Sky Network Television Ltd (SKT) Q4 2021 Earnings Call Transcript

Sky Network Television Ltd (NZE: SKT) Q4 2021 earnings call Aug. 24, 2021.

Corporate Participants:

Sophie Moloney — Chief Executive Officer

Andrew Hirst — Interim Chief Financial Officer

Analysts:

Arie Dekker — Jarden Securities Ltd. — Analyst

Aaron Ibbotson — Forsyth Barr — Analyst

Phil Campbell — UBS — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Sky FY ’21 Annual Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sophie Moloney. Please go ahead.

Sophie Moloney — Chief Executive Officer

Ora and good morning. My name is Sophie Moloney and I’m your Chief Executives here at Sky. I’m joined this morning by Andrew Hirst, Sky’s Interim Chief Financial Officer. Now for those of you watching online, I hope you just enjoyed that short reel with some of our cool content highlights for the year. We had hoped to be able to present from our studio but the current COVID lockdown has meant that we’re here and voice only. So here’s the game plan for today. I will shortly give you an overview of the highlights of FY ’21 before briefly recapping on our strategy.

And then look at our operational performance before I hand over to Andrew, who will guide you through our financials. We’ll then move to the guidance for the year ahead and give some color on the outlook we provided to the market today. As usual, there will be an opportunity for Q&A and we look forward to taking your questions at the end of the presentation. Before we talk through the headline numbers some context for the year. We drafted our annual report and this presentation at a time when fans right across the country were enthralled by the Tokyo Olympics. I lost count of the number of times that was referred to as a game like no other.

It was a real privilege to Sky to be able to bring those incredible moments, be it a brilliant high or a devastating low to homes, workplaces and commercial outlets right across New Zealand. It was a particular privileged to connect families and friends of athletes with those incredibly poignant moment after all of that gut-wrenching training. And that’s a special role we play here at Sky, connecting Kiwis to the content that matters. I also reflect on the Olympics because we, too, it’s something of a year like no other. I’m very proud of the strong work of our team and the results we have achieved.

So to the headline numbers and 2021 at a glance; I’m pleased to report strong revenue, EBITDA and NPAT that are slightly above our last guidance. These results were in part due to underlying operating improvements and in part from one-off items which we’ll touch on shortly. Our successes in the year included securing strategically important rights, continuing to stabilize our valuable Sky Box space and growing our streaming customer numbers. But as I said at the interim, we can and must do better with FY ’22 being an inflection point for Sky. It is particularly pleasing to deliver on reduced operating costs. And in the coming period you’ll see us continuing this important trend as well as returning to revenue growth.

And so to our strategy. We are focused on what matters most, our customers. We’re clear on our role and what makes Sky special. We commit to New Zealanders the sports and entertainment they love in ways that work for them right across Aotearoa New Zealand. And we’re clear on what success looks like and how we’re going to achieve it. Today, we’ll give you an update on what we’re doing in each of our four key focus areas and I trust that throughout you’ll a good sense of what we call bedrock, record and sustained execution and being an efficient, adaptive and profitable business. Moving to slide 6; we set our three-year targets for you at our Investor Day and will reference some of those targets during today’s presentation.

Now, this slide beautifully summarizes what we’ve achieved in FY ’21. In the interest of time I won’t dwell on those here and we’ll instead touch on each area as we progress. I note, however, that the achievements this year set the foundation for Sky’s continued turnaround. Turning now to operational performance and as far as surprise, we’re starting with what matters most, our customers. So turning to slide 8, I’ll start by saying that I’m delighted that we served 955,000 customers across New Zealand. That is an impressive customer base and we value our ongoing relationships with each of them. You’ve seen here that we talk about 16% growth in core customer numbers. We’re not being tricky, 12 months ago we had a number of customers who had Lightbox bundled as part of a wholesale deal and the underlying growth demonstrates the growth in paying subscription.

But let’s get to the valuable Sky Box numbers. We are certainly focused on stabilizing that base and so the improvement in customer reduction from 5.4% in FY ’20 to 3.8% in FY ’21 is definitely the right trend to be seeing. And of course, the rapid growth in our streaming services is a source of pride for the Neon and Sky Sport and our teams. We continue to do an excellent job of attracting new customers and engaging in [Indecipherable] ones. Let’s briefly take a look at the movements in the Sky Box based on slide 9. We report good news in both activations and disconnection. We continued Sky Box activations to grow about 15% from FY ’20.

And on the disconnects front, the reduced sales by 6%, continuing the positive trend of recent years. Both activations and churn are benefiting from the implementation of test and learn initiatives that are fueled by rich data insights. And yes, it’s fair to say we believe we are only just warming up on this front. On slide 10, our June trends are also very encouraging. You can see we provide data based on tenure as well as total churn. Total churn for the entire Sky Box space has continued the steady reduction we’ve been seeing over a number of years down to 12.2% from 12.6% a year ago and from 15.3% at FY ’18, meaning an improvement of 20% over 3 years.

The tenure chart focuses on direct customers. With the migration of reseller customers to a direct relationship with Sky, we’ve added them into the chart from the December 2020 based on the length of the relationship with the Sky Box service. I note this simply because we weren’t able to do it before now. We also know that the first year that a customer with us as a critical time. And we’ve been working very hard to make sure we get the relationship off to a great start. We’ve been doing this with tailored communication, retailer check ins to ensure they’re actually seeing the content that they still needs and of course by ensuring they know about Sky Go.

We’ve had an increase of 31% improvement in year on churn and that strategy is paying off. It’s also very pleasing to continue to report on our strong base of customers with more than 5 years of tenure, which now accounts for 74% of the total customer base. These customers are acquired champions who love this guy in the service we provide and they represent a core strategic strength. Turning to the next slide, part of the core value proposition moving forward, is our new Sky Box experience. We told you at our Investor Day, a couple of months ago that we would deliver a new Sky Box into customer homes in the middle of next year and we’re right on track to achieve this.

We’ve had really strong feedback from existing and potential customers but tells us there is a compelling case for what we are developing and we continue to use customer insights to inform our decisions. I’m really excited about the possibilities the new Sky Box presumes. That will reinforce our role is the preferred content aggregator and the New Zealand market. It is a hybrid box offering our customers great functionality as a period range of Sky content and access to of it we will conveniently had one place on remote. It is a critical next step in our strategy and I look forward to sharing more with you soon. Our objective of adding value for our Sky Box customer base is of course also supported by the rollout of Sky Broadband.

It’s broadband made for entertainment of it as a special and highly competitive price to Sky Box customers and the great service and quality to boot. I’m pleased to say our marketing strategy is hitting its marks and positive word of mouth is also beginning to build as the speed, coverage and pricing is resonating. It’s great to see the trust in our brand in reliability coming through with our loyal customer base. Now, it is early days so we won’t releasing customer numbers in this round, but we’re comfortable that we’re on track with our targets, including the 3% to 5% tax rate FY ’22. And I know since my opening remarks and as out on slide 13 we’re also happy to report strong growth in streaming.

We’re adding new customers and we’re keeping them. We told you at Investor Day that the key metrics of streaming our engagement and growth in customer numbers. Year-on-year engagement for Neon has lifted by 28% and for Sky Sports Now by 15%. We’ve seen a slight reduction in average tenure a number of continuous months customers have been with us yes, actually due to ask and adding new customers throughout the year to grow the underlying customer base. That’s delivered total streaming growth of 57% including 39% to Neon since the merge and 134% for Sky Sports Now and you’ll see when we get to our target that we expect to continue to grow.

Moving now to slide 14 and our important commercial customers; first up we do want to acknowledge the impact on many of our commercial customers due to the current COVID lockdown. Looking at FY ’21 despite challenges from border restrictions we’re seeing gradual recovery and Andrew touched on this more later. All of our licensed premise customers are now on value based tiered pricing, which means a more flexible playing field when it comes to valuing the revenue generating opportunity our content provides to our licensed premise customers.

We’ve had positive feedback from these customers about the approach and the more tailored pricing also remains an overall increase in ARPU for Sky. It’s also opening up opportunities to add new customers in lower tier and I’m proud to say that we’ve signed up around 18 new sports club customers now making the most of our high quality content and their local communities. And that moved us nicely on to add great content. You’ve been hearing about our content wins throughout the year, but it’s worth reflecting on what we’ve achieved in FY ’21 securing some strategically important deals such as the NRL, the New Zealand Rugby League, ESPN, Discovery, Foxtel, NBCUniversal and ViacomCBS to name but a few.

These are all significant multiyear content deals. Importantly, they demonstrate we continue to be an attractive partner and reinforce our preferred aggregator role. These partners recognize and value the ease with which we provide access to our significant customer base of high ARPU customers right across the country. Thus of course, we continue to be disciplined in our decision-making around rights using rich customer insights to understand what customers value as we demonstrated during our Investor Day yeah. Now, before I hand over to Andrew I want to touch on a very important priority, our people. Our focus on being a place where our crew are empowered to do the basic on the data themselves is very important to me.

Some of you would be aware that we’ve had some challenging moments this year in that regard. I believe we are responding in the right way. And my team and I are absolutely committed to Sky being a place where everyone feels they belong and are able to do their best work. Our business is evolving and we continue to make changes and transform the way we do things. We are making good headway and realigning our business to what matters most to our customers. We’ve also worked across the full Sky team to confirm our values of be yourself, making someone’s day and creating something amazing which need to underpin everything that we do.

I’ll now hand over to Andrew to take you through Sky’s financial performance. Thank you, Andrew.

Andrew Hirst — Interim Chief Financial Officer

Thank you, Sophie and good morning everyone. As Sophie said at the top of the call, FY ’21 has certainly been a year like no other and the events of the last week just to emphasize the changing environment we’re dealing with. As already highlighted, it was a very profitable year for Sky and I’ll take you through the numbers in a bit more detail to give you some insight into the various moving parts. As we said at our Investor Day in June our FY ’21 results were at the top end or slightly above guidance. Revenue of NZD711 million was towards the top end of guidance, while EBITDA of NZD186 million and net profit after tax of NZD47.5 million were both above.

Revenue was down 4.7% year-on-year. But once we strip out the direct impact of COVID and other one-offs, the underlying revenue decline was only 3.6%. When compared to the 6.1% decline last year you can see the progress we have made in stabilizing the revenue position. This will become more evident later when we can talk about FY ’22 guidance as we’re budgeting revenue growth for the first time since 2016. Offsetting this 4.7% revenue decline our underlying operating expenses were down by NZD27 million or 5% despite stepping into higher content cost in the second half of the year. This reflects permanent savings we’ve already locked into the underlying cost base as well as further savings in content rights and production costs due to COVID.

As with the FY ’20 we again had a few one-off impacts this year but these broadly offset each other with no impact on earnings. We had NZD10.8 million of non-recurring income from a gain on sale of OSB of NZD5.8 million and another NZD5 million relating to settling the RugbyPass earnout on favorable terms and releasing content provisions will be exited rights commitments on better terms than originally expected. Offsetting this non-recurring income we had NZD10.3 million of one-off costs relating to content impairments and the mutually agreed exit of the former CEO.

As a result, we delivered the full year underlying EBITDA of NZD185.9 million, which compares to NZD192.4 million last year. This was a pleasing result given we did step into higher content costs in the second half of the year most notably, the new rugby deal that came into effect from January 1. While the result was encouraging as we look forward to FY ’22, there is more work underway to stabilize and then grow our Sky Box revenues to continue with the growth we have achieved in our streaming services and to lock-in further permanent savings to our operating costs.

So looking more closely at revenue; as has already been mentioned, our revenue was down 7% on last year, which is an improvement on the 6.1% decline in FY ’20. Furthermore once we strip out the direct impact of COVID and other one-off or structural impacts that I will talk about shortly the underlying revenue decline was only 2.4%. I will cover off each of Sky Box streaming commercial and advertising revenues in a bit more detail on the next few slides. So turning firstly to our Sky Box revenue, which declined by 9% in FY ’21 compared with an 8% decline last year. As Sophie has mentioned, the Sky Box subscribers continue to stabilize with a decline of only 3.8% this year.

However, revenues were impacted by customer losses in FY ’20 which meant we started the year with a lower subscriber base as well as a number of one-off or structural impacts that contributed to ARPU reducing by NZD3.70 this year. These one-off effect this course half of that after decline and included the migration of 34,000 reseller customers from Vodafone to being direct with Sky, which means we no longer recognize that revenue on a gross basis was an offsetting commission cost and now revenues are recorded on a net basis. We also offer these migrating reseller customers a one-off first month free to align their billing cycles. Secondly, we saw lower sports penetration than normal for the first half of the year due to the COVID impacted sporting calendar.

And finally, we had fewer pay-per-view events this year as well as reduced revenue following the discontinuation of the Sky Watch magazine. Stripping out these one-off impacts the underlying Sky Box revenue decline was 5.8%. The pleasing aspect is, as many of these one-offs were largely isolated to our first half and while some did have some run rate effect flow through the second half, the ARPU decline in the second half was much more muted. I also note that we’ve not increased our prices for Sky Box customers since April 2019. We would normally have rolled out an annual price increase to allow for the inflationary impact on our rights costs but we opted not to do so in what was already a challenging period for New Zealanders.

Now looking at our streaming revenues which grew by 24% year-on-year. ARPU did reduce from NZD20 to NZD17 as a result of the continued change in the mix of our streaming customers with high growth from Neon relative to other streaming products. ARPU actually fell to NZD16 in the second half of FY ’20 following the acquisition of Lightbox and we’ve since seen it increase back up to NZD17 this year as we put through a price increase in May and also increased the proportion of Neon customers that pay direct rather than through Spark at a wholesale rate. At the same time we’ve also grown Sky Sports Now subscribers which are packaged at a higher price point and we were delighted to see Sky Sports Now Hero throughout the recent Tokyo Olympics.

Looking now with our commercial revenues, which were down NZD3 million year-on-year. You can see from the chart on page 22, the impact that COVID head on the second half of last year and the first half of this year as we provided discounts and suspensions to affected customers during the COVID period. You can also see the sign of recovery in the second half of the year, reflecting our licensed premise customers returning to normal billing in August 2020 and the impact of reducing accommodation provided discounts from November 2020.

As Sophie mentioned, we also completed the rollout of our value-based tiered pricing model for licensed customers in February 2021. We expect to see continued recovery in the commercial space in FY ’22 where the — obviously, we’ll have to wait and see what impact the current lockdown situation brings. Turning to our advertising revenues, which were flat year-on-year. Like commercial, you can see from the chart, the impact that COVID had on the second half of last year and the first half of this year as well as the recovery in the second half of the year. Sky’s market share was steady this year and off the back of growth in the TV advertising market revenue has largely returned to pre-COVID levels.

Other than the impact of a change in the arrangement with Discovery which saw them take direct representation for advertising on their channels from February 2021. Now turning to our costs, total expenses reduced significantly down by NZD45 million, an 8% reduction despite the step up in our broker deal in the second half of the year. Adjusting both years for the impact of one-off costs, the underlying reduction year-on-year was NZD27 million or 5%. The NZD13 million reduction in programming costs reflects further savings on rights and production costs as a result of cancelled or postponed events and reduced availability of entertainment content due to COVID.

We also had permanent savings from the non-renewal of domestic cricket as well as reductions in the cost base of RugbyPass. These COVID related and permanent savings were partly offset by a NZD25 million step up mainly related to the new rugby deal as well as other sporting events such as Euro 2020 and the Lions Tour. The NZD14 million reduction across subscriber related broadcast and infrastructure and other cost lines primarily relates to savings from the restructuring carried out in FY ’20 as well as a range of other cost saving initiatives and streamlining of operations. The NZD11 million reduction in depreciation is consistent with our transition to a lighter capital model.

We expect to see this trend continuing and we’ll also see the benefit of our new Optus’ deal kicking in from December 2021. And as I noted earlier one-off costs were NZD10.3 million compared to NZD28 million last year. On the next slide, we bridge the year-on-year movement and EBITDA. You will see that we firstly added back the one-off costs of NZD28 million. So adjusting for these, our normalized EBITDA for FY ’20 was NZD192 million. The direct impact of COVID was NZD8 million made up of lower commercial revenues, reduced sport penetration over and above normal seasonality, and the impact of lower acquisitions from March to June 2020 carrying into this year and reducing our opening subscriber base.

On the cost side, the impact of COVID on the 2020 sporting calendar resulted in rights and production cost savings of NZD18 million. We’ve now moved to a more normal, but by no means fully concerned sporting calendar for the rest of 2021 and into 2022. As a result, we do not expect to maintain this level of savings going forward albeit to the extent the calendar for sport continues to be affected we would expect further savings relative to our contractual obligations. Our underlying subscription revenue was down NZD29 million versus last year. This was mainly made up of a decline in SKY box revenue of NZD50 million of which NZD7 million was directly COVID-related offset by streaming growth of NZD14 million.

Once you remove the one-off and other structural changes that impacted our Sky Box revenues and ARPU that I talked about earlier, the underlying subscription decline was NZD20 million or 3%. This is a 6% decline we saw last year. As part of our ongoing efforts to create efficiencies that right-size the cost base we’ve made a number of structural changes that resulted impairment savings of NZD7 million. This includes the full year impact of restructuring activities in FY ’20 and the other factors mentioned earlier, such as the non-renewable domestic cricket and a significant reduction in the cost base of RugbyPass.

And finally, as I’ve already covered we had non-recurring income of NZD10.8 million broadly offset by one-off costs of NZD10.3 million. So looking at capex, our FY ’21 capex of NZD51 million represented 7.2% of revenue compared to NZD57 million or 7.6% of revenue last year. Both years were well within our long-term target of 7% to 9% of revenue. Sky Box installation capex increased compared to last year from NZD13 million to NZD15 million due to the higher levels of new activations. Gross capex includes the launch of Sky Broadband with the investment in customer routers and mesh devices as well as some initial spend on the development of a platform supporting the new set-top box.

Our enhancement capex included upgrading our broadcast capabilities and digital streaming as well as investment on personalization and customization capability. And one final point on capex, the sale of OSB means we will avoid at least NZD50 million in future capex spending over the next 5 years. So in summary, our message on capital investment is that we continue to transition to a lot of capital model, rewrite spend towards growth initiatives and our preferred approach is department where it makes sense to do so. Looking now at cash flows, we were pleased with the level of free cash flow generated for the year of NZD69 million, which compares to NZD23 million in FY ’20.

I note that for both these figures we have excluded the move to net working capital in order to get a like-for-like comparison and that’s because we had the unusual situation with the cash on hand at June 2020 of NZD111 million was inflated by a significant level of payables at that time relating to sports rights with the values were still being negotiated at year-end through an equitable reduction process. And just to put that into context this year, we had a cash outflow of NZD39 million relating to reduction in these payables. This is an inflow last year from an increase in payables of NZD18 million. Cash outflows for interest, tax, capex and lease payments were all in line with expectations in the prior year albeit, I know we had lower interest costs as a result of repaying our retail bonds.

And tax payments were higher this year because we had one extra tax payment, which was delayed from FY ’20. On March 31, we repaid our NZD100 million of retail bonds out of cash reserves and also received the first NZD7 million of proceeds from the sale of OSB with the second installment of NZD7 million due on September 2021. As a result, we closed the year with NZD35 million of cash and together with our NZD200 million undrawn debt facility we have significant funding headroom going forward. As we turn now to guidance for FY ’22, it’s important we caveat this with the continued uncertainty regarding the impacts of COVID with the current lockdown situation only serving to highlight at this point.

Notwithstanding that for the first time since 2016 we are expecting revenue growth in FY ’22 with guidance of NZD715 million to NZD745 million being above the NZD711 million level this year. As we’ve already discussed we do have a step-up in our programming costs in FY ’22, which together with the absence of the nonrecurring income we had in FY ’21 means we will see a reduction in our EBITDA and net profit after tax. This means 2022 becomes an earnings inflection point reflecting this new programming cost base before we generate revenue growth and further operating cost savings over the next two or three years.

This is reflected in our EBITDA guidance for FY ’22 of NZD115 million to NZD130 million and net profit after tax of NZD17.5 to NZD27.5 million. In order to help you navigate through the noise of COVID and the various one-offs in both FY ’21 and FY ’22 as well as the step-up in our programming costs on the next slide, I’ll take you through a high level EBITDA bridge from FY ’21 to FY ’22. I would note that guidance excludes any impact from the potential sale of property. As you’ll be aware, we are exploring options to maximize shareholder value through a possible sale of the three properties on our Mt. Wellington side with the corresponding leaseback of our main studio and technology facilities.

This process has been delayed by the current lockdown as site tours have not been possible. We expect to be able to update the market for the time of our AGM in October. So as we step into the lower level of earnings and cash flow generation in FY ’22 we expect to reinvest operating free cash flow into growth initiatives such as the new set-top box. However, the Board continues to consider capital management options, including the potential for dividends in the context of our strong balance sheet as well as options for the use of proceeds from any asset sales such as property.

And finally from me, as I mentioned, we thought it’d be useful to provide a high level bridge from FY ’21 to FY ’22. I note that as we bridge to the midpoint of our NZD115 million, NZD130 million EBITDA range many of the buckets here are also averages. The key things to take away from this slide are that the net impact of COVID is an NZD11 million reduction. Next we have NZD15 million of net costs in FY ’22 that include one-off events such as the Tokyo Olympics. This was originally scheduled to occur in FY ’21 so the delay means it will now impact out FY ’22 results.

The content renewals cost increase of NZD39 million includes the full year impact of the new rugby deal together with the impact of other recent and expected sport and entertainment renewals. Importantly, for the first time our streaming revenue growth is expected to outstrip the decline in Sky Box revenue, reflecting the continued move to stabilizing our SKY Box subscriber base and the expectation of further growth in streaming. So together with the revenue from Sky Broadband and the continued recovery in commercial this is a key factor behind the expectation that revenue will return to growth in FY ’22.

We were expecting further permanent operating cost savings of NZD5 million to NZD10 million in FY ’22 although we will be reinvesting some of that in marketing investments to support growth in Sky broadband and customer loyalty retention and acquisition initiatives in Sky Box. So as I said before, our FY ’22 EBITDA guidance of NZD115 million to NZD130 million becomes an inflection point fully reflecting our new programming cost base as well as including NZD15 million for costs for one off sporting events before we see the full impact of revenue growth and further cost savings kicking in over the next two or three years. That was all I was supposing to cover on the financial results and outlook. But there will be a chance for you to ask any questions you might have shortly.

I will now hand over to Sophie to wrap things up.

Sophie Moloney — Chief Executive Officer

Thanks, Andrew. So to finish on slide 31 we have repeated the three-year strategy targets we shared with you at our Investor Day. We’ve also added one year targets FY ’22. So you can see the progress we expect to deliver in the year ahead. Now, as we’ve mentioned, we’re at the positive inflection point in Sky’s transition and these targets will allow you to track our progress and delivering on the revenue growth and cost reductions we have firmly in our sides. For this year, that includes revenue growth, growth of up to NZD35 million.

It also includes further permanent operating cost reductions of NZD5 million to NZD10 million for this financial year with additional permanent cost savings to be achieved in FY ’22 that we will see the benefit of in FY ’23 and beyond. And of course we will deliver our new Sky Box within our capex envelope. Now, as I said at the top of the presentation we’re clear on what success looks like and how we will achieve it. We have a laser focus on executing brilliantly on our plan and as I wrote in my Annual Report to shareholders I’m hugely optimistic about the future for Sky and remain deeply determined to deliver for our customers, our partners, our crew and thereby our investors.

With that, we’re now happy to take your questions. And so I’ll hand back to the operator.

Questions and Answers:

Operator

Thank you, Sophie. [Operator Instructions] We’ll take our first question from Arie Dekker from Jarden. Your line is open. Please state your question.

Arie Dekker — Jarden Securities Ltd. — Analyst

Good morning and thanks for presentation. First question was just in relation to the stabilization of revenues and just sort of what you’re factoring in for Sky Box customers. So I guess maybe the first way — part of tackling that there was a NZD50 million decline and FY ’21 you’ve called out NZD7 million, I think related to COVID. How does that reconcile in your EBITA bridge to the NZD29 million decline in FY ’21? Is that net of streaming gains, is it?

Andrew Hirst — Interim Chief Financial Officer

I’m going to take the first if you like, but I might jump in as well. The NZD7 million of NZD50 million is obviously directly COVID related, Arie. There’s also the impacts of one-off structural impacts that I talked about as well as part of that normalization because obviously we had a bunch of other things that were unusual in FY ’22 around some of the migration impacts of the retailer from Vodafone to Sky and the other things that I called out there.

Arie Dekker — Jarden Securities Ltd. — Analyst

So the Sky Box decline in FY ’22 and the EBITDA bridge of NZD16 million, I mean is that a revenue midpoint revenue estimate for Sky Box decline revenues or what costs would be netted off the revenues to get that NZD16 million EBITDA impact?

Andrew Hirst — Interim Chief Financial Officer

It will be a revenue number.

Arie Dekker — Jarden Securities Ltd. — Analyst

Okay. So, yes, so what you’re saying that essentially you’re comfortable that assuming a midpoint somewhere between NZD20 million to NZD20 million of Sky Box decline in revenue ex-broadband in FY ’22.

Andrew Hirst — Interim Chief Financial Officer

Yeah.

Arie Dekker — Jarden Securities Ltd. — Analyst

Okay. I mean that’s obviously quite a marked reduction from sort of the NZD50 million we’ve seen in the last few years. And I guess the second half run rate on sub-loss was I mean, it’s still a big improvement on recent years but it’s still sort of I think it was NZD11,000 or NZD12,000. What are the key drivers of sort of that more positive view in FY ’22?

Andrew Hirst — Interim Chief Financial Officer

You go ahead Sophie.

Sophie Moloney — Chief Executive Officer

I do think Arie the stabilizing we’re seeing, some of that is that we’re getting to those very loyal customers. We talked about the 74% the last, more than 5 years. But it’s also we actually just getting better at our craft, getting better understanding what content matters and engaging with our customers in a much better way. So I think the test and initiatives which Corrie talked about during our Investor Day are really starting to show up that first year retention. So as I said, we felt like and as we talked about in our Investor Day, we’re only just getting started. So we expect to see those benefits continuing and growing this financial. Andrew, do you have anything more salient to add on that one?

Andrew Hirst — Interim Chief Financial Officer

I was just really got to call out I suppose that our June run rates going and coming out of FY ’21 are actually pretty good and a lot of it is driven by lower churn Arie.

Arie Dekker — Jarden Securities Ltd. — Analyst

That’s good. Yeah, okay. No. Thanks, that’s all for that one now. And then just on the costs, I recognize that you’ve obviously already gone through and taken decent amount of permanent costs out. You’re sort of looking to do kind of I guess somewhere around half of the 3-year target savings in FY ’22 in terms of further permanent cost savings. At what point will you sort of look through the business and I guess if there is more opportunity I guess on that front? Because I guess particularly around the programming costs and I guess is a bit more coming with Rugby league. The overall cost base is very high and that NZD10 million to NZD15 million even as a percentage of I guess non-programming costs isn’t that high. Is there an opportunity to look at whether that 3-year target could be extended and more cost savings found?

Sophie Moloney — Chief Executive Officer

Yeah. So I suppose the first things first, that’s a minimum and we obviously might want to make sure that we outperform and so my response to that is yes, we are going to be very focused and we’re looking at everything that we are doing across the piece in terms of what we’re producing and it’s all about what value does it drive to customers. So, I just reiterate that this is a minimum that we want to be achieving and I’m obviously going to be pushing the team to outperform.

Arie Dekker — Jarden Securities Ltd. — Analyst

Okay. In terms of the commentary around capital management, including dividends, I guess I just sort of want to differentiate and so we’ll see if there is a differentiation in what you are saying between sort of where you’re at on the operating side of the business versus potential divestment proceeds. So, I mean obviously the prospect that you could release a significant amount of cash out of property sale.

And I guess what would be just a partial leaseback given that you’re only looking at leasing back Studio One. So are those comments at this point sort of related to potentially capacity to release some money contingent on that excess or are you also sort of saying that your confidence in the stabilization of the business, which is obviously subject to still material drop in earnings this year is driving your consideration of capital management and dividends?

Andrew Hirst — Interim Chief Financial Officer

I think it’s probably more the former Arie. I think we are stepping into a year — we generated NZD69 million of free cash on our result this year it. We’re looking at a lower level of earnings next year still with positive cash flow generation but it will be a lot lower. So I think what we’re signaling is the operating cash in the business of operating cash flows will be invested in the growth. But as you say, to the extent that there is proceeds for example of property sale, I think that’s where the Board would look to options around return potentially.

We’ve also got a very strong balance sheet with no debt and a sizable debt facility. But I think it’s probably the right way to differentiate it. I think obviously we need to execute on the property sale before we can say any more than that, and that has frustratingly been somewhat stalled by lockdown. But if it goes to where we think that it will, I think that’s where we’ll hit there would be a good some of that money might be available.

Arie Dekker — Jarden Securities Ltd. — Analyst

And in the mix you’ve also mentioned investments outside of, I guess what you’re doing and broadband, which has a little bit of, I guess, capital investment required and sort of upfront and the set-top box changeover which obviously you’re going have to make a call on how quickly you sort of roll that through the base in that. Outside of those two things are there any sort of meaningful investment initiatives on the cards.

Andrew Hirst — Interim Chief Financial Officer

Those would be the two biggest. I think we’ve come through a period where we’ve invested in the capability in the business over the last two or three years. So that sort of piece of our capital applies has been largely done so it’s largely those two that you called out. And broadband is not that significant. Set-top box is probably the biggest.

Arie Dekker — Jarden Securities Ltd. — Analyst

Yeah and just my final question, I mean it’s great that you’re on track for the ’22, just any comments you can give on sort of the approach you’re going to take on rolling that out.

Sophie Moloney — Chief Executive Officer

At the moment we’re looking to deliver here both calendar year ’22. We will be delivering it. In terms of the go-to-market and things we are still looking it through with customer insight. On the look and feel and the design, we should be able to share some pretty cool stuff at the time of the AGM but no further direction of [Indecipherable] go-to-market for our customers.

Arie Dekker — Jarden Securities Ltd. — Analyst

Great, thank you.

Sophie Moloney — Chief Executive Officer

Thanks Arie.

Operator

We will take our next question from Phil Campbell from UBS. Your line is open. Please state your question. I beg your pardon. Aaron Ibbotson from Forsyth Barr. Please go ahead.

Aaron Ibbotson — Forsyth Barr — Analyst

Yes, hi, good morning. Can you hear me?

Sophie Moloney — Chief Executive Officer

Yes. Hi, Aaron.

Aaron Ibbotson — Forsyth Barr — Analyst

Perfect. I have two questions if I may. So the first one is just to get our head around the programming costs or content costs for FY ’23, I guess. You referred to the Olympics, etc, sort of one-off or event costs. Thinking for FY ’23, am I right in assuming that the NRL there will be a step up as a largely offsetting the one off nature of the Olympics and then will there be another Olympics in ’24, ’25 or is that too early to talk to?

Sophie Moloney — Chief Executive Officer

So the new NRL, there will be a half-year and as we, to the deal HMH but I would need help from and during gas in terms of your around the offset, certainly from my perspective at least as less than the Olympics in terms of this step up, but Andrew Gareth is anything further we can share at this stage.

Andrew Hirst — Interim Chief Financial Officer

No, I think you’ve covered it. I think that’s exactly that won’t be as significant as the impact of the impacts, but it will be a half-year impact. Yeah. But other than that or if point I made in my presentation is the programming cost base is now fully cost other than the other piece.

Aaron Ibbotson — Forsyth Barr — Analyst

Okay. But on an annualized basis, it will be smaller than the effect of the Olympics up so since then.

Andrew Hirst — Interim Chief Financial Officer

Sorry, what was the question Aaron? I missed it.

Aaron Ibbotson — Forsyth Barr — Analyst

Sorry. On an annualized basis. So the NIO that on an annualized basis. Will it be smaller than the drop-off out of the Olympics that you talking to fully cost that we have, we’re obviously what you have actually committed to costs.

Andrew Hirst — Interim Chief Financial Officer

I think I’ll overall cost costs will be lower in ’23 in there in ’22.

Aaron Ibbotson — Forsyth Barr — Analyst

Okay. So if I look at the, for the bridge by center I’ll some there but you confidences is a target of 3 to 5, that it’s not going to be on meaningful when it comes to the revenues. This is that mean we should be. It is largely a wash on the EBITDA side, in the Federal Home going forward as well when you the to reach the target of sort of around 10% attachment rate.

Andrew Hirst — Interim Chief Financial Officer

Yeah. So look, it’s not a significant number from an EBITDA perspective as we’re still building scale that will be a small loss in FY ’22 for broadband, but we haven’t separated out the revenue and cost impacts as you say that when we’re not quite sort of breakeven scale in FY22 but, so you have attachment rate that they can take your main points of 4%, so 2%. That’s not loss-making, but if you do that you’re 89% attachment rate is that scalable enough to have a meaningful contribution on the EBITDA level?

Sophie Moloney — Chief Executive Officer

At that point, we definitely will be breakeven or better.

Aaron Ibbotson — Forsyth Barr — Analyst

Yeah. Okay, thank you.

Sophie Moloney — Chief Executive Officer

Thanks, Aaron.

Operator

[Operator Instructions] Our next question from Phil Campbell at UBS. Please go ahead Phil.

Phil Campbell — UBS — Analyst

I just had a question around of broadband and Sky Box. Just could you just give us a bit more color in terms of what’s the definition of the attachment rate? And then the second question, I know it’s pretty early days, but I’m just wondering if there’s any insights from the broadband rollout in terms of behavior of bundling and what it’s doing to possibly churn or any other impacts?

Sophie Moloney — Chief Executive Officer

Maybe if I go through, Andrew, on the second half. A bit too early to be calling improvements at this stage, however, obviously the international does talk to that I, what I can safely say as we see it with our Board, today is the launch has gone very well. The customers who have would then 11 the reliability in the price. So and as we talked about, you only get one chance to get that right so and we starting to see that some of the advocacy coming through. So, it’s early days, but we’re really happy with the start we’ve made, which comes back to that reliability and trust in the service that we are, that we’re delivering.

Andrew Hirst — Interim Chief Financial Officer

So in terms of the attachment. So we’re just talking about the number of our Sky Box customers have a broadband subscription. So 5% attachment is 5% about Sky Box customers having broadband as well.

Phil Campbell — UBS — Analyst

Okay. So it’s not attachment on the gross adds.

Andrew Hirst — Interim Chief Financial Officer

No, no, it’s attachment on the total base. So we’re calling out for example, we had 550,000 Box customers at the end of the year, so we’re talking about a 3% to 5% on effect to be that number or the equivalent of that number.

Phil Campbell — UBS — Analyst

Yeah, no, that makes sense.

Sophie Moloney — Chief Executive Officer

Thanks Phil

Operator

And speakers we have a follow-up question from Arie. Would you like to take them?

Sophie Moloney — Chief Executive Officer

Yeah, sure.

Operator

Thank you. Arie, your line is open. Please go ahead.

Arie Dekker — Jarden Securities Ltd. — Analyst

Thank you. Yeah, just one of the other things I was just going to understand just can be helpful but sometimes be confusing as well. The content rights in the ’21 bridge NZD25 million which I presume sort of the contractual uplift. And then NZD39 million in the ’23 bridge, can you just sort of talk to the key drivers of difference between the ’21 and the ’22.

Andrew Hirst — Interim Chief Financial Officer

Sure happy to take that the bulk obviously of the content uplift in the one relates to our record deal plus or minus whatever we’ve achieved in terms of the quarter reduction that goes into that year. I guess the highlight the point to note in the ’22 bridge is not just rugby. There are other eight another deals that we’ve either done or expect to do this year that will have uplifts. So I was forward that’s the reference that you’re seeking.

Arie Dekker — Jarden Securities Ltd. — Analyst

Yeah, okay. So 2 things just then, so the 5 units of actual Equitable reduction. I mean, I thought that might have set kind of in the COVID step. The 25 net of that and then the 39th got extra just in terms of other right. So I guess, just in terms of that given a number of those deals were co-exclusive, does that mean that there was still underlying inflation, even though you sort of giving out potentially some co-exclusivity and those other deals.

Sophie Moloney — Chief Executive Officer

I think that the — I will take the Andrew, it is this is the received that key content that Rugby be co-exclusive that we looking to secure and we have to talk about 3 months to get through the proceeds. So that’s where the bulk of the has come from top of rugby.

Arie Dekker — Jarden Securities Ltd. — Analyst

Well as a Neon subscriber and an HBO fan. I look forward to that announcement.

Andrew Hirst — Interim Chief Financial Officer

As do we Arie.

Arie Dekker — Jarden Securities Ltd. — Analyst

Thanks.

Sophie Moloney — Chief Executive Officer

Thanks Arie.

Operator

It appears we have no further question. I will hand over the call back to Sophie for any additional closing remarks. Please go ahead ma’am.

Sophie Moloney — Chief Executive Officer

Thank you. Thank you very much. Look, just a thank you for me to everyone that joined the call today for those questions and of course for your ongoing interest and for our shareholders for your support and each and you our team, and I look forward to catching up with many of you over the coming days and all of those and Arturo, New Zealand and keep safe. Thank you.

Operator

[Operator Closing Remarks]