Results for the twelve months ended 30 June 2010

RNS Number : 1216Q

British Sky Broadcasting Group PLC

29 July 2010

 

BRITISH SKY BROADCASTING GROUP PLC

Results for the twelve months ended 30 June 2010

STRONG OPERATIONAL PERFORMANCE DELIVERING STRONG FINANCIAL RESULTS

High levels of customer demand continue in the fourth quarter

·; Net growth of 90,000 to reach 9.860 million customers

·; Strong take-up of additional subscription products with 958,000 net additions to reach 11.7 million

·; Another excellent quarter for Sky+HD with 429,000 net additions; reaching 30% penetration

·; Investment in standout content: multi-year partnership will make Sky the home of HBO in the UK; new slate of original comedy for Sky1 HD; acquisition of Living TV Group completed; HD line-up reaches 43 channels

·; One in five customers now taking each of TV, broadband and telephony, up 36% year on year; broadband and telephony profitable in the quarter

Increased returns and double-digit growth across the board

·; Adjusted revenue up 11% to £5,912 million; reported revenue up 10%

·; Adjusted EBITDA of £1,192 million, up 11%

·; Adjusted operating profit up 10% to £855 million; reported operating profit up 35% to £1,096 million

·; Record adjusted basic EPS of 31.1 pence, up 20%; basic EPS of 50.4 pence up 238%

·; Fourth quarter adjusted operating margin expands to 15.5%, moving through investments in HD and broadband

·; Adjusted free cash flow up 23% to £626 million; free cash flow including one-off receipts up 69% to £800 million

·; Full year dividend increased by 10% to 19.40 pence per share, doubled in five years

 

Note: See tables overleaf, note 7 and Appendix 3 for reconciliation to reported results and page 18 for definition of terms

 

Results highlights

 

Customer Metrics (unaudited)

	Quarterly Net Additions			Closing Base
'000s	30-Jun-10	30-Jun-09		30-Jun-10
Net Customer Additions	90	124		9,860
Additional products
Sky+HD	429	291		2,939
Multiroom	59	66		2,121
Broadband	119	118		2,624
Telephony	137	155		2,367
Line rental	214	244		1,686
Other metrics
Gross additions for the quarter (000)	348	356
Churn for the quarter (annualised %)	10.5%	9.9%
ARPU (£)	£508	£464

 

Business Performance (unaudited) 

 

£'millions	12 months to Jun-10	12 months to Jun-09	% movement
Adjusted revenue(1)	5,912	5,323	11%
Adjusted operating profit(2)	855	780	10%
% Adjusted operating profit margin	14.5%	14.7%
Adjusted EBITDA(2)	1,192	1,071	11%
Adjusted basic earnings per share(3)	31.1p	25.9p	20%
Adjusted free cash flow(2)	626	508	23%

 

Statutory Results

 

£'millions	12 months to Jun-10	12 months to Jun-09		% movement
Revenue	5,912	5,359		10%
Operating profit	1,096	813		35%
Cash generated from operations	1,634	1,205		36%
Basic earnings per share	50.4p		14.9p	238%

 

1 Adjusted revenue for the 12 months ended 30 June 2009 excludes £36 million invoiced in prior years which did not meet revenue recognition criteria under IFRS until March 2009.

2 A reconciliation of adjusted operating profit, adjusted EBITDA and adjusted free cash flow to reported measures is set out in Appendix 3.

3 Adjusted basic EPS is based on adjusted profit for the year. A reconciliation of reported profit for the year to adjusted profit for the year is set out in note 7 to the consolidated financial information on page 27.

 

 

Jeremy Darroch, Chief Executive, said:

 

"We've had another good quarter to bring our financial year to a strong close. Customers are choosing Sky in ever greater numbers, not just for TV but across our entire product range.

 

"High definition goes from strength to strength, with more than twice as many customers as a year ago. At the same time, customers are choosing broader bundles of services, with one in five now taking all three of TV, broadband and telephony. Overall, customers are taking 45% more additional subscription products than a year ago.

 

"Strong customer demand is increasingly reflected in our financial results, with double-digit growth in each of revenue, operating profit and cash flow. Earnings per share are up 20% to a record 31.1p and we are proposing a further 10% increase in the full year dividend, which has now doubled over the last five years.

 

"Today we're announcing new plans to bring even more standout content to customers. A multi-year partnership will make Sky the exclusive home of new HBO programming and we're looking forward to a new slate of original UK comedy on Sky1 HD and the launch of 3D TV to residential customers on 1 October. The recent acquisition of the Living TV Group will help us to broaden our entertainment offering still further in the future.

 

"It has been a good year for Sky but we stay focused on the challenge ahead. The economic outlook remains uncertain and, against that backdrop, we'll pursue the consistent set of priorities that have served us well so far. Executing on these plans will build a larger, more profitable business for the long term."

 

 

OPERATIONAL REVIEW

The business performed well in what continues to be a tough consumer environment, with strong demand for our products across the board.

 

Net customer additions for the quarter to 30 June 2010 ("the quarter") were 90,000, bringing the total base to 9.860 million. Within this, gross additions were 348,000 and churn for the quarter was 10.5%, bringing the figure across the year to 10.3%, flat on the prior year.

 

We continue to see good success in our multi-product strategy, with net additional subscription product sales of 958,000 in the quarter, taking the cumulative 12 month figure to 3.6 million, up 21%. HD was a key driver of this performance, with net additions more than doubling year on year. In addition we continue to grow our share in broadband and telephony and, today, one in five of our customers takes each of TV, broadband and telephony - from a standing start four years ago. As customers reward us with more of their business, ARPU reached a new high of £508, up 9% on the prior year.

 

Content

 

Customers are responding strongly to the breadth and depth of our TV offering. Sky1 continued its track record of bringing more cut-through content to customers, achieving strong audiences in the quarter for talked-about programmes such as 'Pineapple Dance Studios', 'Modern Family', 'Strike Back' and 'Going Postal'. As a measure of success the number of Sky1 shows achieving audiences in excess of one million almost doubled during the year.

 

Sky News HD, Europe's first HD news channel, launched on 6 May 2010, to coincide with the General Election. A total of 20 million viewers across the UK tuned in to watch Sky News during the quarter, up 15% year on year. The Sky News Leaders' Debate, broadcast live from Bristol on 22 April, attracted Sky News' highest ever audience, reaching 6.5 million viewers across all channels on which the programme was shown.

 

Sky Arts continues to demonstrate how we can offer distinctive content to underserved segments of the audience. Average monthly reach across the Sky Arts portfolio increased to 1.7 million in the quarter, up 16% on the prior year, with high-quality, original content including 'In Confidence', 'Songbook', 'Playhouse Live' and 'The Book Show', presented by Mariella Frostrup. Since the year end, Sky Arts announced that Melvyn Bragg will be joining the channel to present the South Bank Sky Arts Awards, due to air on Sky Arts 1 HD in early 2011. He will also front a series of profile documentaries around each of the winners, to air on Sky Arts in the wake of the ceremony.

 

During the quarter, Sky Sports benefited from a strong close to the Premier League season and drew its highest ever audience for cricket, with 2.3 million viewers to the World Twenty20 final. Following the launch of Sky Sports News HD in August, the only place to enjoy the breadth and depth of all five Sky Sports channels in HD will be on Sky. At the same time, Sky Sports News will become a pay-exclusive channel.

 

Looking to the year ahead, Sky Sports will have more great live coverage for customers, with the Ryder Cup, the Ashes series in Australia and 25% more live Premier League games than last season. In entertainment, we will bring more high-quality content to customers through a new partnership with HBO - which will make Sky the home of HBO programming in the UK. We will bring more British productions to Sky1, including a new slate of original comedy backed by well known talent including Ruth Jones, Victoria Wood and Catherine Tate. We will also use the acquisition of the Living TV Group to broaden further the appeal of our basic channels.

 

Leadership in HD

 

We continue to see strong demand for Sky+HD from both new and existing customers, meaning that today 30% of customers choose to pay for our best viewing experience, the top end of our original range of expectations. Supported by a successful advertising campaign around the FIFA World Cup finals, we added 429,000 net HD customers in the quarter, bringing twelve month cumulative growth to 1.6 million.

 

Ownership of HD TV sets continues to rise and this calendar year will see the number of HD-Ready households exceed standard definition homes. We identified the opportunity in HD early and have seen a strong response to our decision to lower the upfront cost of the box, first in January 2009 and again in January 2010. The second of these reductions was fully funded through supply chain efficiencies, with no impact on per-customer economics. In 18 months, the percentage of customers choosing HD has more than tripled and as a result HD is generating a significant, high-margin revenue stream.

 

Other broadcasters are now following our lead in HD and, as a result, awareness is building, with HD increasingly becoming the new standard for TV. While we have made significant progress to date, we continue to see good headroom for growth. We are well placed to take advantage of this, with our leading box technology and the broadest HD content offering in the market, available for just 30p extra a day. As at 29 July, and following the launch of Five HD on Sky this month, we now offer 43 HD channels on our platform, with plans in place to reach 50 by the end of calendar 2010.

 

Innovation

 

Building on our success in high definition, all new and upgrading customers now receive an HD box as standard and those subscribing to the HD channel pack for the first time receive their box for free.

 

Getting our best boxes into customers' homes allows us to innovate and launch new features at an accelerated rate. This autumn, we will launch our Sky 3D channel to residential customers, offering a wide range of 3D programming in sports, movies, entertainment, arts and documentaries. Our first original commission in 3D is 'Flying Monsters', a two-part natural history feature presented by Sir David Attenborough. The residential launch follows the successful introduction of Sky 3D to commercial customers in April 2010. Since launch, over 1,400 pubs and clubs have enjoyed access to live 3D sports coverage, including football, rugby union, rugby league, cricket and darts.

 

We also have a pipeline of products maximising the benefits of the broadband connectivity of the HD box. Later this year we will launch our full video-on-demand service, 'Anytime+', giving customers access to a broad range of content from Sky channels, third-party broadcasters and over 500 movies on demand.

 

We are also offering customers new ways to enjoy our content, by extending the distribution of Sky Player and our Mobile TV products. This quarter we announced the launch of Sky Mobile TV on the iPad which, together with the iPhone, Xbox and PC, allows us to reach out to new customers via new platforms.

 

Broadband and Telephony

 

We continued to see strong demand for our home communications products, with one in five of our customers now taking all three of TV, broadband and telephony, up 36% year on year. During the quarter we added 119,000 broadband customers, 137,000 telephony customers and 214,000 line rental customers. Following the completion of the roll-out of our fully unbundled network, we now have 883,000 customers on our network.

 

This quarter, we improved significantly the returns in our broadband and telephony business, as it moved into profitability for the first time. This performance reflected a number of initiatives over the last 18 months, including an improved take-up of bundled products and a continued focus on cost efficiency. As a result, we have improved the economics of growth going forward, with every broadband customer now making a positive financial contribution.

 

On 1 June 2010 we announced new and simplified pricing for our broadband products. All on-net customers now receive speeds of up to 20Mb, with packages differentiated by usage. We now offer a free product for light internet users and a £7.50 'Unlimited' product for heavier users which, with no usage cap or fair usage policy, is the only genuinely unlimited service of its kind in the UK. For each of these products, there is a £5 monthly surcharge for customers not subscribing to Sky Talk. Alongside these changes we have also improved our operational processes, reducing provisioning time for new customers and increasing the proportion of new customers that join us directly on our fully unbundled network - in the quarter around 40% of new broadband and telephony customers were fully unbundled.

 

We see good headroom to grow further, with 7.8 million customers yet to take all three of TV, broadband and telephony. We are increasing the availability of our communications products to existing customers by putting plans in place to increase our network footprint above our current 74% coverage. In addition, we have extended the availability of our broadband products beyond DTH customers, with the launch of a standalone 'Unlimited' broadband product (no Sky TV subscription required) for an incremental monthly fee of £2.50.

 

The Bigger Picture

 

The quarter saw us build further on our positive contribution to UK life through our Bigger Picture initiative, which looks to combat climate change, to increase participation in sport and to bring more of the arts to more people.

 

We continue to work in partnership with WWF on our Sky Rainforest Rescue campaign, which aims to save one billion trees in Brazil's Amazon rainforest. In April, we broadcast a special week of programming including 'Ross Kemp: Battle for the Amazon' on Sky1 and the singer, Lily Allen, travelled to the region to witness the impact of deforestation, resulting in high profile coverage in the national media.

 

In our fourth year as broadcast sponsor of the Hay festival, Sky Arts broadcast a total of 32 hours from the festival, including a daily version of 'The Book Show', a special 'Songbook' recording with Kelly Jones of 'Stereophonics', and 20 of the best Hay Sessions.

Continuing our ambitious project to promote cycling, we have expanded the number of Sky Rides in 2010 to 12, with free, mass-participation events at locations including London, Glasgow and Birmingham. Sky and the Greater London Authority recently won the Sports Industry 'Sport Participation Event of the Year' award for the Mayor of London's Sky Ride 2009 and so far Sky's cycling activities have encouraged over 298,000 people to cycle more frequently. Team Sky, the new professional road racing team, continued its first season with a debut appearance in the Tour de France, as we look to inspire a new generation to take up cycling at all levels.

 

 

FINANCIAL SUMMARY

 

For the twelve months ended 30 June ("the year"), we delivered double-digit growth in each of revenue, operating profit, cash flow and earnings. Reported operating profit was £1,096 million (2009: £813 million) and included a net exceptional gain of £241 million (2009: £33 million gain), leading to adjusted operating profit of £855 million (2009: £780 million). Reported profit after tax of £878 million (2009: £259 million) included a net exceptional gain of £336 million (2009: £192 million loss), leading to adjusted profit after tax of £542 million (2009: £451 million). For more information on adjusting items please refer to "Exceptional Items" on page 12.

 

Adjusted revenue increased by 11% to £5,912 million, reflecting a growing customer base and success in our multi-product strategy. Adjusted operating profit was 10% higher, at £855 million, generating margin of 15.5% in the fourth quarter, the second successive quarter of increase and the highest quarterly margin for two years. Adjusted basic earnings per share (EPS) increased by 20%, to reach a record 31.1 pence. Adjusted free cash flow, excluding exceptional items, increased by 23% to £626 million, as we once again efficiently converted profit to cash.

 

Reported revenue of £5,912 million includes £619 million related to Sky Broadband and Talk and £203 million related to Easynet. Reported operating profit of £1,096 million includes operating losses of £38 million attributable to Sky Broadband and Talk and an operating loss of £18 million from Easynet.

 

Revenue

 

Group revenue, excluding exceptional items, increased to £5,912 million (2009: £5,323 million), up 11% year on year (up 10% on a reported basis).

 

There was a particularly strong performance in retail subscription revenue which increased by 15%, excluding exceptional items, to £4,761 million (2009: £4,141 million), reflecting a 4% increase in customers and a £44 year on year increase in ARPU.

 

Wholesale subscription revenue increased by £32 million to £238 million (2009: £206 million), benefiting from a higher number of subscribers to our premium channels and the return of Sky's basic channels to the cable platform.

 

In advertising, we increased our estimated share of the advertising sector by around two percentage points to 15.8%. Revenue for the year was 4% higher at £319 million (2009: £308 million) with accelerated growth in the second half. Our growth for the year was in line with the sector and in the fourth quarter our revenues were 18% higher, slightly behind the growth in the sector, which benefited from the FIFA World Cup being on terrestrial channels. While we remain cautious on the outlook for advertising our agreement with Viacom and our acquisition of the Living TV Group position us well.

 

Easynet revenue was level year on year at £203 million (2009: £202 million). On 21 July 2010, the Group announced that it entered an agreement with Lloyds TSB Development Capital ("LDC"), over the sale of Easynet Global Services. For more information, please refer to the Corporate Section.

 

Installation, hardware and service revenue was £174 million (2009: £235 million), with the doubling of HD customer additions more than offset by the lower retail price of a Sky+HD box.

 

Other revenue of £217 million (2009: £231 million) was 6% lower year on year, with the loss of conditional access fees from Setanta and the absence of third party set-top box sales associated with the former Amstrad business. This was partially offset by higher Sky Bet revenues.

 

Direct Costs

 

Direct costs increased as the result of our continued investment in content and the strong growth in our broadband and telephony business. Within this, programming costs were 9% higher year on year at £1,902 million (2009: £1,750 million), with increased investment across most categories, partially offset by rate savings in movies.

 

Sports costs accounted for two thirds of the year on year increase, reflecting additional UEFA Champions League rights, new deals such as US PGA Tour golf and renewals for the Football League and rugby's Super League. Third party channel costs were also higher reflecting the new retail relationship with ESPN, as well as the launch of a further nine HD channels during the year and the full year impact of launches in the prior period. Entertainment and News spend increased slightly on the comparative period, with increased investment in more original commissions. Increases were partially offset by lower movie costs, which benefited from improved terms on recent renewals from some of the major studios.

 

Direct network costs increased to £518 million (2009: £373 million) as a result of the 19% increase in broadband customers, the 28% increase in telephony customers and the 84% increase in line rental customers. In addition, we completed the migration of eligible customers to our fully unbundled network in the year, with all related charges fully expensed upfront. On an on-going basis migrating customers directly lowers the regulated monthly costs per customer by £2.43.

 

Other Operating Costs

 

Marketing costs increased by £211 million to £1,118 million (2009: £907 million), primarily reflecting the volumes of HD additions doubling year on year and our policy of expensing customer acquisition costs upfront. The proportion of new customers subscribing to HD directly on joining increased year on year, with almost half of gross additions in the fourth quarter choosing to pay an additional £10 a month for our HD channel pack. Above the line spend was also higher in the year as we continued to focus on HD in our marketing.

 

Subscriber management and supply chain costs (excluding exceptional items) were reduced by £24 million to £638 million (2009: £662 million), reflecting continued focus on operational efficiencies. In particular, we have achieved lower set-top box costs through greater in-sourcing of box design and manufacture, helping to offset the 21% year on year increase in net additional subscription product sales. This quarter we introduced a self-install option for upgrading customers, allowing our engineers to focus on more complex jobs and around half of eligible customers chose this option.

 

The cost to acquire a new subscriber ("SAC") increased by £31 to £339. This increase reflects strong demand for HD from customers joining Sky for the first time, offset by continued efficiencies in our supply chain and routes to market.

 

Transmission, technology and fixed network costs increased by £21 million to £374 million (2009: £353 million), reflecting higher IT costs and a stronger euro impacting transponder costs.

 

We have maintained tight control of 'back office' costs. Administration costs (excluding exceptional costs) were 2% higher at £507 million (2009: £498 million), reducing as a percentage of sales by a further 80 basis points. Over the last two years we have held administration costs broadly flat, achieving 150 basis points of improvement in operating margin.

 

Earnings

 

Net interest was £132 million (2009: £161 million), excluding income relating to the EDS litigation settlement, gains and losses relating to the remeasurement of derivative financial instruments not qualifying for hedge accounting and gains and losses arising from designated fair value hedge accounting relationships. Reported net interest payable was £70 million (2009: £185 million).

 

Profit before tax of £1,173 million (2009: £456 million) includes the Group's share of results of joint ventures and associates of £32 million (2009: £19 million), a net interest charge of £70 million (2009: £185 million) and a profit on disposal of ITV shares of £115 million (2009: impairment charge of £191 million).

 

Taxation for the period was £295 million (2009: £197 million). The full year adjusted effective tax rate was 28%, as a result of new rules exempting foreign dividends from UK tax and the impact of the movement in share price on the tax accounting for share options.

 

Adjusted profit for the period was £542 million (2009: £451 million), translating into 20% growth in adjusted basic earnings per share of 31.1 pence (2009: 25.9 pence).

 

Including all exceptional items, reported profit for the period was £878 million (2009: £259 million), generating reported basic earnings per share of 50.4 pence (2009: 14.9 pence).

 

Distributions to shareholders

 

The Directors propose an increase of 10% in the full year dividend to 19.40 pence, continuing our track record of dividend growth.

 

The ex-dividend date will be 20 October 2010 and, subject to shareholder approval at the Annual General Meeting to be held on 22 October 2010, the final dividend of 11.525 pence will be paid on 12 November 2010 to shareholders appearing on the register at the close of business on 22 October 2010.

 

Cash Flow and Financial Position

 

Adjusted free cash flow increased by 23% to £626 million, reflecting 11% growth in adjusted EBITDA, improved working capital and lower interest payments. This excludes £229 million cash received from EDS litigation settlement after tax, and £1 million of associated costs, as well as a £3 million receipt on closure of a joint venture and £57 million for the purchase of freehold land (2009: £24 million). Adjusted free cash flow for the prior year excluded £7 million relating to a restructuring exercise. Free cash flow including these items was £800 million, up 69%.

 

During the year we completed the purchase of freehold land and buildings immediately adjacent to our Osterley site for £57 million and let the site back to the current occupant in the short term. The comparative period included £24 million relating to the purchase of the freehold of part of our existing site. Both of these allow us to consolidate operations into a single, sustainable campus and make the most efficient use of our existing Osterley site. Excluding these amounts, capital expenditure was 3% higher, at £387 million.

 

Strong cash flow generation during the year has contributed to the reduction in net debt of £660 million to £1,076 million (2009: £1,736 million), for a reconciliation of net debt see Appendix 3. The combination of falling net debt and higher EBITDA over the past 12 months has reduced the Group's net debt to EBITDA ratio to 0.9x, compared to 1.6x as at 30 June 2009.

 

The Group's liquidity and headroom are comfortable with no bond redemptions falling due until October 2015. As at the end of the year, cash and cash equivalents and short-term deposits were £1,049 million and, in the fourth quarter, we extended our £750 million Revolving Credit Facility (RCF) by an additional year to 30 July 2013.

 

Exceptional Items

 

Results for the year included a net exceptional gain of £336 million (2009: £192 million loss), of which £241 million is included within operating profit (2009: £33 million gain). The total amount has been excluded from adjusted profits and earnings to show the underlying performance of the business.

 

The exceptional gain of £336 million comprises six elements:

 

·; Full and final settlement gain for litigation between Sky and EDS of £318 million; other related items £4 million gain.

·; Restructuring charge of £32 million relating to reorganisation costs and asset impairments.

·; Profit on disposal of £115 million from the placement of 404 million ITV shares (2009: impairment of £191 million).

·; Mark to market gains of £13 million, relating to derivative financial instruments not qualifying for hedge accounting and gains and losses arising from designated fair value hedge accounting relationships, recorded within net interest (2009: £24 million loss).

·; A £3 million gain from joint ventures and associates, related to a one-off receipt on closure of one of our joint ventures.

·; The related tax effect of the above items resulted in an exceptional tax charge of £85 million (2009: £4 million).

For a full reconciliation between adjusted and reported profit see note 7 on page 27 and between adjusted and reported operating profit see Appendix 3 on page 33.

 

In relation to the EDS settlement, £269 million was recorded within Litigation settlement income (included within Operating profit) and £49 million within Investment income on litigation settlement. In addition, a £5 million credit related to the cancellation of accounts payable and was recorded within Subscriber management and supply chain costs, and a legal expense of £1 million was recorded within Administration costs (2009: £3 million).

 

In relation to the restructuring charge of £32 million, £10 million was recorded within Administration costs and related to restructuring costs which comprise principally redundancy payments incurred as part of business-wide actions to improve operational efficiency. The remaining £22 million was recorded within Subscriber management and supply chain costs and relates to the impairment of Picnic - our proposed pay TV service over the DTT network. Picnic was proposed in February 2007 and in April 2007 Sky submitted its application to Ofcom for the necessary approvals. In September 2008, with Ofcom's consideration of Sky's proposals still ongoing, Sky announced its decision to suspend its preparations and cease work on the project. The impairment reflects our decision not to proceed with a DTT pay service in the form originally envisaged.

 

Results in the prior year also included an adjustment to Retail subscription revenue of £36 million representing amounts invoiced in prior years, which did not meet revenue recognition criteria under IFRS until March 2009 and an adjustment of £6 million relating to a deferred tax write-off following a change in law in the period in respect of industrial building allowances.

 

Corporate

 

News Corporation Proposal

On 10 June 2010 the Group received a proposal from News Corporation that could lead to an offer for the entire share capital of BSkyB not already owned by News Corporation ("the Proposal"). The Proposal, which is not a formal offer, is subject to regulatory and financing pre-conditions. Recognising that an offer from News Corporation could be in the interests of BSkyB shareholders in the future, and that obtaining any necessary merger clearances would facilitate such an offer, BSkyB has agreed to co-operate with News Corporation in seeking those clearances from the relevant authorities.

 

The Board of BSkyB has passed a resolution to appoint a committee comprising the Independent Directors and the Executive Directors with authority to exercise all powers of the Board in relation to the possible offer and any matters relevant to the Proposal. These Directors, who constitute a majority of the Board of BSkyB, intend to exercise their rights and powers to manage the governance of the Board during this period in the best interests of all shareholders. In recognition of this, the Board appointed Nicholas Ferguson, the Senior Independent Non-Executive Director, as Deputy Chairman of the Board with effect from 16 June 2010.

 

For further detail of the Proposal please refer to the Group's statement of the 15 June available on our Corporate website (www. sky.com/corporate).

 

Living TV Group

On 4 June 2010 we announced the acquisition of Virgin Media Television (subsequently renamed the "Living TV Group") for consideration of up to a maximum of £160 million. On 12 July 2010 we were granted Irish approval and the transaction completed. £105 million was paid immediately upon completion. The outstanding contingent consideration of £55 million is payable upon receipt of UK regulatory clearance for the transaction. The Group notified the transaction to the OFT on 9 July 2010. The OFT has started its review of the transaction and issued its invitation to third parties to comment on the transaction on 20 July 2010. We will use these channels to expand the appeal of our basic channel offering, with the Living channel, in particular, further complementing our existing strengths. We will see immediate financial and strategic benefits, saving third party channel costs and securing additional advertising revenue. The acquisition is expected to be earnings accretive before integration costs in its first year.

 

Easynet

On 21 July 2010 the Group announced that it entered an agreement over the sale of its business-to-business telecommunications operation, Easynet Global Services, to LDC, a leading UK private equity company. LDC will pay £100 million for the business on completion of the transaction, subject to regulatory approval. The existing Easynet management team, including current CEO David Rowe, will be retained by LDC, which is fully funded by the Lloyds Banking Group.

 

Sky will retain the UK network assets that it acquired as part of the original acquisition of Easynet Group in 2005. As part of the sale, Sky and LDC will enter into a long-term supply agreement to grant Easynet Global Services continued access to Sky's fibre network, which continues to support the fast-growing Sky Broadband and Sky Talk services. On completion, Sky will recognise a profit on disposal and the transaction is expected to be neutral to operating profit on an ongoing basis.

 

Ofcom Pay TV Review

On 1 June 2010 the Group submitted to the Competition Appeal Tribunal ("CAT") its substantive appeal against Ofcom's decision of 31 March 2010, imposing wholesale must-offer obligations on Sky ("WMO Obligations") in respect of Sky Sports 1, Sky Sports 2, Sky Sports 1 HD and Sky Sports 2 HD. Ofcom has until 30 November 2010 to file its defence. In April 2010 Sky applied to the CAT for a suspension of the WMO Obligations. On 29 April 2010, Sky's application was resolved by way of an agreed Order from the CAT, suspending certain aspects of Ofcom's decision pending the outcome of the appeal. In summary, the effect of the Order is that the WMO initially applies only in respect of BT, Top-Up TV and Virgin Media in respect of DTT and Virgin Media in respect of cable. BT, Top-Up TV and Virgin Media will pay Sky the equivalent of the maximum prices Sky may charge for Sky Sports 1 and/or Sky Sports 2 under the WMO Obligation, with the difference between that and the relevant rate card prices paid into escrow; at the conclusion of the appeal, the CAT will determine the distribution of monies held in escrow.

 

US Registration

In the quarter we completed the required filings with the Securities Exchange Commission ("SEC") to withdraw our SEC registration and expect that deregistration will become effective on 20 August 2010.

 

We have maintained a Level One American Depositary Receipt (ADR) programme on OTCQX, to ensure that US shareholders can receive dividends and daily pricing of our ADRs in US dollars and remain committed to a full programme of US investor relations activities.

 

Enquiries:

 

Analysts/Investors:

 

Francesca Pierce	Tel:	020 7705 3337
Lang Messer	Tel:	020 7800 2657

 

E-mail: [email protected]

 

Press:

 

Robert Fraser	Tel:	020 7705 3706
Bella Vuillermoz	Tel:	020 7705 3916

 

E-mail: [email protected]

 

There will be a presentation to analysts and investors at 09:45 a.m. BST today. Participants must register by contacting Emily Dimmock or Yasmin Charabati on +44 20 7251 3801 or at [email protected]. In addition, a live webcast of this presentation to UK/European analysts and investors will be available via http://www.sky.com/investors and subsequently available for replay.

 

There will be a separate conference call for US analysts and investors at 09.30 a.m. (EST). To register for this please contact Dana Diver at Taylor Rafferty on +1 212 889 4350. Alternatively you may register online at http://invite.taylor-rafferty.com/_bskyb/cc. A live webcast of this presentation will be available today on Sky's corporate website, which can be found at www.sky.com/corporate.

An interview with Jeremy Darroch, CEO, and Andrew Griffith, CFO, in audio / video and transcript will be available from 7:00 a.m. BST today at www.sky.com/corporate and www.cantos.com.

 

 

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 of 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 management's strategy, plans and objectives for the Group. These statements include, without limitation, those that express forecasts, expectations and projections 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+, Sky+HD and other services penetration, churn, DTH and other revenue, profitability and margin growth, cash flow generation, programming costs, subscriber management and supply chain costs, administration and other costs, marketing expenditure, capital expenditure programmes, liquidity and proposals for returning capital to shareholders.

 

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, these statements (and all other forward-looking statements contained in this document) 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 materially from those expressed or implied or forecast in the forward-looking statements. These factors include, but are not limited to, the fact that the Group operates in a highly competitive environment, the effects of laws and government regulation upon the Group's activities, its reliance on technology, which is subject to risk, change and development, failure of key suppliers, its ability to continue to obtain exclusive rights to movies, sports events and other programming content, risks inherent in the implementation of large-scale capital expenditure projects, the Group's ability to continue to communicate and market its services effectively, and the risks associated with the Group's operation of digital television transmission in the U.K. and Ireland.

 

Information on significant risks and uncertainties are described in the "Principal risks and uncertainties" section of Sky's Interim Management Report for the half year ended 31 December 2009. Copies of the Interim Management Report are available from the British Sky Broadcasting Group plc web page at www.sky.com/corporate. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in the Company or any other entity and must not be relied upon in any way in connection with any investment decision. 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.

 

Appendix 1 - Glossary

 

Useful definitions	Description
Adjusted earnings per share (EPS)	Adjusted profit for the period divided by the weighted average number of ordinary shares during the period.
Adjusted operating profit and margin	Operating profit excluding exceptional items. Adjusted operating margin is stated as a percentage of adjusted revenue.
Adjusted profit for the period	Profit for the period adjusted to remove exceptional items and related tax effects
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 number of customers over a given period that terminate their subscription in its entirety, net of former customers who reinstated their subscription in that period (where such reinstatement is within a 12 month period of the termination of their original subscription), expressed as an annualised percentage of total average customers for the period.
Customer	A subscriber to a DTH service.
DSL	Digital Subscriber Line
DTH	Direct-to-Home: the transmission of satellite services and functionality with reception through a mini dish. The Group also retails certain Sky Channels to a limited number of DSL subscribers (references throughout to 'DTH subscribers' include DSL subscribers).
EBITDA	Earnings before joint ventures, interest, taxation, depreciation and amortisation is calculated as operating profit before depreciation, amortisation and impairment of property, plant and equipment and intangible assets.
Exceptional Items	Items that arise from events or transactions that fall within the ordinary activities of the Group, but which management believes should be separately identified to help explain underlying performance.
Free cash flow	The amount of cash generated by Sky after meeting obligations for interest and tax, after all capital expenditure and net cash flows relating to joint ventures and associates.
HD	High Definition television.
Multiroom	Installation of an additional set-top box in the household of an existing customer.
Net debt	Borrowings net of cash and cash-equivalents, short-term deposits, and borrowings related derivative financial instruments
Sky Broadband and Talk	Residential Sky Broadband and Sky Talk customers. UK Online customers are excluded from quoted subscriber figures.
Sale	A sale is a gross addition of any product.
Sky+	Sky's fully-integrated Personal Video Recorder (PVR) and satellite decoder. This includes Sky+HD decoders.
Viewing share	Number of people viewing a channel as a percentage of total viewing audience.

 

 

Appendix 2 - Consolidated Financial Information

 

Consolidated Income Statement for the year ended 30 June 2010

 

		2010	2009
	Notes	£m	£m
Revenue	1	5,912	5,359
Operating expense	2	(5,085)	(4,546)
Litigation settlement income	3	269	-
Operating profit		1,096	813
Share of results of joint ventures and associates	11	32	19
Investment income on litigation settlement	3	49	-
Investment income	4	3	35
Finance costs	4	(122)	(220)
Impairment of available-for-sale investment	5	-	(191)
Profit on disposal of available-for-sale investment	5	115	-
Profit before tax		1,173	456
Taxation	6	(295)	(197)
Profit for the year attributable to equity shareholders of the parent company		878	259
Earnings per share from profit for the year (in pence)
Basic	7	50.4p	14.9p
Diluted	7	50.1p	14.8p
Adjusted earnings per share from adjusted profit for the year (in pence)
Basic	7	31.1p	25.9p
Diluted	7	30.9p	25.7p

 

 

Consolidated Statement of Comprehensive Income for the year ended 30 June 2010

 

		2010	2009
		£m	£m
Profit for the year attributable to equity shareholders of the parent company		878	259
Other comprehensive income
Amounts recognised directly in equity
Exchange differences on translation of foreign operations		8	19
Gain on revaluation of available-for-sale investments		117	96
Gain on cash flow hedges		160	377
Tax on cash flow hedges		(45)	(105)
		240	387
Amounts reclassified and reported in the income statement
Cash flow hedges		(89)	(351)
Tax on cash flow hedges		25	98
Transfer to income statement on disposal of available-for-sale investment		(115)	-
		(179)	(253)
Other comprehensive income for the year (net of tax)		61	134
Total comprehensive income for the year attributable to equity shareholders of the parent company		939	393

 

Condensed Consolidated Income Statement for the three months ended 30 June 2010

 

		2009/10 Three months ended 30 June £m (unaudited)	2008/09 Three months ended 30 June £m (unaudited)
Revenue		1,529	1,363
Operating expense		(1,319)	(1,172)
Litigation settlement income		241	-
EBITDA		563	271
Depreciation and amortisation		(112)	(80)
Operating profit		451	191
Share of results of joint ventures and associates		11	4
Investment income on litigation settlement		40	-
Investment income		1	2
Finance costs		(37)	(80)
Profit on disposal of available-for-sale investment		-	-
Profit before tax		466	117
Taxation		(130)	(27)
Profit for the quarter attributable to equity shareholders of the parent company		336	90
Earnings per share from profit for the quarter (in pence)
Basic		19.3p	5.2p
Diluted		19.1p	5.1p
Adjusted earnings per share from adjusted profit for the quarter (in pence)
Basic		8.8p	6.7p
Diluted		8.7p	6.6p

 

 

Consolidated Balance Sheet as at 30 June 2010

 

		2010	2009
	Notes	£m	£m
Non-current assets
Goodwill		852	852
Intangible assets	9	336	345
Property, plant and equipment	10	899	799
Investments in joint ventures and associates	11	149	135
Available-for-sale investments	12	182	261
Deferred tax assets	13	-	17
Trade and other receivables	15	18	21
Derivative financial assets		382	202
		2,818	2,632
Current assets
Inventories	14	343	386
Trade and other receivables	15	538	613
Short-term deposits		400	90
Cash and cash equivalents		649	811
Derivative financial assets		56	37
		1,986	1,937
Total assets		4,804	4,569
Current liabilities
Borrowings	18	-	465
Trade and other payables	16	1,526	1,492
Current tax liabilities		136	173
Provisions	17	27	18
Derivative financial liabilities		10	46
		1,699	2,194
Non-current liabilities
Borrowings	18	2,458	2,279
Trade and other payables	18	52	66
Provisions	17	11	12
Derivative financial liabilities		17	82
Deferred tax liability	13	7	-
		2,545	2,439
Total liabilities		4,244	4,633
Share capital	19	876	876
Share premium		1,437	1,437
Reserves		(1,753)	(2,377)
Total equity (deficit) attributable to equity shareholders of the parent company		560	(64)
Total liabilities and shareholders' equity (deficit)		4,804	4,569

 

 

Consolidated Cash Flow Statement for the year ended 30 June 2010

 

		2010	2009
	Notes	£m	£m
Cash flows from operating activities
Cash generated from operations	20	1,634	1,205
Interest received		57	47
Taxation paid		(320)	(178)
Net cash from operating activities		1,371	1,074
Cash flows from investing activities
Dividends received from joint ventures and associates		30	20
Net funding to joint ventures and associates		(1)	(3)
Proceeds on disposal of an investment		196	-
Purchase of property, plant and equipment		(261)	(261)
Purchase of intangible assets		(183)	(139)
Purchase of available-for-sale investments		-	(19)
Proceeds on disposal of property, plant and equipment		1	2
(Increase) decrease in short-term deposits		(310)	95
Net cash used in investing activities		(528)	(305)
Cash flows from financing activities
Proceeds from borrowings		-	398
Repayment of borrowings		(495)	(434)
Proceeds from disposal of shares in Employee Share Ownership Plan ("ESOP")		16	1
Purchase of own shares for ESOP		(56)	(40)
Interest paid		(156)	(217)
Dividends paid to shareholders		(314)	(298)
Net cash used in financing activities		(1,005)	(590)
Net (decrease) increase in cash and cash equivalents		(162)	179
Cash and cash equivalents at the beginning of the year		811	632
Cash and cash equivalents at the end of the year		649	811

 

 

Consolidated Statement of Changes in Equity for the year ended 30 June 2010

 

	Share capital £m	Share premium £m	ESOP reserve £m	Hedging reserve £m	Available- for-sale reserve £m	Other reserves £m	Retained  earnings £m	Total  shareholders' (deficit) equity £m
At 1 July 2008	876	1,437	(37)	7	-	335	(2,786)	(168)
Profit for the year	-	-	-	-	-	-	259	259
Exchange differences on translation of foreign operations	-	-	-	-	-	19	-	19
Revaluation of available-for-sale investment	-	-	-	-	96	-	-	96
Recognition and transfer of cash flow hedges	-	-	-	26	-	-	-	26
Tax on items taken directly to equity	-	-	-	(7)	-	-	-	(7)
Total comprehensive income for the year	-	-	-	19	96	19	259	393
Share-based payment	-	-	(36)	-	-	-	48	12
Tax on items taken directly to equity	-	-	-	-	-	-	(3)	(3)
Dividends	-	-	-	-	-	-	(298)	(298)
At 30 June 2009	876	1,437	(73)	26	96	354	(2,780)	(64)
Profit for the year	-	-	-	-	-	-	878	878
Exchange differences on translation of foreign operations	-	-	-	-	-	8	-	8
Revaluation of available-for-sale investment	-	-	-	-	117	-	-	117
Transfer to income statement on disposal of available-for-sale investment	-	-	-	-	(115)	-	-	(115)
Recognition and transfer of cash flow hedges	-	-	-	71	-	-	-	71
Tax on items taken directly to equity	-	-	-	(20)	-	-	-	(20)
Total comprehensive income for the year	-	-	-	51	2	8	878	939
Share-based payment	-	-	26	-	-	-	(36)	(10)
Tax on items taken directly to equity	-	-	-	-	-	-	9	9
Dividends	-	-	-	-	-	-	(314)	(314)
At 30 June 2010	876	1,437	(47)	77	98	362	(2,243)	560

 

 

Notes to the consolidated financial statements

 

The financial information set out in this preliminary announcement does not constitute statutory financial statements for the years ended 30 June 2010 or 2009, for the purpose of the Companies Act 2006, but is derived from those financial statements. Statutory financial statements for 2010, on which the Group's auditors have given an unqualified report which does not contain statements under s. 498(2) or (3) of the Companies Act 2006, will be filed with the Registrar of Companies prior to the Group's next annual general meeting. Statutory financial statements for 2009 have been filed with the Registrar of Companies. The Group's auditors have reported on those accounts; their reports were unqualified and did not contain statements under s. 498(2) or (3) of the Companies Act 2006.

 

Whilst the financial information included in this press release has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use in the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRS. The accounting policies applied in preparing this financial information are consistent with the Group's financial statements for the year ended 30 June 2009 except in relation to the mandatory adoption of new accounting standards and revisions and amendments to existing accounting standards, none of which had any material impact on the Group's results or financial position.

 

1 Revenue

			2010	2009
			£m	£m
Retail subscription (i)			4,761	4,177
Wholesale subscription			238	206
Advertising			319	308
Easynet			203	202
Installation, hardware and service			174	235
Other			217	231
			5,912	5,359

 

 

(i) Included within retail subscription revenue for the year ended 30 June 2009 is £36 million of additional revenue representing amounts invoiced in prior years, which did not meet revenue recognition criteria under IFRS until March 2009.

To provide a more relevant presentation, management has chosen to re-analyse the revenue categories from those previously reported. Easynet revenue is now shown separately and other revenue now principally includes income from Sky Bet, technical platform service revenue and our online portal.

 

2 Operating expense

 

		2010	2009
		£m	£m
Programming		1,902	1,750
Direct networks		518	373
Transmission, technology and fixed networks		374	353
Marketing		1,118	907
Subscriber management and supply chain(i) (ii)		655	662
Administration(i) (iii)		518	501
		5,085	4,546

 

 

(i) Included within operating expense for the year ended 30 June 2010 is £32 million (2009: nil) of expense relating to a restructuring exercise of which £22 million was recorded within subscriber management costs and related to the impairment of assets associated with Picnic (the potential launch of a subscription television service on DTT) and £10 million was recorded within administration costs and related to restructuring costs which comprise principally redundancy payments.

 

(ii) Included within subscriber management and supply chain costs for the year ended 30 June 2010 is a £5 million credit (2009: nil) related to the cancellation of accounts payable on settlement of the claim against EDS.

 

(iii) Included within administration costs for the year ended 30 June 2010 is £1 million (2009: £3 million) of expense relating to legal costs incurred on the Group's claim against EDS.

 

To provide a more relevant presentation, management has chosen to analyse further the operating expense categories from those previously reported and has split Transmission, technology and network costs into Direct network costs (costs directly related to the supply of broadband and telephony services to our consumer and business-to-business customers) and Transmission, technology and fixed network costs.

 

3 Litigation settlement income and investment income on litigation settlement

 

On 26 January 2010, the Technology and Construction Court ("TCC") gave judgment in the litigation between Electronic Data Systems ("EDS") and the Group. The litigation related to EDS' former role as a supplier to the Group as part of the Group's customer relationship management (CRM) project.

 

On 7 June 2010, EDS and the Group fully and finally settled the litigation between them and all related claims (including for damages, costs and interest) for a total amount of £318 million.

 

The Group has recognised £49 million of these payments in investment income on litigation settlement. This allocation was based on the Group's estimate of the TCC's likely award of interest on its lost cash flows since the end of EDS' role as a supplier to the Group in March 2002.

 

The balance of £269 million has been recognised in litigation settlement income representing settlement for costs and damages.

 

4 Investment income and finance costs

 

		2010	2009
		£m	£m
Investment income
Cash, cash equivalents and short-term deposits		3	30
Dividends receivable from available-for-sale investments		-	5
		3	35

 

		2010	2009
		£m	£m
Finance costs
- Interest payable and similar charges
£750 million/£1 billion Revolving Credit Facilities ("RCF")		(11)	(3)
Guaranteed Notes		(116)	(186)
Finance lease interest		(8)	(7)
		(135)	(196)
- Other finance income (expense)
Remeasurement of borrowings and borrowings-related derivative financial instruments(i)		16	(21)
Remeasurement of programming-related derivative financial instruments (i)		(1)	(3)
Gain arising on derivatives in a designated fair value hedge accounting relationship		36	46
Loss arising on adjustment for hedged item in a designated fair value hedge accounting relationship		(38)	(46)
		13	(24)
		(122)	(220)

 

(i) Not qualifying for hedge accounting

 

Borrowing costs included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalisation rate of 5.3% to expenditure on such assets. The amount capitalised in the current year amounted to less than £1 million.

 

5 Impairment of available-for-sale investment and profit on disposal of available-for-sale investment

 

The Group's investment in ITV is carried at fair value. The fair value of ITV is determined with reference to its equity share price at the balance sheet date. An impairment in the carrying value was first recorded at 31 December 2007, due to the significant and prolonged decline in the equity share price. In accordance with IFRS, the Group has continued to review that carrying value and recognised an impairment loss of £191 million in the year ended 30 June 2009. This impairment loss was determined with reference to ITV's closing equity share price of 20.0 pence at 27 March 2009, the last trading day of the Group's third fiscal quarter in fiscal 2009. In line with IFRS, all subsequent increases in the fair value of the ITV investment above this impaired value have been recorded in the available-for-sale reserve.

 

On 8 February 2010 the Group placed a shareholding of 10.4% in ITV in accordance with the final undertakings given by the Group to the Secretary of State for Business, Innovation and Skills relating to the Group's investment in ITV. The placing by the Group of 404,362,095 ITV shares at 48.5p per share resulted in aggregate consideration of £196 million. A profit of £115 million was realised on disposal being the excess of the consideration above the impaired value of the shares. The Group continues to hold just under 7.5% of ITV.

 

At 25 June 2010, the last trading day of the Group's financial year, ITV's closing equity share price was 53.5 pence. In accordance with IAS 39, the effect of any further decline in the value of the equity share price of ITV below the price of 20.0 pence as at 27 March 2009 will be recognised in the income statement at the relevant future balance sheet date.

 

6 Taxation

 

Taxation recognised in the income statement

 

		2010	2009
		£m	£m
Current tax expense
Current year		305	191
Adjustment in respect of prior years		(23)	10
Total current tax charge		282	201
Deferred tax expense
Origination and reversal of temporary differences		9	6
Adjustment in respect of prior years		4	(10)
Total deferred tax charge (credit)		13	(4)
Taxation		295	197

 

Taxation relates to a £288 million UK corporation tax charge (2009: £190 million) and a £7 million Luxembourg corporation tax charge (2009: £7 million).

 

The tax expense for the year is lower (2009: higher) than the expense that would have been charged using the standard rate of corporation tax in the UK (28%) applied to profit before tax. The applicable enacted or substantially enacted rate of UK corporation tax for the year was 28% (2009: 28%).

 

7 Earnings per share

 

The weighted average number of shares for the year was:

		2010	2009
		Millions of shares	Millions of shares
Ordinary shares		1,753	1,753
ESOP trust ordinary shares		(10)	(13)
Basic shares		1,743	1,740
Dilutive ordinary shares from share options		11	13
Diluted shares		1,754	1,753

 

The calculation of diluted earnings per share excludes 11 million share options (2009: 21 million), which could potentially dilute earnings per share in the future, but which have been excluded from the calculation of diluted earnings per share as they are anti-dilutive in the year.

 

Basic and diluted earnings per share are calculated by dividing the profit or loss for the year into the weighted average number of shares for the year. In order to provide a measure of underlying performance, management have chosen to present an adjusted profit for the year which excludes items that may distort comparability. Such items arise from events or transactions that fall within the ordinary activities of the Group but which management believes should be separately identified to help explain underlying performance.

 

7 Earnings per share (continued)

 

		2010	2009
		£m	£m
Reconciliation from profit for the year to adjusted profit for the year:
Profit for the year		878	259
Remeasurement of all derivative financial instruments not qualifying for hedge accounting and hedge ineffectiveness (see note 4)		(13)	24
Litigation settlement income relating to claim against EDS (see note 3)		(269)	-
Investment income on litigation settlement (see note 3)		(49)	-
Legal costs relating to claim against EDS (see note 2)		1	3
Cancellation of accounts payable on settlement of claim against EDS (see note 2)		(5)	-
Cost relating to restructuring exercise (see note 2)		32	-
Receipt on closure of joint venture (see note 11)		(3)	-
Profit on disposal of available-for-sale investment (see note 5)		(115)	-
Impairment of available-for-sale investment (see note 5)		-	191
Recognition of deferred revenue (see note 1)		-	(36)
Deferred tax write off following change in legislation		-	6
Tax effect of above items		85	4
Adjusted profit for the year		542	451

 

		2010	2009
		Pence	Pence
Earnings per share from profit for the year
Basic		50.4	14.9
Diluted		50.1	14.8
Adjusted earnings per share from adjusted profit for the year
Basic		31.1	25.9
Diluted		30.9	25.7

 

8 Dividends

 

		2010	2009
		£m	£m
Dividends declared and paid during the year
2008 Final dividend paid: 9.625p per ordinary share		-	167
2009 Interim dividend paid: 7.50p per ordinary share		-	131
2009 Final dividend paid: 10.10p per ordinary share		176	-
2010 Interim dividend paid: 7.875p per ordinary share		138	-
		314	298

 

The 2010 final dividend proposed is 11.525 pence per ordinary share being £201 million. The dividend was not declared at the balance sheet date and is therefore not recognised as a liability as at 30 June 2010.

 

 9 Intangible Assets

 

	Internally generated intangible assets £m			Software development (external) £m	Software licenses £m	Other intangible assets £m	Internally generated intangible assets not yet available for use £m	Other intangible assets not yet available for use £m	Total £m
Cost
At 1 July 2009	124			302	101	72	17	86	702
Foreign exchange movements			-	-	(1)	-	-	-	(1)
Additions	51			12	19	41	18	38	179
Disposals	(6)			(10)	-	-	-	(22)	(38)
Transfers	5			1	1	-	(3)	(3)	1
At 30 June 2010	174			305	120	113	32	99	843
Amortisation
At 1 July 2009	58			205	62	32	-	-	357
Foreign exchange movements			-	-	(1)	-	-	-	(1)
Amortisation for the year		37		59	20	47	-	-	163
Impairments	3			1	-	-	-	22	26
Disposals	(6)			(10)	-	-	-	(22)	(38)
At 30 June 2010	92			255	81	79	-	-	507
Carrying amounts
At 1 July 2009	66			97	39	40	17	86	345
At 30 June 2010	82			50	39	34	32	99	336

 

10 Property, plant and equipment

 

	Land and freehold buildings £m	Leasehold improvements £m	Equipment, furniture and fixtures £m	Assets not yet available for use £m	Total £m
Cost
At 1 July 2009	128	77	931	191	1,327
Foreign exchange movements	-	-	(4)	-	(4)
Additions	58	2	152	64	276
Disposals	-	(6)	(69)	(3)	(78)
Transfers	-	-	30	(31)	(1)
At 30 June 2010	186	73	1,040	221	1,520
Depreciation
At 1 July 2009	22	29	477	-	528
Foreign exchange movements	-	-	(4)	-	(4)
Depreciation	4	4	160	-	168
Impairments	-	-	2	3	5
Disposals	-	(6)	(67)	(3)	(76)
At 30 June 2010	26	27	568	-	621
Carrying amounts
At 1 July 2009	106	48	454	191	799
At 30 June 2010	160	46	472	221	899

 

11 Investments in joint ventures and associates

 

The movement in joint ventures and associates in the year was as follows:

 

		2010	2009
		£m	£m
Share of net assets
- At 1 July		135	114
Movement in net assets
- Funding, net of repayments		1	3
- Dividends received		(30)	(20)
- Share of profits(i)		32	19
- Exchange differences on translation of foreign joint ventures and associates		11	19
At 30 June		149	135

 

(i) Included within the share of profits for the year ended 30 June 2010 is £3 million (2009: nil) related to an amount received on the closure of one of the Group's joint ventures.

 

12 Available-for-sale investments

 

		2010	2009
		£m	£m
Investment in ITV at cost		946	946
Impairment of ITV investment		(807)	(807)
Unrealised gain on ITV investment		98	96
Realised gain on ITV investment		115	-
Part disposal of ITV investment		(196)	-
Fair value of ITV investment		156	235
Other investments at cost		26	26
		182	261

 

On 17 November 2006, the Group acquired 696 million shares in ITV, at a price of 135 pence per share, representing 17.9% of the issued capital of ITV, for a total consideration of £946 million including fees and taxes. The Group's investment in ITV is carried at fair value. The fair value is determined with reference to its equity share price at the balance sheet date. An impairment in the carrying value was first recorded at 31 December 2007, due to the significant and prolonged decline in the equity share price. In accordance with IFRS, the Group has continued to review that carrying value and has recognised a cumulative impairment loss of £807 million in fiscal 2008 and fiscal 2009. This impairment loss was determined with reference to ITV's closing equity share price of 20.0 pence at 27 March 2009, the last trading day of the Group's third fiscal quarter in fiscal 2009. In line with IFRS, all subsequent increases in the fair value of the ITV investment above this impaired value have been recorded in the available-for-sale reserve.

 

On 8 February 2010 the Group placed a shareholding of 10.4% in ITV in accordance with the final undertakings given by the Group to the Secretary of State for Business, Innovation and Skills relating to the Group's investment in ITV. The placing by the Group of 404,362,095 ITV shares at 48.5p per share resulted in aggregate consideration of £196 million. A profit of £115 million was realised on disposal being the excess of the consideration above the impaired value of the shares. The Group continues to hold just under 7.5% of ITV.

 

The disposal is exempt from tax under the provisions of the Substantial Shareholding Exemption (SSE) and as such the SSE provisions would prevent any capital loss arising for tax purposes.

 

The Group holds certain unquoted equity investments that are carried at cost less impairment. The fair value of these investments is not considered to differ significantly from their carrying value.

 

13 Deferred tax

 

Recognised deferred tax (liabilities) assets

	Fixed asset temporary differences £m	Tax losses £m	Short-term temporary differences £m	Share-based payments temporary differences £m	Financial instrument temporary differences £m	Total £m
At 1 July 2009	(2)	2	6	22	(11)	17
(Charge) credit to income	(6)	(2)	-	(6)	1	(13)
(Charge) credit to equity	-	-	-	9	(20)	(11)
At 30 June 2010	(8)	-	6	25	(30)	(7)

 

14 Inventories

 

		2010	2009
		£m	£m
Television programme rights		255	274
Set-top boxes and related equipment		73	97
Other inventories		15	15
		343	386

 

15 Trade and other receivables

 

		2010	2009
		£m	£m
Net trade receivables		150	179
Amounts receivable from joint ventures and associates		6	5
Amounts receivable from other related parties		3	-
Prepayments		197	221
Accrued income		135	116
VAT		18	52
Other		29	40
Current trade and other receivables		538	613
Non-current prepayments		18	21
Total trade and other receivables		556	634

 

Included within current trade and other receivables is nil (2009: £54 million) which is due in more than one year.

 

16 Trade and other payables

 

		2010	2009
		£m	£m
Trade payables		419	407
Amounts owed to joint ventures and associates		4	3
Amounts owed to other related parties		70	69
VAT		105	93
Accruals		609	586
Deferred income		251	269
Other		68	65
		1,526	1,492

 

17 Provisions

 

	At 1 July 2009 £m	Provided during the year £m	Utilised during the year £m	At 30 June 2010 £m
Current liabilities
Restructuring provision	-	7	-	7
Acquired and acquisition related provisions	14	4	(3)	15
Other provisions	4	2	(1)	5
	18	13	(4)	27
Non-current liabilities
Acquired and acquisition related provisions	1	-	(1)	-
Other provisions	11	2	(2)	11
	12	2	(3)	11

 

18 Borrowings and non-current other payables

 

		2010	2009
		£m	£m
Current borrowings
Guaranteed Notes		-	463
Loan Notes		-	2
		-	465
Non-current borrowings
Guaranteed Notes		2,388	2,208
Obligations under finance leases		70	71
		2,458	2,279
Non-current other payables
Amounts owed to other related parties		3	5
Accruals		11	18
Deferred income		38	43
		52	66

 

19 Share Capital

 

		2010	2009
		£m	£m
Authorised ordinary shares of 50p
3,000,000,000 (2009: 3,000,000,000)		1,500	1,500
Allotted, called-up and fully paid
1,752,842,599 (2009: 1,752,842,599)		876	876

 

20 Notes to the consolidated cash flow statement

 

Reconciliation of profit before taxation to cash generated from operations

 

		2010	2009
		£m	£m
Profit before taxation		1,173	456
Depreciation and impairment of property, plant and equipment		173	173
Amortisation and impairment of intangible assets		189	118
Impairment of available-for-sale investment		-	191
Profit on disposal of available-for-sale investment		(115)	-
Share-based payment expense		35	48
Net finance costs		70	185
Share of results of joint ventures and associates		(32)	(19)
		1,493	1,152
Decrease (increase) in trade and other receivables		69	(52)
Decrease (increase) in inventories		43	(76)
Increase in trade and other payables		24	190
Increase (decrease) in provisions		8	(19)
(Decrease) increase in derivative financial instruments		(3)	10
Cash generated from operations		1,634	1,205

 

 

21 Events after the reporting period

 

a) Acquisition of Virgin Media television business

 

On 4 June 2010, the Group signed an agreement to purchase 100% of the shares of Virgin Media Television Limited, Virgin Media Television Rights Limited, and the assets and liabilities of the Virgin Media television channels ("VMtv"). The agreement was conditional on obtaining merger control clearance in the Republic of Ireland. On 12 July 2010, the conditions to completion were fulfilled and the Group completed the acquisition of VMtv. VMtv operates a portfolio of television channels including Living, Bravo, Virgin1 and Challenge which are distributed over various television platforms and generate revenue principally from the sale of advertising airtime and carriage fees paid by Pay-TV operators such as Virgin Media and Sky. VMtv was acquired to complement the Group's existing content business and to deliver strategic and financial benefits.

 

Goodwill arising from the acquisition is attributable to the anticipated profitability arising from the Group's access to new viewer demographics, breadth of content and channel slots and the anticipated future operating synergies from the combination.

 

Total consideration comprises £160 million of cash, with £105 million having been paid immediately upon completion. The outstanding contingent consideration of £55 million is payable upon receipt of UK regulatory clearance for the transaction. The Group notified the transaction to the OFT on 9 July 2010. The OFT has started its review of the transaction and issued its invitation to third parties to comment on the transaction on 20 July 2010. Should certain conditions be imposed by the regulatory authorities the contingent consideration may be reduced. The potential undiscounted amount of all future payments that the Group could be required to make under the contingent consideration arrangement is between £nil and £55 million. The Group estimates that the fair value of this contingent consideration is £55 million less the time value of money.

 

Acquisition-related costs included in administration expenses in the Group consolidated income statement for the year ended 30 June 2010 amounted to £2 million.

 

Because the process of fair valuing the Virgin Media Television business has not been completed as at 28 July 2010, the initial accounting for the business combination is incomplete as at 28 July 2010. As a result, the Group is unable to disclose the following information regarding the acquisition:

 

·; the gross contractual amount, fair value amount, or estimated contractual cash flows not expected to be collected of/from the receivables acquired

·; the amounts recognised as of the acquisition date for each major class of assets and liabilities acquired/assumed

·; the existence of or the values relating to any contingent liabilities recognised in accordance with IAS 37 on acquisition; and

·; the amount of goodwill acquired and the amount of goodwill that is expected to be deductible for tax purposes.

b) Agreement on sale of Easynet Global Services business

 

On 21 July 2010 the Group announced that it had reached an agreement over the sale of its business-to-business telecommunications operation, Easynet Global Services ("Easynet"), to Lloyds TSB Development Capital ("LDC"). LDC will pay the Group £100 million for the business on completion of the transaction, subject to regulatory approval. The Group will retain the UK network assets that it acquired as part of the original acquisition of Easynet Group in 2005. As part of the sale, the Group and LDC will enter into a long-term supply agreement to grant Easynet continued access to the Group's fibre network and Easynet will also continue to be a key supplier to the Group. If the transaction completes on the proposed terms, with the regulatory approvals having been received, the Group estimates that it will recognise an accounting profit on disposal to the order of £70-90 million in the next financial year.

 

Appendix 3 - Non-GAAP measures

 

Reconciliation of operating profit to adjusted operating profit and adjusted EBITDA

for the year ended 30 June 2010

 

		2010	2009
	Notes	£m	£m
Operating profit		1,096	813
Litigation settlement income relating to claim against EDS	3	(269)	-
Legal costs relating to claim against EDS	2	1	3
Cancellation of accounts payable on settlement of claim against EDS	2	(5)	-
Costs relating to restructuring exercise	2	32	-
Recognition of deferred revenue	1	-	(36)
Adjusted EBITDA		1,192	1,071
Depreciation and amortisation		(362)	(291)
Costs relating to restructuring exercise included within depreciation and amortisation(i)	2	25	-
Adjusted operating profit		855	780

 

(i) Included within depreciation and amortisation for the year ended 30 June 2010 is £25 million (2009: nil) of expense relating to a restructuring exercise of which £22 million related to the impairment of assets associated with Picnic (the potential launch of a subscription television service on DTT) and £3 million related to restructuring costs.

 

Reconciliation of cash generated from operations to free cash flow and adjusted free cash flow

for the year ended 30 June 2010

 

		2010	2009
	Notes	£m	£m
Cash generated from operations	20	1,634	1,205
Interest received		57	47
Taxation paid		(320)	(178)
Dividends received from joint ventures and associates		30	20
Net funding to joint ventures and associates		(1)	(3)
Purchase of property, plant and equipment		(261)	(261)
Purchase of intangible assets		(183)	(139)
Interest paid		(156)	(217)
Free cash flow		800	474
EDS litigation settlement (after tax)		(229)	-
Legal costs relating to claim against EDS		1	3
Purchase of freehold land		57	24
Receipt on closure of joint venture		(3)	-
Cash paid related to restructuring exercise		-	7
Adjusted free cash flow		626	508

 

Net Debt

As at 30 June 2010

 

		2010	2009
		£m	£m
Current borrowings		-	465
Non-current borrowings		2,458	2,279
Total borrowings		2,458	2,744
Borrowings related derivative financial instruments		(333)	(107)
Cash and cash equivalents		(649)	(811)
Short-term deposits		(400)	(90)
Net Debt		1,076	1,736