Sky (LSE: SKY) delivered a strong set of full year results today. Adjusted EBITDA in the 12 months to 30 June grew 10% to £2.03 billion. This is the first trading year for the expanded business, following BSkyB’s acquisition of Sky Italia and a majority stake in Sky Deutschland back in November 2014.
The company reported strong customer growth in the year, with 973,000 new customer additions in the year. This is 45% higher than in the previous year, and reflects growing customer demand for Sky’s products across Europe. Its Italian business, which had previously been struggling from intense competition from low-cost rivals, is seeing signs of improvement. Its customer base there was stable in 2014/5 after declining for three consecutive years.
Churn rates, which is the percentage of customers that cancel their subscription with the company, decreased in all five markets. The biggest improvement was in Germany & Austria, where the churn rate dropped 1.8 percentage points to 8.6%. This reflects a strong increase in customer loyalty, which the company attributes to continued investments in customer experience.
In order to set itself apart from its competitors, Sky has been increasing the number of big-budget original content it commissions. With Sky’s new pan-European ownership structure, the company has been able to simultaneously launch home-grown dramas across multiple markets, which allows it to justify increased spending on original content.
Live sports is another area where Sky is particularly strong. But its rival in the UK, BT (LSE: BT-A), is intensifying competition by offering its sports channels for free to all its TV customers. Earlier this year, Sky won five of the seven Premier League TV packages in the UK, but it had cost Sky some 83% more than it did in the last auction three years ago. In turn, BT won the exclusive live television rights for the Champions League in June.
Although BT is making strong inroads with sports TV customers, its narrow focus has limited its appeal to non-sports customers. As a result, Sky has a 65% market share in the UK paid TV market. But, this could soon change, as BT plans to bolster its entertainment range by launching the AMC channel exclusively on its network.
Aggressive competition, particularly on price, is usually a bad sign for investors, as it usually leads to lower profitability for all businesses involved. But, analysts are still sanguine about the earnings prospects of both companies. This is because although competition is intensifying, margins are still expanding and the projected revenue growth in the paid-TV and broadband markets will more than offset the impact of competition.
So, which stock is the better buy?
On valuations, it will have to be BT Group. BT’s forward P/E is 14.9, compared to Sky’s 17.6. Both stocks have a forward dividend yield of 3.1%; but BT has better dividend cover. In 2014/5, BT’s free cash flow was three times its dividend, whilst it was only 1.9 times for Sky. BT’s strong momentum in growing its free cash flow should mean it could deliver stronger dividend growth over the medium term.
