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SKY Television Announces Annual Result

Published: Thu 15 Aug 2002 03:21 PM
15 August 2002
SKY Television Announces Annual Result
SKY Television announced today a significantly reduced loss for the 2001/02 financial year, down $12.1m from $42.3m to $30.2m.
Revenues were $344.6 million for the year, a 15% increase over last year. The increase in revenues came from a 17% increase in subscribers, bringing the year-end total to 503,249 subscribers. “We are pleased that after 11 years in business, our subscriber base is still growing at a rate of 17% ”, said SKY Television Chief Executive, John Fellet.
The subscriber count includes 136,300 UHF customers, 284,300 digital subscribers and 75,400 wholesale customers who received SKY as part of a bundled arrangement with third party telecommunication companies such as TelstraClear and Telecom. SKY also has 7,300 commercial subscribers.
Demand for SKY continues to be strong in all provincial areas with Otago and Southland recording the biggest percentage gains in subscribers. The Wellington area at 50%, has the largest overall penetration in New Zealand. At the same time, net churn, a measure of subscribers disconnecting the service dropped to 11.7%, an all time record low.
EBITDA, earnings before interest, unrealised foreign exchange gains, taxes, depreciation and amortisation grew 43% to 108.2 million and net cash inflows from operations increased 75% from $43.9m to $77.0m. The net cash shortfall in the business improved from $96.8m last year to $37.2m.
“The gap between the operating cash flow of the business and the capital required to install new customers is closing and we expect that next year the business should generate enough cash to be free cash flow positive”, Fellet said.
Two other major milestones were reached, by the company during the year. TVNZ agreed to join SKY’s platform meaning that now all nation-wide television stations are on its platform. Also, SKY reached a carriage agreement with TelstraClear to provide its service on TelstraClear’s cable television platform.
-Ends-
FINANCIAL ANALYSIS
The following should be read in connection with the Company’s consolidated financial statements and accompanying notes. References to "the Company" refer, where applicable, to Sky Network Television Limited and its subsidiaries.
The following operating data has been taken from the Company records and is not audited.
As at 30 June
2002 2001 2000 1999 1998
Total UHF, DBS and other subscribers
Total number of households in New Zealand (1) 1,368,207 1,368,207 1,346,600 1,346,600 1,346,600
Number of households within reach of the SKY UHF network (2) 996,055 996,055 992,800 992,800 992,800
Percentage of households within reach of the SKY UHF network 72.8% 72.8% 73.7% 73.7% 73.7%
Subscribers - UHF:
Residential 136,309 159,793 210,374 288,711 306,113
Commercial 1,880 2,110 2,324 2,520 2,932
Total UHF 138,189 161,903 212,698 291,231 309,045
Subscribers - DBS (Satellite):
Residential 284,297 264,195 160,245 51,844 17,068
Residential - wholesale (3) 75,376 - - - -
Commercial 3,326 2,390 1,711 1,181 617
Total DBS 362,999 266,585 161,956 53,025 17,685
Subscribers - Other: (4)
Commercial 2,061 1,948 1,918 1,306 -
Total other 2,061 1,948 1,918 1,306 -
Total subscribers 503,249 430,436 376,572 345,562 326,730
Percentage of households within reach subscribing to the SKY network:
UHF 13.7% 16.0% 21.2% 29.1% 30.8%
DBS 26.3% 19.3% 11.9% 3.8% 1.3%
Total UHF and DBS 36.3% 31.0% 27.5% 25.4% 24.0%
Gross churn rate (5) 19.9% 22.7% 26.4% 30.9% 28.3%
Net churn rate (5) 11.7% 14.4% - - -
(1) Between 30 June 1997 and 30 June 2000, based upon New Zealand Government census data as of March 1996. June 2001 and June 2002 is based upon census data as of March 2001 June 2001 has been updated from last year, as the data was not available at the time of preparing the report.
(2) Based on the data referred to in note (1) and information provided by Broadcast Communications Limited as to metropolitan areas within reach of SKY UHF broadcasts.
(3) Includes subscribers receiving SKY packages via affiliate services, such as arrangements with TelstraClear and Telecom.
(4) Includes subscribers to programmed music, via SKY’s subsidiary company, SKY AEI Music Limited.
(5) Gross churn refers to the percentage of residential subscribers over the 12 month period ended on the date shown who terminated their subscriptions, net of existing subscribers who transferred their service to new residences during the period. Net churn is calculated by excluding reconnected subscribers. Information regarding this is not available for the years June 2000 and prior.
Overview
From 30 June 1998 to 30 June 2002, subscriber numbers increased by 54.0% from 326,730 to 503,249. Revenue increased by 83.0% from $188.3 million to $344.6 million. In April 1997, the Company introduced an analogue DBS (Direct Broadcast Satellite) service and converted to a digital DBS service in December 1998. At 30 June 2002 the Company had 362,999 subscribers to the DBS service, contributing $203.5 million to total subscription revenue.
The Company now offers 33 television, 12 audio, 5 radio, 5 pay-per-view and 2 information channels.
Operating revenue is driven by several factors, including the number of households subscribing to its pay television service, the average revenue obtained per customer, churn rates and, to a certain extent, seasonality. Churn rates have a direct impact on the Company’s profitability and ability to generate cash flow. The Company endeavours to minimise churn by providing customers with high quality programming at reasonable prices, combined with strong levels of customer service. Financial results and operating statistics also reflect certain seasonal variations. Historically, SKY’s net gain in subscribers has occurred during the first six calendar months of the year, during the rugby season, and it is not uncommon for SKY to experience a net loss of subscribers during the last calendar months of the year.
In late December 2001, the Company signed a seven year agreement with TelstraSaturn (later renamed TelstraClear), enabling TelstraClear to sell the SKY service to their cable subscribers.
Revenue consists principally of monthly residential and commercial subscription revenue (including revenue from TelstraClear subscribers) and revenue from the sale of the SkyWatch programming guide. Subscription charges are payable a month in advance. Other revenue is generated from advertising, aerial and satellite dish installations, sublicensing of programming to third parties and, until June 2002, Football Kingz sponsorship and gate sales. The Company’s listed installation rate for new UHF subscribers is $50 (inclusive of GST), while the (recently reduced) rate for new DBS subscribers is $399 (inclusive of GST). From time to time the Company reduces the DBS and UHF installation rates to attract new subscribers.
Programming expenses include costs for rights to broadcast sporting events, movies, news and other programmes produced by third parties; production and studio costs; transportation charges; and costs of taping, formatting and adding captions, dubbing and adding other features to programmes. Costs for some programmes are fixed irrespective of the number of subscribers, whereas costs for other programmes, for example movies, are often based upon the number of subscribers to the relevant channel, such as SKY Movies. A significant portion of operating expenses, 37.1% or $129.2 million for the year ended 30 June 2002, are denominated in US dollars, which are principally programming expenses. Refer below under “Hedging –Foreign Exchange”, for further information.
Subscriber management costs include service and maintenance of equipment installed at subscribers’ homes; a portion of the overhead costs of SKY’s customer service departments; and general and administrative costs associated with SKY’s regional offices. They do not include costs attributed to installations for subscribers, (including payments to independent contractors and SKY employees to install equipment at subscribers’ homes). Installation costs are capitalised and amortised on a straight-line basis over a five-year period.
Transmission costs consist of transmission and linking paid to Broadcast Communications Limited (“BCL”) for transmitting SKY’s UHF signals from its studios in Auckland to other locations, using a digital microwave and optical fibre distribution network. They also includes broadcasting the signals from BCL’s television towers throughout New Zealand. From 1 May 2001, new transmission and linking agreements between SKY and BCL came into effect. Payments to BCL for transmission services are now based on revenue generated from SKY’s UHF network, subject to minimum and maximum annual payments, whereas payments for linking are predominantly fixed.
Selling, general and administrative expenses consists of marketing costs, including overheads; the costs of producing and selling commercials and other advertising; and promotions. Other marketing costs include commissions paid to sales representatives for selling advertising, production of the SkyWatch programming guide, and, until June 2002, promotional costs relating to Football Kings Limited. General and administrative costs include overheads of SKY’s corporate management, finance department, management information systems (“MIS”) department and, until June 2002, Football Kings Limited; the costs of collecting bills from subscribers including bad debts, write-offs of damaged and unreturned set-top boxes; and foreign exchange gains and losses. Also included as a one-off this year is the loss on sale of the Football Kings Limited.
Depreciation and amortisation consist principally of depreciation charges for subscriber equipment, including aerials, satellite dishes and set-top boxes, all owned by the Company, as well as installation charges. Depreciation also includes depreciation of the transponders leased on the Optus Satellite and fixed assets such as the studios and facilities and SKY’s UHF transmission equipment. Depreciation for installation of analogue DBS and digital DBS equipment began in April 1998 and December 1998 respectively, to coincide with the earning of analogue and digital DBS subscription income. DBS equipment will be fully depreciated by the five-year period from DBS equipment installation date. At the present time the Company estimates the total incremental direct cost of installing subscriber equipment for a residential UHF customer to be approximately $125 per subscriber (exclusive of GST) and the total direct cost of installing subscriber equipment for a residential DBS customer to be approximately $680 per subscriber (exclusive of GST). SKY also capitalises and amortises over a five-year period new channel development costs, including research, development of an on-air look or logo and/or initial promotional and programming expenses incurred when the channel is previewed to subscribers free of charge.
Interest and financing charges include interest on outstanding borrowings paid to financial institutions, interest on the capital notes and also the amortisation of capital notes issue costs as well as bank commitment and facility fees. Lease interest relating to the four Optus transponders is also included and is being expensed over the remaining estimated life of the satellite lease.
Taxation expense: a small taxation expense was incurred for the year ended 30 June 2002, due to SKY AEI Music Limited’s taxable profits. These profits were unable to be offset against the holding company tax losses. The Company estimates that at 30 June 2002 it had deferred tax assets of approximately $54.4 million calculated at the current corporate tax rate of 33%. These deferred tax assets include $36.1 million attributable to tax losses. These deferred tax assets have not been recognised in the statement of financial position. Under New Zealand law a minimum level of shareholding continuity is required before accumulated tax losses can be carried forward.
The Company and Independent Newspapers Ltd ("INL") have agreed that INL will utilise certain income tax losses incurred by the Company from 1 July 2001. INL will pay the Company the tax effect of the losses to be offset. Subject to the issue of a binding ruling by Inland Revenue, the amount payable will be calculated by multiplying the losses utilised by the corporate tax rate applicable in the year of offset and will be paid when the Company becomes liable to pay income tax.
Results of Operations
The year ended 30 June 2002 compared to the year ended 30 June 2001
Revenue
Revenue increased 14.7% from $300.4 million to $344.6 million, reflecting an increase in subscription revenue and a slight increase in other revenue, as shown below:
For the years ended 30 June ($ millions)
2002 2001 % Inc/(Dec)
Subscription revenue:
Residential (1) 266.0 225.2 18.1
Commercial (2) 19.6 17.3 13.3
SkyWatch (3) 6.1 5.8 5.2
Total subscription revenue 291.7 248.3 17.5
Other revenue:
Advertising (4) 16.5 12.6 31.0
Installation, programme sales and other (5) 36.4 39.5 (7.8)
Total other revenue 52.9 52.1 1.5
Total revenue $344.6 $300.4 14.7%
Notes:
1. Reflects a 16.8% increase in the number of residential subscribers (including the TelstraClear subscribers added in February 2002), as well as an increase in pay-per-view revenue. Average monthly subscription revenue per DBS subscriber decreased , due to the increase in wholesale residential subscribers such as TelstraClear and Telecom; average monthly subscription revenue per DBS subscriber increased however if wholesale subscribers are excluded, due mainly to an increase in pay- per- view revenues and other interactive offerings. There was a small decrease in monthly subscription revenue per UHF subscriber due to an increase in the proportion of subscribers on less expensive packages.
2. Due to an increase in total commercial subscribers and more subscribers on higher priced packages, together with an increase in pay-per-view revenue.
3. Due to increased circulation.
4. Due to higher billings based on increased subscriber numbers, combined with extra sponsorship revenue at the time of the World Cup soccer.
5. Due mainly to reduced programme sales, partially offset by an increase in installation revenue. Installation revenue increased due to the increased average UHF and DBS install price more than offsetting the decreased installations.
Operating expenses
Total operating expenses increased 8.3% from $321.3 million to $347.9 million, as shown below:
For the years ended 30 June
2002 2002 2001 2001 2002
(millions) % of revenue (millions) % of revenue % Inc/(Dec)
Programming (1) 166.6 48.3 151.5 50.4 10.0
Subscriber management (2) 12.7 3.7 9.2 3.1 38.0
Transmission (3) 6.9 2.0 17.5 5.8 (60.6)
Selling, general and administrative : (4)
Football Kingz expenses 3.2 4.1
Football Kingz - loss on sale 2.0 -
Realised and unrealised foreign exchange (0.8) 3.7
Other selling, general and administrative expenses 44.2 39.9
Selling, general and administrative – total 48.6 14.1 47.7 15.9 1.9
Depreciation and amortisation (5) 113.1 32.8 95.4 31.8 18.6
Total operating expenses $347.9 100.9% $321.3 107.0% 8.3%
Notes:
1. Increase in programming rights costs due to a further unfavourable decline in the US/NZ dollar exchange rate, as well as an increase in costs due increased subscribers to pay-per-view. Increase in production costs due to extra provincial rugby and test cricket coverage.
2. Increase due to higher staffing levels and telecommunications costs to manage the increased subscriber base, as well as the continuing increase in offerings.
3. Decrease reflects full year’s lower charges relating to the new transmission and linking agreements with BCL, which came into effect on 1 May 2001.
4. A positive movement in unrealised and realised foreign exchange of $4.5 million was offset by the loss on sale of Football Kings Limited of $2.0m and an increase in bad and doubtful debt expense, as well as advertising sales costs.
5. Due primarily to the higher depreciable subscriber equipment base, particularly DBS set-top boxes and DBS installations.
Interest and financing charges
Interest and financing charges increased 25.4% from $21.3 million to $26.7 million, primarily due to the increase in total borrowings. The weighted average interest rate on bank borrowings, inclusive of hedging instruments and facility fees, was 7.3% for the year ended 30 June 2002, compared with 7.5% for the year ended 30 June 2001. Borrowings fluctuated during the year, as funds raised from the capital notes issue temporarily reduced borrowings. Refer “Liquidity and Capital Resources” below. The notional interest rate on the lease obligations is between 7.4% and 13.0%.
Taxation expense
A small taxation expense was incurred for the year ended 30 June 2002 due to SKY AEI Music Limited’s taxable profits. These profits were unable to be offset against the holding company tax losses. As discussed in the “Overview” section above, an agreement between the Company and INL has been entered into whereby INL will utilise some of the Company’s tax losses. The anticipated gross amount of losses intended to be offset for June 2002 is $58 million.
Liquidity and Capital Resources
In October 2001 the Company raised $111 million through a capital notes issue. The interest rate payable on the capital notes was fixed at 9.3% per annum, with interest payable quarterly. Prior to the initial election date of 15 October 2006 the Company must notify noteholders of the proportion of capital notes that it intends to redeem and, if applicable, the new terms on which noteholders may elect to roll-over their capital notes. Unless the Company redeems all capital notes, each note-holder must elect to either retain some or all of their capital notes for a further period on the new terms or convert some or all of the capital notes into ordinary shares in the Company.
The Company’s principal sources of funds have historically been cash flows from operating activities, funding from shareholders and loans from banks. The Company anticipates that capital, lease and other expenditures contracted but not provided for as at 30 June 2002 will be met from cash flows from operating activities and to the extent necessary, from external borrowings under the remaining capacity of the Bank Facility.
The following table summarises the Company’s cash flows from operating and investing activities:
For the years ended 30 June ($ millions)
2002 2001 2000 1999 1998
(unaudited) (unaudited)
Cash inflows from operating activities 77.0 43.9 59.6 60.9 36.1
Cash outflows from investing activities (114.2) (140.7) (105.8) (117.9) (67.0)
Net cash outflows from operating and investing activities ($37.2) ($96.8) ($46.2) ($57.0) ($30.9)
Cash inflows from operating activities increased 75.4% from $43.9 million to $77.0 million, primarily due to an increase in earnings before interest, tax, depreciation and amortisation. Cash outflows from investing activities decreased 18.8% from $140.7 million to $114.2 million, due to a reduction in decoder purchases and reduced spending on digital expansion.
The Company’s borrowings profile has been as follows:
As at 30June ($ millions)
2002 2001 2000 1999 1998
(unaudited)
Current borrowings 14.9 12.6 11.5 7.3 4.8
Term borrowings 209.6 271.6 260.1 183.5 124.7
Capital notes 107.5 - - - -
Total borrowings $332.0 $284.2 $271.6 $190.8 $129.5
Other loans 0.2 0.2 0.6 - -
Lease liabilities 67.3 69.0 81.0 56.4 56.5
Bank loans 157.0 215.0 190.0 134.4 73.0
Capital notes 107.5 - - - -
Total borrowings $332.0 $284.2 $271.6 $190.8 $129.5
Total borrowings increased by 16.8% from $284.2 million at 30 June 2001 to $332.0 million at 30 June 2002, due primarily to ongoing capital expenditure on digital set-top boxes and installations. The Company’s borrowings fluctuated during the year as funds raised from capital notes issued temporarily reduced borrowings.
In March 1997, the Company entered into a $250 million secured revolving credit facility (the “Bank Facility”) with what is now a syndicate of five international banks led by Toronto Dominion Australia Limited and The Hong Kong and Shanghai Banking Corporation Limited. The other members of the syndicate are now ANZ, ABN AMRO Australia Limited and BNP Paribas. Prior to the Bank Facility, the Company’s debt funding was provided by a consortium of three New Zealand-based banks and by the Company’s shareholders. Initial drawdowns in March 1997 under the Bank Facility were used to refinance such borrowings. All of the Company’s non-leasehold properties are mortgaged to the lenders under the Bank Facility. At 30 June 2002 $157 million was outstanding under the Bank Facility, with the remainder of total debt attributable to capital notes and the treatment of the Optus satellite transponder lease as a finance lease. See “Overview” above for a description of this treatment.
The Company also has in place letter of credit facilities, of which $0.4 million was drawn on the facility at 30 June 2002 and an overdraft facility of up to $1.0 million with the Bank of New Zealand. The Company pays a fee of 0.25% on amounts supported by the letters of credit and currently pays interest on amounts drawn under the overdraft facility at the rate of 7.95% per annum.
Subject to certain conditions, interest under the Bank Facility accrues at a rate between 0.5% and 1.2% per annum above the average bid rate for the purchase of bank accepted bills of exchange on the date of applicable drawdown. The Bank Facility requires amounts outstanding thereunder to have been reduced to $240 million by 11 March 2001, $225 million by 11 March 2002, and thereafter to be reduced to $210 million by 11 March 2003 and the remaining outstanding balance to be paid in full on 11 March 2004.
Capital Expenditure
Capital expenditure decreased by 19.5%, from $153.3 million to $123.4 million, reflecting a significant decrease in decoder purchases (due to a reduction in the increase in DBS subscriber numbers, a reduction in stock levels and reduction in cost price), as well as a reduction in expenditure on digital expansion. This was offset partially by the new capitalised fourth Optus satellite transponder and capitalised programming renewal rights.
Capital expenditure (unaudited) is summarised as follows:
For the years ended 30June ($ millions)
2002 2001 2000 1999 1998
Satellite transponder lease 17.5 - 33.7 - 63.1
Subscriber equipment:
Decoders, smart cards and associated
Equipment 38.5 75.6 44.2 66.9 12.4
Installation costs 47.2 55.1 49.4 31.0 24.1
Digital expansion 2.0 11.4 6.8 13.5 16.9
Interactive applications 3.0 2.0 0.4 - -
Renewal rights 10.7 4.8 0.8 1.5 3.5
Other 4.5 4.4 1.7 1.8 6.9
Total capital expenditure $123.4 $153.3 $137.0 $114.7 $126.9
Note: the above table is prepared on an accrual basis, whereas the cash flow statement included in the financial statements is prepared on a cash basis.
In connection with its strategy to increase the number of subscribers to its DBS service, the Company expects to continue to have significant capital and marketing expenditure, including purchases of satellite dishes and digital set-top boxes for installation in the homes of subscribers to its digital DBS service and investments in its Mt. Wellington, Auckland studios and facilities for further digital technology and equipment for increased services. The Company purchases and maintains ownership of all UHF and DBS subscriber equipment. Future operating cash flow, together with the remaining capacity of the bank facility should be sufficient to satisfy its anticipated capital expenditure. No assurance can be given, however, that the Company will not have to issue further equity securities or otherwise obtain funding to finance its future capital expenditure.
Hedging
The Company uses interest rate swaps and forward foreign exchange contracts, currency collars and currency options to manage its interest and exchange rate risk within guidelines set by the board of directors of the Company.
Interest Rates
At 30 June 2002 the Company had a number of interest rate swap agreements with major international banks outstanding. For floating to fixed swaps there is a notional principal amount of $140 million in total, providing a fixed interest rate exposure up to the maximum of the notional principal amount. For fixed to floating swaps there is a notional principal amount of $55 million in total, providing a floating interest rate exposure up to the maximum of the notional principal amount. Refer to Note 17 in the financial statements.
Foreign Exchange
Almost all of the Company’s revenue is denominated in New Zealand dollars, although a significant portion of its operating expenses, 37.1% or $129.2 million for the year ended 30 June 2002 (for the year ended 30 June 2001: 38.3% or $123.0 million), are denominated in US dollars, which are principally programming costs. At 30 June 2002 the Company had TV programming commitments of approximately $342 million, the majority related to commitments payable in US dollars for periods of up to five years. The majority of programming expenses is expected to continue to be denominated in US dollars.
In addition, payments related to the Company’s lease of four transponders on the Optus satellite will continue to be denominated in Australian dollars. Annual payments currently total approximately $21.0 million, based on the NZ/Australian dollar exchange rate at 30 June 2002 of NZ $1.00 = A$0.8637.
A significant portion of the Company’s capital expenditures (excluding satellite transponders), is denominated in US dollars: 38.7% or $47.8 million for the year ended 30 June 2002 (for the year ended 30 June 2001: 58.6% or $89.9 million). These costs are primarily for digital set-top boxes and associated equipment acquired from various manufacturers. At 30 June 2002 the Company had commitments relating to digital set-top boxes and associated equipment of approximately $20.7 million.
The Company manages its exchange risk exposure by utilising a variety of Board approved derivatives, for exposures of up to three years. Exchange gains and losses and hedging costs arising on contracts entered into as hedges of future commitments are deferred until the date of such transactions. All other exchange gains and losses on foreign currency contracts and foreign currency denominated liabilities are recorded in the statement of financial performance in the period of the exchange rate changes. All forward foreign exchange contracts entered into by the Company are exceeded by the value of firm commitments. At 30 June 2002 the Company had outstanding commitments to purchase US$81.0 million at an average rate of US$0.44 to NZ$1.00 and A$30.5 million at an average rate of A$0.82 to NZ$1.00. Although these financial instruments can mitigate the effect of short-term fluctuations in exchange rates, there can be no effective or complete hedge against long-term currency fluctuations.

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