Interim dividend maintained at 2.75 pence.
Mark Booth, Chief Executive of BSkyB, today announced that Sky digital has signed up over 350,000 sales in its first four months, with over 120,000 of them being new subscribers.
Mark Booth said: "Sky digital is off to a superb start. 350,000 customers is much better than our forecast and a terrific endorsement by consumers. Sky is now in 7 million homes, approximately 30% of homes in the British Isles. Digital is helping multi channel penetration to reach a critical mass of the British public and to become an important, growing and lasting fixture in British households. Given the fast take up rate, combined with subscriber satisfaction which scores 25% higher than for the analogue service, we are targeting 1,000,000 homes to be subscribing to Sky digital by October."
Sky also announced that Open, which will provide interactive services from the spring, has signed up new service providers. Mr Booth said: "Open will provide a step change to the digital platform, providing e-commerce for the mass market through the television - at no extra cost. The inclusion of such well known brands as Dixons and Argos make it a very attractive proposition for consumers."
In addition, Mr Booth announced Sky's first internet initiative, a strategic marketing alliance with AOL. Sky will supply key content including the Sky Sports website to AOL, and AOL will help to market Sky digital to its subscribers. Mr Booth said, "We believe Sky's strong brands will create many opportunities on the internet of which this is the first step."
Martin Stewart, Chief Financial Officer
British Sky Broadcasting Group plc - Tel: 0171 705 3000
Tim Allan, British Sky Broadcasting - Tel: 0171 705 3267
Pager: 0941 128328
David Beck, Bell Pottinger Financial - Tel: 0171 353 9203
Total subscribers to Sky's channels increased by 191,000 in the three months to December 1998. Of the total 7,073,000 subscribers, 6,497,000 are in the UK, and 576,000 in Eire.
In the quarter, total DTH subscriber numbers increased by 54,000 to 3,458,000. Excluding the effect of the sports promotion in the first quarter, churn during the half period decreased to 11.2% compared to 15.4% in the same period last year.
The response to Sky digital has been very encouraging with sales in the first three months of 275,000. Of these, 225,000 have been fully installed, and include 70,000 new customers. Demand since Christmas has continued at a similar pace with over 350,000 digital sales by the end of January.
The Company has set a target of one million digital subscribers by October 1999. With the initial marketing campaign having accomplished its objectives of setting the digital benchmarks and positioning Sky as the leader in digital, the focus of the next marketing campaign will be aimed at attracting new subscribers.
The pay to basic ratio in digital is significantly higher than in analogue, churn is negligible, and both NVOD buy rates and the percentage taking the family basic package are higher than expected. Significantly, customer satisfaction with this new product is much higher than for analogue with the most popular attributes being movies, pay-per-view, sport, documentaries and the SkyGuide (EPG), which all deliver outstanding satisfaction scores.
During 1999 interactive and e-commerce services will be added which will enhance the proposition considerably. British Interactive Broadcasting (BiB) will be launching the Open service in the spring. Interactive programming services, linking programming and text will become available from the summer.
The Company has focused on three themes to enhance the value and the competitive positioning of the channels. First, it has created new on-air images and branding for all of the Sky channels to make each one distinctive and important to viewers. Second, it has introduced a significant number of original, high impact programmes and series that are improving viewership and satisfaction. Third, it has begun marketing these brands to consumers—not only to drive distribution but also to increase viewing levels, awareness and image.
This new strategy is starting to produce results. On Sky One, where original programming has replaced acquired shows within many time slots, there has been an overall increase in viewing share of 5%. In movies the take up and satisfaction among digital subscribers is significantly higher than in analogue.
In sports, the period has seen the launch of two new sports channels; Sky Sports News - the first made-for-digital channel - and Manchester United Television (MUTV - a joint venture with Manchester United plc and Granada plc) - the first TV channel devoted to one football club. Sky Sports has in addition concluded a new deal for live Scottish football and been awarded a new contract for English Cricket, where significantly we will for the first time be showing a live domestic Test match each season in addition to live One-Day internationals.
In 1999 Sky Sports will offer two of the biggest sports events of the year - the Cricket World Cup will bring 25 live matches to Sky Sports through May and June and golf's Ryder Cup will be exclusively live in September. Sky Sports will also carry exclusive live broadcasts of England's Five Nations internationals against Scotland and France, European Football Championship qualifying matches for both Scotland and England and tonight, England's football international against World Cup winners France.
On Sky Box Office, sports events include the channel's first live Football League match - Oxford United vs Sunderland on Saturday 27 February - and the World Heavyweight unification fight between Evander Holyfield and Britain's Lennox Lewis on Saturday 13 March.
The results for the six months ending 31 December 1998 reflect the considerable investment in digital during the period. Revenues increased by £61.2 million to £753.0 million, up 9% on the comparable period. This was more than offset by a £117.2 million increase in costs to £645.8 million as the Company stepped up investment in both programming and distribution. As a result operating profits decreased by £56.0 million to £107.2 million for the half year.
After increased investment in joint ventures, largely due to BiB, profit before taxation declined £75.4 million to £53.2 million. Profit after taxation in the period was £38.8 million resulting in earnings per share of 2.3 pence, down 4.5 pence from the same period last year.
DTH revenues increased £17.1 million or 4% to £486.4 million following an increase in average revenue per customer of 6%, which was partly offset by a 2% fall in the average number of customers. DTH revenue benefited from an increase in Sky Box Office DTH revenue and the price rises in September 1997, though these were offset by a reduction of £8.5 million relating to the VAT treatment on the Sky TV Guide.
Cable revenue increased by £5.9 million in the period to £116.1 million, with a 17% increase in the average number of subscribers, partly offset by a 10% fall in the average revenue per subscriber. Despite an increase in UK cable subscribers of 439,000 in the past 12 months, the numbers taking basic only packages has increased by 465,000. The Company has withdrawn its proposed new rate card for cable operators pending the outcome of discussions with the OFT.
Advertising revenue continued to perform well increasing 14% to £103.0 million as the Company's share of advertising revenue increased from an estimated 6.8% to 7.1%. Other revenue increased £25.4 million to £47.5 million with £16.9 million of the increase relating to sales of digital set-top boxes. The cost of these sales is included within subscriber management costs.
The most significant increase was in programming costs, which have increased by £39.5 million over the period to £366.7 million. The increases were across all the major genres due to new content being secured and a general strengthening of the programming schedules for digital.
Marketing costs increased £25.7 million to £110.7 million in the period. The increase in the second quarter reflects the impact of the launch of digital on 1 October, the biggest consumer product launch of the year. The launch coincided with a substantial above the line marketing campaign, together with the introduction of free installation for all digital customers.
Subscriber related costs increased £25.2 million to £72.7 million with £16.9 million of the increase relating to sales of digital set-top boxes. In addition there were and will continue to be costs associated with an increase in the numbers of operators required for the consumer launch to handle the high levels of interest in digital. The increase in transmission and administration costs reflects the impact of the launch of digital.
Net debt and interest Net debt at 31 December 1998 was £670.0 million, an increase during the six months of £151.7 million. Operating cash flow of £87.7 million was offset by the acquisition of an 11.1% stake in Manchester United plc for £66.9 million, capital expenditure of £43.5 million, joint venture funding of £35.2 million (of which £28.4 million was to BiB) together with dividend and ACT payments of £67.7 million.
Although net debt at 31 December 1998 was £62.8 million higher than at 31 December 1997, net interest has marginally decreased by 4% to £26.2 million. This is due to a £22.2 million reduction in average borrowings during the period, being partially offset by an increase in average interest rates from 7.5% to 7.8%.
The Directors have proposed an unchanged dividend of 2.75 pence per ordinary Share reflecting a period of considerable investment in digital. The dividend will be payable on 6 April 1999 to shareholders recorded on the share register at 26 February 1999.
On 5 October 1998, the Company made a recommended offer to acquire Manchester United plc. The transaction has been referred to the Monopolies and Mergers Commission (MMC), and accordingly the offer has lapsed. The MMC is due to report on the transaction by 12 March 1999.
On 13 October 1998 Granada Group plc sold its 6.5% direct interest in the Company. Following this disposal, Graham Parrott, the Granada representative on the Board resigned. On 16 December 1998 BSB Holdings Limited disposed of 1% in the Company, retaining an 11.8% stake.
BSkyB's agreement with the FA Premier League is currently being reviewed by the Restrictive Practices Court under the provisions of the Restrictive Trade Practices Act 1976. The proceedings are unlikely to be resolved before summer 1999.
Our strategy remains to build the digital platform through both new and transition customers. To achieve this we will continue to invest in programming, marketing and subscriber management. We have been very encouraged by the results from digital to date and have set a target of one million digital subscribers by October 1999.