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Game of Thrones and Riviera help drive first quarter sales and profit growth at Sky

The UK broadcaster saw like-for-like revenues rise by 5% in the three months ended 30 September to £3.3bn, driven by new subscribers signing up to watch hit TV series like Game of Thrones
game of thrones ad
4.7mln viewers tuned in to watch the new season of Game of Thrones during the quarter

The popularity of TV shows like Game of Thrones and Riviera helped propel Sky PLC’s (LON:SKY) sales and earnings in the first quarter of its financial year.

Analysts had hinted at a slowdown in top line growth but the UK broadcaster saw like-for-like revenues rise by 5% in the three months ended 30 September to £3.3bn – the same rate it delivered in 2016.

Flat cost base helps boost earnings

Operating costs were flat year-on-year, which meant underlying earnings (EBITDA) jumped 11% to £582mln.

One of the factors behind the strong performance was the popularity of its content. More than 4.7mln viewers tuned in to watch Game of Thrones during the period, while Riviera notched up 20mln downloads to make it Sky’s most successful ever drama.

In the UK and Ireland Sky continued the momentum it built towards the end of last year, with revenues up 4% and EBITDA rising 11% to £452mln.

160,000 new UK subscribers; advertising robust

The FTSE 100 company signed up 160,000 new British customers in the quarter – 51% more than it added last year – as well as 108,000 new mobile customers.

Importantly its long-term customers continue to buy more services, Sky said. It hopes to squeeze even more out of them as well going forward with the launch of new, flexible sports packages designed to engage the estimated 4mln sports fans in its UK customer base who don’t currently take Sky Sports.

Advertising has been a tricky one for Sky and fellow broadcasters in recent years as companies cut back on their marketing budgets.

Sky believes the market as a whole was down by around 2% in the UK during the period but said its advertising business still turned in a “good performance…against the backdrop of a difficult market”.

On track heading into busy Q2

“We've had a strong start to our new financial year with good revenue growth and excellent profit growth as investments we've made come through,” said group chief executive Jeremy Darroch.

“Our investment on-screen to broaden our offering is delivering with viewing to Sky channels up 10% year on year.

“Within this the first series of our home-grown drama Riviera achieved 20 million downloads, becoming our highest ever rated Original commission and Game of Thrones has become the most watched series ever on Sky.”

He added: “Looking ahead, despite the uncertainty in the broader consumer environment, we remain on track with our plans and enter the busy Q2 trading period focused on delivering our clear strategy for growth.”

No real update on Sky-Fox merger

As expected, there was no real update on Rupert Murdoch’s £11.7bn bid to acquire the 60.9% of the company his 21st Century Fox Inc (NASDAQ:FOXA) doesn’t already own.

The takeover offer is currently being probed by the Competition and Markets Authority which will look at the possible impact on media plurality and broadcasting standards.

READ: Liberum expects deal to get the thumbs-up

Sky did confirm that the offer, which values each Sky share at £10.75, is not effective before 31 December, it will pay out a special dividend of 10p a share without any reduction in the bid price.

Given that the CMA isn’t expected to complete its investigation until next March, it’s almost certain that the deal won’t be given the greenlight until 2018.

GoT ad campaign a 'masterstroke'

“Marketing has always been a strong suit for Sky, and the decision to base recent campaigns around the hit Game of Thrones series has proved another masterstroke," said Hargreaves Lansdown analyst George Salmon.

"New customer growth has rocketed in recent months, with Sky’s pay-as-you-go streaming services also growing handsomely.

"An impressive grip on cost control, plus the successful launch of Sky Mobile and a streaming service in Spain, has added further gloss to these results. All-in-all, there’s been a marked improvement from the back end of its last financial year."

He added: "Usually, such news would come as a relief to investors. However, with Fox’s takeover bid being reviewed on public interest grounds by the Competition and Markets Authority, these are far from normal circumstances."

Netflix and Amazon competition to heat up

"A softer ad market comes just as broadcasters face a fight on a second front with huge competition from new entrants like Netflix and Amazon," said ETX Capital analyst Neil Wilson.

"Like ITV management thinks the answer is content ownership, hence the 25% increase in Sky Originals. Coming up with fresh content is not as a stable source of revenues as ads, however, and comes with additional costs.

"Sports broadcasting rights is a potential source of trouble and a £30 million increase in Bundesliga costs contained in today’s update points to the pressures on margins and profits. BT has already helped drive up costs, the arrival of cord-cutters in the sports broadcasting sector could spark further rights inflation – consensus estimates suggest this could be about £600m a year more, £1.8bn in total over three years, for the right to show the Premier League."

Wilson added: "We note that Amazon has just entered the UK market by outbidding Sky for ATP tour tennis rights – a sign of things to come no doubt."

Shares were up 2%, or 18p, to 931.5p - still way below the Fox offer price which suggets investors aren't holding out much hope that it will get the go-ahead from regulators.

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