Sky PLC Financial Review As at 30 June 2015


Group financial performance
To provide a more representative analysis of ongoing performance of the Group, all commentary down to the operating profit level for the Group is on an adjusted basis as if we had owned Germany and Italy for the full year from 1 July. The financial results of Germany and Italy are translated into sterling at a constant currency rate of €1.31:£1.

Unless otherwise stated, adjusted figures below are from continuing operations and on a recurring basis excluding i) the impact of Sky Bet as this is presented as a discontinued operation; ii) set-top-box sales to Italy which are now an intragroup transaction; and iii) ESPN carriage revenue in the UK and Ireland from FY14 comparatives, as we no longer retail the channel.

Numbers below the operating profit line for the Group consolidate Germany and Italy only for the actual period of ownership from 12 November and are on an adjusted basis.

Our statutory financial reporting consolidates Germany and Italy for the period from 12 November 2014 to 30 June 2015. During this period Italy contributed revenue of £1,297 million and operating profit of £25 million while Germany contributed revenue of £866 million and an operating loss of £21 million.

Revenue
We achieved excellent growth in Group revenues which were up  5% to £11,283 million (2014: £10,776 million). Revenue in Germany was up 9% to £1,377 million (2014: £1,262 million) whilst revenue in the UK was up 6% to £7,820 million (2014: £7,368 million). Revenues in Italy remained resilient at £2,086 million (2014: £2,140 million) despite the tough economic backdrop.

We have delivered strong rates of growth across all of our main revenue streams with good consumer demand for our products and services, helping drive subscription revenue up 5% whilst transactional revenue was our fastest growing area with revenue up 22%. We also achieved good growth in both advertising (+4%) and wholesale (+5%) revenues highlighting the strength of our ability to monetise content.

Subscription revenue growth of 5% was underpinned by excellent customer growth across the group of almost one million customers and strong product growth of 4.6 million, with the largest proportion of revenue growth continuing to be delivered through the UK where revenues were up over £300 million. Alongside this, our best year of customer growth in Germany drove a 10% increase in subscription revenues, whilst in Italy we held total customers and revenue flat.

Transactional revenues increased by 22% to £173 million (2014: £142 million) as we benefited from the success of our Buy and Keep service, which surpassed weekly revenue of £1 million in Q4, and NOW TV transactions, which totalled almost 1.5 million over the past 12 months.

Our content-related revenues also performed well. Wholesale and syndication revenues were up 5% to £550 million (2014: £524 million) largely driven by continued growth in the UK where revenues were up 19% as success on screen led to more favourable terms for our channels with wholesale partners. Alongside this, revenues were strong through the distribution of our programming internationally and the first time consolidation of Znak&Jones and Love Productions. In Italy, underlying wholesale revenues were broadly  flat year on year (excluding the benefit in the prior year from Champions League resale revenues), whilst revenues in Germany were slightly down following the successful migration of former Deutsche Telekom wholesale customers to a retail relationship in the prior year.

We delivered good growth in advertising revenues of 4% to £716 million (2014: £690 million) with Germany delivering excellent growth of 26% through higher sellout rates and increased inventory around Bundesliga. Advertising revenues in the UK grew strongly, up 5%, due to the benefit of incremental AdSmart revenues combined with Sky Media increasing their share of net advertising revenue by almost 170 basis points, while advertising revenue was down in Italy as we lapped the €27 million benefit of the FIFA World Cup revenues in Q4 last year.

Costs
Total Group costs grew by just 3%, well below the rate of revenue growth, to £9,883 million (2014: £9,591 million) as we maintained tight discipline over our operating cost base while continuing to invest where our customers see the greatest value.

Programming costs increased 5%, in line with revenue growth as we increased the depth and breadth of our offering. We launched the exclusive ITV Encore channel in the UK in June 2014 and expanded our channel line-up in Germany, as well as having a full-year impact of the new Sky Atlantic channel in Italy. We continue to invest in a diverse content portfolio, with an enhanced box set offering in the UK and increased investment on Sky originated content, with successes including Fortitude and 1992. The strong growth in Sky Store revenues has driven an increase in our transactional programming costs.

Our network costs in the UK were up only 3%, well below the rate of home communications revenue growth.

Sales, General and Administration costs grew by just 1% as the higher up-front cost of strong subscriber growth in Germany was offset by efficiencies made across the UK and Italy as part of their respective operating efficiency programmes.
Profits and earnings
Operating profit grew strongly, up 18% to £1,400 million (2014: £1,185 million) as we combined excellent revenue growth with careful choices within our cost base whilst continuing to invest in programming. This has driven a 140 basis point expansion in our operating margin.

The share of joint ventures and associates’ profits was £28 million (2014: £35 million) and net finance costs increased by £91 million to £200 million (2014: £109 million) due to the interest charge associated with an additional £5.4 billion of gross debt that we issued during the year.

The tax charge of £251 million (2014: £237 million) was at an effective tax rate of 21%.

Profit after tax for the year grew by 6% to £945 million (2014: £892 million) resulting in adjusted earnings per share of 56.0 pence (2014: 57.1 pence) after accounting for the higher number of shares following our issuance in July 2014. Over the year the weighted average number of shares excluding those held by the Employee Share Ownership Plan (‘ESOP’) for the settlement of employee share awards was 1,690 million (2014: 1,562 million). The closing number of shares excluding the ESOP shares at 30 June 2015 was 1,704 million (2014: 1,546 million).

Adjusting items
Statutory profit for the year includes a gain of over £1 billion relating to a £492 million gain on the disposal of available-for-sale investments; a £299 million gain on the disposal of our stake in the National Geographic Channel; and a profit of £600 million on the sale of a controlling stake in Sky Bet. This was partially offset by operating expenses of £396 million principally comprising the costs of a corporate efficiency and restructuring programme, the costs of a programme to replace aged customer equipment, advisory and transaction fees incurred on the purchase of Sky Deutschland and Sky Italia, costs of integrating those businesses in the enlarged Group and the ongoing amortisation of acquired intangible assets.

Statutory profit after tax was £1,332 million (2014: £820 million).

Following the sale of a controlling stake in Sky Bet on 19 March 2015, the results of Sky Bet are now presented as a discontinued operation. The sale resulted in a profit on disposal of £600 million which is included within profit for the year from discontinued operations.
A reconciliation of statutory to adjusted numbers is detailed in Non-GAAP measures.

Group cash flow and financial position
Group free cash flow increased year on year by 20% to £1,060 million (2014: £885 million) while net debt increased to £5,056 million (2014: £1,212 million) as a result of the acquisition of Sky Deutschland and Sky Italia in November 2014. Gross debt as at 30 June 2015 was £7,534 million with cash of £2,478 million. The ratio of net debt to EBITDA at 30 June 2015 was approximately 2.5 times. Sky has an investment grade credit rating, being rated BBB by Standard & Poors and Baa2 by Moody’s, both with stable outlook.
As at 1 July 2014
£m
Cash movements
£m
Non-cash movements
£m
As at 30 June 2015
£m
 Current borrowings  11  –  483  494
 Non-current borrowings  2,658  5,082  (322)  7,418
 Borrowings-related derivative financial instruments  (80)  –  (298)  (378)
 Gross debt  2,589  5,082  (137)  7,534
 Cash and cash equivalents  (1,082)  (296)  –  (1,378)
 Short-term deposits  (295)  (805)  –  (1,100)
 Net debt 1,212 3,981  (137)  5,056
Balance Sheet
During the year, total assets increased by £8,909 million to £15,358 million at 30 June 2015. Non-current assets increased  by £6,923 million to £10,799 million, primarily due to an increase of £3,141 million in goodwill and an increase of £3,274 million in intangible assets largely as a result of the recognition of goodwill and customer contracts and relationships recognised on the acquisition of Sky Deutschland and Sky Italia. Current assets increased by £1,986 million to £4,559 million at 30 June 2015 principally due to a £805 million increase in short-term deposits, a £461 million increase in current trade and other receivables and a £301 million increase in inventories. Current inventories and trade and other receivables have increased mainly due to the impact of the consolidation of the inventories and trade and other receivables of Sky Deutschland and Sky Italia.

Total liabilities increased by £6,757 million to £12,134 million at 30 June 2015. Current liabilities increased by £1,685 million to £4,204 million, primarily due to a £1,144 million increase in trade and other payables, due to the impact of the consolidation of the trade and other payables of Sky Deutschland and Sky Italia, and a £483 million increase in current borrowings. Non-current liabilities increased by £5,072 million to £7,930 million, principally due to a £4,760 million increase in the Group’s non-current borrowings. Current and non-current borrowings have increased as a result of the issue of euro, dollar and sterling bonds in the year.

Distributions to Shareholders
The Directors’ proposed final dividend of 20.5 pence per share takes the total dividend payable in respect of the financial year to 32.8 pence per share, an increase of 3% on last year.

The proposed dividend continues the track record of shareholders benefiting from our strong financial performance and represents the 11th consecutive year-on-year increase in the dividend.

The ex-dividend date will be 22 October 2015 and, subject to shareholder approval at the 2015 Annual General Meeting, the final dividend of 20.5 pence will be paid on 20 November 2015 to shareholders appearing on the register at the close of business on 23 October 2015.

Post balance sheet events
Purchase of minority interests in Sky Deutschland
As announced on 17 February 2015, Sky initiated the necessary steps for the transfer of the remaining approximately 4% minority shareholdings in Sky Deutschland. The requisite shareholder resolution was subsequently approved by 99.4% of shareholders at an Extraordinary General Meeting of Sky Deutschland on 22 July 2015 and we expect the formal transfer of the minority shareholdings to be effective in the second quarter of the 2015/16 financial year.