Results for the nine months ended 31 March 2016

SKY PLC

Unaudited results for the nine months ended 31 March 2016

STRONG PROGRESS AGAINST OUR STRATEGY

Delivering the very best TV experience and broadest choice for customers, across multiple platforms

· Securing more of the best content from around the world; pan-European movie deal with Sony

· Extending our leadership in sport; new deals including Formula 1 and UEFA Euro 2016

· Delivering market-leading innovation; Sky Q and Sky Kids app launched in the UK

· Leveraging our connected home investments further; Sky Box Sets now available in all markets

Strong demand from new customers; existing customers continuing to take more from Sky

· 177,000 new customers joined in Q3; 686,000 more products in Sky homes

· UK surpasses over 40 million products in the quarter

Excellent financial results

· 5% increase in group revenue to £8,715 million

· 12% increase in operating profit to £1,143 million

Jeremy Darroch, Group Chief Executive, commented:

"It's been another strong quarter for Sky. Our strategy to broaden our business, expanding into new markets and customer segments, has delivered further excellent financial results with revenue up 5% and a double digit growth in profit.

"We want to offer customers the very best TV experience, whenever and however they want to watch. With the launch of Sky Q in February, we now have three outstanding products to meet all our customers' needs. We are pleased with the early response to Sky Q, as we focus on establishing this premium product in its first market. Our approach to the connected home continues to engage customers; almost 11 million Sky households have now connected to enjoy our on demand services including Sky Box Sets, which recently launched in both Germany and Italy.

"Our content offering is getting bigger and better. With Sky originals, we are creating unique and high-quality shows such as Stan Lee's Lucky Man, which drew record audiences. We have many more exciting original productions to look forward to with our first production in Germany, Babylon Berlin, shortly to begin filming and we have just announced our most ambitious production slate in the UK, featuring world class talent such as Idris Elba, Tim Roth and Christina Hendricks in six major new shows. Strengthening our movies offer, we secured our first group-wide movie deal with Sony this quarter, and for families we launched our new Sky Kids App, which will be rolled out in all territories. In sport, we are excited to become the exclusive home of Formula 1 in the UK and Ireland from 2019 whilst we will be showing UEFA Euro 2016 this summer in Italy.

"Our promise of world class content, commitment to innovation and brilliant service is persuading more customers to join and stay with Sky, in every market. As we pass the major milestone of 40 million products in UK and Irish households, we will continue to execute this successful approach across the group."

Results highlights

Group operational performance (Q3)

STRONG EXECUTION OF OUR STRATEGY IS DRIVING PERFORMANCE

We are making strong progress as we broaden our business; expanding into new markets, opening up new customer segments and developing more products and services. This strategy is delivering an excellent performance which has been sustained over time, as we continue to grow our customer base, revenues and profits. Alongside attracting more new customers to Sky, our existing customers continue to take more services from us across all markets.

At the heart of our plans is building Europe's leading entertainment business. This means that across all our markets we are ensuring Sky is the home of more of the best content from around the world, with sustained market-leading innovation across multiple platforms, delivered by a trusted brand that offers best in class customer service. Through this - and the fact that we operate in attractive markets with excellent headroom - we are driving sustained broad revenue growth which, combined with our focus on operating efficiency, leads to a stronger, more profitable business and increased returns for shareholders.

We have made excellent progress against these plans this quarter, resulting in strong customer and product growth, revenues up 5% and a double digit increase in profits. This continues the strong and sustained financial performance which has seen us deliver revenue growth of around 5% in each of the last five years together with a cumulative increase in profit in excess of 50%. The integration of the three Skys is on track, already delivering tangible benefits, and is enabling us to pursue significant growth opportunities across the group.

SUMMARY OF GROUP OPERATIONAL PERFORMANCE

We had a good trading quarter across all markets. In total, we added 177,000 new customers, taking our total customer base to 21.7 million, and grew total products by 686,000. Group revenues for the period increased by 5% to £8,715 million, leading to a 12% increase in operating profit to £1,143 million.

In the UK and Ireland we had a good quarter of growth, following a strong first half. We focused our marketing on building brand awareness for Sky Q, ahead of the first installations towards the end of the quarter. In Q3 we added 70,000 new retail customers and 438,000 new products, including 46,000 new broadband additions. Churn for the quarter was 10.7%, reflecting our decision to limit discounts; we believe this impacts the quarter by around 10,000 additional customers churning. Revenue was up 6% to £6,161 million (2015: £5,824 million) which, together with our strong focus on operating efficiency, delivered a 15% increase in operating profit to £1,154 million (2015: £1,004 million).

In Germany and Austria we are seeing a strong customer response to our new Entertainment pack, which offers customers more channels and our full on demand service at a higher price point of €21.99 versus the lower tier of €16.99. Over 40% of new customers chose this pack, driving an increase in new customer ARPU of almost €2 per month versus the prior year. Across Q3, we grew total customers by 73,000, along with 199,000 new products, and churn of 9.8% was stable quarter on quarter. On a constant currency basis, revenue was up 10% to £1,079 million (2015: £983 million) and despite our increased investment in programming, marketing and our connected home strategy, we recorded an operating profit for the first time ever in a third quarter in Sky Deutschland's history. Excluding the impact of the changed amortisation profile of Bundesliga rights, our nine-month operating loss was £16 million (2015: £23 million), a £7 million improvement year on year.

Our strategy in Italy to strengthen our TV offer with great content, innovation and service, while extending our reach across platforms, is delivering. In Q3 we achieved our highest quarterly customer growth in four years, adding 34,000 new retail customers and 49,000 new products. In March our marketing focused on the launch of Sky Box Sets, and right through the quarter customers responded to our investments in content with record viewing to Sky entertainment channels. Churn for the quarter was 11.0%, a resilient performance as we effectively manage the business through the loss of the UEFA Champions League rights. Whilst we have now benefitted from positive customer growth in each of Q2 and Q3, the average number of customers over the first half of the fiscal was lower, leading to a 2% fall in revenues to £1,475 million (2015: £1,508 million) on a constant currency basis. This revenue movement, together with the one off investment year to date of around £16 million in connected boxes and box sets marketing, resulted in a £21 million decline in operating profit to £22 million. On an underlying basis, looking through the connected box and box sets expenditure, profit would have been down only £5 million.

DELIVERING THE VERY BEST TV EXPERIENCE FOR CUSTOMERS

In content, we secured a number of significant and exclusive long-term deals with content partners, as well as further developing our own slate of Sky original TV programmes.

Our first pan-European agreement for movies with Sony means our customers can enjoy access to major new releases including Ghostbusters and Inferno, along with a wide range of on demand titles. In sports, we secured the rights for UEFA Euro 2016 and Copa America Centenario earlier in the quarter in Italy whilst we also announced our deal to make Sky Sports the exclusive home of Formula 1 in the UK and Ireland for six years from 2019. Within our own portfolio of programmes, we unveiled the new 16-part crime drama Babylon Berlin - our first major co-production with ARD - in Germany, which is due to enter production shortly. Earlier this month our critically acclaimed drama, The Tunnel, returned in the UK for a second season, and we've recently announced our most ambitious production slate in the UK yet, featuring world class talent such as Idris Elba, Tim Roth and Christina Hendricks, in six major new shows, adding to our growing portfolio of high-quality drama.

Our market-leading innovation is continuing to transform the viewing experience for our customers in all markets.

Across the group, we continue to roll out our proven connected home strategy. In the quarter, Sky connected homes grew by almost 400,000, taking the total to 11 million. This supported a 44% increase in connected views year on year, to 2.6 billion in the past nine months.

In a big quarter for new product launches, we began selling our ground-breaking new product, Sky Q, in mid-February, and we've been really pleased with the early response from both customers and reviewers. We completed the roll out of Sky Box Sets with the launch in Italy this quarter, which means TV customers in all our markets can now access this hugely popular service. Finally, we launched a brand new Sky Kids app in the UK and Ireland, offering children a safe and engaging way to access thousands of hours of kids programmes at no extra cost. We will roll this app out in Germany and Italy later this year.

Our best in class service was once again recognised by OFCOM this quarter, with Sky receiving the lowest level of complaints in aggregate in the UK across TV, broadband and landline in their latest 'Telecoms and pay TV complaints Q4 2015' report.

SYNERGIES AND INTEGRATION

We continue to make good progress on our key areas of integration - platform leadership; content acquisition; a single brand; and efficient operations - and remain on track to hit our run-rate synergies target as we exit FY 2017.

At the start of the latest Formula 1 ("F1") season we further reorganised our production activities into a single European team which will service all of our markets, and share expertise and innovation across the group. We also created one F1 promotional campaign which ran across all markets. Similarly, the current Sky Box Sets marketing campaigns running in Germany and Italy utilise the original format created in the UK. We have now also aligned the channel logos for Sky Atlantic and Sky Arts across the group, allowing for more cross-territory marketing campaigns to be delivered in the future. Sky Sports and Sky News will be aligned in all territories over the next six months, along with the UK's market-leading Sky Sports app launching in Germany and Italy later in the year.

Our pan-European deal with Sony follows those we've agreed with HBO and Showtime in the past five months, allowing us to deliver world-class programming efficiently to all our customers. The latest hit drama from HBO, Vinyl, premiered to all customers in February and we're looking forward to the next series of Game of Thrones, which airs next week on all platforms.

Finally, during the quarter we also moved the playout for Sky Cinema in Germany to our shared broadcast facility in Milan. We expect to broadcast almost 100 German channels from Milan by the end of 2016.

GROUP FINANCIAL PERFORMANCE

Unless otherwise stated, all growth rates and comparative amounts are presented on an adjusted like-for-like basis and on a constant currency basis using current period exchange rates. The financial results of Italy and Germany are translated into sterling at a constant currency rate of €1.36: £1. For a reconciliation to amounts at actual exchange rates see page 2.

Revenue

Group revenue grew by 5% to £8,715 million (2015: £8,315 million).

Subscription revenue, our largest category, delivered strong revenue growth of 4% across the group. Over the past twelve months we've added 806,000 retail customers and over 3.5 million paid-for products whilst we benefitted from the TV price rise in the UK in June. This growth has been achieved with the absence of the Champions League in the UK and Italy.

Transactional revenue was our fastest growing segment, up 21% to £141 million, with the continued strong performance of Sky Store in the UK, growing demand for NOW TV Sports passes and three major pay-per-view boxing events in the year to date.

Our commercial businesses continue to grow with programme and channel sales revenue up 18% and advertising revenue up 7%. Programme and channel sales revenue benefitted from growing international programme sales of our original commissions through Sky Vision, the first time consolidation of Blast! Films and Jupiter Entertainment, and continued strong growth in channel distribution revenues. Advertising revenue was boosted by the strong performance of TV8 in Italy, higher reach of our wholly owned channels through subscriber growth in Germany and the continued success of Sky Adsmart in the UK.

Costs

Total costs were up 4%, a full 100 basis points below the rate of revenue growth, as we drive efficiencies through our operating cost base, allowing us to expand margins while investing in programming.

Programming costs were up 5%. During the quarter we continued to invest in our content portfolio, incorporating exclusive rights to the Fox Sports channel in Italy, launching pop-up channels for Star Wars and Harry Potter in the UK and Sky Disney Prinzessinnen HD in Germany, and adding more on demand content in all territories. The benefit of the absence of the Ryder Cup and FIFA World Cup, as well as savings from not renewing the Champions League in the UK and Italy, was partially offset by higher Bundesliga costs. These related to the annual contractual step-up and impact from the previously announced change in the amortisation profile, which better reflects the pattern of consumption by our customers of these rights.

Direct networks costs, which relate solely to the UK communication business, increased 7%. This supports strong customer growth and increased take up of fibre products by our customers over the last 12 months, whilst remaining below the rate of revenue growth in our home communications business.

Sales, general and administration costs increased by only 2%. Within this, marketing increased due to the launch of Sky Q, which cost an additional £15 million this quarter, as well as spend to maintain share of voice in Italy. Cost to serve and G&A increased only marginally as the investment in our connected box roll out was mostly offset by savings from our cost efficiency programmes, particularly the benefits we are seeing across the group from our focus on digital technology in our contact centres.

Profit

Group operating profit increased by 12% to a record ever nine month profit of £1,143 million (2015: £1,024 million) and we delivered an 80 basis point increase in operating margin to 13.1%.

Net debt

Net debt as at 31 March was £6.3 billion (31 March 2015: £5.6 billion). Non-cash movements account for £517 million of this increase, predominantly due to the retranslation of Euro denominated debt into sterling at a less favourable exchange rate of €1.27 (2015: €1.37). Underlying net debt was up approximately £200 million with strong free cash generation of £775 million offset by approximately £750 million of returns to shareholders and £175 million for the completion of the Sky Deutschland squeeze-out. The ratio of net debt to reported adjusted EBITDA at 31 March was approximately 3.0 times (2015: 2.8 times). The group has excellent liquidity with cash of £1.7 billion as at 31 March 2016 and access to a £1 billion Revolving Credit Facility which remained wholly undrawn throughout the period.

Schedule 1

Group KPI Summary (unaudited)

- Wholesale customers taking at least one paid-for Sky channel. The customer numbers are as reported to us at the end of March 2016.

- In the UK and Ireland, paid-for products includes TV, Sky+ HD, Multiscreen, Sky Go Extra, Broadband, Line Rental and Telephony.

- In Italy, paid-for products includes TV, Multivision and paying HD.

- In Germany and Austria, paid-for products includes TV, Second Smartcard, Premium HD and Mobile TV.

- ARPU is quarterly annualised, residential and presented as a monthly amount.

- Churn is 12 month rolling and includes residential customers only, unless otherwise stated.

Enquiries:

There will be a conference call for analysts and investors at 8.30 a.m. (BST). Participants should register by contacting Holly Dymock on +44 20 7251 3801 or at [email protected]. There will be a separate conference call for US analysts and investors at 10.00 a.m. (EDT). To register for this please contact Dana Diver at Taylor Rafferty on +1 212 889 4350. Alternatively you may register online at http://www.invite-taylor-rafferty.com/_sky/2016Q3. A live webcast of both conference calls will be available via the Sky website at http://www.sky.com/corporate. Replays will subsequently be available.

Use of measures not defined under IFRS

This press release contains certain information on the Group's financial position, results and cash flows that have been derived from measures calculated in accordance with IFRS. This information should not be read in isolation from the related IFRS measures.

Forward looking statements

This document contains certain forward looking statements with respect to the Group's financial condition, results of operations and business, and our strategy, plans and objectives for the Group. These statements include, without limitation, those that express forecasts, expectations and projections, such as forecasts, expectations and projections in relation to new products and services, the potential for growth of free-to-air and pay television, fixed line telephony, broadband and bandwidth requirements, advertising growth, DTH and OTT customer growth, On Demand, NOW TV, Sky Go, Sky Go Extra, Sky+ HD, Sky Q, Sky Store, Sky Online, mobile, Multiscreen and other services penetration, revenue, administration costs and other costs, advertising growth, churn, profit, cash flow, products and our broadband network footprint, content, wholesale, marketing, synergies and integration, and capital expenditure.

Although the Company believes that the expectations reflected in such forward looking statements are reasonable, these statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied or forecast in the forward looking statements. Information on the significant risks and uncertainties are described in the "Principal risks and uncertainties" section of Sky's Annual Report for the full year ended 30 June 2015 (as updated in Sky's results for the six months ended 31 December 2015).

All forward looking statements in this document are based on information known to the Group on the date hereof. The Group undertakes no obligation publicly to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.