Sky plc - Annual Financial Report

Sky plc (the 'Company') released its preliminary announcement of annual results for the year ended 30 June 2018 ('Preliminary Announcement') on 26 July 2018.  Further to the Preliminary Announcement, the Company confirms that the Annual Report 2018 has been published today and is available on the Company's website at www.skygroup.sky/corporate/investors. It has also been submitted to the National Storage Mechanism and will shortly be available for viewing at www.morningstar.co.uk/uk/NSM.

The following note from Jeremy Darroch has been appended to the copy of the Annual Report 2018 on our website to provide further context for the reader:

"This annual report covers the period from 1 July 2017 to 30 June 2018, and was completed and signed off by the Board and our auditors on 25 July 2018.  At this time, both Twenty First Century Fox ("21CF") and Comcast had made firm offers for the company and the offer process was ongoing.

Following an auction process led by the Takeover Panel, on 22 September 2018 the Independent Directors recommended Comcast's superior offer of £17.28 per Sky share to shareholders. This valued Sky at £29.7 billion and demonstrated the strength of our business and its position across Europe. Subsequently, on 9 October 2018 Comcast announced they had acquired over 75% of the voting rights of Sky and their offer had therefore become wholly unconditional, meaning our business had become part of a global and world-class entertainment organisation. We expect Sky shares to cease trading on the London Stock Exchange on 7 November 2018.

It was nearly 30 years ago that Rupert Murdoch took a risk to launch our company and revolutionise the way people watch TV.  The support of 21CF over that time, including James' Chairmanship of our business, has enabled Sky to grow in to one of Europe's leading direct-to-consumer media and entertainment companies. I would personally like to thank Rupert, James and 21CF for their consistent support as shareholders, Board members and friends.

I'd additionally like to thank those Board members - Chase Carey, Tracy Clarke, Martin Gilbert, Adine Grate, John Nallen, Matthieu Pigasse, Andy Sukawaty and Katrin Wehr-Seiter - who have or will shortly join James in stepping down from the Board. They have all made a significant contribution to the success of Sky and have continually looked after the interests of all shareholders. 

This is the beginning of the next exciting chapter for Sky and I look forward to bringing our business together with Comcast for the benefit of customers, colleagues and the communities in which we operate. As part of a broader organisation our momentum will only increase and our aim is to make the next 30 years equally as successful as the last. I'm very proud by what we've achieved at Sky and I'm equally excited about the opportunities that still lie ahead."

A condensed set of the Company's financial statements was included in the Preliminary Announcement and the appendix to this announcement contains additional information which has been extracted from the Annual Report dated 25 July 2018 (the 'Annual Report') for the purposes of compliance with the FCA's DTRs and should be read together with the Preliminary Announcement. Both documents can be downloaded from the Company's website at www.skygroup.sky/corporate/investors.

Together these constitute the information required by DTR 6.3.5 which is required to be communicated to the media in full unedited text through a Regulatory Information Service. Page and note references in the text below refer to page numbers and notes in the Annual Report 2018.

Appendix

OVERVIEW AND RECENT DEVELOPMENTS

The global media and entertainment industry is changing at pace. Consumers' viewing behaviours are evolving and the rate of innovation and technological change is accelerating. Competition continues to intensify, especially for direct relationships with consumers, and with this the quality and quantity of what's on screen is increasing. In a world of almost unlimited choice, consumers are becoming more discerning, seeking out better curation and quality from brands they trust, while spending more time than ever watching video content.

As the original direct-to-consumer media and entertainment business, Sky is uniquely well positioned to succeed in today's environment.  We've remained flexible in our approach, building out our portfolio of products and services in order to bring better content and innovation to all our customers, connecting them in ways that most suit their needs. We package together programmes from the world's best partners with our very own home-grown content.  We have a strong brand that now has significant reach across multiple and growing territories.  Our people are highly engaged and committed and our infrastructure is robust, enabling us to deliver the very best front-line service to customers.

We've delivered an excellent set of results and have put in place the building blocks for future growth

Our approach is working. Revenue for the period is up 5% to £13.6 billion, with growth in each of our territories.  EBITDA from our Established businesses is up 11% to £2.5 billion and up 9% when taking into account the investments we've made this year in Sky Mobile and our expansion into Spain.

This strong financial performance has been delivered against the backdrop of a challenging consumer environment, demonstrating the continual improvement in our broad set of products and services, and our focus on providing value for money to all our customers.  We now have a customer base of over 23 million households across Europe who are taking over 63 million Sky products. This year alone, we sold a further 3.1 million products, with particularly strong take-up of Sky Q multiscreen, Ultra HD and Sky Mobile.

Importantly, this year has been about establishing and opening up new opportunities for growth.  In the UK, we've agreed a cross-supply deal with BT and renewed our Premier League rights, meaning customers will have the best choice of sport through one Sky TV subscription.  In Italy, we have transformed the business into a major multi-product, multi-platform company. We reached landmark agreements with Mediaset and Open Fiber that will allow us to expand our product reach to more customers, plus launch a triple-play offering as well as developing our Sky over IP service.  In Germany and Austria, we significantly upgraded all of our products and services, and launched Sky Q to transform the viewing experience. Additionally, we agreed European partnerships with Spotify and Netflix, which will further enhance the whole home entertainment experience on the Sky Q platform and provide our customers with even greater value from their subscription.

More of the very best content available

All of this has been achieved at the same time as delivering for customers today. We offer our customers the best and broadest range of content and ensure we have something for every home and everyone in that home. We know our customers want exclusive, high-quality local storytelling that is differentiated from free-to-air and OTT offerings, which is why we have significantly increased our investment in Sky original productions in each of our markets.  Over the course of calendar year 2018 we're showing an average of one Sky original a week, including at least 10 big dramas. Alongside ramping up the quantity, we're focused on step changing the quality and scale of what we produce. We're attracting the very best writers, directors and acting talent in each of our markets, including global stars such as Benedict Cumberbatch, who starred in the critically acclaimed Patrick Melrose, which has now been nominated for five Emmy Awards; Lars Eidinger, our award-winning Babylon Berlin actor; Alessandro Cattelan, our X Factor host and one of Italy's most talented showmen; and writer of Britannia, Jez Butterworth.  This in turn is allowing us to increase the international distribution of our programmes, recoup a significant percentage of our costs and thereby enable further investment in the overall customer experience.

Alongside our great entertainment portfolio, our customers also benefit from a sports offering that is second to none.  This year, we've built on important partnerships and secured rights that will enable us to reach even more sports fans.

We successfully renewed our Premier League rights in the UK at a lower overall cost versus our contract today, and in Italy secured a significant increase in the number of exclusive Serie A games at a lower price per exclusive game than the previous seasons. For the first time in Germany and Austria, we will take UEFA Champions League exclusive to pay TV from next season, plus air the Austrian Bundesliga.

In news, the quality of original journalism from Sky News was once again recognised in 2018 with the channel taking home two RTS Awards, including News Channel of the Year, and a BAFTA for its coverage of the Rohingya humanitarian crisis. The channel continued to champion important causes, leading the way in the gender equality debate with its 100 Women series, and pushing technological boundaries, becoming the only broadcaster to show the Royal Wedding in Ultra HD.

In Italy, Sky TG24 has completed the transfer of its operations to our Milan headquarters and opened a new editorial office in Rome. The new premises have been equipped with the latest technology to ensure the highest-quality news output.

Offering customers the best ways to watch

Along with our curation of the best range of content, we have further developed and improved the customer viewing experience in each of our territories, making it easier for new customers to watch on a platform that best works for them and giving them the flexibility to join at a price point to suit their needs. We remain agnostic to how customers choose to watch their favourite programmes, be it via satellite, through our on demand services, on our NOW TV and Sky Ticket streaming platforms, or across DTT. In fact, over 70% of our customers now have the ability to access our content through our hybrid model of both satellite and streaming delivery.

Our investment in Sky Q is paying off. Sky Q customers are watching more - on average, an hour more of TV a day - transacting more, and are more loyal to Sky, demonstrating the strength of the Sky Q platform as Europe's leading home entertainment service. We are therefore committed to getting Sky Q into more homes to the benefit of both our customers and our business. Following its launch in Italy in November and in Germany and Austria in May, Sky Q is now in over 3.6 million homes across Europe and we'll continue to push its penetration in the year ahead.

In order to help us achieve this, we're going to make the platform even better. In February, we announced the next stage in Sky Q's development with a new and improved user interface along with enhanced personalisation, allowing customers to find their favourite programmes more easily. In the year ahead, we're rolling out new Kids and Sports modes, plus extending our voice functionality.

The launch of Sky Q in Germany and Austria was just one part of our comprehensive upgrade to our service in these markets. In order to realise the full growth potential in these territories over the longer term, we used insights and designs from across the Group to transform the viewing experience for our customers across each of our existing platforms. Combined with the launch of a new, simpler pricing structure and a new customer service centre in Berlin, these significant initiatives will enable us to push ahead with our next leg of growth in this market.

In Italy, Sky Q is at the heart of our segmentation strategy, which is focused on building a solution for every household, combining the best of Group and local initiatives. When taken together with our streaming platforms, DTT and Sky over IP services, this expansive product portfolio means we've never been in a better position for long-term growth.

We continue to drive deeper product penetration among all our customers. Sky Mobile is now in over half a million homes in the UK and we've recently signed a new deal with Telefónica that will further strengthen this area of our UK business.  In the year ahead, we will increase our penetration of fibre broadband customers with the launch of a new router, ensuring our customers are receiving the best experience no matter which platform they use to access our services.

Our customer service is best in class

We know customers want the best experience whenever they interact with Sky and giving them excellent customer service remains at the forefront of everything we do. We have embraced data and automation to keep making customer interactions simpler and quicker, driving higher satisfaction scores as well as delivering further efficiency within our business.

In the UK, we have once again been recognised by Ofcom for our superior service and have launched our VIP loyalty programme, rewarding customers the longer they remain with us. We also continue to make great progress with our Digital First service delivery through the new My Sky app, which has now been enhanced to include engineer tracking, putting an end to customers having to wait in for the engineer to arrive. In Germany and Austria, we have similarly launched the Mein Sky service app as we take our next steps in digital service in these markets. We will also be launching a loyalty programme there in September, replicating the success of similar initiatives in Italy and, more recently, the UK.

Our growing social impact

Our contribution to the cultural, economic and social life of the communities in which we live and work has never been greater. I'm proud we continue to grow as a business that plays its part in making a difference and bringing about change in the issues that both we and our customers care about.

Sky has a strong history of taking the lead on environmental issues that matter to our customers. We are currently the only FTSE 100 firm committed to eliminating the use of single-use plastics from our operations, products and supply chain by 2020 and are on track to do so. In the past year, we've already eliminated the use of disposable coffee cups, a simple act saving 12 tonnes of annual plastic waste, or seven million cups. We are also using our voice and reach to raise awareness of the crisis in ocean health through our Sky Ocean Rescue campaign, and are inspiring others to make changes through new partnerships with the likes of National Geographic and the Premier League. This year also saw us establish Sky Ocean Ventures, which will help find solutions to the single-use plastics issue we face by investing in breakthrough ideas for the future.

We also invest in and are passionate about helping high- potential young people receive the support they need for their talent to flourish. As well as our Sports Scholars programme, which has now expanded into Europe, we have two new scholarship programmes in the UK. The first, in partnership with National Geographic, gives grants to young innovators to enhance the impact of their scientific research into ocean health. The second sponsors female entrepreneurs working in technology and underpins our commitment to increase the number of women working in this field.

Sky's people are our greatest asset

The people who work for Sky across our seven territories are central to our success. I am very grateful every day for their hard work, enthusiasm and dedication to making Sky an even better place to work and to creating even better services for our customers.  The restlessness, creativity and ability to get things done, which has always been at the heart of Sky, has never been more apparent and it's through our people that our ethos 'believe in better' remains strong.

Perfectly placed to succeed

We exit the year in a strong position. In our vibrant and dynamic markets, we have the right strategy, infrastructure, people and culture in place to continue delivering for customers and shareholders. This will be achieved while meeting our responsibilities as a large business and using our expanding reach across Europe in the interests of all our stakeholders.  As direct-to-consumer relationships become more important than ever before, Sky is a business that is well positioned to succeed.

FINANCIAL REVIEW

We've delivered another set of strong results with like-for-like revenues up 5%, Established EBITDA up 11% and EPS up 10%.

Group financial performance

Unless otherwise stated, all numbers are presented on an adjusted basis for the year ended 30 June 2018. For comparative amounts in the prior year down to operating profit, numbers are translated at a constant currency rate of €1.13:£1 being the average exchange rate prevailing in the year to 30 June 2018, while content revenue and programming costs also exclude the one-off sale of the Rio Olympic rights in Italy in the prior year.

Adjusted results exclude items which may distort comparability in order to provide a measure of underlying performance. Such items arise from events or transactions that fall within the ordinary activities of the Group but which management believes should be separately identified to help explain underlying performance. Further details of the adjusting items impacting the Group can be found in note 8 to the consolidated financial statements. A reconciliation of the Group's statutory and adjusted consolidated income statement can be found in the Non-GAAP measures section of the consolidated financial statements on page 135.

Revenue

Group revenues increased by £588 million, or 5%, to £13,585 million (with growth of £669 million or 5% on a statutory basis, at actual exchange rates). 

We delivered growth in each territory, with the UK and Ireland up 4% (+£331 million), Germany and Austria up 6% (+£107 million) and Italy up 6% (+£150 million). We also delivered revenue growth in each category.

Direct-to-consumer revenue, our largest revenue category, grew by 3% or £396 million to £11,830 million, driven by a number of factors. These include: the increased size of our customer base; greater product penetration, as we grow into Sky Fibre, Sky Q and Sky Mobile; a higher number of pay- as-you-go buys; the full-year benefit from our home communications price rise in the UK in March 2017; and a price rise in Italy in October 2017.

Content revenue strongly increased by 15% (+£110 million) to £838 million as we monetised our growing investment in original programming. Similarly advertising revenue grew 10% (+£82 million) to £917 million with each territory outperforming its market.

An analysis of revenue by category for each territory for the current and prior year is provided in note 2 to the consolidated financial statements.

Costs

We made excellent progress in operating efficiency, with operating costs as a percentage of revenue improving by 70 basis points, and as a result total costs of £12,011 million increased by 4% (£12,551 million or an increase of 5% on a statutory basis, at actual exchange rates).

We continued to invest on screen for customers, with programming costs up 4% (+£225 million). This includes a £153 million step up in Bundesliga costs in Germany and greater investment in original drama. This was partly offset by a change to our sports rights amortisation in the UK, following the repackaging of our sport channel proposition, to an approach similar to that of Italy and Germany. As a result we are allocating 97.5% of the Premier League costs from the 2017/18 season to this fiscal year, with 2.5% or £35 million deferred into the 2019 fiscal year.

Direct network costs increased by 21% as we scaled growth in Sky Mobile to over half a million customers, and increased fibre penetration to 38% of the total broadband customer base.

Sales, general and administrative costs were up only 2% (+£79 million) and down 70 basis points as a percentage of revenue to just 33%. We absorbed our increased investment in brand to support Sky original dramas and the launch of Sky Q in Italy and Germany, as well as higher depreciation as a result of investment in the roll-out of Sky Q set-top boxes, Group integration and our UK campus. This performance reflects the strong progress we have made driving operating efficiency through the business as well as the benefit of capitalising rather than fully expensing Sky Q costs.

An analysis of costs by category for each territory for the current and prior year is provided in note 2 to the consolidated financial statements.

Profit and earnings

As a result of our strong revenue growth and excellent progress in operating efficiency, Established business EBITDA was up 11% to £2,456 million (2017: £2,208 million). EBITDA was up 9% after including the net costs of our investments in Sky Mobile and our streaming TV service in Spain.

Adjusting for depreciation and amortisation of £775 million, operating profit was up 7% to £1,574 million (2017: £1,473 million), or up 7% to £1,034 million on a statutory basis at actual exchange rates.

Tax was £1 million lower at £214 million, at an effective rate of 15.5% (2017: 17.0%) mainly reflecting the reduction in the UK rate and the recognition of tax allowances in Italy.

Profit after tax was £1,168 million (2017: £1,048 million), resulting in earnings per share of 67.3 pence, up 10% (2017: 61.4 pence) or 47.5p, up 17% on a statutory basis at actual exchange rates. The total weighted average number of ordinary shares was 1,716 million (2017: 1,710 million shares).

Statutory revenue, profit and adjusting items

Statutory revenue for the year of £13,585 million was up 5% from the prior year (2017: £12,916 million), which included the one-off sale of the Rio Olympic rights in Italy.

Statutory operating profit for the year of £1,034 million (2017: £964 million) increased by 7%, reflecting 5% growth in statutory revenue, progress in operating efficiency and the movement in foreign currency exchange rates.

Statutory operating profit is after the deduction of net operating expenses of £540 million (2017: £504 million) comprising three elements: (i) the ongoing amortisation of acquired intangible assets and acquisition-related costs, (ii) one off costs associated with the offers for the Company and (iii) adjusting items including the costs of corporate efficiency and restructuring programmes and the costs of integrating Sky ltalia and Sky Deutschland, which were partly offset by income received with respect to regulatory receipts and proceeds from settlements.

A reconciliation of the Group's statutory and adjusted consolidated income statement can be found in the Non-GAAP measures section of the consolidated financial statements on page 135.

Cashflow and net debt

Free cash flow of £552 million was £277 million lower than the prior year, reflecting the investment in deploying Sky Q to customers in each of our markets (c£180 million),as well as a peak year for the payment of upfront deposits on key sports rights including Premier League, Serie A and English Cricket Board (c£230 million).

Net debt as at 30 June 2018 was £6.5 billion (30 June 2017: £6.2 billion). On a pro-forma basis reflecting Sky Bet sale proceeds actually received on 10 July, net debt would have been £6.0 billion, representing a net debt to EBITDA ratio of 2.6 times.

During the year the Group repaid its October 2017 and February 2018 bonds (£787 million) from existing cash resources. The Group continues to maintain a strong financial position and has ample headroom to its financial covenants, including excellent liquidity with cash of £1.6 billion as at 30 June 2018 and access to Revolving Credit Facilities totalling £1 billion.

Balance sheet

During the year, total assets decreased by £436 million to £18,002 million at 30 June 2018.

Non-current assets increased by £160 million to £13,264 million, primarily due to an increase of £180 million in intangible assets and property, plant and equipment due to continued capital investment; an increase in deferred tax assets of £123 million; and an increase in programming distribution rights of £46 million.  These movements were offset by a decrease in non-current derivative financial assets of £168 million.

Current assets decreased by £596 million to £4,378 million at 30 June 2018, principally due to a £878 million decrease in cash and cash equivalents and short-term deposits, as a result of repaying two bonds this year from existing cash resources, and a £154 million decrease in derivative financial assets. These movements were offset by a £254 million increase in trade and other receivables and a £192 million increase in inventories.

Total liabilities decreased by £609 million to £13,982 million at 30 June 2018.

Current liabilities decreased by £229 million to £5,321 million, primarily due to a £527 million decrease in current borrowings following the repayment of two bonds in the year offset by the reclassification of non-current borrowing in line with bond maturities.  This was offset by a £283 million increase in trade and other payables as a result of an increase in programming right payables and the timing of the year end close.

Non-current liabilities decreased by £380 million to £8,661 million principally due to £453 million decrease in the Group's non-current borrowings following the movement to current borrowings in the year, offset by a £54 million increase in trade and other payables.

Distributions to shareholders

The Company has remained in an offer period throughout the year.

On 9 February 2018, shareholders received a 10 pence special dividend as the 21st Century Fox offer had not become effective by 31 December 2017.  Following this, on 23 April 2018, shareholders received an interim dividend of 13.06 pence per share, representing an increase of 4% on the interim dividend paid in 2016 and making a total of 23.06 pence per share.

On 25 April 2018, Comcast announced a firm pre-conditional cash offer for Sky at an offer price of £12.50 per Sky share. Following the year end, on 11 July 2018, 21st Century Fox announced a recommended cash offer for the shares in the Company which it (or its affiliates) did not already own at an offer price of £14.00 per Sky share. Subsequently and also on 11 July 2018, Comcast announced an increased cash offer of £14.75 per Sky share which the Independent Committee of the Board recommended shareholders to accept.

The increased Comcast offer and increased 21CF offer both include an amount in lieu of a final dividend in respect of the financial year ended 30 June 2018, with Comcast and 21CF each reserving the right to reduce their respective offer prices by some or all of the amount of any dividend (which is announced, declared, paid or becomes payable to Sky shareholders).  As a result, the Board is not proposing a final dividend at this stage.

Principal risks and uncertainties

The Board has overall responsibility for determining the nature and extent of the principal risks it is willing to take to achieve its strategic objectives, as well as establishing and maintaining the Group's systems of internal control and risk management and reviewing the effectiveness of those systems.

Additional information on the Group's internal control and risk management processes is set out in the Corporate Governance Report and in the Audit Committee Report.

The Group has a formal risk management framework embedded within the business to support the identification and effective management of risk across the Group. The divisions within the Group are each responsible for managing and reporting risk in accordance with the Group's risk management policy and standards that have been approved by the Audit Committee.

The risks are then consolidated into a Group risk register which provides an overview of the Group risk profile.

The Board, through the Audit Committee, conducts a robust assessment of the Group's principal risks, including those that would threaten its business model, future performance, solvency or liquidity, and their mitigation.

The Group risk register is reported to the Audit Committee typically twice a year.

Detailed controls and any relevant action plans are monitored by the Group Risk team on an ongoing basis.

There is an ongoing monitoring process which is operated by the Group Risk team and supported by senior management across the Group, to identify and report to the Audit Committee on significant changes or new risks.

The outcome of the UK referendum on EU membership continues to cause uncertainty in both the political and economic environments in which we operate. Although the large majority of our revenue is from subscriptions, we are not immune from the impact of any economic uncertainty. We do, however, believe that our business model means that we are comparatively well placed to manage the consequences of the result and of its effect on the economic environment. Our operations are conducted mainly on a territorial basis and our business involves limited movement of goods and services between the UK and the rest of the EU and, to the extent that it does, we can adapt our business processes as necessary. Like all companies, we will need to monitor and manage the practical implications as they occur. Where appropriate we have also outlined in the table below the impact of the result on our principal risks and uncertainties.

This section describes the current principal risks and uncertainties facing the Group. In addition to summarising the material risks and uncertainties, the table below gives examples of how we mitigate those risks.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

As set out above, the following responsibility statement is repeated here solely for the purpose of complying with DTR 6.3.5. This statement relates to and is extracted from page 70 of the Annual Report 2018. Responsibility is for the full Annual Report not the extracted information presented in this announcement or the Preliminary Announcement.

Directors' responsibility statement

The Directors confirm that to the best of their knowledge:

1.    The financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

2.   The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

3.  The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

By order of the Board

Transactions with related parties and major shareholders

a)    Entities with joint control or significant influence

During the year the Group conducted business transactions with companies that form part of the 21st Century Fox, Inc. group, a major shareholder in the Company.

Transactions with related parties and amounts outstanding in relation to those transactions and with related parties at 30 June are as follows: