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Current as of 26/05/17 07:40PM NZST
Matt Nippert is a business investigations reporter.

Sky TV profits dip as churn and competition grows

Sky released their half-yearly financial results for the six months to December 2015 today. Photo / NZ Herald
Sky released their half-yearly financial results for the six months to December 2015 today. Photo / NZ Herald

Pay-TV operator Sky Network Television saw its highest customer churn in more than a decade as online rivals nipped at its heels and bid content prices ever-higher.

Chief executive John Fellet said Sky was competing well in the frothy market, despite a drop in net profit to $87.1 million for the six months to December 31, pointing to 2.4 percent rise in revenues on the back of a 0.5 per cent expansion of its subscriber base.

Customer churn, or the proportion of customers who cancelled subscriptions, rose to 15.4 per cent - the highest since at least 2006 - from 14.5 per cent the previous year.

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Fellet said churn cycles tended to peak the year following a Rugby World Cup, and given the fragmenting market he was comfortable with the result. "When you consider there's now more option to Sky than ever before, I guess I'm pleased with this churn figure," he said.

The cost of acquiring content rose 10 per cent to $162.9m, which Fellet mostly put down to delivering Rugby World Cup to viewers but noted the market was becoming increasingly competitive.

Good content has never been more expensive than it is now. But I think we've got a pretty good lock on the good stuff, and I wouldn't trade my programming with anyone else.
Sky TV chief executive John Fellet

The results come as Sky TV loses its hold on some premium content with the introduction of online streaming video services such as Netflix and Spark New Zealand's Lightbox offering.

Still, the pay-TV firm retains rugby rights, which are seen as a linchpin in securing domestic viewers.

Fellett said: "Good content has never been more expensive than it is now. But I think we've got a pretty good lock on the good stuff, and I wouldn't trade my programming with anyone else'."

The company is in the midst of a transition in its distribution technology, moving from satellite- to internet-based broadcasting, which saw capital spending rise 21 percent to $62 million, almost half of which went on Sky TV's decoder upgrade.

Fellett said this transition, along with the expansion of its online SkyGo and FanPass services, was going well but was occasionally frustrating. Congestion has seen complaints from viewers that access to popular sporting events has been choppy or unavailable.

"It's something I stay awake with more than anything else. Right now, if you watched Sky 365 days a year, 24 hours a day, it'd be 99.9 per cent reliable, SkyGo would be 99 per cent reliable: But it's that one per cent that lands you on the front page of the Herald."

Following the result Sky shares fell 2.2 percent to $4.51. The stock is rated an average 'hold' based on seven analyst recommendations compiled by Reuters, with a median target price of $5.10.

It's something I stay awake with more than anything else. Right now, if you watched Sky 365 days a year, 24 hours a day, it'd be 99.9 per cent reliable, SkyGo would be 99 per cent reliable: But it's that one per cent that lands you on the front page of the Herald.
John Fellet

Forsyth Barr analyst Blair Galpin was forecasting profit to fall to $84.1 million on sales of $470 million.

"As expected in a period of rapid change and considerable competition, pressure has been placed on financial performance," chief executive John Fellet said. "Like most traditional pay-television companies, we are losing traditional satellite customers, but gaining in our online products like Neon and Fan Pass."

Sky TV provided less detail about the breakdown of its subscriber base, which it said "hurt us in negotiations with content suppliers". It's rolled out new web-based on-demand services, and expects to complete a programme of switching out old digital decoder boxes for new My Sky decoders by the middle of next year, which it anticipates will provide savings on its satellite bandwidth spend.

Revenue from satellite subscriptions increased 0.7 percent to $383.5 million, accounting for the bulk of Sky TV's sales, though other subscriptions revenue climbed 11 percent to $38.8 million.

Sky TV's advertising revenue generated the fastest increase in the half, rising 17 percent to $42.3 million, and now accounts for 8.9 percent of total revenue compared to 7.8 percent a year earlier. That's in a market where television advertising is sinking, with free-to-air players Television New Zealand and MediaWorks bearing the brunt of the decline.

The board declared a dividend of 15 cents per share, with a March 11 record date, payable on March 18.

Sky TV has also hired an investment bank to look at its capital management as it ends a period of investment, which it expects will deliver strong free cash flow in the future. At the same time, it's considering several investment opportunities, it said.

"The amount and timing of any capital required for growth opportunities is expected to become clearer by the time our full year results in August are announced," Fellet said. "If growth opportunities do not materialise within that timeframe, we intend to announce capital management initiatives with our full year results."

-Aditional reporting: BusinessDesk

See Sky's latest investor presentation here:

- NZ Herald

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