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Edited Transcript of SKY.L earnings conference call or presentation 20-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q3 2017 Sky PLC Earnings Call (UK/European Analysts and Investors)

Isleworth Middlesex Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Sky PLC earnings conference call or presentation Thursday, April 20, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew John Griffith

Sky plc - CFO, Group COO and Executive Director

* Jeremy Darroch

Sky plc - Group CEO and Executive Director

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Conference Call Participants

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* Jeremy A. Dellis

Jefferies LLC, Research Division - MD and Senior Telecommunications Analyst

* Matthew John Walker

Crédit Suisse AG, Research Division - Research Analyst

* Nick Delfas

Redburn (Europe) Limited, Research Division - Research Analyst

* Yin Kin Tang

UBS Investment Bank, Research Division - MD and Head of Telecom Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Sky Q3 conference call. My name is Maddie, and I will be your coordinator for today's conference. (Operator Instructions) I will now hand you over to Mr. Jeremy Darroch to begin today's conference. Thank you.

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [2]

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[ Good morning ], officer. And in terms of the agenda for the call, what we're going to do is I'll start by taking you through the headlines of our Q3 results, Andrew will then take you through the detail of our operating and financial performance, and then I'll come back on at the end on a couple of areas before we take any questions.

So it's been another strong quarter for Sky and, of course, what's our seasonally quietest period, and we continued, I think, to make good progress in implementing our strategy right across the group. We attracted more customers across our platforms and territories. We added over 0.75 million new customers in the last year. That includes 106,000 in the third quarter. And our total customer base now stands at 22.4 million households.

We had a good financial performance, and we're on track. Group revenue grew by 11%. That was up 5% on a constant currency basis, and that was in line with our guidance. And we delivered good growth across each of our territories and each of our product categories.

We achieved adjusted EBITDA of GBP 1.5 billion, and operating profit was in excess of GBP 1 billion. Of course, that's after absorbing the step-up in the new Premier League contract. And I think it shows the strong underlying progress that we're making and includes, as part of that, really strong growth in operating profit in Italy, Germany and Austria.

We've taken some important steps this quarter on our growth plans that we've previously laid out to you, most notably, of course, the successful launch of Sky Mobile, which is going to create a substantial future source of revenue and profits, we hope.

We also announced today a major new multi-year coproduction deal with HBO and the groundbreaking VR partnership with Sir David Attenborough, but more on all of that later on.

That altogether, we entered the final quarter of our financial year in good shape. And whilst we expect the broader consumer environment to remain somewhat uncertain, we're on track for the full year.

I'll now hand you over to Andrew to talk you through the detail of the operating and financial results.

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [3]

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Thank you, Jeremy, and good morning, everyone.

So I'd like to start with U.K. and Ireland, where we're making strong progress in a year of investment. We added 40,000 new customers, taking our total customer base to 20.7 million. Despite a weak advertising market, our U.K. revenues in the period were up 4%, with every part of (technical difficulty). And our operating profit was GBP 918 million. Our customers in the U.K. are continuing to see value from our investment on screen. This quarter, Sky Atlantic achieved a standout viewing performance, driven by a strong slate of drama, including the new hit show Big Little Lies and the return of Fortitude, Lucky Man and Billions. In a big quarter for rights negotiations, we've secured long-term right renewals with significant third-party channel subscribers, like NBCUniversal, UKTV, A+ E Networks and Discovery. And on Sky Mobile, as Jeremy said, we've most recently stepped up a gear, with the launch of handsets at the end of March. This features the latest devices at very competitive prices and gives customers the option to upgrade their handset every 12 months, building on our unique offer to let customers save by rolling our news data every month.

In Germany and Austria, we've had a very strong quarter, driving customer growth and market penetration. We added 73,000 new customers in the third quarter, taking our total customer base there to 4.9 million. That's now over 1 million customers we've added since our acquisition of Sky

Deutschland. Revenues increased strongly by 10% in the period, EBITDA grew by 117%, and operating profit increased by GBP 43 million year-on-year.

On screen, viewing figures were up by 5% for both Bundesliga and Champions League Football. And Sky 1 has made a really excellent start since its launch in November. It's already become our #1 entertainment channel by reach.

Finally, Italy, where we've continued to deliver good revenue growth and strong operating leverage. Our revenues in Italy were, on a like-for-like basis, up 4%. That's our fastest rate of growth in Italy for 8 years. And at GBP 91 million, our operating profit was over 3x higher than last year. Obviously, we've got the ongoing contractual dispute with Telecom Italia. And more generally, the ongoing economic uncertainty in Italy meant that we gave back some of the year-on-year customer growth this quarter. However, our total customer base is still 68,000 up on the prior year and stands at 4.8 million. And on screen, our Italian viewing figures have been very positive. The latest series of MasterChef achieved record audiences. Sky Cinema viewing grew by 6%. And we've seen really good start to the new Formula 1 and Moto GP seasons, with viewing up around 4%.

So turning to the financial results. We've made good progress executing our financial model. As you know, it's combining mid- to high single-digit revenue growth with a structured approach to cost to convert that into growing profits and shareholder returns over time.

If we look first at revenue, we've delivered GBP 9.6 billion so far this year, which represents strong growth of 11% or 5% on a constant currency basis. Within that, subscription revenue was up 4% to GBP 8.1 billion, and this was driven by the 769,000 new customers that we've added over the last year as well as the June 2016 price change in the U.K.

Now we've seen tougher ad markets as we've got into calendar 2017, particularly in the U.K. and Italy. But despite that backdrop, our group advertising revenues were up 4%. We outperformed the market in each territory through a combination of viewing share performance as well as benefits from targeted advertising. And just to call out, in Germany, our advertising revenues were up 30%; and in Italy, up 13%. Elsewhere, in some of our newer revenue streams, we're seeing faster rates of growth, with transactional revenue up by 10% and our program and channel sales increasing by 20%.

Moving on to costs. Total costs were GBP 8.6 billion, that's up 8%, primarily reflecting the step-up in the new Premier League deal. We'll incur a further GBP 135 million this quarter, after which, that cost is going to be flat for the next 2 years. Excluding the Premier League, our costs only increased by 2%, which is obviously well below the rates of revenue growth and in part reflects the success of our efficiency programs across the group, and that includes our leading digital first program in the U.K., which has delivered GBP 80 million in savings year-to-date relative to 5 years ago by cutting incoming service costs that we handled in half. Operating costs were down 1%. That's an absolute saving this period of GBP 36 million and were down over 200 basis points as a percent of revenue.

So bringing all this together, adjusted EBITDA was GBP 1.5 billion, and operating profit was just over GBP 1 billion. Net debt was GBP 7.2 billion and over GBP 100 million lower than at the end of December, with our net debt-to-EBITDA ratio at 3.1x.

In summary, I think our financial results today shows strong execution of our strategy, and we remain on track for the full year.

So I'd now like to hand back to Jeremy.

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [4]

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Okay, thanks, Andrew. I wanted to conclude just by rounding up the progress we've made on some of the growth plans that we had laid out to you on our recent Investor Day. I think they're all pretty good examples of how great content, innovation and better service are creating the best possible experience for our customers.

So our content offerings there really never been stronger, following a strong third quarter, customers can look forward to what's going to be an exciting summer on screen across our entire portfolio. Now central to this for this year will be an outstanding slate of our own productions, including the likes of Riviera and Guerrilla, the return of Gomorrah as well as a strong lineup of hit U.S. shows and the seventh series of Game of Thrones. In movies, we're going to be providing access to the best premieres, with more Hollywood blockbusters mixed with popular local titles. So we'll have the likes of Jason Bourne, Captain America: Civil War and Pelé, which is one of our own productions from Italy.

As always, we'll have a particularly strong summer of sports, with the climax of each of the domestic football leagues. The British and Irish Lions, of course, will be taking on the All Blacks. And we hope we will have the most widely open Formula 1 championship for many years. And then finally, we're delighted to launch our third sport in Ultra HD when we cover the England-South Africa Test series to Sky Q customers in July.

We've also announced today some new exciting partnerships that I think are real validation of our Sky Original's strategy. So we're joining forces with HBO to create a new global drama series powerhouse. Now this $250 million multi-year coproduction deal will bring together 2 of the world's leading direct-to-consumer brands to commission and produce high-quality drama for a global audience. And we expect to see our first commissions air in 2018, with initial projects already in development.

We'll also be taking a big step forward for VR. We're teaming up with Sir David Attenborough and the National History Museum on a new initiative, a new virtual reality experience for its customers, customers will enjoy later this year.

And of course, our innovation continues at pace. So we've recently launched a number of innovations for Sky Q in the U.K., including a great voice search and new personalization features. And we look forward to rolling out Sky Q to our other territories in due course.

And then we're making further big steps in service delivery, which we think, once again, is going to transform our customers' service experience. So of course, we've launched our new My Sky digital service here in the U.K. At the heart of that is a new app, which has already been downloaded by some 1.2 million customers in the last 2 months alone. And next to it will be messaging. This gives our customers an entirely new way of communicating with Sky. So like SMS or WhatsApp, they don't need to wait whilst our customer adviser sorts out their query. And on the course of this year, we'll continue to enhance our digital service, which, of course, got the dual benefit of not just improving the customer experience but also transforming our cost base and leveraging greater efficiencies to the P&L.

So in summary for the 9 months, each of our businesses are performing well, I think, slightly broader environment remaining a bit uncertain. We continue to deliver on our strategy, and we are on track for the full year.

As we move on to questions, I just need to remind you that, of course, we're currently constrained by the Takeover Code as a result of the 21st Century Fox bid, and so we're limited on what we can say about that subject. But we hope you'll understand that -- you'll understand if we can't answer all of your questions as fully as we might like.

So with that, I'll hand back to the operator to take any questions that you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question comes from the line of Polo Tang from UBS.

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Yin Kin Tang, UBS Investment Bank, Research Division - MD and Head of Telecom Research [2]

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I actually have 3 different questions. The first one is in terms of U.K. revenue growth. So if I look at the quarter-by-quarter movement, it's about plus 5% revenue growth in U.K. Q1, Q2. That has slowed to around about plus 3% in Q3. So how optimistic are you that revenue growth in the U.K. can accelerate in Q4? And can you maybe talk about the moving parts, for example, having an impact? Will that be from communications price rises? How big a driver will Sky Mobile be? That's the first question. Second question is really on U.K. net adds. Obviously, you did 40,000 in the quarter. But is there any color on the split between TV net adds and stand-alone broadband net add? And my final question is really just about seasonality of net add on NOW TV. So does it follow a similar pattern to your DTH business, with Christmas being a big quarter? Alternatively, is it more hit driven, depending on timing of key shows like Game of Thrones? And then maybe you just talk about how NOW TV is doing in Germany and Italy?

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [3]

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Sure. I am probably going to do the second 2. I think in U.K. net adds, we're not going to sort of break that out at the quarter. It's just, as you know, 13 weeks, not quite as 13 weeks. Generally, we're pretty happy in the U.K. I mean, gross sales are good in the U.K., churn, obviously, is a bit higher, and that's affecting the net adds line in the quarter. So as and when we bring churn down, then that should flow through, I think, to overall growth. In terms of seasonality, actually, the business, in just generally over the last 3 years, has start -- in the U.K. has started to become a little bit more weighted in terms of growth with the first half. In terms of OTT, the major piece, as you said, one, which is if you have a big content piece, we can get behind that, and that can drive growth. It also tends to be stronger in the run-up to Christmas. And of course, broad -- the broadband market, it was to do with a bit more broadband that affects our mix, that tends to be its strongest in the sort of post-summer period, back to school, back to university. So that's pulling a little bit of our growth in the first half relative to this quarter. In terms of revenue growth, Andrew?

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [4]

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Yes, there's nothing much to add. I mean, you've got communications that we -- that price, where it landed a quarter later this year, so obviously, didn't get any benefit in Q3. We will get that benefit in Q4. In terms of that year-on-year rate of growth, we're at nadir of that. We'll see what happens in advertising, but expect that to be slightly better this quarter than last. And then, as you say, Sky Mobile will see the first benefit of that. We really weren't in market for this quarter. Handsets only launched at the last few days of the quarter and really started going above the line. So we'll start to see some benefits to the U.K. business of mobile this quarter.

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Yin Kin Tang, UBS Investment Bank, Research Division - MD and Head of Telecom Research [5]

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And can you maybe just talk about NOW TV...

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [6]

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Sure.

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Yin Kin Tang, UBS Investment Bank, Research Division - MD and Head of Telecom Research [7]

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In terms of [ particularly ] Germany and Italy?

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [8]

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Yes, sorry. Yes, yes, yes. So I think it's -- I think decent would be what I would say. In Italy, we had originally planned more to come from our sort of Telecom Italia deal. And that's -- as you know, we're in dispute there, and that's really not adding anything. So we're stepping up our own focus so that we can just get more of those customers directly in NOW TV is a core part of that. It's done okay. It needs to -- we just going to have a big focus in the next 6 months in the Italian business, that's trying to do a bit better, I think. In Germany, pretty good. It started well and is a good part of the mix. So following across our new screen businesses overall, whether it's Sky or NOW TV, I'm happy with the progress we're making of big, big screening business to the platform. I think if you look at the specifics, a little bit more mix in terms of performance.

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Operator [9]

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So our next question comes from the line of Matthew Walker from Crédit Suisse.

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Matthew John Walker, Crédit Suisse AG, Research Division - Research Analyst [10]

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I've got also 3. So on churn, you said it was roughly stable in the U.K. Can you give us a bit of more color on what the exact churn rate was? The second question is, can you give us an update on AdSmart and the run rate of advertising on AdSmart maybe for the U.K.? And lastly, I believe consensus is around sort of GBP 1.4 billion to GBP 1.45 billion for the group for the year. Can you say how you're feeling about that? Do you think that's a number you can hit or you have to improve the rate of decline in EBIT to get there? So can you maybe say a few words about that?

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [11]

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Sure, I think I'd give those to Andrew.

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [12]

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Yes. And -- so I think we've been pretty clear, we’re saying that churn is roughly stable, and that's when you've come into a slightly quieter quarter. The post-Christmas quarter is obviously a time that customers reappraise their bills but also one in which we've communicated a communications price rise to half that base. So nothing more to add on that. AdSmart is going at a good clip. It's running at -- well, I think the last number we said, it was a run rate of around over GBP 70 million per annum, and it's exceeded that, so we're not going to start breaking out a subsplit of advertising revenue. So our advertising outperformed the market in each market. And it's not just -- I just want to [ elaborate ], it's not just about innovation. Innovation is a big part of it, but it's also about the great value that we offer advertisers. There's a connection between the increased quality you're seeing on screen of ad content and the fact that we're able to sustain outperformance in the advertising market in every market that we're in. So it's more than just AdSmart that's allowing us to outperform. And we can't guide on consensus during a bid, but suffice to say, our normal sort of continuing obligation's to let you know if any material changes continue to apply. And we're happy with where we are.

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Operator [13]

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And our next question comes from the line of Nick Delfas from Redburn.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [14]

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So obviously, 2.6% growth in Q3. Could you talk about the way you account for the handsets and confirm that that's going to be 100% upfront for the handset revenue even though the customer may be paying over 12 or 24 months? And then secondly, just going back to your point about -- or Matthew's point about consensus. Just to press you on that, I mean, obviously, it's not a material change because it's only going to be a couple of percent for the full year. But is it fair to say that EBIT is unlikely to be up year-on-year for the group and that, therefore, you'll land somewhere around GBP 1.4 billion rather than the current GBP 1.45 billion that consensus have?

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [15]

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Nick, there's nothing I can add. We're under the Takeover Code. It's very clear what companies can and cannot say. We've not made any change to any of our guidance since November. So I'm sorry, but that's just the environment under which we operate. And we've been very clear today that these results are an on-track set of results. They're on track with where we expect to land the year. In terms of handsets, I think we recognize the revenue and the costs both upfront, and therefore, we make a small margin -- not a large margin, but we make a -- we booked a small margin on the handset sales. That doesn't affect this quarter, the quarter we're reporting, because, obviously, we only launched handsets post the end of this quarter.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [16]

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And is that something -- I mean, obviously, we're maybe moot by that point, but if you're still reporting as a separate company in July, is that something you'll break out, or will that be just included in the subscription revenue?

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [17]

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Look, it will be included somewhere within our -- what we call our mobile revenue in terms of the disclosure. I think twice a year, we’re on our fee, we try and give you a really good understanding of the different drivers of the business. Just as we do give you some shade and color on things like AdSmart or transactional revenues, just try and give you a good sense of what's driving the business. I'm not sure we're going to change the statutory headings we report under because investors tell us they value the consistency of those over time.

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Operator [18]

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And our next question comes from the line of Jerry Dellis from Jefferies.

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD and Senior Telecommunications Analyst [19]

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I've got 3 questions, please. Firstly, on U.K. churn. I think in the past, you'd said that the pickup in U.K. churn was related to the broadband-only cohort in your customer base. Is that specifically where the stabilization occurred this quarter? And what's been the trend since the new price increase came into effect in March, please? Secondly, related to fiber. I think you said in the trading statement, there's been a 50% increase in fiber penetration to 24%. What exactly does that mean, please? How many fiber customers do you actually have? To what extent was there a pickup in your fiber net adds in the last quarter? And then, finally, related to Italy, please. What proportion of your net adds has historically been coming from telecom partners? And what is the road map towards a resolution to the dispute to win the Telecom Italia deal?

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [20]

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Thanks, Jerry. Look, on churn, U.K. churn, there's obviously a mix. So I think we've alluded to broadband because that sort of gives some greater color as to what is there. I mean, I think if you look at this quarter, with all the things that you're facing, I think post Christmas, the consumer economy in the U.K. generally has felt a bit -- direction's a bit tougher than it was, so there's a bit of that. It's a pretty promotional market, so there's always, I think, a heightened -- or that leads to a heightened number of offer seekers and people who spin around, and well, I just try and not to play that game, stay away from that, and that's fine. And just generally, as broadband increases as part of our mix, then that -- the consequence of that, it leads to a bit higher churn because broadband tends to have a bit higher churn versus DTH. But I think these are all sort of marginal. I think the big thing for us is to just execute our plans, particularly the loyalty program, which is going to roll out in the summer, because there, those sort of things, mobile will be a big part of our loyalty, will be the bigger levers, I think, that will affect our churn. In Italy, we haven't really split that out. I mean, it's a bit -- it's been -- the past, been a better growth, so obviously, that's gone away. It's in legals now, so there's -- we're just having resolution of that, and so there's not a specific timeframe that I can give you on that. But as always, when one opportunity runs its course, then we'll just have to find another away. I mean, that's what we do. And in terms of fiber, Andrew?

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Andrew John Griffith, Sky plc - CFO, Group COO and Executive Director [21]

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Yes, on fiber, I mean, the way you get to the 50% is that it's currently 24% of our broadband base is taking fiber. 12 months ago, it was 16%, and so the 50% is just the percentage difference between those 2.

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Operator [22]

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(Operator Instructions)

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Jeremy Darroch, Sky plc - Group CEO and Executive Director [23]

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Okay. I think good stuff for everybody. Thanks for joining the call today. It's obviously been a busy quarter, as always, but I think we exited the Q3 with the business in pretty good shape and, as Andrew said, on track for the full year. And so we look forward to talking to you next time, and have a good day.

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Operator [24]

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Thank you. Thank you, ladies and gentlemen, for joining today's conference. You may now replace your handsets. Thank you.