SWIMMING UPSTREAM
Sky subscriptions are rising — so why aren’t investors impressed?
Martin Stewart has managed to turn around Sky’s fortunes during his first year as chief executive — at least to the degree that he has turned around what seemed a relentless decline in subscribers.
He’s managed to hold on to Sanzaar rights and institute a sweeping restructure to redouble efforts on streaming, which has got positive notices from most analysts.
Under his reign, Sky has gone on the front foot, buying Lightbox from Spark for $6 million, and global streaming player Rugby Pass in a deal worth up to $63m. It’s grabbed naming rights to the cake tin in Wellington.
But Sky’s stock has kept tumbling. Shares dropped 1.59 per cent to 62c shortly after its half-year result was announced, for a cumulative fall of 68.4 per cent over the past 12 months.
Does he feel like he’s not getting the love from investors for various moves he’s made so far?
“I think . . . with every chief executive, you go through periods of dissatisfaction with your share price.
“I came in here with a belief of what needed to be done. And I had plenty of [advice] from all quarters about what needs to be done. And . . . we did it all in the first 12 months.
“So I think it’s just a question of us working through . . . whatever the doubts are. You know, we have the [Sanzaar] rights for the next five and a half years.
“There’s no way that we’re going anywhere in five and a half years, and yet we’re valued on a couple of times [operating earnings] multiple. It just makes no sense.”
One of those who has given Stewart little love is Forsyth Barr analyst Matt Henry, who had an underperform rating ahead of Sky’s result yesterday. Afterward, he indicated he’s seen no upside surprises to change his mind.
Stewart was able to deliver a positive headline result: a jump in total subscriber numbers in the first half from 779,000 (or the year-ago 750,000) to 795,000, driven by a 74 per cent increase in subs to its various streaming services.
For the second period in a row, streaming subscriber numbers (which jumped from 113,000 first half of 2019 to 196,000) grew faster than satellite numbers fell.
Henry had expected as much, however, and was left cold.
“The success in one doesn’t come close to offsetting the attrition in the other,” he told the Herald.
Satellite customers spent an average $83 per month with Sky in the six months to December, while the company’s streaming services are far lower yielding (Neon costs $13.95 per month, RugbyPass US$14.99 ($23.15) per month and Sky Sport Now from $38.99 per month).
Henry doesn’t like that downward pressure on overall arpu (average revenue per user per month) as the percentage of customers on streaming plans increases.
He’s also been put off by increasing costs. He concedes some are one-offs related to restructuring, but he also sees ongoing upward pressure on programming and marketing costs thanks to new online competition.
He noted that Sky was cashflow negative for six months to December 31, if costs associated with the RugbyPass acquisition were included.
“They’re trying to revolutionise the business,” Henry said. “But everything has just got a lot harder.”
Stewart could brag that, this month, total customer numbers have swelled to 925,000 thanks to customers gained through Sky’s acquisition of Spark’s Lightbox for $6m (Lightbox will be merged with Neon later this year). The Sky boss would not say how many of those were individuals who paid for Lightbox and how many would keep getting “Lightbox on us” under a commercial deal between the two companies.
Stewart would not comment on the terms of Sky’s ongoing deal with Spark, so that the telco can continue to provide free access to Lightbox to qualifying broadband customers.
But whatever the sum involved in the wholesale deal, it was not enough to change Sky’s guidance (originally issued on November 18) for lower revenue (between $750m and $770m) and lower operating earnings ($170m to $190m) for full-year 2020. The dividend remains suspended.
For his part, Stewart remains optimistic. He dismisses recent reports of South Africa decamping from Sanzaar to join the Six Nations. Sanzaar contracts are solid, he said.
Stewart said that globally, there are about four million people who access RugbyPass articles or video every month. He sees the global streaming service as central to Sky’s future.
Close to the time of the acquisition, Rugby Pass founder Tim Martin told the Herald the service had around 20,000 paying subscribers. Stewart would not give a figure, but total streaming revenue figures indicate Rugby Pass has yet to catch fire.
First-half revenue fell 5 per cent to $384.5m. Within that, residential satellite customers’ contribution fell from $322m to $299m; “other subscriptions” (including Neon, Sky Sport Now and Rugby Pass) added $52m from the year-ago $46m, and advertising revenue fell from $27m to $26m.
That is, streaming customers accounted for 24.7 per cent of total subs for the period, but just 13.5 per cent of total revenue.
Stewart’s key issue remains that cost pressure is rising at a time when new services are bringing in much less money than those they replace.