and completed its complex integration. Against this backdrop, today, we're reporting against those 3-year targets and reflecting on what else we've achieved over this time. Starting with the target. We fell short on stand-alone revenue growth given those market conditions, coupled with the impact of the satellite migration. Importantly, despite those revenue challenges, we delivered programming costs and CapEx ratios well within target ranges, improving earnings and cash generation. That left the Sky stand-alone EBITDA margin to 21% to 22%. Customer Net Promoter Score improved 11 points. That is meaningful progress but not yet where we want it to be, and we continue to chase this down. I'm particularly proud of employee engagement, up 22 points and 57% above target. Bringing teams together is an important part of any acquisition. So the 5-point uplift in FY '26 is a great indicator of the progress we're making and the strong outcomes we've achieved. And perhaps the boldest of our targets to double the FY '23 dividend of $0.15 per share has been well and truly delivered with confirmation of a full year dividend of $0.32 per share. And on that note, I'll now hand you over to David.

Thanks, Sophie, and good morning, everyone. I'll now take you through the performance in more detail. The underlying EBITDA increased 6% to $157 million, reflecting the additional scale following the acquisition of Sky Free and lower costs in the stand-alone business. Sky Free contributed 11 months of incremental revenue and the associated costs impacted all cost lines. Lower programming costs in the Sky stand-alone business largely offset the program-related costs introduced with Sky Free. Also of note is the growth in the broadband business was a key driver of the increased broadcast and infrastructure costs. Overall, the improved earnings are driven from increased scale, disciplined cost management and synergies from the acquisition. Underlying revenue increased 9% to $826.1 million, with Sky Free as a key driver of the increase. The 11 months Sky Free contribution was $77.2 million, comprising $74.2 million of advertising revenue and $3 million of other revenue. Sky stand-alone revenues declined a modest 0.8%, with the trend improving in the second half. Within subscription revenue streaming growth partially offset the reduction in Sky Box customer revenue. Sky stand-alone advertising also recorded modest growth despite the prior period, including the Paris Olympics. Following the acquisition of Sky Free, the expanded advertising portfolio represents a much stronger proposition for the advertising market. Now turning to revenue by product and beginning with the Sky Box, which has shown a continuing retention improvement. Annualized churn reduced to 10.2%, the lowest since FY '22, helping to slow the decline in customers and revenue. Importantly, 86% of the base has been with Sky for more than 5 years and churn in that group reduced to 8.3%. Revenue was $446 million compared to $470 million in FY '25, with 422,000 customers at the end of the year. ARPU improved to more than $85 through sport price increases and higher sport penetration. Adoption of the digital Sky experience increased to 41% of the base. Accelerating this transition is a priority for the year ahead as the enhanced dealing experience has a positive impact on both NPS and churn. Sky Sport Now, our sports streaming product has continued to grow with revenue 13% higher at $76 million through a 9% increase in customers and a 7% increase in ARPU to $48. Growth in the customer base included incremental day pass taker and a 31% increase in monthly pass sales both helped by the removal of the weekly pass in January 2025. The Premium Pass launched in November 2025 added another tier of incremental revenue following the introduction of 4K. After a challenging first half for our entertainment streaming product Neon, the second half rebound has been dramatic. With 5 consecutive months of growth, the customer base grew 17% to finish the year on 252,000 after being as low as 215,000 at the half year. Revenue held up well increasing by 2% on higher ARPU, a good result given average subscriber numbers were 9% lower than the prior year. We launched its new brand proposition in May, giving Neon a clearer voice and a steadier rhythm of premium content with a strong pipeline. There is more work ahead of course but it's great to see the fresh approach in action. Broadband delivered another year of double-digit growth. Customers increased 15% to 59,000 in the competitive market driving a 28% increase in revenue to $47 million. ARPU increased to $71.32 as a result of an October 25 price increase partially offset by more customers choosing the lower-priced data plan. Bundling continues to demonstrate the opportunity with 11% of Sky Box customers currently taking Sky Broadband. This increases to 14% among customers acquired in the year. To our Venue business, which has performed well, although revenue was 2% softer at $52 million, with pressure in the accommodation and retail sectors, partially offset by growth and license premises. There are some encouraging signs as we launch the new Sky Box business addition in the first half. Payment to the needs of the sector being well received will take up already at 22% of accommodation sector devices. The solution brings Sky content to on-demand viewing and selected third-party streaming apps to get in 1 secure in-room entertainment experience for guests. Now turning to advertising revenue on Slide 19 and a significant step change for the business. Revenue increased 131% to $132 million. That reflects 11 months of Sky Free ownership and modest growth in the standalone business. Advertising now represents 16% of total Sky revenue compared to just 8% previously. 22% of advertising revenue is from the fast-growing digital segment. Within Sky stand-alone digital advertising revenue more than doubled during the year, including the inch of digital ads on the new Sky Box and Sky Go. The total digital advertising market is around $3 billion, of which 22% is video, which demonstrates the digital advertising opportunity for Sky. Our share of the broadcast advertising market more than doubled to 35% in line with the acquisition modeling. And while the sector was under pressure, there were signs of market improvement in the fourth quarter. The unified sales team has been in place since the start of the second half presuming Sky's full range of advertising opportunities to customers. Turning to operating expenses. We are lower programming costs in the stand-alone business and above planned delivery of year 1 synergies limited the cost increase to 10% across the expanded business. Overall, the underlying total operating expenses increased to $67.3 million as Sky Free was integrated into the group. The most significant movement to the programming costs, the stand-alone costs reduced 8% to $354.5 million or 47.3% of revenue. This reflected major event timing and disciplined content negotiations and choices. These reductions more than offset new commitments, including additional entertainment content in the second half. This reduction means that across the group, the net increase in programming costs was limited to just $7.9 million after the inclusion of Sky Free costs. Subscriber-related costs were $5.6 million higher, largely due to the addition of Sky Free costs and included investment in brand and marketing across both paid and free products was spend weighted to the second half of the year. Broadcasting and infrastructure costs reflected the growth in broadband, together with the addition of Sky Free costs, while advertising costs increased with the scale and activity supporting the advertising revenue growth. The cost base now supports a much broader business with opportunities for further optimization across the group. Underlying CapEx expenditure reduced 9% to $59.1 million. The reduction reflects the lower spend on customer equipment and the fact that FY '25 included early replacement of transmission equipment to support the satellite migration. This was partially offset by the increased investment in projects, including the Sky Free integration. Underlying capital expenditure represented 7.5% of Sky stand-alone revenue, well within the current target ratio of 7% to 9% of revenue. The core business generated $55.1 million of free cash flow, more than double last year's $24.8 million. Free cash flow benefited from improved earnings, lower capital expenditure, no tax payments and favorable working capital movements were some offset from higher lease principal payments. Cash on hand also benefited from $24.9 million received on completion of the Sky Free acquisition and $8.2 million from office compensation related to expenditure in prior years. Some of this cash has been utilized to settle the acquired liabilities and to contribute to integration costs. Integration costs had a net impact of $7.1 million or approximately $4.8 million expected in FY '27. The $100 million bank facility remained undrawn, and we closed the year for $79.1 million of cash, an increase of $46.7 million. The strong free cash flow enables the Board's decision to pay a final fully imputed dividend of $0.17 per share, bringing the dividend for FY '26 to $0.32 this year demonstrating further growth in shareholder returns and exceeding the FY '26 target dividend. The increased dividend represents 74.9% of normalized free cash flow, as shown in the table on the left of the slide. I'll now hand back to Sophie to cover the outlook for FY '27 and beyond.

Thanks, David. Great job. I want to now talk about outlook, guidance and our capital management plans before closing with a few comments on the critical building blocks that underpin our confidence as we plot a path to our ambitions in FY '31. So to the outlook for FY '27. First up, we acknowledge trading conditions are likely to continue to be challenging and our revenue guidance of $825 million to $840 million reflects that. That said, we remain focused on the opportunities to optimize the business following the successful integration of Sky Free, which is the basis of our EBITDA guidance of $155 million to $165 million, expected to be similar to FY '23. As I'll speak to in a moment, we expect the dividend to be at least $0.35 per share. And looking ahead, we remain on track to deliver at least $10 million of incremental EBITDA by FY '28. That brings us to capital management, where our approach is built around sustainable growth and free cash flow to keep progressively increasing returns to shareholders. From FY '27 through to FY '29, we're targeting 10% annual dividend growth and we're moving to paying quarterly. We're targeting lower capital intensity of 6% to 8% of revenue, while continuing to invest selectively for growth. Beyond that, we'll continue to weigh investment opportunities against other uses of capital. And where we don't see a superior opportunity, we'll consider returning surplus capital to shareholders. That could include buybacks and special dividends with the Board signaling today that will consider initiating a buyback following the FY '27 interim results. I now want to look beyond FY '27 and share the ambition we're building towards and why we believe Sky is well positioned to deliver on it. On the basis of the work completed to date, the Sky Board and management team have an aligned ambition to significantly grow revenues by FY '31, with 20% to 30% of that growth coming from non-subscription sources. We intend to deliver that alongside margin expansion, earnings growth and disciplined capital management while operating within our CapEx envelope. So this is not growth at any cost. This is a growth ambition built around delivering sustainable value for shareholders. Our confidence is grounded in having the [indiscernible] building blocks in place. This includes a match fit team with a demonstrated ability to drive margin and free cash flow, secured long-term sports rights, a flexible and audience-lead entertainment strategy and greater audience scale and reach across digital with a richer data set. Expanding first on our content, where Sky's formidable position and must-watch premium sport has been significantly reinforced. We have secured the strategically important rights for key sports for the longer term, including an expanded slate of Rugby content out to the end of 2030, with the greatest rivalry or currently demonstrating the added value for our Rugby fans. The Olympic rights out to Brisbane in 2032, which is the process we will get to have the home games in RPL New Zealand. The New Zealand cricket rights returning to Sky with the highly anticipated India now just 8 weeks away, adding to our strong complement of international cricket deals, including with the England cricket boards and Cricket Australia, the latter of which will see us showcasing the black kits, most likely winning this year's boxing day test. Last month, we renewed the hugely popular NRL rights for 7 years from the start of 2028, thereby extending these rights out to the end of 2034. And as of today, there are very exciting news that we have renewed the Premier League also out until 2034. The power of these rights deals has not just been securing the sports we know New Zealanders love but also the tenure deliberately staggered and enabled by the strength of our balance sheet. Critically, Sky's value is not built around 1 code or 1 season. We showcased major local and global sport throughout the year. And this is important because the average sports fan follows multiple sports with our bundle offering compelling year-round value. Our coverage brings audiences all the action of game time providing the high attention opportunities that advertises value, but that doesn't stop at the final whistle, with replays, highlights, exit analysis and behind the theme stories that keep viewers engaged and help grow tender. And we do that across a full range of platforms through Sky and Sky Sport Now, free-to-air with a strategic use of 3 and 3 now and across social media. If you're a sports band for a sport partner, there is simply no better place to be than with Sky. From an entertainment perspective, we've executed on our strategy to unshackle ourselves in Neon from a single supply risk to a more flexible multi-studio model that delivers a steadier drumbeat of quality content and also allows us to respond faster to audience trends guided by our data. Neon is a great example of that refreshed approach in action as are the launch of our own curated channels such as Sky Drama, which not only reflects better customer choice, but also better margins. Local content continues to resonate with audiences. And with the addition of 3 and 3 now and the support of New Zealand on air, we have secured a stronger pipeline of new local titles. This builds on our FY '26 success, including Bust Up, a local title that was recently in our top 10 titles on Neon. The latest survey from ended on air reinforces the value that our audience is placed on local with 81% of New Zealanders liking seeing ourselves on screen. As an essential media business, you'll have also seen us strengthen our presence and news in partnership with leading news organization, staff and NZME. In the coming months, this includes special let programming designed to inform debate and for Sky to play our part. As we shared in the annual report letter, at the heart of where we're heading is a fundamental shift from thinking about products and subscribers to thinking about audiences. We're now reaching more New Zealanders than ever before with the addition of Sky Free significantly broadening and diversifying our audience. That scale gives audiences more choice, gives us more ways to optimize content and gives advertisers 1 integrated way to connect across the portfolio. Each 1 of these platforms is a window for audiences to engage with a part or all of our content bundles. Behind the scenes, it also creates opportunities to simplify and to unlock margin through unifying our data and technology. Part of this unlock reflects the reality that our audience is already increasingly digital with 70% of paid customers already engaging with Sky through a digital service. Our streaming position is strong across pay and free with the addition of 3 Now providing the opportunity to engage with younger and more diverse audiences and our social following has doubled in the last year to reach 4.1 million followers, connecting new and young audiences to relationship with our portfolio of programming. As partners appreciate, greater digital reach means richer audience data. This has a compounding impact on better decisions across content and opportunities to monetize through advertising. Bringing all of this together, we are working towards 1 audience-led connected Sky ecosystem, enabled by data and technology with less cost and complexity. It's underpinned by our purpose to share stories to share possibilities and to share joy and by our enduring commitment to be a sustainably profitable Aotearoa New Zealand-focused business. That is the sky we are building with the foundations already secured to drive sustainable value in the years ahead. And with that, I'll now hand back to the operator, and we look forward to your questions.

[Operator Instructions] Your first question comes from Ben Crozier from Forsyth Barr.

The first 1 on your comment around aiming for significant revenue growth. So can you sort of break this down between what is just achieving this 20% to 30% non-subscription target, which is presumably mostly advertising? And then sort of the core subscription platform as we look at you strip out broadband out of subscription that has sort of ticked backwards slightly over the last couple of years. Do you think you can get that back into growth, too?

Ben, nice to hear from you. Yes. So we're not -- we're obviously not giving much detail of how we're going to grow that revenue other than to talk about that 20% to 30%, but we certainly see opportunity on the subscription side of our business as well. And we've got an incredible array of content. What we're looking to do is to make it easier for our teams to actually deliver that great content to our customers and alongside advertisers. So you're spot on to think that the 20% to 30% is largely advertising, but we do have incredibly rich data that we think is valuable in this market. But on the subscription side, yes, there's still a lot of opportunity for us, particularly as you'll appreciate, with our new sport and entertainment strategy.

Yes. And maybe just 1 on content costs. Obviously, you signed a couple of these big deals, and there's a lot of movement in that sort of programming rights line with cricket's coming and HBO going out and [indiscernible] step-up. Previously, you've had a 46% to 48% revenue target. Is that sort of broadly where you're still targeting? Or have you seen a bit of content cost inflation through that line?

Well, we're super excited about those rights, and we're really comfortable with the -- you're right, we have delivered on that target and it's a really important 1 to driving the free cash flow and margin in our business. The team have done an excellent job this past year in terms of we've brought this new company with its content rights and it's been a pretty low start. But you're right, we are looking to continue with that sort of target. We just haven't put it out into the market. David, I don't know if there's any other detail you want to add?

Yes. I think if you talk about how we plan to monetize the audiences and going into the future, the expectation will be able to do better than what we've done in regard to content cost as a percentage of revenue in the future.

That's helpful. And maybe just last one. You've got a pretty healthy balance sheet, nearly $80 million in net cash, like you sort of got the signaling of for surplus capital will be returned to shareholders and dividends or buyback after the first half result, like of that $80 million, how much do you think is surplus versus you want to maintain on the balance sheet to have a pretty strong cash position?

So we don't have a specific perspective on this, but obviously, we're talking to all of our shareholders all the time around what we think the right level of capital for us to have in there. And I guess if we look at what's in front of us over the next sort of while, it's just pausing while we get through the election and the economic times that we're experiencing at the moment and then to have a relook at that as we go into the finish of the first half.

And I think just to build, I do think that acknowledging though the Board and management team's confidence in giving that 10% per annum progressive dividend growth from '27 to '29. And also paying quarterly is quite a shift in this market. We think that's positive for shareholders. But as David said, we're really well placed. We're very good at managing our cash in this business. But the Board is signaled. We'll figure it out at the half year if there's going to be a buyback at that time or some other distribution of capital.

Yes. Perfect. No, that's all for me. Well done on the result and good to see the dividend growth.

Your next question comes from Rob Morrison from Craigs.

Congratulations to determine especially social for delivering on your $0.30 per share plus dividend target. Just starting off from the FY '27 guidance, reads like you're assuming the economy will improve in the back half of '27?

So we're certainly hoping that, that is going to be the case. I guess I wouldn't be making 3 bolder statement. But our perspective is that there are some signs that there is some improving confidence, but we do think there is a little bit of numbers around the election in particular. And post that, we hope to see some improvement. But we haven't specifically factored perspective on that into our thought process.

Sorry. So midpoint would assume the midpoint of guidance track probably assumes the economy remains about as it is today over the year. Is that fair?

That's great.

And then maybe then just -- because if that's -- then what are the assumptions around the top and the bottom end of guidance. When we start at the top end. But it sounds -- it looks like albeit a lot of it to Sky Free. Is that fair?

So I think -- I mean, a lot of it is around the economy, which ultimately at the upper end, you would think things would go a little better and on the lower end as kind of things perhaps get a little worse. So that's the main driver. And we know what we're doing around the Sky Free integration. We've made great progress there. There's more that we're doing. We've got a line of sight into what that looks like. So the range that's there, so it's more about how the economy plays out and rather than anything else.

No, that's correct. So the [indiscernible]. Okay. And sorry, I want to ask a few questions about the free cash flow because, of course, that underpins the dividend and you've given some pretty ambitious targets for dividend growth over the next few years. So you've got the cost on the slide there. We've got this $59 million normalized free cash flow number you've delivered this year, a very strong number. But it kind of looks to me like maybe it was boosted by marketing capital. So like, what -- can you give me the quantum of what that boost was or maybe what the normalized number is could it be around like 55? Is it worse than that?

No. So the level of working capital related improvement in that free cash flow is relatively small. So if you talk about that, no context did sub-$5 million, that's probably the right sort of way to think about it. It's not a large number, but there is some working capital benefit that remains in there that may reduce a little bit in the first half of this year as we clear away some of the acquisition-related working capital, but it's not a significant number.

Okay. Because I'm just trying to get at like what a sustainable base of free cash flow is going forward? Because, a, on 1 hand, it seems like you're saying that this $59 mil's a pretty sustainable basis of free cash flow going forward. But then on the other hand, the payout ratio was 75. Why not -- if it's sustainable why not pay [indiscernible] a 30, that other 5% dividend? 9

So I think the answer to your question is we -- that is what we're working towards is this and growing that free cash flow is our goal in our ambition. But at the same time, we know that the world is an uncertain place. So in terms of -- and that's why the payout ratio is a range as well. But that's certainly our ambition is to do better.

And as you said, serious, it is an ambitious 10% per progressive dividend that we're talking about, which we think our shareholder base will appreciate. And we wouldn't be able to do that unless is real confidence at a board level that free cash flow generation is there, notwithstanding working capital movement. So hopefully, that gives you some comfort on your modeling.

Yes. No, that is helpful. It's just in terms of the detail because we kind of need to understand put it into our modeling to see you've got $59 million free cash flow this year. And then I think assuming flat shares, which probably won't be, but let's say this, to pay that $0.43 per share dividend, you'll need at least $66 million at the top end of the range, that's on 66 [indiscernible] about $7 million. So you're basically going to $7 million step up over the next few years, like free cash flow. Can you kind of -- is it almost all that going to be revenue or -- and maybe lower CapEx? Or -- could you break that down between what the drivers, please, broadly?

Were confident that we've got a pathway to improve our free cash flow. We -- and what that looks like over the next few years in terms of -- we've talked about our investment for revenue growth, our ambition for expanded margin, which says we're going to manage costs well. And then in the context of CapEx, what we plan to do, we can fit inside the window that we've talked about, and we've provided some guidance around the 6% to 8% of revenue being lower than where it's been previously. So -- and that there's no greater detail than what we've provided in that context.