BSkyB likely to feel the pressure next year

The pay-TV company beat our expectations for fiscal 2009 but we expect to see revenue growth slowing as competition increases going forwards

Allan C. Nichols, CFA | 05-08-09 | E-mail Article

British Sky Broadcasting last week reported results for fiscal 2009 that were a bit better than our expectations, but we're maintaining our fair value estimate for now. Revenues increased 7% for the full year, faster than our expectation, but growth slowed to 4% in the fourth quarter. We continue to expect revenue growth will be slower in fiscal 2010 than in 2009. The firm has done a great job of signing additional contracts to carry more sporting events, movies, and television shows while marketing high-definition channels. These services have resonated well with potential customers as they have stayed at home more during the recession. BSkyB added 124,000 new subscribers during the fourth quarter, taking its total to 9.4 million. The firm is also taking market share in the high-speed Internet access market. As more customers sign up for more services it has enabled the firm to increase its average revenue per user (ARPU) to £464, annually an increase of £37.

BSkyB's operating margin, before depreciation and amortisation, was spot on with our estimate at 20.1%. Costs for content increased 2% during the year, but its biggest competitor for sporting content--Sentanta Sports--went under in June. While this might sound like a good thing at first, the auction for its assets brought ESPN into the market. BSkyB has recently extended several of its major sporting contracts, which puts it in good stead for the next couple of years. We expect competition for the next round of renewals will be much more intense with ESPN in the mix, however, slowing margin expansion in two or three years.

Allan C. Nichols, CFA, is a Morningstar senior stock analyst and international investing specialist based in the United States.

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