Sky Reports In-Line 9 Month Results

Sky reported solid nine-month results in line with analysts expectations, who consider the stocks to be fair valued

Allan C. Nichols, CFA 20 April, 2017 | 12:38PM
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Sky (SKY) reported solid nine-month results in line with Morningstar equity analysts’ expectations, and we don’t expect to make any significant changes to our fair value estimate. Our narrow moat rating remains intact. Reported revenue grew 11% due to the strength of the euro versus the British pound.

Sky continues to do an excellent job of controlling costs

Underlying revenue grew 5%, versus our full year projection of 6.2%. While subscriber growth slowed in the fiscal third quarter in the UK to 40,000 net new customers, this is historically its slowest quarter. In Italy, the firm lost 7,000 subscribers due to a dispute with Telecom Italia and the weak economy. Growth was better in Germany at 73,000. Germany remains the fastest-growing segment, with revenue up 10% year over year. We expect this trend to continue.

In the UK, which remains Sky’s most important market, revenue grew 4%. There had been concerns earlier in the year regarding Premier League viewership being down from last year. Sky previously told us that it had intentionally backloaded important games to later in the season, so we were pleased to see third-quarter viewership up 3% from the previous year. While Italy struggled in the third quarter, it is still showing significant improvement over the past several years.

Sky continues to do an excellent job of controlling non-programming costs. While its costs for the new Premier League contract jumped by £494 million, other costs increased just 2%, well below its revenue growth rate. This allowed its nine-month earnings before tax to reach £1.5 billion, exactly in line with our full-year projection of £2 billion.

The most important item remains the pending acquisition of the remaining Sky shares from Twenty-First Century Fox. We ultimately expect the deal to go through.

The deal has received approval from the European Commission, the Jersey Competition Authority and media clearances in Italy, Germany, and Austria. However, the U.K. Secretary for Culture, Media, and Sport issued a European Intervention Notice requesting reviews from Ofcom, the telecom regulator, and the Competition Markets Authority. A deadline of May 16 has been set for both entities to respond, but the response could constitute an extension of the time needed to review the case.

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About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.