British Sky Broadcasting : Annual Financial Report

24 October 2014

British Sky Broadcasting Group plc - Annual Report and Annual General Meeting

British Sky Broadcasting Group plc (the "Company") released its preliminary announcement of annual results for the year ended 30 June 2014 ("Preliminary Announcement") on 25 July 2014.

Further to the Preliminary Announcement, the Company confirms that the Annual Report 2014, Notice of Annual General Meeting 2014 and Form of Proxy are being posted to shareholders today.

The documents have been submitted to the National Storage Mechanism and will shortly be available for viewing atwww.hemscott.com/nsm.do.

The Annual Report 2014 and Notice of Annual General Meeting 2014 are available on the Company's website at www.sky.com/corporate/investors. 

The Company's 2014 Annual General Meeting will be held at 2pm on 21 November 2014 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE.

The appendix to this announcement contains additional information which has been extracted from the Annual Report 2014 for the purposes of compliance with the Disclosure and Transparency Rules and should be read together with the Preliminary Announcement. Both documents can be downloaded from the Company's website at www.sky.com/corporate/investors/

This announcement should be read in conjunction with and is not a substitute for reading the full Annual Report 2014 (the 'Annual Report'). A glossary of terms is available on page 142 of the Annual Report. Together these constitute the information required by Disclosure and Transparency Rule 6.3.5 which is required to be communicated to 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.

OVERVIEW AND RECENT DEVELOPMENTS

Our performance

The success of our strategy is reflected in the strong performance of the business over the past year. Against a challenging economic and competitive backdrop, we added 23% more products than the prior year and achieved the highest rate of customer growth for three years (excluding the acquired O2 customers and product base).

Strong demand across the board translated to a 7% increase in revenue (excluding ESPN). Combined with a continued focus on operating efficiency, this meant we ended a year of investment with earnings per share flat year on year. This is an excellent result in a period where we absorbed a one-off step up in Premier League costs and invested to accelerate take-up of new connected services, and it reflects the strength of the underlying business.

In light of this performance, the Board has proposed a dividend of 32.0 pence, an increase of 7% on the prior year and the tenth consecutive year of growth.

We continued to reap the benefits of our broadly-based approach to growth as more people chose to come to Sky and take more of our products. We added a total of 3.1 million new paid-for subscription products over the 12 months to take our total base of subscription products past 34 million. At the same time, we added 342,000 new customers to reach 11.5 million, reflecting a continuing appetite to switch services from other providers to Sky. At the end of the year, 37% of our customers took all three of TV, broadband and telephony from Sky, extending our lead as Britain's favourite triple-play provider.

We saw a particularly good performance in TV, adding twice as many new customers as last year. This growth was underpinned by the quality and range of content we offer the whole family. This is our biggest year in entertainment yet as we target a spend of £600 million by the end of 2014 on original British programmes. Highlights from the past 12 months included Anglo-French crime drama The Tunnel , a co-production with Canal Plus, and Penny Dreadful , a psychological thriller produced by Oscar winner Sam Mendes.

We also strengthened our relationship with some of the world's leading content producers, signing major new partnerships with ITV and HBO and renewing a multi-year movies agreement with Paramount, thereby increasing our range of exclusive content. Meanwhile, Sky Sports enjoyed its highest share of viewing for seven years with the best-ever Premier League season in terms of audiences, while at the same time strengthening its offering for the future with 30 new sports rights agreements.

Meanwhile, our investment to accelerate take-up and usage of our connected TV service delivered excellent results, increasing the value we offer to customers and opening up new sources of revenue. Over the year, the total number of connected Sky+HD boxes more than doubled to 5.7 million, equivalent to 57,000 new households being connected every week. This means that more than 50% of TV customers were connected at the end of June, making Sky Britain's most popular connected TV platform.

This explosive growth has transformed the viewing experience. On Demand downloads grew threefold over the year as customers responded to greater flexibility and choice. Our expanded Box Sets service proved particularly popular with viewing to top titles like 24 and Game of Thrones up fourfold in Q4.

At the same time, the number of households registered for Sky Go, our mobile TV service, grew 19% to 5.5 million, helping push viewing figures to new highs. We saw particularly strong growth in entertainment, with entertainment and movies accounting for two-thirds of all viewing to Sky Go at the end of the year.

Through all this, we continued to extend our lead in customer service. Initiatives like bringing our entire engineer workforce in-house and the roll-out of our 'One Service' operating model, where we join up different elements of the service experience more effectively, has helped deliver record levels of customer satisfaction. As a result, Sky again earned the top ranking from Ofcom for quality of service by a provider of TV, broadband and home phone services.

Underpinning everything we achieved operationally was our continued work to reach beyond our business and make a positive impact on the wider community. We launched Sky Academy in November and were delighted that over 105,000 young people took part in a Sky Academy initiative during the year.

Of course, none of what we do would be possible without the dedication and hard work of our people. They are vital to our success and I would like to thank each and every one of them for their contribution in the last 12 months.

With their continued support, the outlook for the business is very positive. Our strategy is delivering and there is a broad and growing market opportunity that Sky, with our unique combination of strengths, is best placed to take advantage of. Our track record of success in Britain and Ireland is the starting point as we expand into Europe. The opportunity is substantial and this is good news for our people, good for customers and good for our shareholders.

Financial Review

We have delivered an excellent year of operational and financial growth. Continued demand across the board translated into strong revenue growth which, combined with a continued focus on operating efficiency, meant we absorbed our investment in connected services and matched last year's record adjusted earnings per share.

Financial performance

We delivered a good financial performance for the twelve months to 30 June 2014. Adjusted revenue growth was 5% (or 7% after excluding the impact of ESPN) and this, together with continued discipline on costs, allowed us to deliver adjusted EBITDA of £1,667 million, down only 1% despite our connected services investment and the step up in Premier League amortisation. Adjusted basic earnings per share were 60.0 pence, flat on the prior year's record level.

Unless otherwise stated, all figures and growth rates exclude adjusting items. A reconciliation of statutory to adjusted figures is detailed on page 139.

Revenue

Revenue increased by 5% to £7,617 million (2013: £7,235 million) with continued strong growth in both our retail and commercial businesses. Revenue grew by 7% excluding the impact of the discontinued retailing of the ESPN channel in both 2014 and 2013.

Retail subscription revenue, after excluding £6 million of ESPN revenue (2013: £89 million), grew by 7% to £6,249 million (2013: £5,862 million) reflecting strong product and customer growth and price rises in the year. Our investments in connected services are paying back, driven by a strong performance from Sky Store which saw revenues more than double on last year.

Our commercial businesses also performed well. Advertising revenue was up 7% to £472 million (2013: £440 million) through a combination of market growth, share gains through our consolidation of two small sales houses in this financial year and a first time contribution from Sky AdSmart. Wholesale subscription revenue increased by 3% to £407 million (2013: £396 million) as renewed carriage agreements and price increases were partially offset by lower customer volumes on third-party platforms.

Other revenue increased by 10% to £398 million (2013: £361 million) with continued strong performance from Sky Bet which saw mobile users up 29%, driving revenues up 18% to £183 million.

Our statutory reported revenue grew 5%.

Costs

Excluding the one-off step up in the new Premier League deal and the discontinuation of ESPN carriage (2014: £223 million; 2013: £78 million), programming costs of £2,439 million (2013: £2,408 million) were up 1% in the year as we made disciplined choices across our diverse content portfolio. Sports accounted for the majority of the increase given our investment in a large number of renewed and new rights agreements. Movies costs increased from a broader grant of rights facilitating new propositions like NOW TV, Sky Go Extra and Sky Store, while payments to third-party channel providers were lower than the prior year as we negotiated more favourable terms on several renewed agreements.

Direct network costs of £819 million were up 15% (2013: £715 million), as we continued to grow our customer base and absorbed the acquired O2 customer base onto our network.

Marketing costs of £1,199 million (2013: £1,116 million) were driven by the increased growth of paid-for products compared to last year and promotions behind our drive to connect our base of set-top boxes. Above the line marketing was also higher as we maintained our share of voice in the market with targeted campaigns throughout the year.

Subscriber management and supply chain costs were up 6% at £688 million (2013: £647 million) as we continued to see strong growth in products and customers, invested in our connected services and integrated the acquired O2 customers into the Sky base.

Transmission, technology and fixed network costs increased by 11% to £447 million (2013: £401 million) largely due to the first time consolidation of the cost base associated with the acquired O2 broadband business. Administration costs of £542 million were broadly flat on last year (2013: £540 million).

Profits and earnings

Adjusted EBITDA of £1,667 million (2013: £1,692 million) and adjusted operating profit of £1,260 million (2013: £1,330 million) is an excellent result in a period where the business absorbed a one-off step up in Premier League costs and invested to accelerate take-up and usage of new connected TV services.

Depreciation and amortisation was up 12% at £407 million (2013: £362 million) due to the integration of the acquired O2 business, a higher base of depreciable assets with more unbundled exchanges, network upgrades carried out across the year and a higher fixed asset base as we begin to depreciate the development costs of products such as NOW TV and Sky AdSmart.

Profit before tax was £1,186 million (2013: £1,264 million), which included the Group's share of joint ventures and associates' profits of £35 million (2013: £37 million) and a net interest charge of £109 million (2013: £103 million). Taxation for the period was £249 million (2013: £295 million), at an adjusted effective tax rate of 21% (2013: 23%) mainly as a result of the reduction in the rate of UK corporation tax.

Profit after tax for the year was £937 million (2013: £969 million), generating adjusted basic earnings per share of 60.0 pence (2013: 60.0 pence). Over the year the weighted average number of shares excluding those held by the Employee Share Ownership Plan ('ESOP') for the settlement of employee share awards was 1,562 million (2013: 1,614 million). The closing number of shares, excluding the ESOP shares, at 30 June 2014 was 1,546 million (2013: 1,573 million).

Adjusting items

Statutory operating profit of £1,161 million (2013: £1,291 million) includes a net exceptional cost of £99 million (2013: £39 million) which reflects integration costs of the acquired O2 business and the ongoing amortisation of acquired intangibles (£72 million), the costs of a corporate efficiency programme undertaken through the year (£40 million), offset in part by a net gain from the termination of an escrow agreement with a wholesale customer (£13 million).

Statutory profit after tax of £865 million (2013: £979 million) also includes a net exceptional gain of £27 million due to a tax credit and the tax effect on all adjusting items (£32 million) partially offset by a £5 million cost relating to mark to market values of derivative financial instruments.

In the prior year, statutory profit after tax included a net exceptional gain of £10 million, consisting of a gain of £32 million relating to a credit note received from BT following an Ofcom determination that BT had overcharged for Ethernet services, a gain of £33 million following final settlement of disputes with a former manufacturer of set-top boxes and a gain of £9 million on the disposal of our investment in MUTV Limited. These gains were offset by costs of £56 million for a one-off upgrade of set-top boxes and a programme to offer wireless connectors to selected Sky Movies customers, in addition to costs of £33 million for a corporate efficiency programme and costs of £15 million in relation to the acquisition and integration of O2's consumer broadband and fixed-line telephony service. Other adjusting items in the prior year were a £23 million gain relating to mark to market values of derivative financial instruments and a £17 million credit relating to the tax exceptionals and the tax effect on all adjusting items.

A reconciliation of statutory to adjusted numbers is shown on page 139.

Cash flow and financial position

Adjusted free cash flow, excluding campus redevelopment investment costs of £62 million (2013: £12 million), was 3% lower at £1,006 million (2013: £1,040 million) reflecting lower EBITDA and higher capital expenditure, offset by a positive working capital movement and

lower cash tax.

Capital expenditure increased by £89 million to £543 million (2013: £454 million) due to the phasing of campus redevelopment investment, the integration and migration of acquired O2 customers and product development investment. Excluding the campus redevelopment, underlying capital expenditure was £481 million (2013: £442 million).

Net debt increased slightly to £1,212 million (2013: £1,183 million) as a result of the £750 million cash returned to shareholders via dividends and share buy-back in the year. Gross debt was £2,589 million, with £1,377 million of cash and cash equivalents and short-term deposits at 30 June 2014. The Group's liquidity and headroom remain comfortable.

Balance Sheet

During the year, total assets increased by £104 million to £6,449 million at 30 June 2014. Non-current assets increased by £100 million to £3,876 million, primarily due to an increase of £139 million in intangible assets and property, plant and equipment as a result of campus redevelopment investment, the integration and migration of acquired O2 customers and product development investment, an increase of £111 million in available-for-sale investments mainly resulting from the increase in the value of our investment in ITV plc, offset by £165 million decrease in non-current derivative financial assets which offsets against movements in non-current borrowings. Current assets increased by £4 million to £2,573 million at 30 June 2014.

Total liabilities increased by £44 million to £5,377 million at 30 June 2014. Current liabilities increased by £202 million to £2,519 million, primarily due to a £263 million increase in trade and other payables, offset by a £48 million decrease in current tax liabilities. Non-current liabilities decreased by £158 million to £2,858 million, principally due to a £251 million decrease in the Group's non-current borrowings as a result of the strengthening of pounds sterling against the US dollar and fair value movements in the value of bonds, offset by a £100 million increase in non-current derivative financial liabilities.

Distributions to Shareholders

We have once again increased our ordinary dividend. The Directors' proposed final dividend of 20.0 pence per share takes the total dividend payable in respect of the financial year to 32.0 pence per share, an increase of 7% on last year and double the level of seven years ago. Shareholders have now benefited from a decade of sustained dividend growth such that a holder of a single Sky share over that period would have received over 200 pence in dividends.

The ex-dividend date will be 13 November 2014 and, subject to shareholder approval at the 2014 Annual General Meeting, the final dividend of 20.0 pence will be paid on 5 December 2014 to shareholders appearing on the register at the close of business on 14 November 2014.

At the Company's AGM on 22 November 2013, we received shareholder approval to return up to £500 million of capital to shareholders via a share buy-back. On 25 July 2014, the Company suspended its share buy-back programme.

Post balance sheet events

On 17 July 2014, the Group sold a shareholding of approximately 6.4% in ITV plc, consisting of 259,820,065 ITV shares for an aggregate consideration of approximately £481 million.

The Company announced on 25 July 2014 that it has conditionally entered into share purchase agreements (the "Acquisition Agreements") with 21st Century Fox (and its relevant subsidiaries) to acquire its 100% stake in Sky Italia Srl and its 57.4% stake in Sky Deutschland A.G. The Company further announced its intention to make a voluntary cash offer (the "Offer") to the minority shareholders of Sky Deutschland A.G. The Acquisition Agreements and the Offer (together the "Transactions") are conditional on, amongst other things, their approval by the Company's independent shareholders and regulatory clearances.

The total consideration for the acquisition of Sky Italia is £2.45 billion with approximately £2.07 billion to be paid in cash and the balance to be satisfied through the transfer of the Group's 21% stake in National Geographic Channel to 21st Century Fox ("21CF"). The acquisition of 21CF's shareholding in Sky Deutschland A.G. is for a consideration of £2.9 billion in cash, valuing Sky Deutschland at €6.75 a share. Subject to the number of Sky Deutschland A.G. minority shareholders that accept the Offer, the total consideration for the transaction will range from £2.9 billion to £5 billion.

For further details, see note 29 to the consolidated financial statements.

Principal risks and uncertainties

The Group risk register is reported formally to the Audit Committee twice a year and focused risk reporting on selected themes occurs on a quarterly basis. Additional information on the Group's internal control and risk management processes is set out in the Corporate Governance Report and the Audit Committee Report (see page 54).

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.

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 Company announced on 25 July 2014, that it has conditionally entered into share purchase agreements (the "Acquisition Agreements") with 21st Century Fox (and its relevant subsidiaries) to acquire its 100% stake in Sky Italia Srl and its 57.4% (on a fully-diluted basis) stake in Sky Deutschland A.G. The Company further announced its intention to make a voluntary cash offer (the "Offer") to the minority shareholders of Sky Deutschland A.G. The Acquisition Agreements and the Offer (together the "Transactions") are conditional on, amongst other things, approval by the Company's independent shareholders and regulatory clearances. The risks relating to the Transactions and their impact if all relevant conditions are satisfied and they proceed to completion, will be set out in a circular which will be sent to the Company's shareholders, together with a notice of a general meeting of the Company containing the resolutions seeking shareholder approval for the Transactions.

Appendix

STATEMENT OF DIRECTORS' RESPONSIBILITIES

As set out above, the following responsibility statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from page 81 of the Annual Report 2014. 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, 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 performance, business model and strategy.

By order of the Board

Jeremy DarrochAndrew Griffith

Chief Executive Officer                                                    Chief Financial Officer

25 July 201425 July 2014

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 Twenty-First 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:

At 30 June 2014 the Group had expenditure commitments of £99 million in relation to transactions with related parties (2013: £97 million) all of which related to minimum television programming rights commitments.

Goods and services supplied

During the year, the Group supplied set-top boxes, programming, airtime, transmission, marketing, consultancy services, customer relationship management services and a licence to use the Sky brand to Twenty-First Century Fox, Inc. companies.

Purchases of goods and services and certain other relationships

During the year, the Group purchased programming and technical and marketing services from Twenty-First Century Fox, Inc. companies.

There is an agreement between Twenty-First Century Fox, Inc. and the Group, pursuant to which it was agreed that, for so long as Twenty-First Century Fox, Inc. directly or indirectly holds an interest of 30% or more in the Group, Twenty-First Century Fox, Inc. will not engage in the business of satellite broadcasting in the UK or Ireland.

Share buy-back programme

During the year, the Company purchased, and subsequently cancelled, 12,140,586 ordinary shares held by Twenty-First Century Fox, Inc. as part of its share buy-back programme. For further details, see note 24.

b) Joint ventures and associates

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below.

Transactions between the Company and its subsidiaries, joint ventures and associates are disclosed in the Company's separate financial statements.

Services supplied are primarily the provision of transponder capacity, marketing, airtime sales and support services. Purchases represent fees payable for channel carriage. Amounts owed by joint ventures and associates include £1 million (2013: £1 million) relating to loan funding.

These loans bear interest at a rate of one month LIBOR plus 1%. The maximum amount of loan funding outstanding in total from joint ventures and associates during the year was £1 million (2013: £7 million).

The Group took out a number of forward exchange contracts with counterparty banks during the year on behalf of the joint venture AETN UK. On the same dates as these forward contracts were entered into, the Group entered into equal and opposite contracts with AETN UK in respect of these forward contracts.

Consequently, the Group was not exposed to any of the net gains or losses on these forward contracts. The face value of forward exchange contracts with AETN UK that had not matured as at 30 June 2014 was £4 million (2013: £8 million).

During the year, US$4 million (2013: US$4 million) was paid to the joint venture upon maturity of forward exchange contracts and less than US$1 million (2013: US$nil) was received from the joint venture upon maturity of forward exchange contracts.

During the year, £3 million (2013: £2 million) was received from the joint venture upon maturity of forward exchange contracts, and £5 million (2013: £3 million) was paid to the joint venture upon maturity of forward exchange contracts.

During the year, €5 million (2013: €4 million) was received from the joint venture upon maturity of forward exchange contracts and less than €1 million (2013: €nil) was paid to the joint venture upon maturity of forward exchange contracts.

At 30 June 2014 the Group had minimum expenditure commitments of £3 million (2013: £4 million) with its joint ventures and associates.

c) Other transactions with related parties

A close family member of one Director of the Company runs Freud Communications Limited ("Freud"), which has provided external support to the press and publicity activities of the Group. During the year the Group incurred expenditure amounting to £1 million (2013: £1 million) with Freud. At 30 June 2014 there was £1 million (2013: less than £1 million) due to Freud.

In addition to the foregoing, the Group has engaged in a number of transactions with companies of which some of the Company's Directors are also directors. These do not meet the definition of related party transactions.

d) Key management

The Group has a related party relationship with the Directors of the Company. At 30 June 2014, there were 15 (2013: 14) members of key management all of whom were Directors of the Company. Key management compensation is disclosed in note 6b.

Forward looking statements

This document contains certain forward looking statements with respect to our financial condition, results of operations and business, and our strategy, plans and objectives.

These statements include, without limitation, those that express forecast, expectations and projections, such as forecasts, expectations and projections with respect to new products and services, the potential for growth of free-to-air and pay television, fixed-line telephony, broadband and bandwidth requirements, advertising growth, Direct-to-Home ("DTH") customer growth, Over-the-top ("OTT") customer growth, Multiscreen, On Demand, NOW TV, Sky Go, Sky Go Extra, Sky+, Sky+HD and other services, churn, revenue, profitability and margin growth, cash flow generation, programming costs, subscriber managements and supply chain costs, administration costs and other costs, marketing expenditure, capital expenditure programmes and proposals for returning capital to shareholders.

Although the Company believes that the expectations reflected in such forward looking statements are reasonable, these statements (and all other forward looking statements contained in this document) are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied or forecast in the forward looking statements. These factors include, but are not limited to, those risks that are highlighted in this document in the section entitled 'Principal risks and uncertainties', and information on the significant risks and uncertainties associated with our business is described therein.

No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in the Company or any other entity and must not be relied upon in any way in connection with any investment decision. All forward looking statements in this document are based on information known to us on the date hereof. Except as required by law, we undertake no obligation publicly to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.