Sky TV slashes prices to stem customer exodus; cuts dividend to meet challenges
By Paul McBeth
Feb. 28 (BusinessDesk) - Sky Network Television has slashed prices in an effort to slow an exodus of customers quitting its pay-TV service in favour of cheaper on-demand rivals and cut its interim dividend in half in an effort to cope with the rapidly changing environment. First-half profit rose.
The Auckland-based company lost 37,359 customers in the six months ended Dec. 31, including the 10,608 it shed with the closure of the Fatso DVD rental unit, leaving it with 778,776 subscribers at the end of the year. The reduction in customer numbers trimmed subscriber related costs and Sky spent less on programming, more than offsetting a 5.5 percent decline in sales to $433.1 million. First-half net profit rose to $66.6 million, or 17.1 cents per share, from $59.3 million, or 15.24 cents, a year earlier.
Sky has been contending with the rise of online alternatives such as Netflix and Spark New Zealand's Lightbox, driving up the cost of content and syphoning off customers attracted to cheaper and more convenient offerings.
The pay-TV operator had hoped to counter that by merging with telecommunications carrier Vodafone New Zealand but was rejected by the Commerce Commission over competition fears, and it's been forced to change tack, today announcing cheaper entry-level services. From tomorrow, Sky's $49.91 a month basic package will be replaced by alternative entry-level packages, Starter or Entertainment, at $25 a month. If customers take either Sport or Movies they will get the $9.99 a month premium TV SoHo channel for free.
"In the last six months our churn, or disconnects, have lowered to an almost all-time low - but our total subscriber count declined because we didn't attract enough customers who find the new On Demand models appealing," chief executive John Fellet said in the report. "In order to return to the growth path, we are planning to launch new price options, new packages and new services than ever before."
Sky's shares sank to an 18-year low of $2.43 in December as investors questioned the company's ability to cope with the new environment and amid speculation global internet giant Amazon may bid for New Zealand Rugby's broadcasting rights, the Kiwi company's marque content. The stock has recovered a little since then, closing at $2.80 yesterday.
"The Sky board believes that as we continue to operate in rapidly changing and uncertain media environment, the company needs to divert funds from dividends to further debt retirement to ensure we have the flexibility to meet competitive challenges and have the balance sheet strength required to successfully negotiate renewal of key content deals in the future," Fellet said.
The board declared an interim dividend of 7.5 cents per share, payable on March 23 with a March 15 record date, half the 15 cents it paid a year earlier. Sky's board trimmed 2.5 cents per share from last year's final dividend. First NZ Capital analyst Arie Dekker had been forecasting a dividend of 12.5 cents for this result, and previously warned it would take a "major change in momentum" to avoid further cuts.
Free cash flow rose 19 percent to $81.7 million, while capital spending dropped 87 percent to $28.2 million. The company had drawn down $190.8 million of bank debt as at Dec. 31 of its $300 million facility.
The board also warned the new pricing structure may prompt an impairment charge on Sky's $1.4 billion value for goodwill, something auditor PwC acknowledged in an 'emphasis of matter' note in its report on the accounts.
"The board believes the impact of these changes will be positive on the value fo Sky, but recognise there is uncertainty and any adverse changes in key assumptions around churn, subscriber numbers and ARPU (average revenue per user) could give rise to an impairment of goodwill," the directors said. "The board will reassess the carrying value of goodwill at year end when there will be more evidence of the impact of the pricing and packaging changes on the key assumptions."