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Sky maps out major headwinds for year ahead

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Sky maps out major headwinds for year ahead

Sky plc reported a strong start to its financial year but noted the challenges to growth that remain in the run-up to the busy Christmas period.

During an Oct. 12 earnings call Sky CEO Jeremy Darroch addressed questions over the spiraling cost of Premier League soccer rights, the ongoing slump in the U.K. advertising market and intensified competition from British Telecom and EE's quad-play offer of landline, TV, broadband and mobile.

Sky estimated that the British market was down about 2% due to pressure on consumer spending and lower spend on U.K. TV advertising. However, the company said it outperformed the market, with fiscal first-quarter revenues in the U.K. and Ireland up 4% to £2.2 billion and EBITDA up 11% to £452 million.

Meanwhile, analysts have speculated Sky could pay as much as 40% to 45% more — an extra £600 million annually — in the next Premier League rights auction due to competition from tech giants such as Amazon.com Inc. and Facebook Inc.

Darroch said that while Sky's 3,000 stand-alone mobile customers was still a "tiny" amount, they would provide a good upsell opportunity for Sky Sports.

"There is an opportunity there... [mobile] brings entry level to Sky Sports down to 60 pence a day," he said, adding that the decision to provide access to soccer matches for its mobile customers would ultimately be up to the rights holders.

Liberum analyst Ian Whittaker pointed out that piracy by streaming of the Premier League had increased substantially in the U.K. market, adding further pressure on the FTSE 100 giant.

Andrew Griffith, group COO and CFO at Sky, said the British pay TV company takes piracy "incredibly seriously" but success is not guaranteed.

"Piracy is not something you're ever going to fully vanquish but it is important to take all the measures you can," he told analysts during the earnings call.

Sky's management team also addressed concerns about BT and EE's advantages over its peers in network presence and spectrum.

While the combined group's converged offering had undoubtedly put pressure on the broadband market, Darroch said the company's increased focus on fiber broadband would help it expand its base in that market by converting Sky customers on BT broadband packages.

Nonetheless, Whittaker said in a research note that Sky had delivered a strong operational performance overall, adding that new customer growth in the U.K. alone was double what the company had achieved a year earlier.

Boosted by the popularity of fantasy drama "Game of Thrones," total like-for-like revenue at Sky was up 5% to £3.30 billion in the fiscal quarter, while EBITDA increased 11% to £582 million.

Strong demand led to an addition of 160,000 customers in the first quarter, up 51%, while pay-as-you-go sports and entertainment purchases grew by 12% to 9.6 million. Sky also reported that customer viewing to Sky pay channels was up 10%.

Sky is the target of a planned £11.7 billion takeover by Rupert Murdoch's 21st Century Fox Inc., which has been referred to the Competition and Markets Authority for further investigation over broadcasting standards and media plurality. A final verdict is due by March 2018.

Referring to growing political opposition to the deal, Whittaker noted the rising popularity of the Labour party, led by Jeremy Corbyn, who he said is "hostile to Fox."

Whittaker said: "We think the concerns are overdone and believe the deal will pass."