Financial reporting of Sky Group - Amazon S3s3-eu-west-1.amazonaws.com/skygroup-sky-static/... ·...

Financial reporting of Sky Group 19 December 2014

Sky News – Jeff Randall

2

Disclosure

• The changes outlined in this presentation are draft proposals.

• They have not yet been subject to audit and legal opinion, nor have they been approved by the

Board.

• There is therefore the potential for further changes to our disclosure before we report H1 results

on February 4th, 2015.

• Any KPIs or financials are illustrative only.

DRAFT - Subject to audit and legal opinion

3

Introduction

• Sky has created Europe's leading entertainment company after completing the acquisition of Sky

Italia and a majority interest in Sky Deutschland.

• Our expectation is that this will lead to some changes to our external financial reporting.

• Our objective is to better align our external reporting with our strategy, to enable the investment

community to better understand the key drivers and results of our business and to align external

and internal management reporting.

• In order to proactively help investors and analysts, this presentation outlines some of the

potential key changes to our external reporting.


4

Contents

• Operating segments

• Operating metrics and disclosure

• Changes to how we display our financials

• Primary financial statements

• Adjusted profit

• Deferred tax

• 2015 external reporting calendar

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2

3

4

5

6

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5

Operating segments

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6

Operating segments

• Historically, the BSkyB Group has disclosed a single reportable segment comprising the whole of the

UK and Ireland business.

• We propose to present three segments for the enlarged Sky Group. This is to reflect the different:

- competitive set in each market

- economic and regulatory environment in each market

- stages of maturity of the businesses

• The three segments are:

- UK and Ireland

- Italy

- Germany and Austria

• The results for Germany may continue to be published additionally by Sky Deutschland for so long as

the business remains listed.

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7

Operating segments

• We will have an eliminations column which will include any inter-segment trading – for example, the sale

of set-top boxes and programming between businesses.

• We will not be presenting a segmental split of assets and liabilities.

– The Sky Group has one Balance Sheet and Cash Flow Statement

• As well as presenting statutory financials in sterling, we may provide narrative commentary using a

“constant currency” method to show the underlying performance of the business.

• As well as presenting statutory financials, we may provide pro-forma financials for the Group to show

the underlying performance of the business.

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8

Operating segments 1

Illustrative proposed extract from Note 2 of the press release Segmental income statement for the half year end 31 December 2014

2014/15

Half Year

2013/14

Half Year

UK &

Ireland

Italy Germany &

Austria

Eliminations Group

Total

Group

Total

£m £m £m £m £m £m

Subscription [X] [X] [X] [X] [X] 3,096

Transactional [X] [X] [X] [X] [X] 119

Wholesale and syndication [X] [X] [X] [X] [X] 208

Advertising revenue [X] [X] [X] [X] [X] 237

Other revenue [X] [X] [X] [X] [X] 97

Revenue [X] [X] [X] [X] [X] 3,757

Inter-segment revenue [X] [X] [X] [X] [X] -

Revenue from external customers [X] [X] [X] [X] [X] 3,757

Programming [X] [X] [X] [X] [X] (1,311)

Direct network costs(i)

[X] [X] [X] [X] [X] (414)

Sales, general and administration [X] [X] [X] [X] [X] (1,467)

Operating expense [X] [X] [X] [X] [X] (3,192)

EBITDA [X] [X] [X] [X] [X] 794

Depreciation and amortisation [X] [X] [X] [X] [X] (229)

Operating profit [X] [X] [X] [X] [X] 565

Share of results of joint ventures and associates [X] 21

Investment income [X] 6

Finance costs [X] (65)

Profit on disposal of available-for-sale investments [X] -

Profit on disposal of associate [X] -

Profit before tax [X] 527

Old comparatives as

reported last year for the

UK and ROI


UK and Ireland

Including six months of

revenue and costs

Germany & Austria/Italy

Including revenue and

costs since acquisition

date (13th November 14)

9

Operating metrics and disclosure

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10


• Our previous disclosure was a legacy of the period in which we were a standalone DTH business.

• Our focus today is fundamentally on growth based on multiple products and routes to market.

• To reflect the increased breadth of the business and to align the metrics across the Group, we propose to

formally report on four headline non-financial KPIs for each territory:

– Customers

– Products

– Churn

– Local currency ARPU

• These are not exclusive and in addition, we will provide narrative commentary by territory and this will

include more granular information, for example growth of broadband in the UK and ROI

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• Where applicable, we expect to align calculation methodologies and definitions to ensure consistency

across the Group

– Where we do this, we will provide historic comparatives on a restated basis

• For example, the three Skys currently calculate churn differently:

– UK and ROI use a quarterly annualised method

– Italy use a 52 week rolling method

– Germany report both

• In this case we expect to adopt rolling 52 week for all territories and to provide, if material, comparatives on

each basis.

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12


2

All figures (000) FY12/13 FY13/14 FY14/15

unless stated

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

UK and Ireland 10,654 10,742 10,812 11,153 11,224 11,330 11,420 11,495 11,546

Germany and Austria

Italy

Retail customers

UK and Ireland 28,898 29,513 30,228 31,634 32,434 33,307 34,071 34,775 35,535

Germany and Austria

Italy

Total Products

UK and Ireland 3,714 3,751 3,801 3,677 3,617 3,624 3,602 4,041 4,035

Germany and Austria

Italy

Wholesale customers

Churn

UK and Ireland 10.9% 10.3% 10.8% 10.9% 11.0% 10.8% 10.9% 10.7% 11.0%

Germany and Austria

Italy

ARPU

UK and Ireland (£) £542 £558 £567 £569 £559 £570 £571 £576 £576

Germany and Austria (€)

Italy (€)

GBP/€ (average)

Proposed quarterly table as included as Schedule 2 of the press release


UK and Ireland

Customers and products as

reported at Q1 – these will

not change.

Churn and ARPU may have

some small changes as we

align methodologies.

Germany & Austria/Italy

We will disclose historical

KPIs prior to H1 results.

13

Changes to how we display our financials

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14

Changes to how we display our financials: Revenue

• We expect to make small changes to the way we display our revenue.

• The main reason to do this is to reflect the increasing breadth of our business.

• We currently report transactional revenue across different revenue lines in our P&L. We intend to

introduce a new revenue line item, Transactional revenue, which will combine all the transactional

revenue we receive. Examples of this include:

– a customer buying a Sky Store movie

– NOW TV sports day pass (NB that a monthly subscription is reported in Subscription revenue)

• We propose to consolidate the revenue we derive from monetising our channels and programmes across

other platforms (Wholesale, Sky Vision, sublicensing) into a new single Wholesale and syndication line.

• To simplify our income statement we are combining the relatively immaterial amount of revenue that we

receive from Hardware, Installation and Service into the Subscription revenue line.

• These changes are summarised in the reconciliation on slide 15.

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15

Reconciliation from old disclosure to new: UK & ROI revenues in FY14 3


1 Currently includes Sky Bet

FY 14 Old Movem

ent of H

IS t

o Subscrip

tion re

venue

Movem

ent from

Other t

o Subs re

vs

Movem

ent of S

ky Store

and

Sport

s PPV

revs (

inc N

OW

TV t

ransactio

nal revs) f

rom

Sub

s to T

ransactional r

evs

Movem

ent of S

kyIQ a

nd Searc

h revs fr

om O

ther to

Whole

sale a

nd Synd

icatio

n or A

dvertis

ing re

vs

Movem

ent of S

port

s synd

icatio

n and S

ky Vis

ion r

evs

from

Other t

o Whole

sale a

nd S

yndicatio

n revs

Movem

ent of W

holesale

PPV

to T

ransactional r

evs

New

Subscription 6,255 85 20 (82) 6,278 Subscription

HIS 85 (85) - HIS

82 3 85 Transactional

Wholesale 407 2 27 (3) 433 Wholesale and Syndication

Advertising 472 15 487 Advertising

Other 1

398 (20) (17) (27) 334 Other

Total Revenue 7,617 - - - - - - 7,617 Total Revenue

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Changes to how we display our financials: Costs

• We may also make some small changes to our cost lines.

• We’ll continue to report programming costs for each segment.

• We expect to combine the sub-categories of our other operating costs for statutory purposes within a

single Selling, General and Administration cost line. We’ll provide a split of this by territory and continue

with additional narrative commentary, particularly around marketing costs within SG&A.

• We will continue to report Direct Network costs for our UK and ROI business. However, this line is not

relevant for Germany or Italy due to the nature of their operations. For information, Direct Network costs

include, amongst other things:

– LLU rental

– Broadband and WLR connection costs

– New Line Provision

– Customer migrations

– Content delivery network costs

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Alignment of accounting policies

• There are currently some differences in the ways in which each territory recognises revenue and costs.

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Differences of accounting policy Differences of fact

• We are reviewing the accounting policies in each

territory to align with the accounting policies of the

Sky Group.

• This will result in the accounting policies of Italy and

Germany being aligned with those of UK and ROI for

the purposes of our Sky Group accounts.

• Generic examples of this could be asset lines and

programming amortisation.

• Where there are differences of fact and commercial

circumstances, the accounting policies in each

territory will reflect this. For example:

– the UK and ROI treat the accounting for set-top box

costs differently to Germany and Italy. This is because of

differences of fact regarding who owns the set-top box

in each territory and accordingly we do not expect this to

change.


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Primary financial statements

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Primary financial statements: Income Statement

• We expect minimal change to our primary financial

statements (income statement, balance sheet and

cash flow statement).

• The consolidated income statement is extended in

order to apportion the result of Sky Deutschland to

Sky Deutschland’s minority German shareholders.

• Earnings per share is calculated after deducting the

portion of the Germany result attributed to minority

shareholders.

4 Condensed Consolidated Income Statement for the half year ended 31 December 2014

2014/15 2013/14

Half year Half year

£m £m

Revenue 3,757

Operating expense (3,192)

EBITDA 794

Depreciation and amortisation (229)

Operating profit 565

Share of results of joint ventures and associates 21

Investment income 6

Finance costs (65)

Profit on disposal of available-for-sale investment -

Profit on disposal of associate -

Profit before tax 527

Taxation (116)

Profit for the period 411

Profit for the period attributable to:

Equity shareholders of the parent company 411

Non–controlling interests -

411

Numbers are illustrative.


20

Primary financial statements: Balance Sheet

• The balance sheet will consolidate all the assets and

liabilities of the Sky Group.

• The opening acquisition balance sheet will include new

intangible assets relating to the existing customer

contracts in the acquired businesses.

• The difference between the assets acquired and

consideration paid will increase the Sky Group’s

goodwill balance.

• Similar to the income statement, the balance sheet will

also apportion the net assets of the German territory

between the Group’s shareholders and the minority

shareholders of Sky Deutschland.

4

Condensed Consolidated Balance Sheet as at 31 December 2014

31 December 31 December 30 June

2014 2013 2014

£m £m £m

Non-current assets

Goodwill 1,028 1,019

Intangible assets 747 810

Property, plant and equipment 1,035 1,088

Investments in joint ventures and associates 170 173

Available-for-sale investments 578 533

Deferred tax assets 29 31

Trade and other receivables 17 20

Programme distribution rights 19 7

Derivative financial assets 221 195

3,844 3,876

Current assets

Inventories 1,017 546

Trade and other receivables 613 635

Short-term deposits 395 295

Cash and cash equivalents 765 1,082

Derivative financial assets 4 15

2,794 2,573

Total assets 6,638 6,449

Numbers are illustrative


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Primary financial statements: Cash flow statement

• We expect the changes to the Group cash flow

statement to be minimal.

• Cash flows from operating and investing activities

will include payments and receipts of the Italian and

German territories.

• Cash outflow for ‘Purchase of subsidiaries’ will

include the cash element of consideration paid.

• Cash raised in debt and equity markets to finance

the transaction will be shown as inflows in the

financing section of the statement.

4 Condensed Consolidated Cash Flow Statement for the half year ended 31 December 2014

2014/15 2013/14

Half year Half year

£m £m

Cash flows from operating activities

Cash generated from operations 774

Interest received 6

Taxation paid (135)

Net cash from operating activities 645

Cash flows from investing activities

Dividends received from joint ventures and associates 17

Net funding to joint ventures and associates (2)

Proceeds on disposal of investments -

Purchase of property, plant and equipment (122)

Purchase of intangible assets (123)

Purchase of subsidiaries (net of cash and cash equivalents purchased) (20)

Purchase of available-for-sale investments (2)

Decrease in short-term deposits 200

Net cash (used in) from investing activities (52)

Cash flows from financing activities

Net proceeds from borrowing -

Repayment of obligations under finance leases (1)

Proceeds from disposal of shares in Employee Share Ownership Plan (“ESOP”) 4

Purchase of own shares for ESOP (164)

Purchase of own shares for cancellation (115)

Interest paid (69)

Dividends paid to shareholders of the parent (298)

Net cash used in financing activities (643)

Net (decrease) increase in cash and cash equivalents (50)

Cash and cash equivalents at the beginning of the period 815

Cash and cash equivalents at the end of the period 765

Numbers are illustrative


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Adjusted profit

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Adjusted profit

• In common with most FTSE companies, we present our financials on an adjusted basis to allow you

to understand the underlying performance of the business.

• We’ll continue to provide statutory financials and provide a reconciliation between statutory and

adjusted.

• This is not a change. For example, following our previous acquisition of O2’s consumer broadband

and fixed-line telephony business in April 2013, we adjusted for the costs of the integration.

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Adjusted profit

• The transaction will add new items to our reconciliation from statutory to adjusted measures.

• As communicated as part of the transaction, there will be a number of substantial one-off items

this year including:

– Profit arising on the disposal of part of our investment in ITV

– Profit on disposal of our stake in National Geographic

– Fees and costs associated with the transaction and financing

– One-time costs of achieving synergies (likely to be some this year and more in the following few periods)

• There will also be a number of new, recurring adjusting items including:

– Amortisation of acquired intangible assets (principally the value of customer contracts arising from the

acquisition accounting process), in line with the practice adopted for the acquisition of the O2 broadband

business

– The deferred tax charge (see section 6) that arises in each period as the acquired tax losses in Germany

are utilised. This will align our results more closely to cash tax paid, after taking relief for the losses

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Adjusted profit 5

Extract from Note 5 of the press release


2014/15

Half year

£m

Reconciliation from profit for the period to adjusted profit for the period

Profit for the period xxx

Profit on disposal of available-for-sale investment xxx

Profit on disposal of associate xxx

Advisory and transaction fees and finance costs incurred on the purchase of Sky Italia and Sky Deutschland xxx

One-time costs of achieving synergies xxx

Amortisation of acquired intangible assets xxx

Remeasurement of all derivative financial instruments not qualifying for hedge accounting and hedge

ineffectiveness xxx

Tax effect of above items xxx

Reversal of deferred tax charge relating to acquired German tax losses xxx

Adjusted profit for the period xxx

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Deferred tax

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Deferred tax 6

• We expect to be able to utilise Sky Deutschland’s historical losses of €2.6 billion to reduce our

current tax payments.

• The value of these losses will be recognised in full as a deferred tax asset in our opening

acquisition balance sheet.

• Our current estimate is that the deferred tax asset is worth in the region of €700 million.

• The deferred tax asset will be unwound through the income statement as the acquired losses

are utilised. There is no time limit on their utilisation.

• We will exclude this deferred tax charge from our adjusted earnings measures in order to align

our results more closely to cash tax paid after taking relief for the losses.


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2015 external reporting calendar

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2015 external reporting calendar

2014/15

Q2

2014/15

Q3

2014/15

Q4

2015/16

Q1

Wednesday

4 February

Wednesday

6 May

Wednesday

5 August

Wednesday

4 November

Proposed

reporting date:

Enlarged group • Historically BSkyB has been one of the fastest reporting

companies in the UK.

• Sky Deutschland’s own external reporting is later and our

enlarged group will become more complex to account for and

audit.

• We will therefore align reporting dates for our quarterly

earnings releases making them later by around a week

• We expect Sky Deutschland to report the same day so long as

they remain listed.

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We’re here to help

Edward Steel

[email protected]

+44 207 032 2093


Lang Messer

[email protected]

+44 207 032 2657

Robert Hope

[email protected]

+44 207 032 2654

mailto:[email protected]

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