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Edited Transcript of SKT.NZ earnings conference call or presentation 11-Feb-20 9:00pm GMT

Half Year 2020 SKY Network Television Ltd Earnings Call

Auckland Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of SKY Network Television Ltd earnings conference call or presentation Tuesday, February 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blair Jonathan Woodbury

SKY Network Television Limited - CFO

* Martin David Stewart

SKY Network Television Limited - CEO & Executive Director

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Conference Call Participants

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* Arie Dekker

Jarden Limited, Research Division - Head of Research

* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Matthew Allan Henry

Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research

* Philip Campbell

UBS Investment Bank, Research Division - Analyst

* Wade Gardiner

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [1]

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Welcome. Good morning. I'm Martin Stewart, the CEO of Sky and with me is our CFO, Blair Woodbury. Thank you for joining us today. It's my pleasure to present Sky's results for the period till the 31st December 2019. Now it's just under a year since I joined Sky, and I'm really pleased with what we've achieved and the progress that we have made towards our goals for the future. We've been transforming the business and the results that we present today are evidence of that. Now the plan for today is I will make a few opening remarks, including walking you through some of the progress of the last 6 months.

I will then outline the main points from the results and then hand over to Blair to go into more detail.

But don't worry there will be plenty of room for questions at the end.

We have done what we said we were going to do. In the last 6 months, we managed to retain the content rights that matter to New Zealand fans, most notably, of course, for rugby. We delivered pleasing growth in our streaming customers to complement our existing DTH base. We invested to open doors to new growth opportunities in New Zealand, with the acquisition of Lightbox and globally, with the acquisition of RugbyPass. Now behind the scenes, we've been reorganizing the business to be a leading multimedia organization, transforming rapidly to meet the current and future needs of all of our customers.

Now to remind you of our strategy. Our core purpose is to connect all New Zealanders with the sport and entertainment content that they love in ways that work for each of them. Now that means, firstly, an accelerated focus on super serving all of our customers, whether it's by streaming, satellite or free-to-air.

Secondly, retaining the rights that matter and making sure that we fuel the sports sector in New Zealand and help to nurture the next-generation of sports fans.

And it also means looking for new growth areas. And we have a clear focus on growth and this underpins all of our decisions, fuels our ambition and drives our everyday actions. Returning for a moment to that core purpose of connecting New Zealanders with the sport and entertainment content that they love in ways that work for them. On the screen is a taste of some of the things that Kiwis have loved for the last 6 months.

Now if you look at our 4 strategy pillars, an outline of what we achieved in each area is pretty impressive. We launched Sky Sport Now, Streaming all 12 of our sports channels and this is the most comprehensive sports streaming service in New Zealand.

Since our launch in August, we've streamed 52,000 hours of sports. We've also made significant improvements to NEON, including improving platform stability with better content curation and most importantly to customers, better pricing. Clearly, there is much more to come from that service when we merge it with Lightbox. We've also established the Sky Digital team to develop a groundbreaking new digital platform, which we'll launch later in 2020. And we're very excited by the opportunities that, that presents, and we look forward to showcasing it soon.

We continue to super serve Sky satellite customers. We enhanced our complementary streaming service, Sky Go, we added new features, including being able to cast to the big screen and adding download to go options. And it's been great to see a 25% increase in Sky customers who have chosen to stream their content on Sky Go. We also launched Sky Sport News, our daily bulletin providing the best sports news from New Zealand and around the world, and that is part of our impressive lineup of the 12 sports channels that go on our DTH and streaming services. We also doubled the MY SKY storage space, which allows customers to store more of their favorite moments, and we've added more HD channels. Now we had some big successes on the rights negotiations front in the last 6 months. Obviously, everybody told me from my first day on the job that we must hold on to the Rugby, and we secured the revolutionary deal with SANZAR, which extends our broadcast rights through to the end of 2025.

It involves a deeper partnership with New Zealand Rugby, and we are working even -- ever more closely together with them for the benefit of the game.

Now we also extended our partnership with Netball New Zealand in a multiyear deal. Netball is the #1 female team sport in New Zealand, with around 145,000 players across the country and, of course, the reigning world champions in The Silver Ferns.

We were delighted to extend the ICC cricket contract for 4 more years, which includes the various cricket world cups and other marquee events featuring the Black Caps. And includes the women's World Cup, which will be hosted here in New Zealand in 2021.

We also extended our rights deal with Cricket Australia, which includes the current Black Caps tour and future tours, and we have other key rights announced in the period, covering the 2022 and 2026 Commonwealth games, the 2020 Tokyo Olympic games, the 2024 Paris Olympic games and the Winter and Youth Olympics during the same periods.

Our role in growing and supporting New Zealand sports is a crucial one for us. Building and nurturing the next-generation of sports fans is as important to our business as it is to the well-being of the communities in which we operate. Now we invested in a groundbreaking initiative with Rob Waddell to create Sky Sport Next which supports more than 50 sports across the country.

We've also invested in a number of teams to help them reach their maximum potential and we sponsored the Sky stadium through, which we plan to work with the management team in Wellington to create new fan experiences in the coming months and years.

Now our fourth and critical strategic pillar is creating new opportunities for growth. We recognized early on that it was not going to be enough just to stick with the business as it was. We needed a different approach to create new opportunities for growth. That belief led us to acquire RugbyPass, the largest online rugby network in the world, reaching over 30 million people a month. It also led us to build better partnerships with other New Zealand businesses to drive awareness, engagement and revenue, including with Spark on the Rugby World Cup and Lightbox, TVNZ on the Tokyo Olympics, NZME on Rugby content generally and on press box and Vodafone, with, of course, Vodafone TV.

Specifically, the purchase of Lightbox enables us to create the clear #1 local entertainment streaming service, combining all of the superb NEON and Lightbox content in one fantastic service. Now here's just a taste of some of the great content it will all bring together.

(presentation)

Now I know you'll have seen some of that content before, but when you see it all in one place, it reminds you what an impressive service this is going to be.

That was a quick run-through of the last few months. We've been very proud as a team of what we've done, not just in that last 6-month period, but across the whole year. When you put it all together, it's clear that we're moving in the right direction. Already, today, we are at 925,000 customers, which is an all-time high for Sky, and we're on track to achieve 1 million customers by 2021.

Now we will reach that target by striving for customer satisfaction and focusing on the efficient running of the business and delivering on the growth opportunities that I've just outlined.

Now I mentioned that Blair will go into the detail of the financial results. But I will cover some highlights now.

I'm pleased with the positive story of growth in streaming revenue of 39%, and we also grew total subscribers to 795 at the 31st of December, which includes a 74% increase in streaming customers. We've also slowed the rate of revenue losses in DTH, largely due to improved customer churn, which is tracking closer to 13% compared to 15% last year. EBITDA is $89.7 million and net profit after tax is $11.9 million despite some significant investment and some significant one-off costs in the period. Our CapEx of $33.2 million is within the target band of 7% to 9% of revenue.

Now to give you more detail, I'll pass you to Blair.

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [2]

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Thanks, Martin. As Martin highlighted earlier, EBITDA has decreased from $128 million to $90 million. In the 6 months to 31 December, we've seen a slowdown in revenue loss with the decline now at 5% from 8% a year ago.

In the period, there were $12 million of one-off items. We haven't adjusted our results for these. The one-off items includes $7 million of redundancy in related organizational change costs, $3 million of professional services fees for nonrecurring decisions, such as the acquisition of RugbyPass. And a $2 million satellite reservation fee as we work through the replacement of the Optus D1 satellite. Looking at our overall revenues, we're starting to see the green shoots of our new strategy coming to life. With satellite revenue declines slowing and streaming growth continuing.

Streaming and commercial revenues grew by $6 million, an increase of nearly 40% -- 14% from the prior period. More on this in a moment. Satellite revenues were $322 million for the period. Satellite revenues have been falling for a number of periods, we are pleased to report some stemming of the decline, with satellite revenue decline now at 7% compared to 10% just a year ago. Advertising remained flat despite the 6 months being dominated by uncertainty with industry structure and commercial viability of the industry players being a topic of interest. The Rugby World Cup was carried by TVNZ instead of our free-to-air channel Prime, so maintaining revenues in this environment was very satisfying.

Satellite ARPU continues to decline at roughly $1 a year. This is a result of customer choice, if they review their mix of services and packages from Sky and through Sky adding more value into the packages, such as removing SoHo charges for some of our customers, removal of their HD fee and not charging for things like The Rugby Channel and beIN SPORTS, which are now Sky Sport 1 and Sky Sport 7. Activations of 19,000 and disconnections of 38,000 continue to decline from prior periods.

Our recent churn performance has us hitting from 15% of a year ago to something closer to 13%. We believe that we can stem the loss of subscribers to lower levels as well as lift our rate of activation by working with more channel partners and by ensuring that our customers understand the full value of the range of services they have access to.

This includes access to Sky Go, which allows customers to access their content on any device, anywhere they want and now has the download-to-go and casting capabilities.

Recent Sky joiners have indicated that Sky Go is one of the compelling reasons to become a Sky customer.

Pleasingly, we continue to grow, both organically and inorganically in streaming. In the 6-month period, streaming customers, which includes NEON, Sky Sport Now, RugbyPass and wholesale retransmission customers grew by 83,000 to almost reach 200,000. Coupled with the over 130,000 active Lightbox customers that we welcome as members of the Sky family, it means that streaming customers will have almost tripled from December 2018. As a result, streaming revenues grew by $7 million, a 39% uplift from a year ago. Once you include the growing number of satellite customers who use Sky Go to access their content, we are approaching 50% of customers who stream their content to a device of their choice.

Commercial revenues stayed flat during the period. We carried Spark's Rugby World Cup coverage to commercial customers at no cost of Spark, other than a small one-off cost of setting up the channel.

As we indicated in our November market guidance, our costs have increased from prior years. Costs have incurred for a number of reasons. We have consolidated the results of RugbyPass for the first time, with the majority of their costs appearing in programming and broadcasting and infrastructure costs.

We've reinvested for growth across satellite and streaming platforms. We've increased our marketing expenditure to better communicate our products to customers.

And we've increased our range in quality of local content. We've also incurred a number of one-off costs from our organizational changes.

Breaking these down into the individual parts. Programming costs increased by $13 million, including a mixture of entertainment and sporting content rights, the cost of our new Sky Sports News service and the content cost for RugbyPass. Subscriber costs increased by $9 million with most of this relating to brand and marketing initiatives associated with our rebranding in August last year and the sponsorship of a number of well-loved New Zealand sporting teams.

Broadcasting and infrastructure costs declined by $8 million. IFRS 16 changes meant that operating leases for our satellite transponders are now reported in depreciation and amortization.

Offsetting the accounting change are increased costs for RugbyPass, the enhancements to our streaming in digital services, the satellite reservation fee and some organizational change costs. Depreciation and amortization increased as a result of the accounting change, offset by some assets reaching end of life. Other costs increased by $7 million, including organizational change costs and professional services fee for nonrecurring transactions. After all of these changes and removing the one-off amounts, overall costs increased by 7%. Now looking at our expenses on a per subscriber basis, more accurately reflects the change in our cost base. Programming, being our largest cost item, grew by 4% year-on-year. A reminder that some of our recently signed rights agreements haven't yet taken effect and there will be cost appreciation in future periods.

Programming costs have increased from 45% -- from 40% mainly driven by the effect of declining satellite revenues. Subscriber costs grew 18%. This reflects the spending to attract new subscribers as we continue to grow our subscriber numbers, we would expect this cost to decline in the future.

Broadcasting and infrastructure decreased 21% as a result of the accounting change for leases. The one-off costs account for around $15 of this per-subscriber increase. $76 million of cash was generated from operations. This compares to $126 million for the same period in FY '19. Working capital movements accounted for $16 million of the decline, with the remainder driven by lower revenues and higher operating costs. As we said at our year-end results, we are reinvesting in the business. And we did not pay a dividend in the period, compared to $33 million paid in the first half of FY '19.

Instead, this money has been spent on growth initiatives, such as growing our streaming services and repositioning the brand. Cash on hand at 31 December was $4 million, consistent with prior periods. Interest-bearing loans and borrowings is up $4 million at 31st of December 2018, and GBP 24 million higher than 30 June 2019, driven by the acquisition of RugbyPass. CapEx for the 6 months totaled $33 million, a decline of $6 million from FY '19. The vast majority of our CapEx is now directed towards our growth areas, with $20 million invested in streaming platforms, connecting customers to our satellite platform, enhancing the quality of the services delivered to customers, such as our HD expansion. Similar to other industry players, we're utilizing global partners for the delivery of our streaming services which reduces our capital burden and allows us to access technology innovations at a far greater pace than if we built our own infrastructure.

We are already operating within the target range of 7% to 9%. And continue to look for ways to optimize our capital allocation and investment. I'll now hand back to Martin, and we look forward to taking your questions.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [3]

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Thank you, Blair. Before we open to questions, I want to reiterate 2 important points. One is the 1 million customer target by 2021 and how we're going to achieve it. As we've noted, it's a significant target, and it will be a further all-time record for Sky when we get there. Now our initiatives to achieve that include, of course, the successful launch of our supercharged new entertainment streaming service by the middle of 2021; by growing the paying RugbyPass customers, through driving increased engagement from the over 30 million people who experience RugbyPass content every month and through the successful launch of our groundbreaking new digital products, which will be part of a technology road map to meet the needs of all New Zealander's who want to view great content.

And we look forward to sharing more details in the coming couple of months.

We're super excited by the possibilities that the increased number of customer relationships will give us. These relationships offer a wealth of opportunity to deliver new services to excite and delight all Kiwis. The second thing that I wish to deal with is to reconfirm the guidance that we issued in November, and I'm pleased to reconfirm that we expect our full year revenue and EBITDA to be within the range given then.

Now before we open for questions, let's take a moment to look at some of the great content that our customers will enjoy in the next few months.

(presentation)

Well fantastic array of content to look forward to over the coming months. Not sure how we'll find any time to do any work. But we're very happy now to take some questions, and we'll throw from the phone lines. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Wade Gardiner of Craig Investment Partners.

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Wade Gardiner, Deutsche Bank AG, Research Division - Research Analyst [2]

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Look, on -- when you're on Page 20 of the presentation, you talked about the programming costs going up in the future as some of those rights take effect. Can you just give us a bit of color or guidance around what sort of level we should be looking at there in the future? And also -- and the other question I had around cost was, just some color around areas for the cost reduction going forward as well?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [3]

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I'll deal with the programming one and then let Blair talk about some of the continuing efficiency work that we're doing and where we see we might be able to improve the operational aspects of the business.

In terms of rights, it's clear to everybody that we're in a very competitive market, at a particularly competitive point in time. We are very focused on retaining the key rights that matter to customers across the country. We've demonstrated our ability and willingness to do that. But we've also demonstrated our understanding of where to draw the line. There are things that are no longer on the Sky service and that's because we couldn't see the sense in it.

So we understand where the lines are, but we are in a competitive environment.

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [4]

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And on the cost front, we've introduced a whole bunch of new capabilities into the organization over the last 6 to 12 months. And those new capabilities will deliver unit cost savings out into the future.

There will be a lot more use of automation. And as we upgrade all of our equipment, we give both a better experience for our customers, a better experience for our supporting partners and our other content partners, and lower cost.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [5]

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And I think that's the key point is that, that the work that we do at this point forward is really about making sure that we really embrace the opportunities that becoming a fully-fledged digital multimedia business will give us.

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Wade Gardiner, Deutsche Bank AG, Research Division - Research Analyst [6]

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Would you like to -- on -- for both of those questions, would you like to put some numbers around that?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [7]

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We're not going to be giving any more guidance other than the numbers that we reconfirmed from last November at this stage.

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Operator [8]

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Our next question comes from Matt Henry of Forsyth Barr.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [9]

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I've got a few questions, but I guess I would like to just press on Wade's point to start. You've seen quite an escalation costs this year, including some one-offs. You made some acquisitions, you've recontracted programming rights, which are yet to take effect. You must have some sort of sense around what the broad cost range might look like in the next couple of years. I appreciate that there's a revenue uncertainty, but at least with some of those costs you bedded down, you must have some sense to what the escalation is. Are you not able to give us any sense about what the lift may be there?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [10]

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Look, I think by looking at the accounts, you'll be able to see the commitments that we've made into the future. I think you have to understand, and surely you can accept that there's a high degree of confidentiality around the commercial arrangements that we have completed. And giving a range as to what we might expect to pay into the future. I can't see any upside for us as we enter into negotiations for doing that. I'm sorry.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [11]

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Okay. Sure. I mean, obviously, we'll see it in due course. Just on Lightbox, again, we'll see it in due course. With the following -- with the earned accounts, but are you able to give us any sense around what you paid for that? And whether the EBITDA contribution from that is positive or negative? And whether that's material, now that you've taken ownership?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [12]

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Well, in terms of the arrangement that we had or have with Spark. We -- there was a $6 million payment, which is in the results announcement. What we did through this deal is put ourselves in a position to consolidate NEON and Lightbox into the clear #1 local streaming service, entertainment streaming service.

We acquired 130,000 customers as part of that deal, which drives the uplift from 795,000 at the end of December to 925,000 today. The majority of those customers are through a continued distribution arrangement with Spark as part of the transaction. We're very pleased about that. They have a very good sales and marketing capability, and we look forward to benefiting from that through that continued partnership. We, obviously, also have acquired good technology and good people. So overall, we think the deal makes sense to us. There will be a period of time -- and Blair can elaborate on, during which we absorb merger costs and the existing content arrangements that Lightbox had and rationalize those with the NEON ones. I don't know if you want to add anything else to that?

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [13]

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Yes. I think the critical thing to highlight is we've reconfirmed guidance. So there's not any material short-term adverse performance hit and as Martin touched on, there are synergies. We've got multiple platforms that we can rationalize. We've got the content deals that we can optimize, and we've got shared customers together with Spark, we can continue to deliver great entertainment content. So all in all, it's a great outcome for us.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [14]

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Yes.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [15]

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Is there any commitment from Spark around customer and revenue levels? Or is that at risk?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [16]

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Well, the precise nature of the relationship is commercially sensitive between the 2 of us. But as part of it, as I say, that we have -- we're carrying the existing Lightbox service and then the merged service to their customers, broadly, in the same way that they do currently. And we're very pleased with that relationship.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [17]

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Okay. One thing, I guess, jumped out in the numbers with cash flow. Which is, I guess, if you include the RugbyPass acquisition, is negative for the half. How focused are you on cash flow? And I guess thinking forward to just over a year's time, you've got a bond issue and how cash flow may influence -- or bond issue maturity, sorry, I mean. How cash may influence your thinking around what your options are for refinancing that bond maturity?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [18]

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We're extremely focused on cash flow. That's what the whole business is about. It's about making sure that you end up with a bigger pile of the cash than you started with. So we're extremely focused on it. We understand the capital structure that we have, as I'm sure you would expect, in accordance with every Board I've ever been on. The Board is constantly looking at the appropriate capital structure for our business. We've been doing that for the last 12 months. So we'll continue to do that. We are very comfortable with where we are at the moment. And we continue to make sure that we take the appropriate decisions, noting, as I say, that rigorous focus on cash flow and ultimately cash generation.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [19]

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Do you have a confidence level around the refinancing of that debt facility?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [20]

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I think we're extremely confident that we're on the right track, that our strategy makes sense. That you can see that the numbers have started to rise from a customer point of view, increased revenue will follow from that in due course. We understand that we're going through a period, a bumpy period with costs, driven by the need to change some things that existed in the business and by the need to add some things into the business, in terms of capability. And also through the competitive situation that we currently find ourselves in.

But we're very confident that the strategy makes sense. We think that that's something that our investors agree with. And we're highly confident that we will be able to achieve all of the things that we need to in order to continue on our path.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [21]

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Okay. And just lastly, you've obviously completed a couple of transactions this year. Are acquisitions something that you continue to look at? And if they are, are you able to give us, sort of, some sense around the parameters of those, strategic parameters, like geographies, type of entities, that kind of thing?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [22]

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We have a constant focus on what we can do in order to grow the business both organically and inorganically. I'm not going to make any comments about anything that we're specifically looking at the moment.

Our priorities and parameters are probably the same as they were with RugbyPass and with Lightbox. We're looking to add, in a complementary way, to the services that we have in order to be able to reach customers perhaps more broadly, but with a deeper range of products to add value to their relationship with Sky.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [23]

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Can we -- I guess, just how -- what is the likelihood that may sit outside, like New Zealand? Like, I guess, you can understand RugbyPass and its importance to your existing content portfolio, but do you think we may see -- or would you consider other options internationally beyond rugby?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [24]

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I would never say -- I would never say never, but that's not a particular area of focus for us at the moment.

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Operator [25]

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We will now take our next question from Philip Campbell of UBS.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [26]

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Martin, just a couple of questions from me. Just in terms of the satellite churn, I was wondering to get kind of your thoughts on why the satellite churn has declined. And then the second one was, whether you can make any comments -- obviously, lots of press over the last few days and week just about changes to the rugby format, I'm just kind of curious, just to kind of get your take on that?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [27]

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Yes. Look, I think there's a short answer for the satellite churn. I think we're just doing -- we're doing a better job. There's a range of things that modern media companies do in a subscription environment, and we weren't doing them. I think that our teams are doing a magnificent job, considering some of the things that we didn't have -- some of the tools that we didn't give them in order to do an even better job. We've started to give them those tools. And the proof is in the pudding. And the churn rate declining is -- shows that they they've been able to take those extra assets and resources and start to really serve customers in a better way.

Now with regard to the rugby speculation at the weekend. The goal I know is we've got a contract until the end of 2025. We are very certain and clear that, that contract is with partners who understood what they were doing when they signed it.

I'm sure there'll be lots of speculation about a lot of different things, but we're very comfortable with where we are from that point of view and with our ongoing relationship with New Zealand Rugby more broadly.

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [28]

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I think I'll just add to Martin's comments about the things that we're doing. If you look at removing SoHo for some customers, HD fee, RugbyPass, there's almost $30 per month of value for customers that they now have. So for customers who were previously thinking about a choice between a competitor or us, the reality is now they can have both and still be paying about the same money as they were before.

So that's a critical part of our strategy.

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Operator [29]

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Our next question comes from Arie Dekker of Jarden.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [30]

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Yes, look, I guess, I just want to, kind of, go, a little bit, to the momentum in the business on revenue and OpEx. I mean, while guidance has obviously been reconfirmed that the EBITDA is down 30% plus in FY '20. So I think that's why there are a lot of questions sort of going to what the outlook is for OpEx. Clearly, you've got some increased programming costs coming. But offsetting that, you've made reference to some of the content you're letting go of as well and some of the choices you've got, I guess, around your expenditure. Just in light of that quite strong negative momentum in the business in FY '20.

Can you just talk a little bit about where you see opportunity? And to the extent you can quantify it around reduced OpEx in FY '21.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [31]

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Well, obviously, there's 2 parts to it. There's rights fees, which will obviously increase in FY '21 from where they are today. Because the -- several of the new contracts that we've signed will kick in, in that period.

I'll let Blair talk specifically about some of the OpEx areas that -- or some of the opportunities that we see to make the business more efficient.

But I would just reiterate that we faced a task or a simple choice, really, a year ago, which was to carry on as we were or to seek to really transform the business and set it up for a sustainable mid-term future as a fully-fledged digital multimedia business. We chose the latter.

And that really means that we have to both take some painful decisions around changing some parts of the organization, which has involved one-off costs and then adding in new skills and capabilities and resources just -- as we just talked about, to do things like enable us to serve customers in a better way to improve our churn rate.

And that's sort of the reality of our business. We needed to do that or else we would continue to see the trends which we'd seen for the 2 or 3 years prior to that.

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [32]

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Yes, I think, obviously, there are some one-off costs and organizational change costs that we've incurred over the last 6 to 12 months. And so they won't repeat. And they are quite significant at the moment. Then we start to see the benefit of the -- some of the growth businesses kicking in. And we've seen some pretty pleasing uplift in streaming subscribers, and we've seen some pretty good numbers coming out of RugbyPass in the last week or so, with the start of the Six Nations and Super Rugby around the world. So it is a trade-off between restricting what we do, which limits our appeal to customers and making sure that we put the precious money in the right spot.

We continue to optimize our content portfolio. It is a large portfolio. We have lots of choices in front of us about which are the rights content that we want to keep for New Zealanders, and what are the ones that they really are willing to watch and pay for. So that continues. We've been doing that since Sky started, almost 30 years ago.

So we'll continue to do that, we'll continue to be better at it, based on the changing needs of the customers and the richer information that we can learn about customers in a streaming world than from our past.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [33]

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Sure. Just on the programming notes. And yes, I mean, the notes do show the large uplift in future commitments associated with new contracts signed, which is up about $260 million on the previous peak. Can you just, sort of, talk to, I guess, the accounting of that? And I'm just reading note 6 as well. I guess, am I right to say that the current asset programming rights inventory, that's for rights that you've, I guess, expensing in the year ahead, specifically, they don't relate to the step-up that will come in the future associated, say, with the new SANZAR agreement, except that for the fact that you have had to -- what looks like expense per shares that you issued all in this year? Am I interpreting that, right?

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [34]

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Yes, pretty close. So the -- what's on our balance sheet is essentially the amount of money that we've prepaid for content and their amortizers based on the type of content editors. Included within that is the value of the shares that were issued to New Zealand Rugby as part of our deal. Now that amortization will kick in when the new deal kicks in. And then later in the accounts, as you pointed out, there's some longer time commitments. They are up from the peak of 3 or 4 years ago, but we're a cyclical business, and those rights had a peak around about every 5 years. And that's where we're at, at the moment. And then as those commitments start to release and we make payments to our partners, those commitments come down, which is what's been happening over the last few years.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [35]

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Sure. Just in terms of monetization, I guess, and strategy on revenue. Martin, was I right -- did I hear you right that you said the middle of 2021 for the relaunch or the launch of the sort of the new NEON/Lightbox service?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [36]

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What I said was later this year during 2020 calendar year, we'll be looking to launch a new -- 2 new services, specifically at the moment. One will be the merged NEON/Lightbox service, and the second will be a totally new digital platform. For those of you who've delved a little bit more into our technology. We have multiple different platforms for all of our different streaming services and this will enable us to bring all of those services into one place in due course. And that'll obviously help with that OpEx rationalization that we're focused on achieving.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [37]

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And will that be an app or will it be both an app and a IP-enabled, I guess, PAK.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [38]

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No, no, this is a pure streaming service. We -- after we canceled the IVP service last year, we said that we would focus on how we can enhance the services that are provided within the DTH space.

We've been focusing on the look and feel of the channels and the presentation of the channels to add more value and looking at certain elements of the pricing and packaging around those services.

We continue to evaluate the opportunities that we have to do something more meaningful in that DTH space.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [39]

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Yes. I guess just then finishing off on the DTH space. I mean, I guess, the rate of decline is reducing over comparable first half period that still sort of sits around that 20,000 mark on the horizon as a kind of enhancements to the platform that you think are going to be key there to sort of stabilize in that base. Or do you have some initiatives that go to kind of pricing and bundling of that content and things like the MY SKY fee that you plan to make changes on?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [40]

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I'll let Blair talk about some of the work that we're doing for pricing and packaging and some of the things that we're thinking. Also the work that is evolving in that area. But to answer the first part, the things I said that we were doing in terms of giving people better resources and tools in order to drive the churn rate down. That's literally been the last 2 months. So we've got a lot more to get out of the work that we've begun. So we fully expect to see those trends continue in the right direction. And...

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [41]

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Yes. Look, I think if you're focusing on what we've been doing over the last 2 to 3 months. We have put a whole bunch of new offers out for specific customers. They're giving us feedback on that constantly. Good customers always give us feedback. And we've got a bigger piece of work going on running in parallel as we look to the future and all of the new services that we've got coming, to make sure that there is a coherent value exchange with our customers and that they've got elements of choice, flexibility, control, all the things that customers generally want.

And we're going to just make sure that we package that up and communicate it in a way that works for them and works for us.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [42]

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Right. And then just final question from me. Just in terms of CapEx, should we expect a similar level of CapEx in the second half to the first half? Or do you sort of see that coming down? And if so, where would the reduction be coming from?

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [43]

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Yes. No, it will be about the same as the first half. The programs that we've got underway, some of them only just recently started. Some of the ones we started earlier in the year are finishing. So by and large, it will be about the same.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [44]

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And as you like -- as you look to sort of, I guess, that streaming future and a more asset-light sort of business and obviously, through the period, there was some speculation around outside broadcasting and that sort of thing. Have you got a sort of a feel for where CapEx might sort of be sitting over the next couple of years as you look to reduce the asset intensity?

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [45]

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We'll stick to the 7% to 9% range. If it was this -- has been media speculation, we put a statement out and respond to that. We've looked at what the future capital demands of our business and partnering with other organizations in the outside broadcast will probably make sense for us in the long term. So those conversations are continuing. But our goal is to keep within the 7% to 9% range over the -- over an average of a few years.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [46]

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I would just reiterate that I think the things that we talked about from an outside broadcast point of view, there's 2 elements to it. One is people and the other one is kit. And the only conversations that we're having revolve around the kit and the service provision. The people element will stay the same. We're a mix of freelance and permanent staff, and we're delighted about that because that's where the real art is in that business.

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Operator [47]

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(Operator Instructions)

Our next question now comes from Brian Han of Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [48]

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How many of the 130,000 Lightbox subscribers are paying customers? And what is the churn differential between Lightbox and NEON subscribers? And is it much of a subscriber overlap between those 2 services?

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [49]

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Well, taking those in reverse order, if I can. There's not much overlap, no, which is obviously an opportunity. In terms of churn, you can't really look at churn as a churn percentage in streaming services. In terms of the reach that Lightbox has achieved, it has been put in front of more New Zealanders than NEON has. So that increases the pool of people that we can contact and show them again what this new enhanced service looks like.

But within the streaming world, it's very content driven, it's very -- much more as a -- almost a pay-as-you-go type environment in some regards, because you have those people that will take a regular monthly subscription and those that will dip in and out. And we have to be flexible to people's needs and make sure they're able to watch the content that they want at any particular point in time. And with regard to how many of them are actually paying. I think I said that the majority of them are part of a -- of our ongoing partnership with Spark, and we're not going to disclose any more detail around those customers at the moment. But obviously, our focus, over a period of time, will be to encourage people with the new merged service to go out and contract it. And I think I'd love to see them obviously take it on that monthly basis and just pay through the whole year because I think there's wonderful content every month.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [50]

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And Blair, just a little help on this one. On a like-for-like IFRS adjusted basis, what would be the EBITDA in the prior half?

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Blair Jonathan Woodbury, SKY Network Television Limited - CFO [51]

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So there's roughly about $14 million of lease costs that was previously above the line, which now flows into depreciation and amortization. You can't explicitly see it because there are moving parts in each part of the business. So within the broadcasting and infrastructure line, whilst the satellite leases come out, in comes RugbyPass and some of the other things that we're doing. And in the depreciation, in comes the amortization, in comes the satellite lease costs. But again, some of our older assets have reached end of life. So it's not quite one-for-one match.

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Operator [52]

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We have no further questions over the phone at this time.

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Martin David Stewart, SKY Network Television Limited - CEO & Executive Director [53]

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Okay. Well, it just remains for me to say then that thank you very much for your time and attendance. And we look forward to seeing some of you individually over the coming weeks. So thanks again. Thank you.