Shareholders of Sky Network Television Limited (ASX: SKT) were left shocked yesterday as their shares plunged 11.6% following a profit downgrade. They're down nearly 30% since peaking at $6.15 in April.
So What: Sky Network is a New Zealand-based pay television operator, much like Foxtel in Australia, and enjoys a strong hold over its local market. The company has grown revenues and earnings at a very reasonable clip in recent years and has enjoyed strong margins.
Most recently however, those trends haven't been as prevalent. Earnings (before interest, tax, depreciation and amortisation, or EBITDA) remained flat during the 2015 financial year (FY15) and are tipped to fall roughly 10% in FY16. According to the company's own forecasts, revenue is also tipped to remain mostly flat with net profit expected to be between $153 million and $158 million – down from $172 million in FY15.
Speaking at the group's annual general meeting yesterday, the company said earnings would take a hit due to higher costs for programmes and rolling out new services. This can partially be attributed to the Rugby World Cup as well as the new Disney and Discovery channels.
Indeed, Sky Network has been slow to adapt to the changing entertainment landscape, particularly in light of the rise of internet-based competitors such as Netflix. This includes a "general escalation of content costs with the entry of new competitors" – programming costs as a percentage of revenue rose 1% in 2015 and could certainly rise again this year.
Now What: Much like Foxtel in Australia, which is owned by Telstra Corporation Ltd (ASX: TLS) and News Corp (ASX: NWS), I don't think Netflix will destroy what Sky Network has to offer customers. Indeed, their sports offerings are a key differential and Netflix has already made it clear it isn't interested in streaming sports (at this point, at least).
However, the rise of Netflix and various other competitors could certainly impact the margins enjoyed by the businesses and it could well act to increase overall business costs. As such, I don't think Sky Network is a great option for long-term investors to consider just yet.
