TIDMSKY

RNS Number : 8561F

Sky PLC

31 October 2018

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 GBP17.28 per Sky share to shareholders. This valued Sky at GBP29.7 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 GBP13.6 billion, with growth in each of our territories. EBITDA from our Established businesses is up 11% to GBP2.5 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 EUR1.13:GBP1 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 GBP588 million, or 5%, to GBP13,585 million (with growth of GBP669 million or 5% on a statutory basis, at actual exchange rates).

We delivered growth in each territory, with the UK and Ireland up 4% (+GBP331 million), Germany and Austria up 6% (+GBP107 million) and Italy up 6% (+GBP150 million). We also delivered revenue growth in each category.

Direct-to-consumer revenue, our largest revenue category, grew by 3% or GBP396 million to GBP11,830 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% (+GBP110 million) to GBP838 million as we monetised our growing investment in original programming. Similarly advertising revenue grew 10% (+GBP82 million) to GBP917 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 GBP12,011 million increased by 4% (GBP12,551 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% (+GBP225 million). This includes a GBP153 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 GBP35 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% (+GBP79 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 GBP2,456 million (2017: GBP2,208 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 GBP775 million, operating profit was up 7% to GBP1,574 million (2017: GBP1,473 million), or up 7% to GBP1,034 million on a statutory basis at actual exchange rates.

Tax was GBP1 million lower at GBP214 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 GBP1,168 million (2017: GBP1,048 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 GBP13,585 million was up 5% from the prior year (2017: GBP12,916 million), which included the one-off sale of the Rio Olympic rights in Italy.

Statutory operating profit for the year of GBP1,034 million (2017: GBP964 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 GBP540 million (2017: GBP504 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.

 
GBPm                            Year to       Year to 
                           30 June 2018   30 Jun 2017 
------------------------  -------------  ------------ 
 
                                             Constant 
                                             currency 
------------------------  -------------  ------------ 
Adjusted Results 
Revenue                          13,585        12,997 
EBITDA                            2,349         2,151 
Operating Profit                  1,574         1,473 
EPS - adjusted (pence)           67.3 p        61.4 p 
------------------------  -------------  ------------ 
 
                                               Actual 
                                             exchange 
                                                rates 
------------------------  -------------  ------------ 
Statutory Results 
Revenue                          13,585        12,916 
Operating Profit                  1,034           964 
EPS - Statutory (pence)           47.5p         40.6p 
------------------------  -------------  ------------ 
 

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 GBP552 million was GBP277 million lower than the prior year, reflecting the investment in deploying Sky Q to customers in each of our markets (cGBP180 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 (cGBP230 million).

Net debt as at 30 June 2018 was GBP6.5 billion (30 June 2017: GBP6.2 billion). On a pro-forma basis reflecting Sky Bet sale proceeds actually received on 10 July, net debt would have been GBP6.0 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 (GBP787 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 GBP1.6 billion as at 30 June 2018 and access to Revolving Credit Facilities totalling GBP1 billion.

Balance sheet

During the year, total assets decreased by GBP436 million to GBP18,002 million at 30 June 2018.

Non-current assets increased by GBP160 million to GBP13,264 million, primarily due to an increase of GBP180 million in intangible assets and property, plant and equipment due to continued capital investment; an increase in deferred tax assets of GBP123 million; and an increase in programming distribution rights of GBP46 million. These movements were offset by a decrease in non-current derivative financial assets of GBP168 million.

Current assets decreased by GBP596 million to GBP4,378 million at 30 June 2018, principally due to a GBP878 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 GBP154 million decrease in derivative financial assets. These movements were offset by a GBP254 million increase in trade and other receivables and a GBP192 million increase in inventories.

Total liabilities decreased by GBP609 million to GBP13,982 million at 30 June 2018.

Current liabilities decreased by GBP229 million to GBP5,321 million, primarily due to a GBP527 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 GBP283 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 GBP380 million to GBP8,661 million principally due to GBP453 million decrease in the Group's non-current borrowings following the movement to current borrowings in the year, offset by a GBP54 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 GBP12.50 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 GBP14.00 per Sky share. Subsequently and also on 11 July 2018, Comcast announced an increased cash offer of GBP14.75 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.

 
                          As at                                                                                         As at 
                          1 July 2017       Cash flows     Non cash movements                                         30 June 
                                                                                                                         2018 
------------------  -----------------  ----------------  -------------------------------------------------  ----------------- 
                                                                                    Foreign     Fair value 
                                                                                   exchange        changes 
                                                                                                       and 
------------------ 
                                                               Transfers    movements                other 
                    -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
                                 GBPm             GBPm              GBPm              GBPm            GBPm               GBPm 
------------------  -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
Current borrowings                974             (937)              450               (47)              7                447 
Non-current 
 borrowings                     8,207                 -            (450)               (18)             15              7,754 
Borrowing-related 
 derivative 
 financial 
 instruments                    (470)               147                -                107            106              (110) 
------------------  -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
Gross debt                      8,711             (790)                -                 42            128              8,091 
------------------  -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
Cash and cash 
 equivalents                  (2,200)               586                -                (8)              -            (1,622) 
Short-term 
 deposits                       (300)               300                -                  -              -                  - 
------------------  -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
Net debt                        6,211                96                -                 34            128              6,469 
------------------  -----------------  ----------------  ---------------  -----------------  -------------  ----------------- 
 

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.

 
 Description of risk                                             Mitigation 
  Market and competition: 
   The Group operates in a highly competitive                      The Group continues to make significant 
   environment and faces competition from                          investments in innovation. 
   a broad range of organisations. Technological                   The Group's product development strategic 
   developments also have the ability to                           aim is to be at the forefront of progressive 
   create new forms of quickly evolving                            technology. 
   competition. 
                                                                   The Group regularly reviews its pricing 
   A failure to develop the Group's product                        and packaging structures to ensure that 
   proposition in line with changing market                        its product proposition is appropriately 
   dynamics and expectations could erode                           placed within the market. 
   the Group's competitive position. 
                                                                   The Group works closely with its marketing 
   Great content is central to Sky's product                       partners to ensure that the value of 
   proposition and increased competition                           its offering is understood and communicated 
   could impact the Group's ability to                             effectively to its customers. 
   acquire content that our customers want 
   on commercially attractive terms.                               The Group makes significant investment 
                                                                   in the origination of content as well 
   Economic conditions have been challenging                       as in acquisition from across the world. 
   in recent years across the territories 
   in which the Group operates and the                             The Group also works to develop and 
   outcome of the UK referendum has caused                         maintain the brand value associated 
   further economic uncertainty. A significant                     with its individual channels. 
   economic decline in any of those territories 
   could impact the Group's ability to 
   continue to attract and retain customers 
   in that territory. 
                                                                ----------------------------------------------------------------- 
   Regulatory breach and change: 
   The Group's ability to operate or compete                          The Group manages these risks through 
   effectively could be adversely affected                            active engagement in the regulatory 
   by the outcome of investigations or                                processes that affect the Group's business. 
   by the introduction of new laws, policies                          The Group actively seeks to identify 
   or regulations, changes in the interpretation                      and meet its regulatory obligations 
   or application of existing laws, policies                          and to respond to emerging requirements. 
   and regulations, or failure to obtain                              This includes, for example: 
   required regulatory approvals or licences.                          *    Broadcasting - compliance controls and processes are 
   Please see page 28 of the 'Regulatory                                    in place in the Group's content services. Interaction 
   matters' section for further details.                                    with the relevant regulatory authorities is 
 
   The Group is subject to regulation primarily 
   under Austrian, German, Irish, Italian,                            co-ordinated between the relevant local 
   UK and European Union legislation.                                 Compliance, Regulatory and Legal departments; 
   The regimes which apply to the Group's                              *    Technical services - with respect to the provision of 
   business include, but are not limited                                    certain technical services in the UK and Germany, 
   to:                                                                      processes are in place to monitor third- party 
    *    Broadcasting - as a provider of audio visual media                 broadcaster access to the relevant broadcast 
         services, the Group is subject to Austrian, German,                platforms and to ensure that this is provided on fair 
         Italian and UK licensing regimes under the applicable        , 
         broadcasting and communications legislation. These                 reasonable and non-discriminatory terms; 
         obligations include requirements to comply with 
         relevant codes and directions issued by the relevant 
         regulatory authorities, including for example, in the         *    Telecommunications - compliance controls and 
         UK, Ofcom's Broadcasting Code, Code on the Scheduling              processes are in place 
         of Television Advertising and Cross-Promotion Code; 
 
                                                                      in the UK and Ireland, overseen by the 
    *    Technical services - as a provider of certain                Customer Compliance Committee, to monitor 
         technical services in the UK and Germany, Sky UK and         compliance and performance against the 
         Sky Deutschland are subject to regulation in their           General Conditions of Entitlement and 
         respective countries; and                                    the Conditions for the Provision of 
                                                                      Electronic Communications Networks and 
                                                                      Services. 
    *    Telecommunications - Sky UK is subject to the General        The Group maintains appropriate oversight 
         Conditions of Entitlement adopted under the                  and reporting, supported by training, 
         Communications Act 2003 (UK) and the Conditions for          to provide assurance that it is compliant 
         the provision of Electronic Communications Networks          with regulatory requirements. 
         and Services under the Communications Regulation Act         The Group will monitor carefully future 
         2002 (Ireland), which impose detailed requirements on        developments that arise out of the result 
         providers of communications networks and services.           of the UK referendum and will engage 
                                                                      in any relevant regulatory processes. 
 
   The Group is also subject to generally 
   applicable legislation including, but 
   not limited to, competition (antitrust), 
   anti-bribery, consumer protection, data 
   protection and taxation. 
   The Group is currently, and may be in 
   the future, subject to proceedings, 
   and/or investigation and enquiries from 
   regulatory and antitrust authorities. 
   The telecommunications and media regulatory 
   framework applying to the Group in the 
   UK and the EU may be subject to greater 
   uncertainty in the event that the UK 
   leaves the EU. Potential changes to 
   the regulatory framework could include 
   divergence in the long term between 
   the UK and EU regulation of telecommunications 
   and media, and changes to certain mutual 
   recognition arrangements for media and 
   broadcasting. Sky does not currently 
   foresee any changes as a result of a 
   UK exit that would have a material impact 
   on its business. 
   Please see page 28 of the 'Regulatory 
   matters' section for further details. 
                                                                ----------------------------------------------------------------- 
 Customer service: 
  A significant part of the Group's business                       The Group strives consistently to exceed 
  is based on a subscription model and                             its customers' expectations, to put 
  its future success relies on building                            its customers first, to understand what 
  long-term relationships with its customers.                      they want and to be responsive to what 
  A failure to meet its customers' expectations                    they say. 
  with regard to service could negatively                          The Group makes significant investments 
  impact the Group's brand and competitive                         in order to deliver continuous development 
  position.                                                        and improvement to its customer service 
                                                                   capabilities, including investment in 
                                                                   its contact centres across the UK and 
                                                                   Ireland, insourcing of service centres 
                                                                   in Germany and implementing ongoing 
                                                                   training and development plans. 
                                                                   The Group tracks its customer service 
                                                                   performance, benchmarks its customer 
                                                                   service experience and strives to be 
                                                                   best in class. 
                                                                ----------------------------------------------------------------- 
 Technology and business interruption: 
  The products and services that the Group                         The Group makes significant investment 
  provides to its customers are reliant                            in technology infrastructure to ensure 
  on complex technical infrastructure.                             that it continues to support the growth 
  A failure in the operation of the Group's                        of the business and has a robust selection 
  key systems or infrastructure, such                              and monitoring process of third-party 
  as the broadcast platform, customer                              providers. The Group is committed to 
  management systems, OTT platforms or                             achieve best in class business continuity 
  the telecommunications and mobile networks                       standards and makes significant investments 
  on which the Group relies, could cause                           in the resilience and robustness of 
  a failure of service to our customers                            its business infrastructure. 
  and negatively impact our brand. 
                                                                   The Group also organises regular scenario-based 
                                                                   group-wide business continuity exercises 
                                                                   to ensure ongoing readiness of key staff, 
                                                                   systems and sites. 
                                                                ----------------------------------------------------------------- 
 Suppliers: 
  The Group relies on a number of third                            The Group continues to invest in its 
  parties and outsourced suppliers operating                       supply chain infrastructure to support 
  across the globe to support its business.                        its business plan commitments. A robust 
  A significant failure of a supplier                              supplier selection process is in place 
  or a discontinuation of supply could                             with appropriate ongoing management 
  adversely affect the Group's ability                             and monitoring of key partners and suppliers. 
  to deliver operationally. 
                                                                   The Group performs regular audits of 
                                                                   key suppliers and of their installations 
                                                                   and, wherever possible, has dual supply 
                                                                   capability. 
                                                                ----------------------------------------------------------------- 
 Financial: 
  The effective management of its financial                        The Group's finance teams are embedded 
  exposures is central to preserving the                           within the business to provide support 
  Group's profitability.                                           to management and to ensure accurate 
  The Group is exposed to financial market                         financial reporting and tracking of 
  risks and may be impacted negatively                             our business performance. Reporting 
  by fluctuations in foreign exchange                              on financial performance is provided 
  and interest rates, which create volatility                      on a monthly basis to senior management 
  in the Group's results to the extent                             and the Board. 
  that they are not effectively hedged.                            The Group continually invests in the 
  Any increase in the financial leverage                           improvement of its systems and processes 
  of the Group may limit the Group's financial                     in order to ensure sound financial management 
  flexibility.                                                     and reporting. The Group has a formal 
  The Group may also be affected adversely                         Treasury Policy which is reviewed and 
  by liquidity and counterparty risks.                             approved by the Audit Committee on an 
                                                                   annual basis. In addition, the Group 
                                                                   COO and CFO monitors the Treasury Policy 
                                                                   on an ongoing basis to ensure its continuing 
                                                                   appropriateness. The Treasury Policy 
                                                                   covers all areas of treasury risk including 
                                                                   foreign exchange, interest rate, counterparty 
                                                                   and liquidity. 
                                                                   The Group manages treasury risk by minimising 
                                                                   risk to capital and uses appropriate 
                                                                   hedging instruments and strategies to 
                                                                   provide protection against adverse foreign 
                                                                   exchange and interest rate movements. 
                                                                   Trading transactional currency risk 
                                                                   is hedged up to five years in advance. 
                                                                   Interest rate risk protection is in 
                                                                   place using interest rate swaps and 
                                                                   an appropriate currency mix of debt 
                                                                   is maintained using cross-currency swaps. 
                                                                   Cash investment is made in line with 
                                                                   the Treasury Policy which sets limits 
                                                                   on deposits based on counterparty credit 
                                                                   ratings. No more than 10% of 
                                                                   the Group's cash deposits are held with 
                                                                   a single bank counterparty, with the 
                                                                   exception of overnight deposits which 
                                                                   are invested in a spread of AAAf-rated 
                                                                   liquidity funds. 
                                                                   The Group maintains headroom within 
                                                                   our banking covenants to allow for unforeseen 
                                                                   adverse impacts on our leverage ratio 
                                                                   as a result of either economic decline 
                                                                   or extreme currency movements. 
                                                                   The Group maintains strong liquidity 
                                                                   as part of its core strategy, with high 
                                                                   cash balances and access to GBP1.5 billion 
                                                                   under fully undrawn revolving credit 
                                                                   facilities. 
                                                                   The Group manages its tax risk by ensuring 
                                                                   that risks are identified and understood 
                                                                   at an early stage and that effective 
                                                                   compliance and reporting processes are 
                                                                   in place. 
                                                                   The Group continues to maintain an open 
                                                                   and proactive relationship with all 
                                                                   relevant tax authorities, including 
                                                                   HM Revenue & Customs. The Group aims 
                                                                   to deal with taxation issues, wherever 
                                                                   possible, as they arise in order to 
                                                                   avoid unnecessary disputes. 
                                                                ----------------------------------------------------------------- 
 Security: 
  The Group must protect its customer                              The Group ensures security-by-design, 
  and corporate data and the safety of                             built in from the ground up, in its 
  its people and infrastructure as well                            products, services and operation, making 
  as needing to have in place fraud prevention                     significant investment in leading technology, 
  and detection measures.                                          systems and infrastructure. Security 
  The Group is responsible to third-party                          protection and assurance is integrated 
  intellectual property owners for the                             into business processes, from research 
  security of the content that it distributes                      and development, to supply chain, sales 
  on various platforms (Sky's own and                              and marketing, delivery, corporate operations 
  third-party platforms).                                          and technical services. 
  A significant breach of security could                           The Group works closely with law enforcement 
  impact the Group's ability to operate                            agencies and policy makers in order 
  and deliver against its business objectives.                     to protect its assets. and is compliant 
                                                                   with applicable laws, regulations, standards 
                                                                   of relevant countries and regions, third-party 
                                                                   contractual obligations, and by reference 
                                                                   to industry best practices. 
                                                                   As part of security protection and assurance, 
                                                                   the Group takes measures including physical 
                                                                   and logical access controls to data 
                                                                   and property, technologies to protect 
                                                                   data, services and infrastructure, third-party 
                                                                   security assessments and the monitoring 
                                                                   of key partners to manage security risks. 
                                                                   The Group ensures that its employees, 
                                                                   partners and suppliers comply with security 
                                                                   policies and requirements, and receive 
                                                                   appropriate training so that security, 
                                                                   in particular cyber security, is deeply 
                                                                   rooted throughout the Sky Group. 
                                                                   The Group takes a proactive approach 
                                                                   to threat management and readiness in 
                                                                   order to minimise risk and has a dedicated 
                                                                   cyber security team which includes security 
                                                                   analysts, threat intelligence specialists 
                                                                   and senior security engineers. They 
                                                                   engage in intelligence monitoring and 
                                                                   detection to hunt for security threats. 
                                                                   The Group actively recruits industry 
                                                                   leading security professionals with 
                                                                   industry recognised certifications and 
                                                                   professional training. 
                                                                ----------------------------------------------------------------- 
 Projects: 
  The Group invests in, and delivers,                              A common project management methodology 
  significant capital expenditure projects                         is used to enable the Group to manage, 
  in order to continually drive the business                       monitor and control its major capital 
  forward.                                                         expenditure projects and strategic programmes. 
  The failure to deliver key projects                              This includes detailed reporting and 
  effectively and efficiently could result                         regular reviews by senior management 
  in significantly increased project costs                         as well as cross-functional executive 
  and impede our ability to execute our                            steering groups for major projects. 
  strategic plans.                                                 Third-party partners will, where appropriate, 
                                                                   be engaged to provide support and expertise 
                                                                   in our large strategic programmes, complex 
                                                                   initiatives and for emerging technologies. 
                                                                ----------------------------------------------------------------- 
 Intellectual property protection: 
  The Group, in common with other service                          We maintain an ongoing programme to 
  providers, relies on intellectual property                       support appropriate protections of our 
  and other proprietary rights, including                          intellectual property and other rights. 
  in respect of programming content, which                         This involves both unilateral action 
  may not be adequately protected under                            and close co-operation with rights licensors 
  current laws or which may be subject                             and other bodies. This includes, for 
  to unauthorised use.                                             example, the use of automated online 
                                                                   monitoring tools, the implementation 
                                                                   of on-screen imprinting of content and 
                                                                   steps in support of the Premier League's 
                                                                   action to require UK ISPs to block illegal 
                                                                   streams of live PL matches together 
                                                                   with an active programme to protect 
                                                                   our intellectual property rights including 
                                                                   registering patents for our products 
                                                                   where applicable. 
                                                                ----------------------------------------------------------------- 
 People: 
  People at Sky are critical to the Group's                        Making Sky a great place to work is 
  ability to meet the needs of its customers                       central to the Group's strategy. The 
  and achieve its goals as a business.                             Group champions diversity and develops 
  Failure to attract or retain suitable                            talent through a number of activities, 
  employees across the business could                              including the Graduate programme, Development 
  limit the Group's ability to deliver                             Studio, an apprenticeship scheme and 
  its business plan commitments.                                   a leadership programme. 
                                                                   The Group invests in the working environment 
                                                                   to make Sky an even more appealing place 
                                                                   to work. The Group has well established 
                                                                   channels and procedures to recruit and 
                                                                   retain its employees, and to ensure 
                                                                   that an adequate number of suitable 
                                                                   employees work within its customer service 
                                                                   teams and across all its operations. 
                                                                   Further details on our people are set 
                                                                   out in the Employees section of the 
                                                                   Directors' report on page 61. 
                                                                ----------------------------------------------------------------- 
 

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

 
 Jeremy Darroch                  Andrew Griffith 
 Group Chief Executive Officer   Group Chief Operating Officer and 
                                  Chief Financial Officer 
 25 July 2018 
                                 25 July 2018 
 
 

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:

 
                                  2018         2017 
=============================== 
                                  GBPm         GBPm 
===============================  =====  =========== 
Supply of goods or services 
 by the Group                       48           41 
Purchases of goods or services 
 by the Group                    (407)        (413) 
Amounts owed to the Group           13           24 
Amounts owed by the Group        (178)        (193) 
 

At 30 June 2018 the Group had expenditure commitments of GBP568 million in relation to transactions with related parties (2017: GBP359 million) which principally related to minimum television programming rights commitments.

Goods and services supplied

During the year, the Group supplied programming, airtime, transmission and marketing services to 21st 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 21st Century Fox, Inc. companies.

There is an agreement between 21st Century Fox, Inc. and the Group, pursuant to which it was agreed that, for so long as 21st Century Fox, Inc. directly or indirectly holds an interest of 30% or more in the Group, 21st Century Fox, Inc. will not engage in the business of satellite broadcasting in the UK or Ireland.

The sale and purchase agreements for the acquisitions of Sky Italia Srl and Sky Deutschland AG contained certain commitments from 21st Century Fox, Inc. not to retail certain services to consumers in certain territories until 1 January 2017. The sale and purchase agreement for the National Geographic channel contained undertakings from the Company not to compete with the business of the National Geographic Channel International until 1 January 2017.

On 15 December 2016, the Company entered into a co-operation agreement with 21st Century Fox pursuant to which the parties agreed to provide each other with information and assistance for the purposes of obtaining all merger control and regulatory clearances and authorisations in relation to the 21st Century Fox Offer and the preparation of the document to be sent to the Company's shareholders in relation to the Original 21st Century Fox Offer. The co-operation agreement was terminated by the Company on 25 April 2018 after the Independent Committee withdrew its recommendation of the Original 21st Century Fox Offer. Notwithstanding such termination, certain obligations under the co-operation agreement continue in effect.

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.

 
                                                2018        2017 
============================================== 
                                                GBPm        GBPm 
==============================================  ====  ========== 
Supply of services by the Group                   47          47 
Purchases of goods or services by the Group     (49)        (52) 
Amounts owed by joint ventures and associates 
 to the Group                                     26          29 
Amounts owed to joint ventures and associates 
 by the Group                                   (23)         (9) 
 

Services supplied are primarily the provision of transponder capacity, marketing, advertising sales and support services. Purchases represent fees payable for channel carriage.

Amounts owed by joint ventures and associates include GBP17 million (2017: GBP16 million) relating to loan funding. These loans bear interest at rates of between 1.50% and 2.00% (2017: between 1.50% and 2.00%). The maximum amount of loan funding outstanding in total from joint ventures and associates during the year was GBP17 million (2017: GBP100 million). In the prior year Sky Bet repaid GBP83 million pursuant to an outstanding loan balance.

The Group took out a number of forward exchange contracts with counterparty banks during the prior 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 2018 was GBP9 million (2017: GBP13 million).

During the year, less than US$1 million (2017: US$19 million) was received from the joint venture upon maturity of forward exchange contracts, and US$4 million (2017: US$37 million) was paid to the joint venture upon maturity of forward exchange contracts.

During the year, GBP3 million (2017: GBP26 million) was received from the joint venture upon maturity of forward exchange contracts, and GBP1 million (2017: GBP21 million) was paid to the joint venture upon maturity of forward exchange contracts.

During the year, EUR1 million (2017: EUR8 million) was received from the joint venture upon maturity of forward exchange contracts and nil (2017: nil) was paid to the joint venture upon maturity of forward exchange contracts.

At 30 June 2018 the Group had minimum expenditure commitments of GBP1 million (2017: GBP1 million) with its joint ventures and associates.

c) Other transactions with related parties

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 2018, there were 11 (2017: 11) 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, DTH, DTT and OTT customer growth, On Demand, NOW TV, Sky Go, Sky Go Extra, Sky+HD, Sky Q, Sky Store, Sky Online, IPTV, Sky Mobile, Sky Ticket, Multiscreen and other services, churn, revenue, profitability and margin growth, cash flow generation, programming costs, subscriber management 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 this document 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.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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October 31, 2018 06:11 ET (10:11 GMT)

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