Sky TV's 21 per cent profit drop was better than the market was expecting, but there are still doubts over its long-term strategy, says a senior economic analyst.
The pay TV operator released its full-year results yesterday, showing a net profit of $116.3 million, down from $147.1m the previous year.
Sky's total revenue dropped to $893.5m from $928.2m the previous year. Earnings before interest, tax, depreciation and amortisation (ebitda) was $292.3m, down from $325.3m the previous year.
Morningstar senior equity analyst Brian Han said despite the lower profit it was "quite a solid result".
"Considering the circumstances, the ebitda number exceeded market expectation, mainly due to performance on the cost side," Han said.
Sky TV's share price closed down 10c yesterday at $3.08.
"I think [the] stock price reaction was mostly due to the cut in dividends and what that signals to the market in terms of what the future might hold because essentially they're just keeping the powder dry and seeing how they're going to respond to this escalating competition," Han said.
"On the one hand, traditional pay TV, even though it is starting to struggle and losing subscribers, is still Sky's cash cow and they need to somehow figure out a way of milking that cow for as long as possible while at the same time responding to these new products and new delivery channels." Should an overseas giant like Amazon try to buy rights to content like All Blacks rugby that would be a huge blow for the company. Rights to rugby broadcasting will be up for grabs again in 2020.
"That's the one strength that Sky has and in fact it's such a strength that it was one of the reasons that the Commerce Commission decided to reject the [merger] deal with Vodafone," Han said.
The pay-TV operator faces increased rivalry from online streaming video services such as Netflix which has seen its subscriber base come under pressure while its programming costs continue to rise. Its costs to secure programming rights increased 5.6 per cent to $349.4m in the latest year, equating to 39.1 per cent of revenue from 35.7 per cent of revenue a year earlier.
Its total subscriber base dropped, from 852,679 in June 2016 to 824,782 this year.
Technology commentator Paul Spain, chief executive of Gorilla Technology, said it would be interesting to see what the company can put in place with Vodafone.
"They talk up the possibility of people continuing to watch linear pay TV but my view is that's going to keep dropping off for them," Spain said.
Some customers felt that they were paying too much "so if people feel they have other options they will take them", he said.
Sky's chief executive of 17 years John Fellet focused on the positives in the annual result.
He "took delight" that the churn numbers were going down, cashflow was up and while it had lost satellite subscribers, much of these had been made up for through its add-on services like Neon and Fan Pass.
"Keep in mind that we're probably ... in the most competitive disruption that the world has ever seen, especially traditional media," Fellet said.
"As if Amazon and Netflix TV wasn't enough, now Apple TV have decided they're going to go in the content game."
Despite the failed Vodafone merger attempt, Sky was continuing to work with the telco and the country could expect some new initiatives from the pair.
Fellet acknowledged Sky could not compete with the likes of Netflix when it came to price but said its points of difference included rights to premium sports content and first-run movies.
He said he wished to remain as chief executive so long as the board and shareholders wanted him in the role.
- Additional reporting: BusinessDesk