1st Feb 2006 07:01
British Sky Broadcasting Group PLC01 February 2006 1 February 2006 BRITISH SKY BROADCASTING GROUP PLC Results for the six months ended 31 December 2005 BSkyB announces the highest net subscriber growth for three years, record growth in Sky+ and Multiroom households and a 16% increase in operating profit to £414 million Operating highlights • Net DTH subscriber growth of 215,000 (2004: 192,000) in the quarter to 8.1 million (2004: 7.6 million) • Sky+ households increased by 254,000 (2004: 168,000) in the quarter to 1,281,000 (2004: 642,000), 16% penetration of total DTH subscribers • Multiroom households increased by 158,000 (2004: 116,000) in the quarter to 906,000 (2004: 473,000), 11% penetration of total DTH subscribers • Completion of Easynet acquisition enhances growth potential and positions the Group to deliver further value for customers and shareholders • Successful launch of new services enable millions of Sky digital viewers to access content through their mobile and PC Financial highlights • Revenue increased by 9% to £2,136 million • Gross margin expanded by three percentage points to 62% • Operating profit increased by 16% to £414 million, a margin of 19% • Profit for the period increased by 12% to £274 million • Earnings per share increased by 17% to 14.9 pence • Free cashflow increased by 29% to £318 million • Interim dividend of 5.5 pence per share declared, an increase of 38% James Murdoch, Chief Executive said: "The business is moving forward on all fronts, including strong growth inearnings and cash flow. In the last quarter, more customers joined Sky than atany time in the last three years and we've seen record growth in Sky+ andMultiroom households. Now nearly one in three families chooses Sky. This year, we'll push the bar further with the launch of high-definition TV andour broadband service. We are well positioned to sustain our growth as existingand future customers tell us that Sky is their preferred brand for newentertainment and communications services. Results like these reinforce ourconfidence that we will achieve our goal of 10 million customers in 2010." Results highlights All financial results have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS"), including comparatives. Key subscriber information 2005 2004 Change % Change Net DTH subscriber additions(1) 215,000 192,000 23,000 12%Total DTH subscribers(2)(3)(4)(5) 8,059,000 7,609,000 450,000 6% Net Sky+ household additions(1) 254,000 168,000 86,000 51%Total Sky+ households(2) 1,281,000 642,000 639,000 100% Net Multiroom household additions(1)(6) 158,000 116,000 42,000 36%Total Multiroom households(2) 906,000 473,000 433,000 92% Income statement (£m) Six months to 31 December 2005 2004 Change % Change Revenue 2,136 1,957 179 9% Operating profit 414 356 58 16%Operating profit margin 19.4% 18.2% 1.2% 6.6% Profit before taxation 390 343 47 14% Profit for the period 274 245 29 12% Cash flow information (£m) Six months to 31 December 2005 2004 Change % Change Cash generated from operations 514 407 107 26% Net debt(2)(7) 458 369 -89 -24% Per share information (pence) Six months to 31 December 2005 2004 Change % Change Earnings per share 14.9 12.7 2.2 17% 1. In the three months to 31 December2. As at 31 December3. Includes DTH subscribers in Republic of Ireland. (393,000, as at 31 December 2005, 347,000, as at 31 December 2004.)4. DTH subscribers include only primary subscriptions to Sky (no additional units are counted for Sky+ or Multiroom subscriptions). This does not include customers taking Sky's freesat offering or churned customers viewing free-to-air channels.5. DTH subscribers include subscribers taking Sky packages via DSL through Kingston Interactive Television and Homechoice.6. Multiroom includes households subscribing to more than one digibox. (No additional units are counted for the second or any subsequent Multiroom subscriptions.)7. Cash, cash-equivalents, short-term deposits, borrowings and borrowings related financial instruments Enquiries: Analysts/Investors: Andrew Griffith Tel: 020 7705 3118Robert Kingston Tel: 020 7705 3726 E-mail: [email protected] Press: Matthew Anderson Tel: 020 7705 3267Robert Fraser Tel: 020 7705 3036 E-mail: [email protected] Finsbury: Alice Macandrew Tel: 020 7251 3801 There will be a presentation to analysts and investors at 09:30 a.m. (GMT) todayat the LSE, 10 Paternoster Square, London, EC4M 7LS. A conference call for US analysts and investors will be held at 10:00 a.m. (EST)today. Details of this call have been sent to North American institutions andcan be obtained from John Sutton at Taylor Rafferty on +1 212 889 4350. A live webcast of the presentation to analysts and investors, together with thispress release, will be available today on Sky's corporate website which may befound at www.sky.com/corporate. Interviews with James Murdoch, CEO and JeremyDarroch, CFO, in audio / video and transcript will be available from 7:00 a.m.today at www.sky.com/corporate and www.cantos.com. OVERVIEW During the three months ended 31 December 2005 ("the quarter"), Sky exceeded thetarget it set two and a half years ago of 8 million direct-to-home ("DTH")digital satellite subscribers by the end of calendar year 2005. Over the same time period, Sky has expanded gross margin(1) by 12 percentagepoints to 62%, operating profit margin by eight percentage points to 19% and hasjust recorded the sixteenth consecutive quarter of year on year growth inearnings per share(2). Growth in the number of households subscribing to Sky+ and Multiroom has alsoaccelerated over this two and a half year period. At 30 June 2003, one in everysixty-five Sky customers subscribed to Sky+. Today this ratio is one in six. Thenumber of Multiroom households has also grown fivefold. (1) Defined as revenue less total programming expenses as a proportion of revenue(2) The financial results for the years ended 30 June 2003 and 2004 were prepared under UK GAAP OUTLOOK The Group delivered a strong performance in the six months ended 31 December2005 ("the period") achieving core performance targets including subscribergrowth, sales, operating profit and earnings per share. Operationally, the Grouphas continued to enhance the subscriber mix with 16% penetration of Sky+, 11%penetration of Multiroom and 73% of DTH customers subscribing to one or morepremium channels. After a strong focus on customer acquisition in the important pre-Christmasselling period, the priority for the first half of calendar 2006 will be onexecuting a number of key work streams that will support and strengthen Sky'scapacity for growth and innovation, and enable the business to drive the pace ofchange in the industry. These include: • Completing the migration of all eight million customers to the recently introduced CRM system, currently being used for new customers only;• The national launch of high definition TV; and• The development and preparatory work for the launch and roll-out of residential broadband services. Against this background, and with the main benefits of these operationalinitiatives starting to accrue in the run up to Christmas 2006, the Groupexpects the phasing of subscriber growth to be weighted towards the second halfof this calendar year. Continued growth is anticipated in both the remainingquarters of this financial year with the Group planning to add a total of around100,000 net subscribers by 30 June 2006. Looking further out, the Group remainson track to achieve its medium-term targets of 10 million DTH subscribers in2010, with 25% penetration of Sky+ and 30% penetration of Multiroom. OPERATING REVIEW At 31 December 2005, the total number of DTH digital satellite subscribers was8,059,000, representing a net increase of 215,000 in the quarter, the highestnet growth since the equivalent period three years ago. Gross DTH subscriberadditions in the quarter increased by 15% year on year to 426,000, the highestrate of growth for five years. During the three months ended 31 December 2005, over a quarter of a millionhouseholds subscribed to Sky+ for the first time, taking the total number ofSky+ households to 1,281,000, 16% penetration of total DTH subscribers. 84% ofcustomers state that Sky+ improves the quality of the TV programmes they watchand over half say that Sky+ had introduced them to programmes and subjects thatthey previously would not have watched. The Sky+ experience, which givescustomers real choice and the flexibility to control and manage how they consumeentertainment within the home continues to rate highly; four out of fivecustomers rate their satisfaction at least '8' on a scale of '1' to '10' withone in three giving it the perfect '10' score(3). Supported by the growth of Sky+, the number of households taking more than onesubscription increased by a record 158,000 driving the total number of Multiroomhouseholds to 906,000, 11% penetration of total DTH subscribers. As with Sky+,Multiroom customers show increased levels of loyalty and a higher propensity totake premium channels. Annualised average revenue per DTH subscriber ("ARPU") increased by £12 on theprevious quarter to £397, principally benefiting from the changes to UK andIreland retail pricing, which became effective on 1 September 2005. DTH churn for the quarter (annualised) was 10.6%, a reduction of 1.1 percentagepoints on the previous quarter. This reflects the seasonal effect of Christmasand no price changes in the quarter. The Group is trialling a range ofinitiatives aimed at improving customer retention over time. These include a newwelcome process, an improved customer information programme and greater use ofpredictive modelling to anticipate at risk customers. The Group's medium termtarget for churn remains around 10%, but it continues to expect churn for the2006 financial year to be around 11%. In a dynamic market place, as entertainment and communications converge, theGroup continues to differentiate itself by evolving its entertainment-ledproposition to give existing and future customers more choice and control overhow, when and where they watch. Following the acquisition of Easynet, the Groupis well positioned to extend its range of innovative products and servicesfurther and set the pace of change in this fast growing market place. On 10 January 2006, the Sky by broadband service launched giving millions of Skydigital subscribers' access to hundreds of films and sporting highlights ontheir PC. The service, which enables eligible subscribers with a broadbandconnection to browse, download and manage content 'on demand' through anintuitive portal has shown encouraging usage since launch. In the first threeweeks after launch around 52,000 customers joined the service, generating over70,000 movie downloads. The most popular movie downloads were "Layer Cake", "IRobot" and "The Girl Next Door". Since launching Sky Mobile TV in partnership with Vodafone on 1 November 2005,3G mobile customers have shown a strong appetite for the service during a threemonth free period, accessing more than five million unique streams of 'live' and'made for mobile' content in the 10 weeks to 10 January 2006. It is anticipatedthat the service, which gives subscribers access to 19 channels, will be madeavailable to other mobile networks later this calendar year. The Sky by mobileservice, which is free of charge and exclusive to eligible Sky digitalcustomers, also launched on 10 January 2006. Customers are able to enjoy sports,news and entertainment updates and videos on the move, manage their Sky Betaccount and will be able to set their Sky+ box to record, remotely from theirmobile phone later this calendar year. On 28 November 2005, National Geographic announced that it would be the firstbroadcaster to join Sky's High Definition TV line-up. The channel's innovativeand factual coverage of natural history, wildlife and science, combined with theenhanced picture quality, vibrant colour and sound of High Definition will be anexciting addition to the HD line-up. On 21 December 2005, Sky and Sony announceda major new marketing agreement to promote the HD revolution, raise customerawareness and provide increased value to customers ahead of the scheduled launchin the first half of this calendar year. A reported 700,000 'HD Ready' TV setshad been sold by the end of calendar 2005 and an estimated 2 million will havebeen sold by the end of calendar year 2006(4). During the Christmas period, Multichannel television increased its viewing sharefrom 29.6% to 31.7%(5) with the top three most watched programmes all being onSky channels; Everton vs. Liverpool and Charlton vs. Arsenal in Premier LeagueFootball and the UK TV premiere of Shrek 2 on Christmas Day. In 2005, Sky Sports offered more sport than ever before, broadcasting almost40,000 hours of coverage, with the six most televised sports all receivingincreased air-time. Highlights during the quarter included exclusive PPVcoverage of Ricky Hatton's victory in the boxing world title unification fight,the Darts World Championships and England's cricket tour to Pakistan, the 16thsuccessive winter of Sky coverage. The year ahead brings an exciting schedulewith exclusive coverage of golf's Ryder Cup in September, the England cricketteam's defence of the Ashes starting in November and more imminently, exclusivecoverage of Chelsea vs. Barcelona in the knock-out stages of football's UEFAChampions League on 22 February 2006. On 31 October 2005, Sky Three was made available to Sky digital, freesat andFreeview households offering a mixed schedule that showcases programming fromthe Sky One library as well as original lifestyle commissions and traveldocumentaries from Sky Travel. The channel has performed well against recentchannel entrants and has helped boost the combined share of the Sky One familyand travel channels by 9% to 2.8% in multichannel homes. (3) According to an independent survey prepared by ICM Research(4) GFK / third party forecasts(5) According to figures from the Broadcaster's Audience Research Board ("BARB") FINANCIAL REVIEW Revenue Total revenues for the period increased by 9% over the six months ended 31December 2004 ("the comparable period") to £2,136 million. DTH revenues increased by 9% on the comparable period to £1,554 million. Thiswas driven by 6% growth in the average number of DTH subscribers and a 3%increase in average DTH revenue per subscriber, principally due to the September2005 price rise. Wholesale revenues increased by 3% on the comparable period to £112 million,mainly due to the change in wholesale prices in September 2005. Advertising revenue growth continued to outperform the UK television advertisingsector driven by strong growth in Sky's overall share in this sector to 12.4%.Advertising revenue increased by 8% on the comparable period, substantiallyhigher than sector growth of 1.4%, to £171 million. With the majority of agencydeals now in place, the Group expects to exceed growth in the UK televisionadvertising sector in 2006, as was achieved in 2005. Total SkyBet revenues grew by 15% on the comparable period to £136 million. Thiswas principally due to an increase in activity through Sky Vegas, following thelaunch of a number of new casino style games during the period. Sky Active revenues of £46 million were in line with the comparable period.Growth in revenue from interactive advertising and enhanced TV were offset by areduction in revenues from other areas of the business, including the SkyBuyretail service, which was wound down and closed in the final quarter of lastfinancial year. Other revenues increased by 18% on the comparable period to £117 millionprincipally due to the growth in digibox revenues associated with the recordsales in Sky+ and Multiroom, the Sky News channel five contract and revenuegenerated from Sky's Credit Card, 'SkyCard'. Programming costs Total programming costs were broadly flat on the comparable period, increasingby £4 million to £810 million. This resulted in a further increase in grossmargin by three percentage points to 62%. Sports costs increased by £7 million on the comparable period to £380 milliondue to an increased level of live coverage and a deeper sports offeringfollowing the addition of the new A1 Grand Prix competition and the UEFAChampions League qualifying football matches. The associated increase in costswas partially offset by the absence of the Ryder Cup, a bi-annual event, in theperiod. Total movie costs decreased by £9 million on the comparable period to £159million. The additional costs associated with a larger subscriber base were morethan offset by the benefits of the weaker dollar and savings generated fromrecent contract renewals. Third party channel costs reduced by £15 million on the comparable period to£167 million, reflecting a 13% saving in the cost per subscriber per monthpartially offset by 6% growth in the average number of DTH subscribers. Thissaving has been predominantly driven by the renewal, on improved terms, of anumber of contracts. Entertainment and news costs increased by £21 million on the comparable periodto £104 million, reflecting the increased investment in Sky One programming andthe incremental cost associated with the coverage of the hurricanes in Americaearlier this year. Other operating expenses Marketing costs increased by £68 million on the comparable period to £332million. During the period, the group increased the level of gross additions by15% year on year and enhanced the mix of new customers, with one in five takingSky+, as opposed to one in nine last year. As a result of this activity, theblended subscriber acquisition cost for the period was £250. The Group alsocontinued to drive the penetration of Sky+ and Multiroom to existingsubscribers, with 60% more subscribers upgrading to Sky+ and 53% more upgradingto Multiroom compared to last year. Above the line marketing costs increased by£3 million on the comparable period to £46 million and retention and othermarketing costs were £54 million, an increase of £8 million on the comparableperiod. Subscriber management costs increased by £22 million to £215 million,principally due to higher call volumes associated with the increased salesactivity and the first full quarter of CRM depreciation, following the launch ofthe new system on 1 September 2005. The remaining other operating expenses increased by £27 million on thecomparable period to £365 million, mainly due to the £18 million increase inbetting costs, which increased in line with SkyBet revenues. Operating profit increased by 16% on the comparable period to £414 milliongenerating a one percentage point increase in operating profit margin to 19%. After the Group's share of operating profits from joint ventures of £7 millionand a net interest charge of £31 million, the Group made a profit before tax inthe period of £390 million, up from £343 million for the comparable period. Taxation The total tax charge for the period was £116 million, comprising of a currenttax charge of £93 million and a deferred tax charge of £23 million. The Group'sunderlying effective tax rate, which excludes the effect of joint ventures,moved from 31.4% for the comparable period to 30.1%, as a result of reduction inthe overall level of profit and loss charges being disallowed for tax purposes. The mainstream corporate tax liability for the period was £93 million and, inaccordance with the quarterly instalment regime, £52 million was paid in January2006. Earnings The Group's profit for the period increased by 12% to £274 million generatingearnings per share of 14.9 pence, a 17% increase on the comparable period. Cash Flow Earnings before interest, tax, depreciation and amortisation ("EBITDA")increased by 16% on the comparable period to £470 million. Following a workingcapital inflow of £44 million, the Group generated a cash inflow from operationsof £514 million, up from £407 million for the comparable period. After taxationof £76 million, net interest payable of £28 million, net proceeds from jointventures of £2 million and capital expenditure of £94 million, the Groupgenerated £318 million of free cashflow, an increase of 29% on the comparableperiod. After returns of £330 million to shareholders, comprising of £92 millionthrough the ordinary dividend and £238 million through the share buy-backprogramme (excluding £2 million of stamp duty and commissions), fixed assetinvestments of £51 million and other items(6), the Group's net debt positionincreased to £458 million as at 31 December 2005. (6) Includes share option exercise proceeds, the revaluation of long-term borrowings and borrowing-related financial derivatives CORPORATE In light of the continued cash generative nature of the Group and reflecting thestrong future prospects of the business, the Board has decided to adjust theCompany's dividend policy whilst ensuring a flexible capital structure.Accordingly the Board aims to reduce the Company's target dividend cover fromapproximately 3.0 times to approximately 2.5 times. In line with this policy,the Directors are declaring an interim dividend of 5.5 pence per Ordinary Share,an increase of 38% on the prior year. The ex-dividend date will be 29 March 2006and the dividend will be paid on 25 April 2006 to shareholders of record on 31March 2006. On 6 January 2006, the directors of BSkyB announced that all conditions of thecash offer for Easynet Group Plc had been satisfied or waived, and accordinglythe offer was declared unconditional in all respects. On 12 January 2006, the directors of BSkyB announced their intention to exercisetheir right, pursuant to the provisions of sections 428 and 430F of theCompanies Act to acquire compulsorily the outstanding Easynet shares to whichthe offer relates under the same terms as the offer. Jacques Nasser has stepped down as Chairman of the Remuneration Committee andwill be replaced as Chairman by Nicholas Ferguson, with immediate effect. MrNasser will however, remain as a member of the Remuneration Committee. Use of measures not defined under IFRS This press release contains certain information on the Group's financialposition, operating results and cash flows that have been derived from measurescalculated in accordance with IFRS. This information should not be read inisolation of the related IFRS measures. Forward-looking statements This document contains certain forward-looking statements within the meaning ofthe United States Private Securities Litigation Reform Act of 1995 with respectto the Group's financial condition, results of operations and business, andmanagement's strategy, plans and objectives for the Group. These statementsinclude, without limitation, those that express forecasts, expectations andprojections with regard to the potential for growth of free-to-air and pay-TV,advertising growth, DTH subscriber growth and Multiroom and Sky+ penetration,DTH revenue, profitability and margin growth, cash flow generation, subscriberacquisition costs and marketing expenditure, capital expenditure programmes andproposals for returning capital to shareholders. These statements (and all other forward-looking statements contained in thisdocument) are not guarantees of future performance and are subject to risks,uncertainties and other factors, some of which are beyond the Group's control,are difficult to predict and could cause actual results to differ materiallyfrom those expressed or implied or forecast in the forward-lookingstatements. These factors include, but are not limited to, the fact that theGroup operates in a highly competitive environment, the effects of governmentregulation upon the Group's activities, its reliance on technology, which issubject to risk, change and development, its ability to continue to obtainexclusive rights to movies, sports events and other programming content, risksinherent in the implementation of large-scale capital expenditure projects, theGroup's ability to continue to communicate and market its services effectively,and the risks associated with the Group's operation of digital televisiontransmission in the UK and Ireland. Information on some risks and uncertainties are described in the "Risk Factors"section of Sky's Annual Report on form 20-F for the year ended 30 June 2005.Copies of the Annual Report on form 20-F are available on request from BritishSky Broadcasting Group plc, Grant Way, Isleworth TW7 5QD or from the British SkyBroadcasting web page at www.sky.com/corporate. All forward-lookingstatements in this document are based on information known to the Group on thedate hereof. The Group undertakes no obligation publicly to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Appendix 1 Subscribers to Sky Channels Prior year Q2 Q1 2005/06 Q2 2005/06 as at as at as at 31/12/04 30/09/05 31/12/05 DTH homes1,2 3 7,609,000 7,844,000 8,059,000 Total TV homesin the UK andIreland4 26,249,000 26,417,000 26,585,000 DTH homes as apercentage oftotal UK andIreland TV homes 29% 30% 30% Cable - UK 3,292,000 3,281,000 3,292,000Cable - Ireland 584,000 588,000 597,000Total Sky pay homes 11,485,000 11,713,000 11,948,000Total Sky pay homes as a percentage oftotal UK andIreland TV homes 44% 44% 45% Sky+ homes 642,000 1,027,000 1,281,000 Multiroom homes5 473,000 748,000 906,000 DTT - UK6 4,216,000 5,316,000 6,363,000 1: Includes DTH subscribers in Republic of Ireland. (393,000, as at 31 December 2005, 347,000 as at 31 December 2004.)2: DTH subscribers includes only primary subscriptions to Sky (no additional units are counted for Sky+ or Multiroom subscriptions). This does not include customers taking Sky's freesat offering or churned customers viewing free-to-air channels.3: DTH homes include subscribers taking Sky packages via DSL through Kingston Interactive Television and Homechoice.4: Total UK homes estimated by BARB and taken from the beginning of the month following the period end (latest figures as at 1 January 2006). Total Ireland homes estimated by Nielsen Media Research, conducted on an annual basis in July with results available in September (latest figures as at July 2005).5: Multiroom includes households subscribing to more than one digibox. (No additional units are counted for the second or any subsequent Multiroom subscriptions.)6: DTT homes estimated by BARB and taken from the beginning of the following month (latest figures as at 1 January 2006). These include Sky or Cable homes that already take multi-channel TV. Appendix 2 Glossary Useful Descriptiondefinitions ARPU Average Revenue Per User: the amount spent by the Group's residential subscribers in the quarter, divided by the average number of residential subscribers in the quarter, annualised Churn The rate at which subscribers relinquish their subscriptions, expressed as a percentage of total subscribers CRM Customer Relationship Management Digibox Digital satellite reception equipment EBITDA Earnings before interest, taxation, depreciation and amortisation is calculated as operating profit before depreciation and amortisation or impairment of goodwill and intangible assets Effective tax Taxation divided by profit before taxationrate Free cash flow Cash generated from operations less net interest paid, taxation paid, purchase of property, plant & equipment and intangible assets plus net proceeds from joint ventures and associates Gross margin Revenue less programming expenses as a proportion of revenue. HD High Definition Mainstream Current corporation tax charge for the year.corporation taxliability Multichannel Share of viewers of non-analogue terrestrial television.viewing share Multiroom Installation of one or more additional digiboxes in the household of an existing DTH subscriber. Net debt Cash, cash-equivalents, short-term deposits, borrowings and borrowings related derivative financial instruments. PVR Personal Video Recorder: Digital TV receiver which utilises a built in hard disk drive to enable viewers to record without videotapes, pause live TV, and record one programme while watching another. Sky + Sky's fully-integrated Personal Video Recorder (PVR) and satellite decoder. Underlying Taxation divided by profit before taxation, excluding theeffective tax effect of joint ventures and in respect of adjustments in priorrate years Viewing share Number of people viewing a channel as a percentage of total viewing audience Consolidated Income Statement for the half year ended 31 December 2005 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m Notes (unaudited) (unaudited) (audited)------------------------------ ----- ----------- ----------- ---------Revenue 2 2,136 1,957 4,071Operating expenses 3 (1,722) (1,601) (3,249)------------------------------ ----- ----------- ----------- ---------EBITDA 470 404 914Depreciation and amortisation (56) (48) (92)------------------------------ ----- ----------- ----------- ---------Operating profit 414 356 822------------------------------ ----- ----------- ----------- ---------Share of results of jointventures and associates 7 8 14Investment income 20 15 29Finance costs (51) (45) (87)Profit on disposal of jointventure - 9 9Profit before tax 390 343 787------------------------------ ----- ----------- ----------- ---------Taxation 4 (116) (98) (209)Profit for the period 274 245 578============================== ===== =========== =========== =========Earnings per share from profitfor the periodBasic and diluted (in pence) 5 14.9p 12.7p 30.2p------------------------------ ----- ----------- ----------- --------- All profit for the period is attributable to equity holders of the parent. All results relate to continuing operations. The accompanying notes are an integral part of this consolidated incomestatement. Consolidated Income Statement for the quarter ended 31 December 2005 2005/06 2004/05 Three months Three months ended 31 ended 31 December December 2005 2004 £m £m (unaudited) (unaudited)-------------------------------------------------- --------- ---------Revenue 1,113 1,009Operating expenses (914) (842)-------------------------------------------------- --------- ---------EBITDA 231 191Depreciation and amortisation (32) (24)-------------------------------------------------- --------- ---------Operating profit 199 167-------------------------------------------------- --------- ---------Share of results of joint ventures and associates 5 7Investment income 12 8Finance costs (26) (24)Profit on disposal of joint venture - 9Profit before tax 190 167-------------------------------------------------- --------- ---------Taxation (56) (44)Profit for the period 134 123================================================== ========= =========Earnings per share from profit for the periodBasic and diluted (in pence) 7.3p 6.4p-------------------------------------------------- --------- --------- All profit for the period is attributable to equity holders of the parent. All results relate to continuing operations. Consolidated Statement of Recognised Income and Expense for the half year ended31 December 2005 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m (unaudited) (unaudited) (audited)----------------------------------------- --------- ---------- --------Profit for the period 274 245 578========================================= ========= ========== ========Unrealised gains (losses) arising duringthe periodCash flow hedges 19 (78) (22)Tax on cash flow hedges (6) 23 6 13 (55) (16)----------------------------------------- --------- ---------- --------Reclassified and reported in profit forthe period(Gains) losses on cash flow hedges (18) 54 4Tax on cash flow hedges 6 (16) (1) (12) 38 3----------------------------------------- --------- ---------- --------Net gains (losses) not recognised inthe Income Statement 1 (17) (13)========================================= ========= ========== ========Total recognised income for the period 275 228 565========================================= ========= ========== ======== All recognised income for the period is attributable to equity holders of theparent. Consolidated Balance Sheet as at 31 December 2005 31 December 31 December 30 June 2005 2004 2005 £m £m £m Notes (unaudited) (unaudited) (audited)------------------------------ ----- ---------- ---------- --------Non-current assetsGoodwill 417 417 417Intangible assets 221 169 202Property, plant and equipment 349 283 335Investments in joint venturesand associates 29 25 23Available for sale investments 52 2 2Derivative financial assets 13 8 9Deferred tax assets 79 131 105 1,160 1,035 1,093------------------------------ ----- ---------- ---------- --------Current assetsInventories 568 599 321Trade and other receivables 389 375 331Derivative financial assets 29 2 14Short-term deposits 764 65 194Cash and cash equivalents 889 642 503 2,639 1,683 1,363------------------------------ ----- ---------- ---------- --------Total assets 3,799 2,718 2,456============================== ===== ========== ========== ======= Current liabilitiesBorrowings 174 - -Trade and other payables 1,376 1,242 1,031Derivative financialliabilities 26 41 6Current tax liabilities 116 110 100Provisions 6 1 13 1,698 1,394 1,150------------------------------ ----- ---------- ---------- --------Non-current liabilitiesBorrowings 1,854 911 982Other payables 23 27 25Derivative financialliabilities 80 173 112 1,957 1,111 1,119------------------------------ ----- ---------- ---------- --------Total liabilities 3,655 2,505 2,269------------------------------ ----- ---------- ---------- --------Shareholders' equity 7 144 213 187------------------------------ ----- ---------- ---------- --------Total liabilities andshareholders' equity 3,799 2,718 2,456============================== ===== ========== ========== ======= The accompanying notes are an integral part of this consolidated balance sheet. Consolidated Cash Flow Statement for the half year ended 31 December 2005 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m Notes (unaudited) (unaudited) (audited)------------------------------ ----- --------- --------- --------Cash flows from operatingactivitiesCash generated from operations 8a 514 407 989Interest received 16 17 28Taxation paid (76) (28) (103)(Increase) decrease inshort-term deposits (570) 71 (60) Net cash (used in) fromoperating activities (116) 467 854------------------------------ ----- --------- --------- --------Cash flows from investingactivitiesFunding to joint ventures andassociates (2) (4) (4)Repayments of funding fromjoint ventures and associates 1 6 8Dividends received from jointventures and associates 3 7 12Proceeds from the sale of ajoint venture - 14 14Purchase of property, plantand equipment (58) (60) (149)Purchase of intangible assets (36) (63) (92)Purchase of available-for-saleinvestments (51) - -Proceeds from the sale ofequity investments - - 1 Net cash used in investingactivities (143) (100) (210)------------------------------ ----- --------- --------- --------Cash flows from financingactivitiesProceeds from issue ofguaranteed notes 8b 1,014 - -Proceeds from disposal ofshares in Employee ShareOwnership Plan ("ESOP") 7 2 4Purchase of own shares forESOP - - (14)Share buy-back (240) (128) (416)Interest paid (44) (49) (91)Dividends paid to shareholders (92) (63) (138) Net cash from (used in)financing activities 645 (238) (655)------------------------------ ----- --------- --------- --------Effect of foreign exchangerate changes - - 1 Net increase (decrease) incash and cash equivalents 8b 386 129 (10)============================== ===== ========= ========= ======== The accompanying notes are an integral part of this consolidated cash flowstatement. Notes to the interim accounts 1 Basis of preparation The interim accounts for the half year ended 31 December 2005 were approved bythe Board of Directors on 31 January 2006. The 2006 Annual Report & Accountswill contain the Group's first full financial statements prepared in accordancewith International Financial Reporting Standards ("IFRS") as adopted for use inthe European Union ("EU"). Accordingly, the unaudited accounts for the half yearended 31 December 2005 and the restatement of financial information for the yearended 30 June 2005 and the half year ended 31 December 2004 have been preparedin accordance with IFRS issued by the International Accounting Standards Board("IASB") as adopted by the EU. The Group maintains a 52 or 53 week fiscal year ending on the Sunday nearest to30 June in each year. In fiscal year 2006, this date will be 2 July 2006, thisbeing a 52 week year (Fiscal Year 2005: 3 July 2005, 53 week year). This interimreport is prepared to 1 January 2006, being the first 26 weeks of the 52 weekyear (Fiscal Year 2005: 26 weeks of the 53 week year). For convenience purposes,the Group continues to date its interim report as of 31 December 2005. The IFRS information for the year ended 30 June 2005 was derived frominformation extracted from the statutory financial statements prepared under UKGAAP and filed with the Registrar of Companies. The auditors' report on theseaccounts was unqualified and did not contain any statement under section 237(2)or (3) of the Companies Act 1985. The restated IFRS information for the yearended 30 June 2005 does not constitute statutory accounts as defined in Section240 of the Companies Act 1985. These interim accounts have been prepared in accordance with the accountingpolicies set out in the document entitled 'IFRS Accounting Policies', which wasissued by BSkyB on 14 September 2005. These interim accounts should be read inconjunction with that document. The document can be found on our website,www.sky.com/corporate. An explanation setting out the major differences betweenUK GAAP and IFRS for the Group, and reconciliations of UK GAAP to IFRS for theIncome Statement for the year ended 30 June 2005, Statement of RecognisedInterest and Expense for the year ended 30 June 2005, Balance Sheets at 1 July2004 and 30 June 2005 and Cash Flow Statement for the year ended 30 June 2005can be found in the document entitled '2005 Results Restated under IFRS'. Thisdocument was published on 14 September 2005 and can be found on the Group'swebsite, www.sky.com/corporate. Reconciliations for the interim period ended 31December 2004 are set out in note 11. The unaudited interim accounts for the half year ended 31 December 2005 do notconstitute statutory accounts as defined in Section 240 of the Companies Act1985. 2 Revenue 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m (unaudited) (unaudited) (audited)------------------------------ --------- --------- -------DTH subscribers 1,554 1,426 2,968Cable subscribers 112 109 219Advertising 171 159 329Sky Bet 136 118 261Sky Active 46 46 92Other 117 99 202 2,136 1,957 4,071------------------------------ --------- --------- ------- 3 Operating expenses 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m (unaudited) (unaudited) (audited)------------------------------ --------- --------- -------Programming 810 806 1,635Transmission and related functions 87 87 171Marketing 332 264 527Subscriber management 215 193 385Administration 154 145 295Betting 124 106 236 1,722 1,601 3,249------------------------------ --------- --------- ------- 4 Taxation Taxation recognised in the income statement 2005/06 2004/05 2004/05 Half year Half year Full year charge charge charge £m £m £m (unaudited) (unaudited) (audited) ------------------------------ --------- --------- -------Current tax expenseCurrent year 93 73 163Adjustment in respect of prior years - (8) (8)Total current tax 93 65 155------------------------------ --------- --------- -------Deferred tax expenseOrigination and reversalof temporary differences 23 32 71Adjustment in respect of prior years - 1 (17)Total deferred tax 23 33 54------------------------------ --------- --------- -------Taxation 116 98 209------------------------------ --------- --------- ------- At 31 December 2005 a deferred tax asset of £14 million (2004/05: half year £12million; full year £14 million) principally arising from UK losses in the Grouphas not been recognised as these losses can be offset only against taxableprofits generated in the entities concerned. There is currently insufficientevidence to support recognition of a deferred tax asset relating to theselosses. A deferred tax asset of £64 million (2004/05: half year £64 million; full year£64 million) has not been recognised in respect of trading losses in the Group'sGerman holding companies of KirchPayTV on the basis that it is not probable thatthese temporary differences will reverse. A deferred tax asset of £330 million (2004/05: half year £450 million; full year£330 million) has not been recognised in respect of potential capital lossesrelated to the Group's holding of KirchPayTV, on the basis that these temporarydifferences do not meet the criteria of a reversal being probable. The Group hasrealised and unrealised capital losses in respect of football club and otherinvestments estimated to be in excess of £24 million (2004/05: half year £25million; full year £24 million) which have not been recognised as a deferred taxasset, on the basis that it is not probable that they will be utilised. 5 Earnings per share Basic earnings per share represents profit for the period, divided by theweighted average number of Ordinary Shares in issue during the period, less theweighted average number of shares held in the Group's ESOP trust during theperiod. Diluted earnings per share represents the profit for the period, divided by theweighted average number of Ordinary Shares in issue during the period, less theweighted average number of shares held in the Group's ESOP trust during theperiod, plus the weighted average number of dilutive shares resulting from shareoptions and other potential Ordinary Shares outstanding during the period. The weighted average number of shares was: 2005/06 2004/05 2004/05 Half year Half year Full year Millions of Millions of Millions of shares shares shares (unaudited) (unaudited) (audited)------------------------------ --------- --------- -------Ordinary Shares 1,849 1,939 1,917ESOP trust Ordinary Shares (4) (4) (4)Basic shares 1,845 1,935 1,913------------------------------ --------- --------- -------Dilutive Ordinary Shares fromshare options 2 2 4Diluted shares 1,847 1,937 1,917------------------------------ --------- --------- ------- The calculation of diluted earnings per share excludes 34 million share options(2004/05: half year 41 million; full year 37 million), which could potentiallydilute earnings per share in the future, because they were anti-dilutive for theperiod since the expected future proceeds from the options exceeded the averagefair value of shares during the period. 6 Equity dividends 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m (unaudited) (unaudited) (audited)------------------------------ --------- --------- -------2004/05 Interim dividend paid:4.0p per Ordinary Share - - 772004/05 Final dividend paid:5.0p per Ordinary Share(2003/04: 3.25p) 92 63 63 92 63 140------------------------------ --------- --------- ------- The proposed interim dividend for the half year ended 31 December 2005 of 5.5pence per Ordinary Share, was approved by the Directors, and was recognised as a£100 million liability, on 31 January 2006. It will be paid on 25 April 2006 toshareholders of record on 31 March 2006. The ESOP has waived its rights to dividends. 7 Reconciliation of movement in shareholders' equity Capital Total Share Share redemption Special ESOP Merger Hedging Retained shareholders' capital Premium reserve reserve reserve reserve reserve earnings equity £m £m £m £m £m £m £m £m £m--------- ------- ------- ---------- ------- ------- ------- ------- -------- -------------At 1 July 2004 971 1,437 - 14 (30) 222 (1) (2,447) 166Share buyback (37) - 37 - - - - (416) (416)Recognitionandtransferof cash flowhedges - - - - - - (18) - (18)Share-basedpayments - - - - (2) - - 17 15Tax onitemstaken directlyto equity - - - - - - 5 (3) 2Profit forthe year - - - - - - - 578 578Dividends - - - - - - - (140) (140)At 1 July 2005 934 1,437 37 14 (32) 222 (14) (2,411) 187Share buyback (23) - 23 - - - - (240) (240)Recognitionandtransferof cash flowhedges - - - - - - 1 - 1Share-basedpayments - - - - 15 - - 1 16Tax onitemstaken directlyto equity - - - - - - - (2) (2)Profit forthe period - - - - - - 274 274Dividends - - - - - - (92) (92)At 31December 2005 911 1,437 60 14 (17) 222 (13) (2,470) 144--------- ------- ------- ---------- ------- ------- ------- ------- -------- ------------- The period from 1 July 2004 to 30 June 2005 is audited. The period from 1 July2005 to 31 December 2005 is unaudited. Share option schemes At 31 December 2005, the Group's ESOP held 2,991,441 Ordinary Shares in theCompany at an average cost of £5.79 per share. During the period, 2,617,771shares were utilised relating to the exercise of Long Term Incentive Plan,Equity Bonus Plan, Key Contributor Plan, Executive Share Option Scheme andSharesave Scheme awards. Purchase of own shares On 12 November 2004, the Company's shareholders approved a resolution at theAnnual General Meeting for the Company to purchase up to 97 million OrdinaryShares. On 4 November 2005, the Company's shareholders approved a resolution atthe Annual General Meeting for the Company to further purchase up to 92 millionOrdinary Shares. Under the former resolution, during the year ended 30 June2005, the Company purchased, and subsequently cancelled, 74 million OrdinaryShares at an average price of 560 pence per share, with a nominal value of £37million, for a consideration of £416 million. This represents 4% of called-upshare capital at the beginning of the year. During the half year ended 31December 2005 the Company purchased, and subsequently cancelled, 45 millionOrdinary Shares at an average price of 528 pence per share, with a nominal valueof £23 million, for a consideration of £240 million. This represents 2% ofcalled-up share capital at the beginning of the half year period under review. 8 Notes to consolidated cash flow statement a) Reconciliation of profit before taxation to cash generated from operations 2005/06 2004/05 2004/05 Half year Half year Full year £m £m £m (unaudited) (unaudited) (audited)------------------------------------- ---------- ---------- --------Profit before taxation 390 343 787Adjustments for:Depreciation of property, plant andequipment 36 20 47Amortisation of intangible assets 20 28 45Loss on disposal of property, plantand equipment - - 2Profit on disposal of joint venture - (9) (9)Net finance costs 31 30 58Share of results of joint ventures andassociates (7) (8) (14) 470 404 916------------------------------------- ---------- ---------- --------(Increase) decrease in trade and otherreceivables (54) (13) 34(Increase) decrease in inventories (211) 275 28Increase (decrease) in trade and otherpayables 312 (248) (67)(Decrease) increase in provisions (7) - 12Decrease (increase) in derivativefinancial instruments 4 (11) 66Cash generated from operations 514 407 989------------------------------------- ---------- ---------- -------- b) Analysis of movements in net debt As at 1 July Cash Non-cash As at 1 July Cash Non-cash At 31 December 2004 movements movements 2005 movements movements 2005 £m £m £m £m £m £m £m (audited) (audited) (audited) (audited) (unaudited) (unaudited) (unaudited)-------------- -------- -------- --------- -------- --------- --------- ----------Cash and cashequivalents 513 (11) 1 503 386 - 889Short-termdeposits 134 60 - 194 570 - 764 647 49 1 697 956 - 1,653-------------- -------- -------- --------- -------- --------- --------- ----------Borrowings (958) - (24) (982) (1,014) (32) (2,028)Borrowings-relatedderivativefinancialinstruments (99) - (4) (103) - 20 (83) Net debt (410) 49 (27) (388) (58) (12) (458)-------------- -------- -------- --------- -------- --------- --------- ---------- On 20 October 2005, the Group issued guaranteed notes (the "new notes")consisting of US $750 million aggregate principal amount of notes paying 5.625%interest and maturing on 15 October 2015, US $350 million aggregate principalamount of notes paying 6.500% interest and maturing on 15 October 2035 and £400million aggregate principal amount of notes paying 5.750% interest and maturingon 20 October 2017. The new notes are carried in the balance sheet at £1,024million at 31 December 2005. In accordance with the Group's treasury policy, various cross-currency swapagreements have been entered into to swap the Group's exposure from the newnotes into pounds sterling. In addition, the Group has entered into poundsterling interest rate swap agreements, which provide for the exchange, atspecified intervals, of the difference between fixed rates and variable rates,calculated by reference to an agreed notional pounds sterling amount. The totalfair value of new cross-currency swap and interest rate swap agreementsassociated with the new notes carried on the balance sheet at 31 December 2005is £10 million. 9 Other matters Events after the balance sheet date On 21 October 2005, Sky Broadband Services Limited ("Sky Broadband"), asubsidiary of British Sky Broadcasting Group plc, made a recommended cash offerfor the entire issued and to be issued share capital of Easynet Group plc("Easynet"). On 6 January 2006, the offer was declared unconditional in allrespects. On 12 January 2006, Sky Broadband had received valid acceptances ofthe offer in respect of more than nine-tenths in value of Easynet shares towhich the offer related and implemented the procedure set out in sections 428 to430F of the Companies Act 1985 to acquire compulsorily those shares which hadnot been assented to the offer. As of 31 January 2006, Sky Broadband hasacquired or received valid acceptances under the offer for 99% of the existingissued share capital of Easynet. Contingent liabilities The Group has contingent liabilities by virtue of its investments in unlimitedcompanies, or partnerships, which include Nickelodeon UK, The History Channel(UK), Paramount UK and National Geographic Channel UK. The Directors do not expect any material loss to arise from the above contingentliabilities. Contingent assets Under the terms of one of the Group's channel distribution agreements, BritishSky Broadcasting Limited is entitled to receive a payment (unless the agreementis terminated due to the default of the Group), between July and September 2006,equal to a proportion of the fair value of certain of the channels under thatdistribution agreement. The fair value of the channels is to be determined atthe earlier of contract termination and 30 June 2006. Accordingly, it is not yetpossible to determine the value of the payment to be received. The Group has served a claim for a material amount against an information andtechnology services provider, which provided services to the Group as part ofthe Group's investment in Customer Relationship Management ("CRM") software andinfrastructure. The amount that will be recovered by the Group will not befinally determined until resolution of the claim. Changes in estimates There have been no material changes in estimates of amounts reported in the sixmonths ended 31 December 2005 or in the year ended 30 June 2005. 10 Regulatory update European Commission Investigation - Football Association Premier League Limited("FAPL") The European Commission's investigation into the FAPL's joint selling ofexclusive broadcast rights to football matches is close to being concluded: theCommission published a notice on 30 April 2004 inviting third party comments onits intention to adopt a decision, making commitments offered by the FAPLlegally enforceable and to close its file. Among other things, these commitmentsaddressed the next auction of rights by the FAPL for the 2007/08 and subsequentseasons and included a commitment that no single broadcaster would be able tobuy all of the packages of live rights. In November 2005 the Commission announced that it had received improvedcommitments from the FAPL and that these revised commitments addressed pointsraised in the public consultation, including: specifying the precise terms ofthe "no single buyer" rule and the conduct of the auction process; the creationof more evenly balanced packages of rights; and increasing the availability ofrights to broadcast via mobile phones. The Commission has stated that it will prepare a draft decision rendering therevised commitments legally binding. This will be sent to the competitionauthorities of Member States for consultation, following which the Commissionwill issue a final decision, no later than the first quarter of 2006. The Commission confirmed in 2004 in a "comfort letter" that, on the basis ofperformance by the Group of certain commitments given by the Group to theCommission, it has fully and finally settled the Commission's otherinvestigations in connection with the Group's bids for all rights in relation toFAPL matches throughout the 2004/05 to 2006/07 FAPL seasons and any resultingagreements between the Group and FAPL. European Commission Sector Inquiry - "New Media" Sports Rights In September 2005, the European Commission published its concluding report onits sector inquiry into the provision of audio-visual content from sports eventsover 3G networks, which it had initiated in January 2004. The European Commission has identified a number of commercial practices which itconsiders raise competition concerns in relation to the availability of mobilesports content and on which it states that it will focus in the future. Amongothers, these include: (i) the sale of what the European Commission considers tobe bundled audiovisual rights for various retail platforms to one or a fewoperators, in relation to which the European Commission has said that it willtarget situations where rights to premium sports remain under-exploited throughsuch bundled sale of rights and subsequent warehousing of rights by powerfuloperators; and (ii) restricting the length and timing of 3G transmissions ofsports coverage, which the European Commission considers may have a negativeimpact on the value of 3G rights and the take-up of 3G sports services byconsumers. The European Commission has stated that it will take account of the findings ofthe sector inquiry in future proceedings in this area. It has also stated thatit will further review, together with the relevant national competitionauthorities of Member States, potentially harmful situations identified duringthe sector inquiry, and that procedures will be initiated in cases wherebehavior is not adjusted to comply with the requirements of competition law. The European Commission has not announced any proceedings arising fromsituations identified in the sector inquiry or publicly indicated whichindividual companies might be the subject of proceedings. At this stage, theGroup is unable to determine whether the European Commission's concluding reportor any subsequent proceedings might have a material effect on the Group. Ofcom review of conditional access guidelines In May 2005, the Office of Communications ("Ofcom") initiated a review of itsguidelines entitled "The pricing of conditional access services and relatedissues". These guidelines, which were originally adopted by the Office ofTelecommunications (Oftel) in May 2002, set out Ofcom's policy towards theregulation of the supply of conditional access (and access control) services(including the structure of tariffs charged for such services). In November 2005, Ofcom published a consultation document as part of this reviewentitled "Provision of Technical Platform Services - a consultation on proposedguidance as to how Ofcom may interpret the meaning of "fair, reasonable andnon-discriminatory" and other regulatory conditions when assessing charges andterms offered by regulated providers of Technical Platform Services". Thedeadline for comments on this consultation document is 1 February 2006. TheGroup is co-operating with this review and at this stage, is unable to determinewhether the review will have a material effect on the Group. 11 UK GAAP to IFRS reconciliations The following is a summary of the effects of the adjustments from UK GAAP toIFRS for the half year ended 31 December 2004. An explanation of the majordifferences between UK GAAP and IFRS for the Group is included in the documententitled '2005 Results Restated under IFRS'. This document was published on 14September 2005 and can be found on the Group's website, www.sky.com/corporate. 2004/05 Half year £m (unaudited)------------------------------------------------------ ---------Profit for the period under UK GAAP 154Adjustments:Goodwill amortisation 57Profit on disposal of joint venture 32Financial instruments and hedge accounting 10Share-based payments (6)Tax impact of IFRS adjustments (2)Profit for the period under IFRS 245------------------------------------------------------ --------- 31 December 2004 £m (unaudited)------------------------------------------------------ ---------Shareholders' equity under UK GAAP 83Adjustments:Goodwill amortisation 57Deferred taxation 10Share-based payment 19Financial instruments and hedge accounting (36)Joint ventures 3Dividend accrual 77Shareholders' equity under IFRS 213------------------------------------------------------ --------- There were no material adjustments to the cash flow statement for the half yearended 31 December 2004. 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