31st Jan 2007 07:02
British Sky Broadcasting Group PLC31 January 2007 BRITISH SKY BROADCASTING GROUP PLC Results for the six months ended 31 December 2006 BSkyB announces record sales and 20% increase in interim dividend; on track for our targets Operational Highlights • New customer additions of 432,000 in the second quarter, the highest in six years • Net customer growth in the second quarter of 183,000 to 8.441 million • Record growth in Sky+ boxes to 2.13 million, in 1.97 million households • HD subscribers almost doubled in the second quarter to 184,000, establishing Sky's leadership in HD • Good progress on Sky Broadband with gross bookings of 343,000 and 259,000 activated customers by 28 January 2007(1) • Broadband network roll-out ahead of plan, 771 exchanges unbundled, 50% of the U.K.(1) Financial Highlights • Revenue increased by 10% to £2,220 million, including £22 million from Sky Broadband and £77 million from Easynet Enterprise • Adjusted gross margin of 63% up from 60% in the comparable period(2) • EBITDA of £486 million including losses of £66 million in Sky Broadband and Easynet Enterprise and a net exceptional gain of £59 million • Operating profit of £395 million including losses of £84 million in Sky Broadband and Easynet Enterprise and a net exceptional gain of £59 million • Basic EPS of 14.0p (2006: 14.9p) and adjusted EPS of 11.3p (2006: 14.7p)(3) • Interim dividend increased by 20% to 6.6 pence per share James Murdoch, Chief Executive said: "In the last six months we have achieved a number of important milestones inbuilding our business for the future. Sales of new Sky boxes were the highestfor six years, Sky+ broke through the two million barrier and Sky HD almostdoubled in size after a strong Christmas sales period. With over one in four ofour customers now taking an additional service from Sky, more people arechoosing more of our products than ever before. "At the end of our first full quarter as a broadband provider, benefits arestarting to flow through the business. Sky Broadband is attracting new andexisting customers with more than two-thirds opting for our faster, paid-forproducts. The rollout of our all-IP broadband network is progressing ahead ofschedule. As a result, we now reach more households than the entire U.K. cablenetwork with our "See, Speak, Surf" combination of TV, telephony and broadbandproducts. "We are committed to making a difference with energy efficiency and climatechange. Sky was recognised recently as a National Energy Efficiency Champion andI want to thank all our staff for making this possible. "In 2007, we will continue to drive towards our goal of being the leader inentertainment and communications in the U.K. and Ireland. We're on track for ourtargets and our expansion into broadband and telephony positions us well to takeadvantage of a growing opportunity in a £20 billion industry." (1) Broadband data stated as at 28 January 2007. As at 31 December 2006 gross bookings were 252,000 with 193,000 activated customers (2) Adjusted gross margin excludes an exceptional gain from a third party channel provider of £65 million, accounted for within programming expenses (3) Adjusted EPS excludes mark-to-market in derivative financial instruments that do not qualify for hedge accounting, an exceptional gain of £65 million and an exceptional charge of £6 million 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 Goldman Sachs, River Court Conference and Training Centre, 7th Floor, 120Fleet Street, London EC4A 2BB. 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 Dana Johnston 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 We continued to see a strong sales performance in the second quarter. Sales ofnew Sky subscriptions ("gross additions") were the highest for six years and wesurpassed two million Sky+ boxes and six million Sky Sports customers(5) in therun up to Christmas. Our new product launches are proceeding well and over aquarter of our customers now take more than one product from Sky. Sky broadbandhas made an encouraging start and sales of Sky HD almost doubled in the quarterwith 88,000 new customers. Overall net additions were also strong, at 183,000 inthe second quarter. As we indicated at our first quarter results announcement on 3 November 2006, wehave moved ahead with our plans to first reduce, and then remove, viewingpackage discounts in retention and acquisition with a greater use of broadbandand telephony. This has resulted in a short-term increase in churn to 11.9%. TheGroup estimates that around 27,000 customers left Sky's platform during thequarter as a result of this change in policy. Excluding these customers, churnwas around 10.6%. We expect this shift in retention and acquisition strategywill deliver valuable benefits in quality and profitability of the businessthrough the second half of the financial year and beyond. Group operating profit was £395 million. Excluding Sky Broadband, EasynetEnterprise and net exceptional gains, operating profit was £420 million, ayear-on-year increase of 1%. Growth was affected by a weaker TV advertisingsector, a decline in wholesale revenue, a full half year of CRM depreciation andthe high levels of gross additions and upgrades. We expect the second half tobenefit from further progress in ARPU, improved marketing efficiencies, aseasonally lighter period of net additions and upgrades and the consequent lowerweighting of operating costs. The Group's expansion into the U.K. broadband and telephony sectors got off to agood start with 259,000 broadband customers by 28 January 2007. In addition, weare beginning to see the initial benefits to the wider business, with around 20%of broadband customers new to Sky and marketing efficiencies leading to lowerSAC as we are able to spread our fixed marketing spend per subscriber over abroader base. The mix of our broadband subscribers has exceeded our initialexpectations with around 70% of our on-net customers opting for a paid-forproduct. Finally, the roll-out of our IP-based broadband network has proceededahead of plan and we now expect to achieve 70% coverage of the U.K. by the endof June 2007, a full six months ahead of schedule. The Group took a number of steps throughout 2006 to increase exposure tofavourable macro growth trends, particularly online advertising. We announcedour world-first partnership with Google which was a strong endorsement of ourbroadband offering. The acquisitions of 365 Media Group plc, the online sportsadvertising sales house Aura and MyKindaPlace further increase our exposure andcapabilities in this segment. On 17 November 2006, we acquired a 17.9% minority stake in ITV plc. ITV is oneof Europe's premier broadcasting and production businesses, and holdssubstantial potential for long-term value creation. During the half year, the Group recognised an exceptional gain of £59 million, consisting of two items: a £65 million one-off payment received from a third party channel provider as a result of a contractual entitlement to a proportion of the value of certain of its channels; and a £6 million charge within other operating expenses as part of our litigation with EDS, an information and technology solutions provider, in relation to work carried out between 2000 and 2002 on our customer relationship management systems. (5) Six million subscribers across all platforms, including Sky residential, cable and Sky business customers Outlook Looking forward to the second half of the financial year, we are confident inthe quality and flexibility of our products together with the value that weoffer customers at all levels. This positions us well as we enter a potentiallymore challenging consumer environment with higher interest rates, and highercompetitor activity in the near-term. The new year has got off to an encouragingstart with good early response rates from our combined 'See, Speak, Surf'advertising campaign, solidifying our position as a deliverer of real value andquality to consumers. Our focus in the second half of this financial year is to continue to drivecustomer demand, accelerate the rate of broadband provisioning to reach over700,000 customers by the end of June and to extend the roll-out of our broadbandnetwork. We also plan to capitalise on the investment in our DTH/DSL platform byintroducing a new enhancement, 'Sky Anytime', giving over a million Skycustomers at launch the chance to enjoy a selection of the week's bestprogrammes on-demand. We will continue with our new acquisition and retention strategy which willresult in a short-term impact on churn over the next one to two quarters and wetherefore expect net subscriber growth to be in the region of 90,000 to 100,000over the next six months. This change will deliver valuable benefits to theprofitability of the business through the second half of this financial year aswell as further growth in ARPU. We remain confident that performance for thefull year will be in line with our expectations. Results highlights All financial results have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS"), including comparatives. Customer Metrics'000s 31-Dec-06 30-Sep-06 Net additions -----------------------------------------------------------------------Total customers(1)(2)(3) 8,441 8,258 183Additional products: Sky+(4) 1,968 1,692 276Multiroom(5) 1,226 1,093 133HD 184 96 88Broadband 193 44 149Telephony 223 195 28Other KPI's: Churn 11.9% 11.8% ARPU £394 £385 ======================================================================= (1) Includes DTH subscribers in Republic of Ireland. (465,020 as at 31 December 2006, 393,000, as at 31 December 2005.) (2) 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. (3) DTH subscribers include subscribers taking Sky packages via DSL through Kingston Interactive Television and Homechoice. (4) Sky+ includes HD households (5) Multiroom includes households subscribing to more than one digibox. (No additional units are counted for the second or any subsequent Multiroom subscriptions within one household.) Financial Summary (unaudited) 6 months to Dec-06 6 months to Dec-05 £'millions Reported Exceptional (6) Adjusted Reported -------------------------------------------------------------------------------Income statement: Revenue 2,220 (7)2,220 2,016 Gross Profit 1,472 (65) 1,407 1,206 % Margin 66% - 63% 60% Operating Profit 395 (59) (8)336 414 % Margin 18% - 15% 21% Profit for the period 246 (47) 199 274 Cash flow information: Cash generated from operations 365 6 371 514 Net debt(9) 1,940 - 1,940 458 =============================================================================== Per share information 6 months 6 months (pence): to Dec-06 to Dec-05 -------------------------------------------------------------------------------EPS - basic 14.0 14.9 EPS - adjusted(10) 11.3 14.7 =============================================================================== (6) Exceptional items include a one-off receipt from third party channel provider for £65 million, £6 million charge for litigation costs and £8 million mark-to-market gain on financial derivatives (7) Revenues include £22 million from Sky Broadband and £77 million from Easynet Enterprise (8) Operating profit includes net operating loss of £73 million from Sky Broadband and £11 million from Easynet Enterprise (9) Cash, cash-equivalents, short-term deposits, borrowings and borrowings related financial instruments (10) Adjusted EPS excludes mark-to-market in derivative financial instruments that do not qualify for hedge accounting, exceptional gain of £65 million and an exceptional charge of £6 million OPERATIONAL REVIEW New DTH customers of 432,000 in the quarter are the highest in six years, andour investment in new products is helping to grow demand. During the quarter,nearly a third of Sky+ additions, 15% of HD additions and 18% of broadbandadditions were new Sky customers. We reached important achievements in content,reaching 6 million Sky Sports customers after 16 years of consistent growth andrecord ratings for Sky One with Terry Pratchet's 'Hogfather' attracting thechannel's highest ever audience for a commissioned programme of 2.8 million. As previously announced on 3 November 2006, we have moved ahead with our plansto improve price transparency and we began reducing our viewing packagediscounts in retention and acquisition part-way during the quarter. This hasresulted in a short-term increase in churn to 11.9%, up 0.1% from the previousquarter. Excluding the impact of this change in strategy, churn was in line withthe second quarter of the 2006 financial year at 10.6%. This impact is expectedto correct within one to two quarters; and more importantly will help delivervaluable benefits to the quality and profitability of the business, as well asquarter-on-quarter growth in ARPU and move the business towards our medium-termchurn target of 10%. After net additions in the second quarter of 183,000, total first half customersincreased by 265,000 in line with the six months to 31 December 2005("comparable period"). Both the mix of products and the balance of packagesremain strong: over a quarter of our customers now take more than one product,up from a fifth in the comparable period. We surpassed sales of two million Sky+boxes in 2006 and by the end of January 2007 we had reached the same level ofSky+ households(6). Our premium TV product, Sky HD, is our fastest selling new TV product launch with 184,000 subscribers in only seven months. We continue tomake good progress with multiroom with 1.2 million subscribers or 15%penetration. A managed approach to the broadband launch continues to benefit the Group withnetwork roll out ahead of plan, operating losses and capital expenditure in linewith guidance and an accelerating rate of customer growth. A total of 771exchanges were unbundled by 28 January 2006, and we now expect to achieve 70%coverage of U.K. households by the end of this financial year, six months aheadof plan. With the strong demand for our pay TV products in the last quarter, we managedour rate of broadband provisioning accordingly in order to maintain highstandards of customer service and delivery over the busy Christmas period. Onaverage around 90% of customers are being connected within 15 working days andour success rates on right-first-time provisioning are seeing furtherimprovement. Initial challenges with our e-sales system meant that theprovisioning of broadband lines was slower than we had hoped in the months ofNovember and December. The run-rate of gross bookings has now accelerated toaround 28,000 per week in January and we are targeting total broadband customersof more than 700,000 by the end of this financial year. Gross Sky Broadband bookings reached 343,000 by 28 January 2007 with 259,000active customers, up from 74,000 at the end of October, and 44,000 at the end ofSeptember, with 87% on-net. Of these on-net customers, approximately 70% optedfor a paid-for package and although it is still early days in our broadbandplan, nearly one in five broadband customers was new to Sky. The Group had afurther 33,000 customers registered to UK Online, Easynet's residentialbroadband service, bringing the total number of broadband customers to 292,000. In telephony (Sky Talk), the focus for the quarter was enhancing our packageoffering and migrating the majority of our existing customers to our newpackages. Customers reached 223,000, up from 195,000 at the end of September,with further acceleration in the month of January following the launch of our'See, Speak, Surf' package. There were 236,000 Sky Talk customers by 28 January2007 and 19% of broadband customers also opted for our Sky Talk package. The Group continued to make excellent progress in reducing programming costs asa percentage of sales. As a consequence, gross margin increased by threepercentage points to 63% (excluding the exceptional gain of £65 million). Thevalue of our content offering was reflected in our record six million Sky Sportssubscribers and the highest rating for an individual series on Sky One, withTerry Pratchet's 'Hogfather' attracting the channel's highest ever audience fora commissioned programme of 2.8 million and the first six episodes of 'Lost'attracting an average of 1.9 million viewers. (6) No additional units are counted for second or subsequent Sky+ boxes within one household FINANCIAL SUMMARY The Group's financial performance for the period reflects the investment in SkyBroadband, operating losses from Easynet Enterprise and net exceptional items.Group revenue of £2,220 million included £22 million from Sky Broadband and £77million from Easynet Enterprise. Group operating profit of £395 million includednet operating losses of £73 million from Sky Broadband, £11 million of lossesfrom Easynet Enterprise and a net exceptional gain of £59 million. Excluding Sky Broadband, Easynet and exceptional gains, operating profit was£420 million, an increase of 1% on the comparable period. Year-on-year profitgrowth in the first half was affected by a substantially weaker TV advertisingsector, continued decline in cable wholesale revenue, a full half year of CRMdepreciation and the high levels of new customers joining Sky and customerupgrades which lead to higher short-term costs. We expect the second half tobenefit through growth in ARPU, a seasonally lower level of gross additions andupgrades and further marketing efficiencies in SAC. The operating loss from Sky Broadband is tracking in line with previousguidance; is expected to break even in the year to 30 June 2010; and has anattractive standalone NPV before wider benefits to the Group. Revenue To improve presentation, we have chosen to re-analyse the revenue categoriespreviously reported. For a reconciliation of this re-analysis please refer toAppendix 3. "Retail Subscription" revenue now includes all subscription revenuefrom residential and business customers including Sky Broadband and Sky Talk. Wehave introduced a new category for installation, hardware and service revenue."Other Revenue" now principally includes Easynet Enterprise, Sky Active andtechnical platform service fees. Group revenue showed good growth increasing by 10% over the six months ended 31December 2006 to £2,220 million (2006: £2,016 million), despite the advertisingsector downturn and a fall in wholesale revenue. Group revenue included £22million from Sky Broadband(7) and £77 million from Easynet Enterprise(8). Retail subscription revenue increased by 5% on the comparable period to £1,638million (2006: £1,557 million) and included £19 million from Sky Broadband and£2 million from Easynet Enterprise. Growth was primarily driven by a 5% increasein the average number of DTH customers, partially offset by a 1% year-on-yeardecline in average revenue per customer due to the cumulative impact of previousviewing package discounts to new and existing customers. ARPU increased by £9 to £394(9) quarter-on-quarter, reflecting the full effect of the 2006 price rise and increased penetration of new products across ourcustomer base. Changes made to our promotional strategy in retention andacquisition during the quarter will lead to benefits in the second half of theyear, with further growth in ARPU expected throughout the financial year. Wholesale revenue fell by 3% to £109 million and continues to disappoint.Advertising revenue was flat year-on-year at £171 million, significantlyoutperforming the overall TV advertising sector, which we estimate contracted by8.6% over the same period. Outperformance was driven by higher advertising shareyear-on-year, up from an average of 12.7% in six months to December 2005 to13.9% in the six months to December 2006. We expect U.K. TV advertising willcontract further in calendar 2007, but we currently expect to continue tooutperform the sector. Sky Bet revenue was £4 million higher than the prior year with good growth ininternet sports betting and TV games. Installation, Hardware and Service revenue was £119 million (including £2million of Sky Broadband) up from £70 million in the comparable period. Thisincrease reflects the strong gross additions and customer upgrades, as well as ahigher proportion of premium priced hardware sales. Other revenue was £163 million (2006: £90 million), including £1 million fromSky Broadband and £75 million from Easynet Enterprise. On a like-for-like basisother revenue decreased by £3 million, largely due to a reduction in Sky Activeand Sky magazine revenue. (7) Sky Broadband revenue includes £19 million of subscription revenue, £2 million of installation, hardware and service revenue and £1 million of other revenue (8) Easynet Enterprise revenue includes £2 million of subscription revenue and £75 million of other revenue (business subscription and other revenue) (9) The Group has adjusted its calculation of ARPU to reflect revised contractual arrangements in respect of Sky Talk. Previously, Sky Talk revenues were recognised on a net margin basis, whereas, now, the Group recognises gross telephony revenues in its ARPU calculation. On a like-for-like basis, this adjustment would result in each ARPU figure disclosed during the previous financial year being increased by £3 Gross margin In programming, major investment in sports rights to further improve the qualityof our channels, was offset by savings and efficiencies achieved in other areas.Reported programming costs were £748 million, including an exceptional £65million credit from a third party channel provider. Programming costs excludingthis exceptional gain increased by £3 million with a gross margin of 63%.Excluding Sky Broadband and Easynet Enterprise, gross margin increased by twopercentage points on the comparable period to 62%. Sports costs increased by £35 million, driven primarily by one-off events suchas the Ryder Cup (which was also transmitted in HD) and ECB cricket, with thefirst summer of exclusive live coverage of all domestic, international andcountry cricket. Movie costs fell by £16 million to £143 million principally asa result of favourable contract renewals and £2 million of foreign exchangebenefits. News and Entertainment costs were £5 million lower. Excluding theexceptional receipt of £65 million, like-for-like third party costs fell by £11million to £156 million, reflecting improved distribution agreements and theimpact of Film4's re-launch as a subscription free channel. Profit Operating profit of £395 million (2006: £414 million) included a net exceptionalgain of £59 million, Sky Broadband losses of £73 million and Easynet Enterpriselosses of £11 million. Sky Broadband net operating losses of £73 million comprised revenue of £22million and operating costs of £95 million; £21 million of which are included insubscriber management; £35 million in transmission; £29 million in marketing;and £10 million administration. Easynet Enterprise net operating losses of £11million comprised revenue of £77 million and operating costs of £88 million; ofwhich £7 million are included in subscriber management; £54 million intransmission; £2 million in marketing and £25 million in administration. Operating costs excluding programming were £1,077 million (2006: £792 million).Excluding Sky Broadband and Easynet Enterprise costs of £183 million and anexceptional charge of £6 million, other operating costs increased by £96million, reflecting strong gross additions, high levels of product upgrades andinvestment in infrastructure and increased contact centre resources. Total marketing costs were £375 million (2006: £332 million), up by £12 millionon a like-for-like basis, with the costs of strong gross additions and increasedproduct upgrades partially offset by efficiencies in subscriber acquisitioncosts ("SAC"). SAC fell by £15 versus the second half of the 2006 financial yearor by £4 on the comparable period to £246, benefiting from the impact ofbroadband as we were able to spread our fixed marketing spend per subscriberover a broader base. Other savings were driven by a higher proportion of premiumpriced HD boxes as well as some supply chain savings. Total subscriber management costs were £313 million (2006: £219 million), up by£66 million on a like-for-like basis. Half of this growth related directly toincreased installation costs (partially offset by installation, hardware andservice revenue) and the remainder from higher call-centre costs anddepreciation relating to the implementation of new CRM systems. The remaining other operating expenses totalled £389 million (2006: £241million) included £124 million of Sky Broadband and Easynet Enterprise costs andincluded an exceptional charge of £6 million relating to the legal costs of theGroup's claim against EDS, which provided services to the Group as part of theGroup's investment in customer relationship management systems software andinfrastructure. The amount which may be recovered by the Group will not befinally determined until resolution of the claim and we currently expect toincur costs of around £20 million during the current financial year, which willbe recognised as an exceptional cost. After the Group's share of operating profits from joint ventures of £6 million(2006: £7 million) and a net interest charge of £45 million (2006: £31 million)which included positive £8 million mark-to-market movement (2006: £4 million) onthe value of non-IFRS hedge accounted derivatives, the Group made a profitbefore tax in the period of £356 million. The total tax charge for the period was £110 million (2006: £116 million), at aneffective rate of 31%. Earnings The Group's profit for the period was £246 million (2006: £274 million),generating basic EPS of 14.0p (2006: 14.9p). Adjusted profit for the period was£199 million (2006: £271 million), generating adjusted earnings per share of11.3 pence compared to 14.7 pence in the comparable period. The 2005/6 sharebuyback programme resulted in the number of shares outstanding in the periodfalling by 4.5% to 1,762 million (2006: 1,845 million). Exceptional items The Group reported net exceptional gains of £59 million within operating profit,consisting of two items. Included within third party costs is a £65 millioncredit resulting from the payment relating to a proportion of the value ofcertain third party channels. Partially offsetting this was a charge of £6million recorded within administration expenses relating to the legal costs ofthe Group's claim against EDS. Cash flow Operating profit for the period was £395 million, generating adjusted EBITDA of£493 million, up 5% excluding Easynet Enterprise and Sky Broadband losses andexceptional items. Following a higher working capital outflow of £121 million,the Group generated a cash inflow from operations of £365 million (2006: £514million). Working capital was impacted primarily by timing differences on the receipt ofan exceptional third party settlement, which was recognised in the incomestatement for the period, with cash received in January and by earlier paymentsto suppliers relative to the prior year in order to take advantage of earlypayment discounts. Capital expenditure for the period was £158 million, including £91 millioninvestment in Sky Broadband and Easynet Enterprise as well as investment ininfrastructure and IT systems. After acquisition spend of £994 million, relating to the investment in ITV, YouMe TV and 365 Media Group plc, interest of £60 million, cash taxes of £39million and returns to shareholders of £331 million, net debt increased to£1,940 million as at the 31 December 2006. CORPORATE Sky announced the purchase of 17.9% of ITV plc on 17 November 2006 for a totalconsideration of £946 million including fees and taxes. The fair value of theseshares was £741 million at the end of December 2006, resulting in a £205 millionnon-cash fair value adjustment to balance sheet reserves. On 15 December 2006, the Group made a recommended cash offer for the entireshare capital of 365 Media Group plc ("365"). The offer became unconditional inall respects on 23 January 2007 and we are now compulsorily acquiring 365'sremaining shares and seeking to delist the company from AIM. Under IFRS, thisinvestment was marked to market at the period end, with the loss of £2 millionbeing taken to reserves. CORPORATE RESPONSIBILITY As one of the U.K.'s leading consumer franchises, reputation is a keycompetitive differentiator. Following the achievement of carbon neutral statusin May 2006, the success of Sky's environmental programme, The Bigger Picture,was externally recognised with a number of awards during the quarter. Sky wonthe National Energy Efficiency award for large businesses and was also named theoverall National Champion for Energy Efficiency. The awards were judged on anumber of criteria including; demonstrable results, environmental impact,financial and other savings and impact on customers, audiences and end-users.For example, just one element of the improvement programme, installation ofoil-less chillers in four Sky buildings, resulted in energy and cost savings of40% (compared to previous installations) and £280,000 per annum. Sky also won an inaugural United Nations Environment Programme (UNEP) sponsoredGreen Award for sustainable business. Sky was commended for a far-reachingprogramme that had produced tangible results such as achieving Carbon Neutralstatus and reaching out to employees, business partners and customers. Use of measures not defined under IFRS This press release contains certain information on the Group's financialposition, results and cash flows that have been derived from measures calculatedin accordance with IFRS. This information should not be read in isolation of therelated 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 respect to the potential for growth of free-to-air and pay-TV,fixed line telephony, broadband and bandwidth requirements, advertising growth,DTH subscriber growth, Multiroom, Sky+ and other services penetration, churn,DTH and other revenue, profitability and margin growth, cash flow generation,programming and other costs, subscriber acquisition costs and marketingexpenditure, capital expenditure programmes and proposals for returning capitalto 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 laws andgovernment regulation upon the Group's activities, its reliance on technology,which is subject to risk, change and development, failure of key suppliers, itsability to continue to obtain exclusive rights to movies, sports events andother programming content, risks inherent in the implementation of large-scalecapital expenditure projects, the Group's ability to continue to communicate andmarket its services effectively, and the risks associated with the Group'soperation of digital television transmission in the U.K. and Ireland. Information on some of the risks and uncertainties associated with the Group'sbusiness are described in the "Review of the Business - Risk Factors" section ofSky's Annual Report on Form 20-F for the year ended 30 June 2006. Copies of theAnnual Report on Form 20-F are available on request from British SkyBroadcasting 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. Except as required by law, the Group undertakes no obligationpublicly to update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. Appendix 1 - Subscribers to Sky Channels Second quarter First quarter Prior year Q2 as at 31 as at as at December 30 September 31 December 2006 2006 2005 DTH homes (1)(2)(3) 8,441,000 8,258,000 8,059,000 Total TV homes in the U.K. and Ireland(4) 26,766,000 26,764,000 26,585,000 DTH homes as a percentage of total U.K. and Ireland TV homes 32% 31% 30% Cable - U.K. 3,397,000 3,251,000 3,292,000Cable - Ireland 605,000 606,000 597,000Total Sky pay homes 12,443,000 12,115,000 11,948,000Total Sky pay homes as a percentage of total U.K. and Ireland TV homes 46% 45% 45% Sky+ homes 1,968,000 1,692,000 1,281,000 Multiroom homes(5) 1,226,000 1,093,000 906,000 HD homes 184,000 96,000 - Broadband customers 193,000 44,000 - DTT - U.K.(6) 7,971,000 7,646,000 6,363,000 (1) Includes DTH subscribers in Republic of Ireland (465,020, as at 31 December 2006).(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 Homechoice.(4) Total U.K. homes estimated by BARB and taken from the beginning of the month following the period end (latest figures as at 1 January 2007). 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 2006).(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 2007). These include Sky or Cable homes that already take multi-channel TV. Appendix 2 - Glossary Glossary Useful definitions Description Adjusted profit for the Profit for the period adjusted to removeperiod mark-to-market movements in derivative financial instruments that do not qualify for hedge accounting, exceptional items and any changes in the estimate of recoverable tax assets in respect of prior years. Adjusted earnings per share Adjusted profit divided by the weighted average number of ordinary shares during the year. 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. 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. Gross margin Revenue less programming expenses as a proportion of revenue. Gross profit Revenue less programming expense. Gross Sky broadband bookings The number of customers that have requested our broadband product, passed pre-sale checks and have been accepted by our booking system and invoiced for any relevant activation fees. Gross Sky Bet revenue Gross stakes placed by customers on events taking place in the period and net customer losses in respect of casino, online roulette and similar interactive casino style games. HD High Definition. Like-for-like Excluding contribution from Sky Broadband and Easynet Enterprise and net exceptional amounts. Multichannel viewing share Share of viewers of non-analogue terrestrial television. 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. On-net Customers subscribing to our unbundled broadband product. Sky + Sky's fully-integrated Personal Video Recorder (PVR) and satellite decoder. Viewing share Number of people viewing a channel as a percentage of total viewing audience. Appendix 3 - Re-analysis of reported revenue by category To provide a more relevant presentation, management has chosen to re-analyse therevenue categories from those previously reported. Other revenue now principallyincludes income from Easynet Enterprise, Sky Active and technical platformservice revenue. 2005/06 Half Year Separate As Transfer of installation, 2005/06 previously Sky hardware and Half Year reported Active service Other Re-analysed £ million £ million £ million £ million £ million (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) ------------------------------------------------------------------------------------Retail Subscription 1,554 - - 3 1,557 Wholesale Subscription 112 - - - 112 Advertising 171 - - - 171 Sky Bet 16 - - - 16 Sky Active 46 (46) - - - Installation, Hardware and Service - - 70 - 70Other 117 46 (70) (3) 90 2,016 - - - 2,016 ------------------------------------------------------------------------------------ 2005/06 Full Year Separate As Transfer of installation, 2005/06 previously Sky hardware and Full Year reported Active service Other Re-analysed £ million £ million £ million £ million £ million (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) ------------------------------------------------------------------------------------Retail Subscription 3,154 - - 3 3,157 Wholesale Subscription 224 - - - 224 Advertising 342 - - - 342 Sky Bet 37 - - - 37 Sky Active 91 (91) - - - Installation, Hardware and Service - - 131 - 131Other 300 91 (131) (3) 257 4,148 - - - 4,148 ------------------------------------------------------------------------------------ Consolidated Income Statement for the half year ended 31 December 2006 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million Notes (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------------------Revenue 2 2,220 2,016 4,148Operating expense 3 (1,825) (1,602) (3,271)Operating profit 395 414 877----------------------------------------------------------------------------------------- Share of results of joint ventures and associates 6 7 12 Investment income 24 20 52Finance costs (69) (51) (143)Profit before tax 356 390 798----------------------------------------------------------------------------------------- Taxation (110) (116) (247)Profit for the period 246 274 551----------------------------------------------------------------------------------------- Earnings per share from profit for the period (in pence) Basic 4 14.0p 14.9p 30.2pDiluted 4 14.0p 14.9p 30.1p----------------------------------------------------------------------------------------- Adjusted earnings per share from profit for the period (in pence) Basic 4 11.3p 14.7p 30.7pDiluted 4 11.3p 14.7p 30.6p----------------------------------------------------------------------------------------- Consolidated Statement of Recognised Income and Expense for the half year ended31 December 2006 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------------------Profit for the period 246 274 551-----------------------------------------------------------------------------------------Loss on available for sale investments (207) - - Net movement in hedging reserve Cash flow hedges 21 1 (54)Tax on cash flow hedges (6) - 16 15 1 (38)----------------------------------------------------------------------------------------- Total recognised income and expense 54 275 513for the period ----------------------------------------------------------------------------------------- Consolidated Income Statement for the three months ended 31 December 2006 2006/07 2005/06 Three months Three months ended 31 December ended 31 December £ million £ million (unaudited) (unaudited)------------------------------------------------------------------------------Revenue 1,149 1,050Operating expense (934) (851)------------------------------------------------------------------------------EBITDA 262 231Depreciation and amortisation (47) (32)------------------------------------------------------------------------------Operating profit 215 199------------------------------------------------------------------------------Share of results from joint ventures and associates 4 5Investment income 10 12Finance costs (39) (26)Profit before tax 190 190------------------------------------------------------------------------------Taxation (60) (56)Profit for the quarter 130 134------------------------------------------------------------------------------Earnings per share from profit forthe quarter (in pence)Basic and diluted 7.4 7.3Adjusted 5.0 7.1------------------------------------------------------------------------------ Consolidated Balance Sheet as at 31 December 2006 31 December 31 December 30 June 2006 2005 2006 £ million £ million £ million Notes (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------Non-current assets Goodwill 659 417 637Intangible assets 209 221 218Property, plant and equipment 593 349 519Investments in joint ventures and associates 31 29 28 Available for sale investments 771 52 2Deferred tax assets 79 79 100Derivative financial assets - 13 - 2,342 1,160 1,504-----------------------------------------------------------------------------Current assets Inventories 609 568 324Trade and other receivables 568 389 489Short-term deposits 202 764 647Cash and cash equivalents 402 889 816Derivative financial assets 6 29 7 1,787 2,639 2,283-----------------------------------------------------------------------------Total assets 4,129 3,799 3,787-----------------------------------------------------------------------------Current liabilities Borrowings 548 174 163Trade and other payables 1,469 1,376 1,247Current tax liabilities 140 116 82Provisions 4 6 6Derivative financial liabilities 36 26 49 2,197 1,698 1,547-----------------------------------------------------------------------------Non-current liabilities Borrowings 1,751 1,854 1,825Other payables 63 23 66Provisions 18 - 19Derivative financial liabilities 245 80 209 2,077 1,957 2,119-----------------------------------------------------------------------------Total liabilities 4,274 3,655 3,666-----------------------------------------------------------------------------Shareholders' (deficit) equity 6 (145) 144 121-----------------------------------------------------------------------------Total liabilities and shareholders' (deficit) equity 4,129 3,799 3,787----------------------------------------------------------------------------- Consolidated Cash Flow Statement for the half year ended 31 December 2006 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million Notes (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------Cash flows from operating activities Cash generated from operations 365 514 1,004Interest received 32 16 43Taxation paid (39) (76) (172)Net cash from operating activities 358 454 875-----------------------------------------------------------------------------Cash flows from investing activities Dividends received from joint ventures and associates 4 3 7Net funding to joint ventures and associates - (1) (2) Purchase of property, plant and equipment (131) (58) (169)Purchase of intangible assets (27) (36) (43)Purchase of available-for-sale investments (975) (51) -Decrease (increase) in short-term deposits 445 (570) (453)Purchase of subsidiaries (net of cash and cash equivalents purchased) (19) - (209) Net cash used in investing activities (703) (713) (869)-----------------------------------------------------------------------------Cash flows from financing activities Proceeds from borrowings 550 1,014 1,014Repayment of borrowings (191) - -Proceeds from disposal of shares in Employee Share Ownership Plan ("ESOP") 8 7 13 Purchase of own shares for ESOP (13) - (17)Purchase of own shares for cancellation (214) (240) (408)Interest paid (92) (44) (105)Dividends paid to shareholders (117) (92) (191)Net cash (used in) from financing activities (69) 645 306 -----------------------------------------------------------------------------Effect of foreign exchange rate movements - - 1 Net (decrease) increase in cash and cash equivalents (414) 386 313 -----------------------------------------------------------------------------Cash and cash equivalents at the beginning of the period 816 503 503 Cash and cash equivalents at the end of the period 402 889 816----------------------------------------------------------------------------- Notes to the interim financial statements 1 Basis of preparation The financial information set out in this press release does not constitutestatutory financial statements for the years half year ended 31 December 2006 or2005, for the purpose of the Companies Act 1985. Statutory financial statementsfor the year ended 30 June 2006 have been filed with the Registrar of Companies.The Group's auditors have reported on those accounts; their reports wereunqualified and did not contain statements under s. 237(2) or (3) Companies Act1985. Whilst the financial information included in this press release has beenprepared in accordance with International Financial Reporting Standards("IFRS"), this announcement does not itself contain sufficient information tocomply with IFRS. 2 Revenue 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-------------------------------------------------------------------------------Retail subscription 1,638 1,557 3,157Wholesale subscription 109 112 224Advertising 171 171 342Sky Bet 20 16 37Installation, hardware and service 119 70 131Other 163 90 257 2,220 2,016 4,148------------------------------------------------------------------------------- To provide a more relevant presentation, management has chosen to re-analyse therevenue categories from those previously reported. Other revenue now principallyincludes income from Easynet Enterprise, Sky Active and technical platformservice revenue. 3 Operating expense 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-------------------------------------------------------------------------------Programming 748 810 1,599Transmission and related functions 181 87 234Marketing 375 332 622Subscriber management 313 219 468Administration 208 154 348 1,825 1,602 3,271------------------------------------------------------------------------------- Included within programming for the half year ended 31 December 2006 is a £65million credit due to the Group arising from certain contractual rights underone of the Group's channel distribution agreements. This item was previouslydisclosed as a contingent asset in the Group's June 2006 financial statements. Included within administration for the half year ended 31 December 2006 is £6million of expense relating to the legal costs of the Group's claim against EDS(an information and technology solutions provider (see note 8b)). 4 Earnings per share 2006/07 2005/06 2005/06 Half year Half year Full year Millions of Millions of Millions shares shares of shares (unaudited) (unaudited) (audited)-------------------------------------------------------------------------------Weighted average number of shares Ordinary shares 1,765 1,849 1,830ESOP trust ordinary shares (3) (4) (3)Basic shares 1,762 1,845 1,827-------------------------------------------------------------------------------Dilutive ordinary shares from share options 1 2 5Diluted shares 1,763 1,847 1,832------------------------------------------------------------------------------- The calculation of diluted earnings per share excludes 21 million share options(2005/06: half year 34 million; full year 37 million), which could potentiallydilute earnings per share in the future. These options do not currently have adilutive effect as the exercise price of the options exceeds the average marketprice of ordinary shares during the period. Basic and diluted earnings per share is calculated by dividing profit for theperiod into the weighted average number of shares for the period. In order toprovide a measure of underlying performance, management have chosen to presentan adjusted profit for the year which excludes items that may distortcomparability. Such items arise from events or transactions that fall within theordinary activities of the Group but which management believes should beseparately identified to help explain underlying performance. 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-------------------------------------------------------------------------------Reconciliation from profit for the period to adjusted profit for the period Profit for the period 246 274 551Remeasurement of all derivative financial instruments (not qualifying for hedge accounting) (8) (4) 14 Amount receivable from channel distribution agreement (see note 2) (65) - - Legal costs relating to claim against EDS (see note 3) 6 - - Tax effect of above items 20 1 (4)Adjusted profit for the period 199 271 561------------------------------------------------------------------------------- 5 Dividends 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-------------------------------------------------------------------------------2005 Final dividend paid: 5.00p per ordinary share - 92 92 2006 Interim dividend paid: 5.50p per ordinary share - - 99 2006 Final dividend paid: 6.70p per ordinary share 117 - - 117 92 191-------------------------------------------------------------------------------Dividends proposed after the balance sheet date and not recognised as a liability 2007 Interim dividend proposed: 6.6p per ordinary share 115 - - ------------------------------------------------------------------------------- 6 Reconciliation of movement in shareholders' (deficit) equity Available Total for shareholders' Share Share ESOP Hedging sale Other Retained (deficit) capital premium reserve reserve reserve reserves earnings equity £ million £ million £ million £ million £ million £ million £ million £ million --------------------------------------------------------------------------------------------------------------At 1 July 2005 934 1,437 (32) (14) - 273 (2,411) 187Purchase of own shares for cancellation (23) - - - - 23 (240) (240)Recognition and transfer of cash flow hedges - - - 1 - - - 1Tax on items taken directly to equity - - - - - - (2) (2)Share-based payment - - 15 - - - 1 16Profit for the period - - - - - - 274 274Dividends - - - - - - (92) (92)At 1 January 2006 911 1,437 (17) (13) - 296 (2,470) 144--------------------------------------------------------------------------------------------------------------Purchase of own shares for cancellation (15) - - - - 15 (168) (168)Recognition and transfer of cash flow hedges - - - (55) - - - (55)Tax on items taken directly to equity - - - 16 - - 4 20Share-based payment - - (8) - - - 10 2Profit for the period - - - - - - 277 277Dividends - - - - - - (99) (99)At 1 July 2006 896 1,437 (25) (52) - 311 (2,446) 121--------------------------------------------------------------------------------------------------------------Purchase of own shares for cancellation (19) - - - - 19 (214) (214)Recognition and transfer of cash flow hedges - - - 21 - - - 21Tax on items taken directly to equity - - - (6) - - (1) (7)Revaluation of available for sale investments - - - - (207) - - (207)Share-based payment - - 1 - - - 11 12Profit for the period - - - - - - 246 246Dividends - - - - - - (117) (117)At 31 December 2006 877 1,437 (24) (37) (207) 330 (2,521) (145)-------------------------------------------------------------------------------------------------------------- The periods from 1 July to 31 December are unaudited. 7 Notes to the consolidated cash flow statement a) Reconciliation of profit before taxation to cash generated from operations 2006/07 2005/06 2005/06 Half year Half year Full year £ million £ million £ million (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------Profit before tax 356 390 798Depreciation of property, plant and equipment 58 36 89 Amortisation of intangible assets 33 20 51Net finance costs 45 31 91Share of results of joint ventures and associates (6) (7) (12) Increase in trade and other receivables (118) (54) (102) (Increase) decrease in inventories (294) (211) 31Increase in trade and other payables 289 312 55Decrease in provisions (3) (7) (13)Decrease in derivative financial instruments 5 4 16Cash generated from operations 365 514 1,004----------------------------------------------------------------------------- b) Analysis of movements in net debt As at 1 As at 1 As at 31 July Cash Non-cash July Cash Non-cash December 2005 movements movements 2006 movements movements 2006 £ million £ million £ million £ million £ million £ million £ million (audited) (audited) (audited) (audited) (unaudited) (unaudited) (unaudited)----------------------------------------------------------------------------------------------Current borrowings - - 163 163 387 (2) 548Non-currentborrowings 982 1,014 (171) 1,825 (1) (73) 1,751Debt 982 1,014 (8) 1,988 386 (75) 2,299----------------------------------------------------------------------------------------------Borrowings-relatedderivative financialinstruments 103 - 133 236 (27) 36 245Cash and cash equivalents (503) (312) (1) (816) 414 - (402)Short-term deposits (194) (453) - (647) 445 - (202)Net debt 388 249 124 761 1,218 (39) 1,940---------------------------------------------------------------------------------------------- 8 Other matters a) Contingent liabilities The Group has contingent liabilities by virtue of its investments in jointventures and associates that are unlimited companies, or partnerships, whichinclude The History Channel (U.K.), Paramount U.K. and NGC-U.K.. The Group'sshare of contingent liabilities of its joint ventures and associates incurredjointly with the other investors is nil (2005/06: half year nil; full year nil). The Directors do not expect any material loss to arise from the above contingentliabilities. b) Contingent assets The Group has served a claim for a material amount against EDS (an informationand technology solutions provider) which provided services to the Group as partof the Group's investment in customer management systems software andinfrastructure. The amount which may be recovered by the Group will not befinally determined until resolution of the claim. c) Changes in estimates There have been no material changes in estimates of amounts reported in the sixmonths ended 31 December 2006 or in the year ended 30 June 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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