Costs of digital startup saddle Sky with interim $4.6m loss

By DITA DE BONI

The high cost of developing its digital satellite business has brought pay-television operator Sky Network Television back to earth with an interim $4.67 million loss.

Last year the company reported an $8.8 million interim profit.

Sky chief executive Nate Smith warned that the full-year results would see flat operating cashflow with a significant net loss.

Writedowns on equipment increased 48 per cent to $36.8 million and were a significant contributor to the loss.

Sky subsidises the cost of decoders for customers and has a "conservative policy of writing them off over five years," according to chief financial officer Paul Smart.

He said yesterday that the depreciated decoders had been extensively used for about two years, and were still being used for digital satellite TV.

Mr Smart described the interim result as "absolutely what the company expected" and said it proved Sky was on its way to achieving a critical mass of digital subscribers.

A 12 per cent increase in revenues to $130 million reflected an increase of 65,233 customers to the company's higher-margin digital service.

Other revenue included $25.2 million from installations and $5.3 million from ads.

The company is on track to launch Open TV in the last quarter of this year. It will offer internet and web services through Sky decoders.

Mr Smart said the move would significantly increase revenue and the company would be able to "head towards profitability" in one or two years.

Operating cashflow increased from $40.2 million last year to $42.1 million this year, a figure the company paid more attention to than net income, which was described as a "byproduct."

Although Sky showed a loss of 11,000 customers in the June-to-December period as a result of the usual summer "churn" - when customers disconnect themselves from cable TV for the summer - the company says there are 5000 new customers scheduled for installation and 2400 exiting analogue customers scheduled for an upgrade to digital for the rugby season.

One analyst, who did not want to be named, said the result was "not great," but agreed that it was in line with expectations and in a few years operating earnings should have grown sufficiently to more than offset depreciation.

Sky's loss looks set to affect Independent Newspapers' half-year profit to be released tomorrow.

INL owns 49.6 per cent of Sky, which is in turn 49.5 per cent owned by Rupert Murdoch's News Corp. Mr Murdoch is now familiar with the losses incurred by satellite television operators in the start-up phase and during the switch to digital television through his interest in BSkyB and other satellite businesses.

Analysts have picked an interim profit for INL of $18 million to $24 million, compared with last year's $26.6 million profit which included a $3.5 million contribution from Sky.

Sky TV shares gained 5c to close at 360c yesterday, with INL stock leaping 25c to 920c.