BSkyB - Results for the six months ended 31 December 2006

Wednesday, January 31st, 2007 
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BSkyB announces record sales and 20% increase in interim dividend; on track for our targets

Operational Highlights

  • New customer additions of 432,000 in the second quarter, the highest in six years
  • Net customer growth in the second quarter of 183,000 to 8.441 million
  • Record growth in Sky+ boxes to 2.13 million, in 1.97 million households
  • HD subscribers almost doubled in the second quarter to 184,000, establishing Sky’s leadership in HD
  • Good progress on Sky Broadband with gross bookings of 343,000 and 259,000 activated customers by 28 January 2007
  • Broadband network roll-out ahead of plan, 771 exchanges unbundled, 50% of the U.K.

Financial Highlights

  • Revenue increased by 10% to £2,220 million, including £22 million from Sky Broadband and £77 million from Easynet Enterprise
  • Adjusted gross margin of 63% up from 60% in the comparable period
  • EBITDA of £486 million including losses of £66 million in Sky Broadband and Easynet Enterprise and a net exceptional gain of £59 million
  • Operating profit of £395 million including losses of £84 million in Sky Broadband and Easynet Enterprise and a net exceptional gain of £59 million
  • Basic EPS of 14.0p (2006: 14.9p) and adjusted EPS of 11.3p (2006: 14.7p)
  • Interim dividend increased by 20% to 6.6 pence per share

Overview

We continued to see a strong sales performance in the second quarter. Sales of new Sky subscriptions (“gross additions”) were the highest for six years and we surpassed two million Sky+ boxes and six million Sky Sports customers in the run up to Christmas. Our new product launches are proceeding well and over a quarter of our customers now take more than one product from Sky. Sky broadband has made an encouraging start and sales of Sky HD almost doubled in the quarter with 88,000 new customers. Overall net additions were also strong, at 183,000 in the second quarter.

As we indicated at our first quarter results announcement on 3 November 2006, we have moved ahead with our plans to first reduce, and then remove, viewing package discounts in retention and acquisition with a greater use of broadband and telephony. This has resulted in a short-term increase in churn to 11.9%. The Group estimates that around 27,000 customers left Sky’s platform during the quarter as a result of this change in policy. Excluding these customers, churn was around 10.6%. We expect this shift in retention and acquisition strategy will deliver valuable benefits in quality and profitability of the business through the second half of the financial year and beyond.

Group operating profit was £395 million. Excluding Sky Broadband, Easynet Enterprise and net exceptional gains, operating profit was £420 million, a year-on-year increase of 1%. Growth was affected by a weaker TV advertising sector, a decline in wholesale revenue, a full half year of CRM depreciation and the high levels of gross additions and upgrades. We expect the second half to benefit from further progress in ARPU, improved marketing efficiencies, a seasonally lighter period of net additions and upgrades and the consequent lower weighting of operating costs.

The Group’s expansion into the U.K. broadband and telephony sectors got off to a good start with 259,000 broadband customers by 28 January 2007. In addition, we are beginning to see the initial benefits to the wider business, with around 20% of broadband customers new to Sky and marketing efficiencies leading to lower SAC as we are able to spread our fixed marketing spend per subscriber over a broader base. The mix of our broadband subscribers has exceeded our initial expectations with around 70% of our on-net customers opting for a paid-for product. Finally, the roll-out of our IP-based broadband network has proceeded ahead of plan and we now expect to achieve 70% coverage of the U.K. by the end of June 2007, a full six months ahead of schedule.

The Group took a number of steps throughout 2006 to increase exposure to favourable macro growth trends, particularly online advertising. We announced our world-first partnership with Google which was a strong endorsement of our broadband offering. The acquisitions of 365 Media Group plc, the online sports advertising sales house Aura and MyKindaPlace further increase our exposure and capabilities in this segment.

On 17 November 2006, we acquired a 17.9% minority stake in ITV plc. ITV is one of Europe’s premier broadcasting and production businesses, and holds substantial potential for long-term value creation.

During the half year, the Group recognised an exceptional gain of £59 million, consisting of two items: a £65 million one-off payment received from a third party channel provider as a result of a contractual entitlement to a proportion of the value of certain of its channels; and a £6 million charge within other operating expenses as part of our litigation with EDS, an information and technology solutions provider, in relation to work carried out between 2000 and 2002 on our customer relationship management systems.

Customer Metrics

'000s                         31-Dec-06       30-Sep-06   Net additions 
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Total customers(1)(2)(3)          8,441           8,258             183
Additional products:                                                   
Sky+(4)                           1,968           1,692             276
Multiroom(5)                      1,226           1,093             133
HD                                  184              96              88
Broadband                           193              44             149
Telephony                           223             195              28
Other KPI's:                                                           
Churn                              11.9%           11.8%                
ARPU                               £394            £385                
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(1) Includes DTH subscribers in Republic of Ireland. (465,020 as at 31 December 2006, 393,000, as at 31 December 2005.)
(2) DTH subscribers include only primary subscriptions to Sky (no additional units are counted for Sky+ or Multiroom subscriptions). This does not include customers taking Sky’s freesat offering or churned customers viewing free-to-air channels.
(3) DTH subscribers include subscribers taking Sky packages via DSL through Kingston Interactive Television and Homechoice.
(4) Sky+ includes HD households
(5) Multiroom includes households subscribing to more than one digibox. (No additional units are counted for the second or any subsequent Multiroom subscriptions within one household.)