HBO's House of the Dragon - the Game of Thrones prequel showing on Sky's SoHo channel and Neon streaming service. Photo / Supplied
HBO's House of the Dragon - the Game of Thrones prequel showing on Sky's SoHo channel and Neon streaming service. Photo / Supplied
Two analysts' take on Sky TV's earnings have seen one issue a downgrade, and another hold the line on his target price and upgrade operating earnings forecasts for the next three years.
A team of Forsyth Barr analysts saw a number of positives in Sky's full-year result, reported Thursday, includingthe return of the dividend.
But ultimately they could not get past rising content costs, which earned the firm a downgrade from outperform to neutral.
At the same time, Forsyth Barr's Aaron Ibbotson, Matt Montgomerie and Milan Law cut their 12-month target from $3.10 to $2.75 (in midday Friday trading, Sky was down 1.2 per cent to $2.59. The stock is up 61.4 per cent for the year).
And while Morningstar's Brian Han maintained his $3.00 "fair value" rating, he said he had "reservations about the maintainability of no-moat Sky's earnings in the long term. While 'house of content' strategy acts as a competitive advantage, especially with marquee sports and WarnerMedia (House of the Dragon), it doesn't come cheap. Indeed, programming costs grew 13 per cent in fiscal 2022 [to] $364 million due to price escalation in key rights and are likely to rise further this year."
The Forsyth Barr team took a similar tack, saying: "Sky TV has done, and we expect it to continue to do, an excellent job offsetting content cost inflation by saving elsewhere.
"[But] this equation looks substantially more difficult after adding another $40m of programming costs."
Sky reported programming costs that rose by $36m to $365m for FY2022, and said another increase was on the way.
"We were surprised by the guidance of $40m of additional programming costs for FY23. This equates to over half of reported ebit [pre-tax earnings] and is a stark reminder that content cost inflation remains extensive," Ibbotson and co said.
The Forsyth Barr crew has revised its cost estimate upwards, and now says content costs will increase to 53 per cent of Sky's revenue in FY2023, "well above its target of 45 to 50 per cent".
Delayed: Sky's new box, which will offer regular channels over UFB fibre, negating the need for a dish, offer 4K ultra high definition and support third-party apps like Netflix. A phased rollout will begin in a few weeks - although customers will also be able to stick with the old decoder, if they choose. Photo / File
Countering this trend, Sky did note that, thanks in part to Sky Sport and Neon price rises, its average monthly revenue per user rose across both satellite users (by $1 to $19 per month) and, for the first time in years, satellite subs (who paid $79, also up $1).
Sky also said it was reviewing the price of its new broadband service.
And the extra spending on content could also help draw more customers into the fold, and potentially drive a lift in operating earnings.
The new financial year has seen English Premier League football return to Sky from Spark Sport. And Sky is widely expected to shortly make a king hit to seize back Rugby World Cup rights from the telco too (Sky will only say it's in "advanced talks" with World Rugby).
And Sky has said it expects revenue to be between $750m and $770m in FY2023 vs $736m in FY2023.
The broadcaster has also had an ongoing op-ex cost-cutting plan, although on the cap-ex side its costs will rise this financial year, to $60m to $75m (from $45m in FY2022), with the rollout of its new Sky box.
The new Sky box will be the first hardware upgrade in a decade. Originally due mid-year, it will begin its initial rollout at some point over the next few weeks. Delays have been pinned on Covid supply chain issues and the war in Ukraine.
If all goes to plan, the new Sky box - which will support both the delivery of Sky TV channels, plus apps for those who prefer all on-demand streaming, all of the time - will become a one-stop-shop for both old-school and new-school ways of consuming content (it's still not clear if Sky will make people pay for the box if they only want to use it for streaming. Sky says it will provide more details shortly, although in an age of smart TVs, it doesn't have a lot of wriggle room).
Ibbotson and co say Sky should actually increase its Sky box customers - by around 5000 - in FY2023 for the first time since 2014, but says this is likely to be a "one-off", driven by its new box and the pending closure of Vodafone TV (which took a wholesale Sky feed, although some customers just used it as a conduit to access free-to-air channels and apps).
Sky's changing customer mix. Sky box customer numbers are declining, but decoder users pay an average $79 per month while streaming app (Neon and Sky Sport Now) subs pay an average $19 per month. Customers of the new Sky Broadband service pay an average $82.95 per month - with backend-provider 2degrees receiving an undisclosed cut. Convincing Sky box, Neon and Spark Sport Now customers to bundle Sky Broadband will be a way to increase average revenue per user across the board. Source / Market filing
Sky made customer gains overall in FY2022. Morningstar's Han said it was "better structurally but dilutes margins". Streamers are paying an average $19 per month, the less fashionable decoder crowd $79.
Streamers are also less loyal - particularly on the entertainment side, where some hop from service to service as they binge on different series.
There's also a third new interesting element in the mix, with Sky now offering its own internet service.
Sky Broadband brought in what Han described as "nascent" revenue of $9m in FY2022 as customer numbers increased from just under 2000 to just under 20,000.
It will be an area to watch in an internet market where Jarden head of research Arie Dekker sees the "other" category (from Sky to power companies) stealing up to 400,000 broadband customers from traditional telcos over the next few years.
All up, Han sees brighter prospects for Sky in the mid-term. Its full-year numbers saw him upgrade his ebitda forecasts by about 30 per cent over the next three years.
And Morningstar's Han notes, "Solid 2023 ebitda guidance of $150m to $170m implies growth of 4 per cent from fiscal 2022 at the midpoint - the first increase in eight years."
The Forsyth Barr team went in the opposite direction, clipping its ebitda and net profit picks (which land about $10m behind Morningstar for each metric).
