BSkyB Reports Solid Fiscal Q3 Results; Maintaining Our Fair Value Estimate

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British Sky Broadcasting BSYBY , known as BSkyB, reported solid fiscal third-quarter results. Revenue increased 7.8% year over year, bringing the nine-month result up 6%, spot on with our full-year projection. We are maintaining our fair value estimate and moat rating. The firm’s growth is being driven primarily by subscriber additions, particularly in its communication business where its broadband base improved 13.6% to 4.4 million, its fixed-line telephony base gained 16% to 4.2 million, and customers with line rental jumped 20.1% to 4.1 million. BSkyB also benefited from a 5.5% increase in its annual average revenue per user to GBP 576 ($893). While churn crept up slightly to 10.8%, we expect the firm will continue to add customers and increase its ARPU going forward as its customers sign up for additional services.

BSkyB is also doing a great job of controlling nonprogramming costs. This allowed the firm to increase its EBITDA margin to 23.3%, which is ahead of our full year projection of 22.9%, despite a 9% increase in programming costs. However, we anticipate an even larger jump in programming costs next year as BSkyB is hit with the higher costs of its new English Premier League Football contract. We think these higher costs will be more than the firm can offset from cost savings elsewhere, which will push margins down in fiscal 2014 before rising again.

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