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MARKET COMMENT
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The costs associated with building up its digital business have had BSkyB (LSE: BSY) firmly in the red for several years, but this morning's results confirm that the company has reached the scale it needs. With both operational and financial gearing, the numbers from now on should be increasingly in the black. Sky's total 'direct-to-home' ('DTH') digital subscribers stood at 6,318,000 at 30 September, an increase of 3.6% over the quarter. At the same time, the churn rate dropped from 10.5% to 9.6%, customer acquisition costs dropped from £237 to £212 and annualised average revenue per user ('ARPU') edged up to £348. The net effect of it all was turnover ahead by 13% (from 2001) to £726m. This resulted in a 69% increase in operating profit to £75m. The cash position shows an even clearer improvement, with an operating outflow of £47m in last year's first quarter becoming an inflow of £97m this time. Despite payments of over £200m to the FA and Premier League, net debt fell during the quarter by £24m to £1.5b. The statement states that "Sky continues to expect net debt to fall at each balance sheet date". Sky is well on schedule to meet its target of 7m DTH subscribers by the end of 2003. The target for ARPU is £400 in 2005, so we might expect £360 by the end of next year. Putting the two together would give annualised DTH revenues of £2.52b. Maintaining current trends in its other revenue streams such as advertising, wholesale, interactive and other suggest total annualised revenues of £3.36b. With programming costs continuing to increase at 17%, giving an annual £1.68b, other operating costs, before goodwill, remaining flat at £1.15b and an interest bill of £124m (four times the first quarter), you might end up with a company making £400m profit before goodwill and tax, or around £275m after tax. Against the current market capitalisation of £11b, that gives a PE ratio of 40. The numbers are moving firmly in the right direction, but a fair amount of growth is already priced in. There are better growth opportunities elsewhere.