Sky Q1 fails to silence bears

A summer price hike was an obvious benefit to Sky's first quarter revenue, easily offsetting weak TV ad sales. Thousands of new customers signed up, too, and Sky mobile will be launched soon.

However, the pay-TV giant's shares are down another 1.5% Thursday, and Sky must use next week's investor day to tackle concerns about high costs and fierce competition.

Revenue grew by 13% in the three months to September to over £3.1 billion. It rose 5% on a like-for-like basis, and by the same in the UK. Euro earnings translated well back into a weak sterling, driving reported sales up 29% in Germany and Austria, and by 34% in Italy. They grew by 9% and 4% like-for-like respectively.

A 3% drop in UK advertising revenue is a worrySky admitted a "quiet" start to the quarter, although business picked up in September once the Euro 2016 soccer tournament and Rio Olympics ended.

It added 106,000 new customers during the three months, including 35,000 in the UK.

"We are on track as we enter our busy second-quarter trading period and we remain focussed on delivering our clear strategy for growth," said chief executive Jeremy Darroch.

He's looking forward to launching Sky mobile soon, but a 3% drop in UK advertising revenue is a worry. Sky also says its more expensive Sky Q box will be the standard for new UK customers.

Analysts expect adjusted pre-tax profit to fall by 7% to about £1.24 billion in the year to June 2017 on revenue up 9% at £13 billion. Look for a drop in earnings per share (EPS) from 62.6p to 58p, as Sky absorbs the impact of its £4.2 billion three-year contract to screen Premier League football.

That puts Sky shares on a forward price/earnings (PE) ratio of just under 15 times, which is down from 18 times a year ago and in early 2016. It's also been a multiple that investors have been happy to pay, historically.

Clearly, sentiment around the shares is weak currently. There's specific concern that over-the-top providers like Netflix and BBC iPlayer will erode the pay-television base.

However, an upcoming investor day on 20 October could be an opportunity for the corporation to "unveil broad financial targets (revenue growth, programming costs and other costs as percentage of revenues for instance)", thinks Barclays.

It might, and there is also the chance that 39% shareholder 21st Century Fox will one day launch a bid for the rest. For now, the share price is dangerously close to the uptrend from the June low. Finding support at that trendline, currently around 838p, would certainly be taken positively.

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