Sky (SKYAY) , Britain's biggest pay-television company, reported a solid set of first-quarter numbers and positive earnings guidance Thursday, but rising costs for key sports rights and weaker U.K. stock markets kept investor reaction cautious.
The Rupert Murdoch-backed firm reported revenues of just over £3.1 billion ($3.8 billion) for the three months ending in September, up 7% on the year at constant currencies and 5% on a like-for-like basis. It also noted a 2% fall in operating costs compared with the prior year and that it added 100,000 new customers during the period.
"We are on track as we enter our busy Q2 trading period and we remain focused on delivering our clear strategy for growth," said chief executive Jeremy Darroch. Sky shares rose by as much 2.4% in earl trading to change hands at 885.0 pence but soon pared gains amid the broader U.K. equity market weakness.
But despite the positive tone of the update and an initially favorable reaction from the market, some brokers are unconvinced about Sky's ability to support growth and margins going forward.
"Sky published its Q1 results, which involved a very significant decrease in disclosure on both KPI metrics and P&L items from previous years ... what was reported does not look good," said Ian Whittaker, lead media analyst at Liberum Capital in London.
Sky has faced competition for customers, advertisers and the rights to air popular content such as sports events during recent years.
Breaking down the numbers by division, Sky saw its strongest growth in Italy, with constant currency revenues up by 13% to £610 million. This was followed by growth of 9% in Germany and Austria, where revenues came in at £434 million.
The U.K. and Ireland division, which accounts for more than two thirds of group revenues, saw weaker growth of 5%, with constant currency revenues up to £2.1 billion.
Strategically, Sky said it is focused on the upcoming launch of its mobile division and the continued roll out of its SkyQ platform in the U.K.. It's also seeking to continue rolling out additional services in faster growing European markets such as Germany and Austria, in order to offset increasing competition from online content providers such as Netflix (NFLX - Get Report) and BT Group's (BT) push into the Sports pay-TV space.ShareS
Its biggest challenge comes from the U.K.'s BT Group, which has entered the pay-TV space with the launch of BT Sport.
The presence of BT and its balance sheet in the sports pay-TV market led Sky to lose the broadcast rights for European UEFA Champion's League football in 2013.
In 2015, competition from BT forced up the price of broadcast rights for the U.K's Premier League football, leading Sky to pay 80% more (£4.2 billion) in 2015 to air the games.
Liberum's Whittaker noted that "while we accept Sky is managing its business well ... we see it still as, at its core, a model that is still reliant on a traditional subscriber growth with growing ARPU, which is coming under pressure, especially as cost inflation for key rights rises significantly."
Liberum reiterated its sell rating for Sky shares on Thursday and maintained its price target of 630.0 pence. Analysts at Berenberg also reiterated their sell rating for the stock this week and affirmed their price target of 730.0 pence.