Good day, everyone, and welcome to the Sky Interim Results Briefing. Today's call is being recorded. At this time, I would like to turn the conference over to Sky Chief Executive, Sophie Maloney. Please go ahead.
Good morning, and welcome to our discussion about Sky's interim results for the half year to December 2020. I'm Sophie Maloney, and it's a pleasure to be here as Sky's Chief Executive. With me on the call today is Andrew Hurst, our Interim Chief Financial Officer and Gareth Jones, our Head of Commercial Finance. And we look forward to discussion with you, our investors. I also want to take a brief moment to thank Chris Major, our Director of External Affairs and her team and Amanda West, our Investor Relations Lead for all of their hard mahi, their work to get us to this juncture.
So in terms of our agenda for today, I'll make some opening remarks and discuss our strategic priorities, after which Andrew will sit through a few of the more important details of the half year results. We expect that most of you have had an opportunity to read the material price for call, so we'll try and get through at a reasonable pace. I know Amanda will pause me if I need to go faster and leave plenty of time for questions at the end. So a few opening remarks from me, and I must say I want to get off the slide fairly promptly given the photo on it. As I said on 1 December, I'm hugely humbled and excited to have been appointed as Sky's Chief Executive.
I'm also hugely grateful to Martin Stewart for the transformational program he instigated at Sky and for the opportunity to work with him and then carry the baton forward as his successor. Now as I shared with our Sky crew yesterday, I've actually been in KTV since 2003, having kicked off my career at Sky in the U. K. And returning home to join Sky in New Zealand in early 2018. Since my appointment as Chief Exec, I've taken time to focus on 3 key areas: our people, our partners and our operational rigor.
I've also taken the opportunity to look at our strategy through a fresh lens. I have a very clear sense of what we need to do as a business and what you can expect to see from me is a clearly articulated strategy and a relentless focus on delivery, something my early years at Sky UK taught me. I readily get that word that while words matter, actions speak louder and we need to act. So turning then to that first lens on our strategy. You'll see that the overall theme for these interim results is what matters most.
And what matters most without question is our customers. If there's one thing our people are going to hear from me probably over and over again is that we must put our customers first. Every decision starts by asking how does this make Skype better for our customers? Now I firmly believe that if we get that right along with valuing our people and our partners, the value creation for you, our investors, will follow. And at our core, we're a content company.
With our satellite delivery technology and streaming services, we really are here for all New Zealanders. It's truly a unique advantage, and it's one we need to take better care of. So turning then to slide 4 and the half year performance for this financial year 2021. It's good to be able to report strong to report a strong result for the first half, which we are going to detail later in the presentation. But as we look ahead to the second half, we know we need to do better.
The first half is a very strong result. The second half sees an uplift in our programming rights cost line, which means that stabilizing our revenue remains a clear priority as is reducing our overall cost base. So how are we going to do that? Well, put simply, we're going to do that by focusing on what matters most for our customers. And what is it?
Well, again, it's pretty simple in my view. It's easy, reliable access to the content they want to watch in ways that work for them. Now I know you've seen content slate from Sky before. And I suppose the reason I really like this one and why it's different is that it more clearly shows the depth and variety of what we offer to New Zealanders, especially from a linear perspective. And linear viewing is far from a thing of the past as our connected boxes tell us.
It's really a unique offering in this market. And I think we've possibly been guilty in our ambition to speak about streaming and new services that was neglected to talk about what we offer to our main customer base. And one of the interesting reflections from the lockdowns of 2020 was just how much of our news, our documentaries and our entertainment content kept our customers happy. When Live Sport was almost non existent, most of our large base of Sky customers stayed loyal, enjoying everything else that was on offer. It really was a salient reminder of the power of the bundle.
But coming back to that question, how do you manage that programming rights cost line to further improve profitability into the second half year and beyond? Well, turning then to the partnership slide. Again, for me, it's by focusing on what matters to our customers. And that also means being comfortable with the new co exclusive world that we now live in. Now I must admit, when Disney first used this term, I thought what on earth are they talking about?
I thought we lived in an exclusive or a non exclusive world. And for awareness for those on the call, co exclusivity simply means Sky and its partner with a direct to consumer offer like Discovery will have access to the same content for distribution in New Zealand. It really is the reality of the world we live in and it's something we're completely comfortable with. Now while others may see it as a threat, I see it and we see it as an opportunity to manage our costs while still superserving our loyal Sky customer base. But of course, continuing to secure the content and striving to do so, the content that matters to customers remains a strategic priority.
And not having the black cats at home this summer was a tough reminder of what it's like when it's not all there on Sky. And I have to say, my lovely 89 year old auntie did remind me of this over the summer break. So this absolutely remains a key priority. And as the slide says, we'll continue to partner as a content company with the likes of Vodafone and Spark to distribute Sky's compelling content slate as widely as possible. Focusing then on what matters most, more specifically for the half year that has just been, we turn to Slide 8 titled our customers.
Before I comment further on this page, a word on terminology. I know we have traditionally talked about satellite customers, but I've yet to meet a Kiwi who uses that word to describe themselves, kind of Sky customer. And for the 100 of 1000 of New Zealanders who have Sky in their home, their experiences with the Skybox, not dish on the roof, we certainly hope it isn't. So from now on, the Skybox customer it is. Now we've made significant progress in stabilizing our Skybox customer numbers as the following slides will illustrate.
You'll notice that at times we report customer numbers year on year and for others we will draw out the 6 month comparison. This is just to better account for the extraordinary impact of COVID-nineteen in the period And of course, we'll always make it clear what reporting period we're referring to. So a few call outs. For the first time, we've separated out the Vodafone reseller customers. For clarity for those on the call, these customers have a Sky box in the home.
However, they originally signed up for the service and received their bills in a relationship with our partner Vodafone. We have all but completed a migration of these customers to a direct relationship with Sky, and we are pleased with the results, evidenced through a strong conversion rate of almost 90%. You'll also see that we've identified the number of customers that were receiving Lightbox as a hard bundled product from Spark at the time of the merge of the Neon and Lightbox platforms in July. And we're extremely pleased to convert over a third of these to paying Neon subscribers when we launched the new platform and this growth has continued. Taking this into account along with continued organic growth has resulted in a year on year growth in streaming customers of 80%.
And as a final note, we've also decided to split out our commercial customers for the first time, having previously been included these having previously been included within our satellite customer base as satellite is the method of delivery. We believe it's important that we provide more transparency and also provide insight to the value these customer relationships generate for Sky. So as set out in slide 9, we are seeing strong evidence that we're reaching a stable core of Skybox customers. A significant milestone in this period was achieving net growth and direct customer numbers before the impact of migrating reseller customers was taken into account. This has not been achieved for a number of years as you can see from the chart on the next slide as well.
This reflects our strong presence in key loyal customer segments as well as the new capability we have built and continue to build in customer value management. Overall, we're leaning into the advantage we have in satellite, which generates 75% of our revenue and has Sky in 1 third of households throughout the country. I believe the next few slides will give you a sense of the reason for our optimism on reaching a stable base of SkyBot's customers. So on slide 9, direct customer activations of 25,000 are up by 50% and disconnections improved by 16%. The trend line showing the net direct movement demonstrates we have had a very stable 6 month period.
These new activations are coming from our traditional strongholds, but also importantly, we're seeing new pockets of interest. Now we acknowledge that there was a peak demand at the start of the period as we exited the lockdown restrictions and that we're also benefiting from broadening our sales channels. And our research has identified that those who aren't currently a customer of Sky, but are open to being so equates to 1 third of all New Zealand households. Heading now to churn. The first slide with a downward trend is one we want to actually celebrate.
So Sky churn rates have continued to come down from approximately 17% 4 years ago to 12.4% today. Now you'll see here that we have split out the total Skybox churn to show the impact of direct customer retention compared to the total retention rates with the total including direct and reseller customers. As evidenced through the lower churn rates on a direct customer relationship basis, we expect this to have a further positive impact on total churn. Now we also anticipate that the upcoming broadband that is coming is expected to have a further positive impact on customer retention based on evidence we've seen both offshore and pay TV and through local provider bundling. Turning now to slide 11, back and back.
You'll see this slide in particular demonstrates just how sticky our customers are. 70% of our Skybox customers have been with Sky for more than 5 years. This is an increase from 55% just 4 years ago. And this growth of customers has extremely encouraging retention rates. Churn is just 6% on an annualized basis.
And at the other end, we've also made significant progress in improving our retention of customers through that early period when churn levels are traditionally higher. In the last 12 months, the churn rates of 1st year customers have improved by 27%, and we know that the longer we retain them, the more likely it is they will become a very loyal and valuable customer of Sky. I now want to take some time to discuss some of the initiatives we are investing in to add value to our loyal Skybox customers. Turning up, Slide 12, Sky Go. So Sky Go is available to all Skybox customers at no additional cost to their monthly subscription and has proven to successfully increase customer loyalty.
Sky Go allows customers to enjoy our content on different devices and different locations with a personalized and on demand type experience. And we're excited to say we're currently rolling out a new and improved Sky Go with heaps more content and enhanced features that have been road tested by more than 1,000 of our Sky Nation panelists. We know that customers value having access to Sky Go and it results in a lower average churn rate in customers that use it, especially when new customers adopt it in their 1st 12 months of subscribing to Sky. This makes these development efforts very worthwhile. And at the same time, we note that by moving Sky Go to our new digital platform, we've been able to rapidly develop the product and have more flexibility for the future, which we're excited about.
Slide 13, Sky Broadband. This is another example of where we're looking to deliver additional value to our customers. While we will widen our sites over time to our streaming customers, our Skybots customers will be our first priority. And as I said earlier, we do expect this to have a positive impact on churn. And I do think it's important to remind ourselves in terms of that strategic lens that we are a content company, not a telco.
And our focus is simply on adding value and making life easier for our Sky customers who are in fiber ready homes. Exceptional service and user experience are therefore clear priorities here. And the customer trials have been valuable in guiding our development of the final product. The positive sentiment from the trial groups gives us a good sense of the value we can offer for our customers. And full details of the customer offer will be available when we start rolling out in the coming weeks.
It's not far away. Slide 14. You've heard us talk about the potential for a new Skybox for some time since the decision was taken to cancel the IBP project in June 2019. Since then, we've been listening to our customers and we have a clear understanding of what's required. That is driving our design of the user experience.
And an interesting insight that was shared with me about a week ago is that what this does need to deliver is the ability for our customers to search and curate the Sky content just as much as it is other party's apps. Now based on what we've seen offshore and the research we've been doing at home, we believe the new Skybox will support the attractiveness of the Sky proposition to both existing and new customers. And I note that 1 third of households are open to sky as I mentioned earlier. Now where it makes sense, we're planning to partner on the development of the box and associated platforms and systems to achieve the economies of scale and inputs we need. Now I know you'll all be interested in what's the business case, what the business case is for this and the timing as is our Board.
So the one off and ongoing costs and the potential timing for being in market and not for discussion today, but we will, I promise, provide more details at R and D today. Turning then to streaming on Slide 15. This continues to be an important part of our business as we look to meet the demands of all New Zealanders. We're obviously pleased with the significant growth with the stage in a short time having grown by 80% year on year and by 2 50% over the past 4 years, although I appreciate this was off a lower base. At the same time, pricing and packaging initiatives together with a strong sports content offering has delivered significant growth in Skyport now.
And we're seeing high levels of engagement with this product. We're also excited to note that Neon continues to increase and the organic growth there is improving day by day. What I think is really important is to note that the growth we are experiencing is not coming at the expense of our valuable Skybox customer base. And we've set out on this slide some useful data points to evidence this. Turning finally, but last but not least to our customer commercial customers on Slide 16.
They've been a hidden gem within our reporting and we're going to provide you with a bit more detail now and going forward. While there are approximately 8,000 commercial customers, these are obviously at a much higher ARPU with nationwide coverage and all of them existing Sky by satellite. This helps bring Sky not only to local pubs, but also to 55,000 hotel rooms and also into retirement villages, sports clubs, gyms, shops and offices throughout New Zealand. It remains an important part of our current business and a way for us to showcase our content to customers and non customers as they frequent these different commercial premises. We split out our customer types into 3 main groupings, license premises, accommodation and corporate and retail.
While we're still planning for recovery to pre COVID levels, there is potential for revenue growth in the license premises as we continue with our new value based appropriately tiered pricing model, reflecting the size and location of each license premise. So now we get to financial performance. As I said at the beginning, while our financial results for the first half are good, we must do better. Revenue was down 7% year on year and clearly stabilizing this is a clear priority. That said, we are comparing against the peers that hadn't imagined an operating environment that included lockdowns and border restrictions.
When we remove the direct impact of COVID-nineteen one offs, the underlying revenue decline was 3% compared to 5% in the prior year. To offset this revenue decline, we were pleased to report that operating expenses were down significantly at 18%. When we strip out one off expenses in both periods, although mainly in the first half of FY 2020, we're still showing a 15% reduction made up of permanent and COVID related cost savings, which Andrew will kindly go through in more detail shortly. As a result, we have delivered first half EBITDA of $116,000,000 with a margin of 33% versus 23% in the prior year. While this is absolutely encouraging, there is more to be done to stabilize and then grow revenues and to lock in further permanent savings to our operations.
And on that note, I'm going to hand over to Andrew, who will provide more detailed information on our financial performance. Over to you. Thank you, Andrew.
Thanks, Sophie, and good morning, everyone. So starting from the top, turning firstly to revenue. As Sophie has already mentioned, our first half total revenue was down 7% on last year, but after stripping out the direct impact of COVID and the one off impact of the 1 month free for customers migrating from a reseller to a direct relationship with Sky in order to mitigate a change in their billing cycles, the underlying revenue decline for the first half of this year was 3% compared to 5% for the first half last year. I will cover off each of Skybox streaming and commercial advertising revenues in the next few slides, but the other key points are not in this slide is that when we compare to the second half of FY twenty twenty, which is perhaps a more comparable period to the first this first half of FY twenty twenty one as it was also impacted by COVID, we see the revenue decline was just 1.4%, which reflects a 4% decline in Skybox revenues, partly offset by continued growth in streaming and a partial recovery of commercial and advertising revenues. So turning firstly to Skybox revenue.
Skybox revenue declined by 9% in the first half of FY twenty twenty one compared with a 7% decline in the first half of last year. Despite the decline in Skybox customers having slowed considerably this year, It was 4% versus 6% last year and only 1.8% in the last 6 months. Our Skybox revenue was impacted by a number of factors that caused ARPU to reduce by 5% from $83 to $79 versus a decline of only 1% in the first half of last year. A significant portion of that $4 ARPU decline, in fact, about $2.50 of it, was due to factors that were structural or one off in nature. And I'll go through these now.
The migration of 33,000 resellers customers from Vodafone to being direct with Sky did have a negative impact on revenue and therefore ARPU because with the change to becoming direct Sky customers, we no longer recognize revenue on a gross basis with wholesale commissions as part of our OpEx as we did when those customers were in the reseller relationship. This change in treatment accounted for $0.44 of the $4 ARPU decline or $1,600,000 in revenue terms. Most importantly, while this reduced revenue in ARPU, it does not materially impact our profitability from those migrated customers as our operating costs also reduced due to the removal of the commission costs. This will have further impact on ARPU in the second half of this year as we'll get the full year effect coming through. But again, we will also get the offsetting savings on commission costs.
Secondly, we have seen lower sports penetration through the first half of the year than we would normally expect as penetration was suppressed by package downgrades as a result of the reduced sporting calendar as well as economic pressure on our subscriber base as a result of COVID. This impacted ARPU by $0.52 or about $2,000,000 of revenue. Offering the 1st month free with a one off 1st month free to migrated reseller customers contributed a further $0.78 to the $4 ARPU decline or $2,800,000 of revenue. The discontinuation of SkyWatch reduced revenue by $1,500,000 or $0.42 in ARPU terms. And finally, fewer pay per view events as a result of a reduced sporting calendar resulted in $800,000 impact on revenue or $0.21 in ARPU terms.
I appreciate that's a lot of detail. But as I said earlier, the important part of all of that is that these factors were all structural or one off in nature and in some cases we hope will be reversible. The combined effect of these one off or direct COVID impacts was almost $2.50 of the $4 ARPU decline in the first half with the underlying decline of $1.50 being much more in line with prior periods. And one last point on ARPU, we would normally have rolled out an annual price increase to allow for the inflationary impact on our rights costs, but instead we opted to look after our customers in 2020 and did not put through a price increase in what was already a challenging year for New Zealanders. As a result, prices have not been increased since April 2019.
Now let's look at streaming revenues, which continue to grow significantly. We achieved 80% growth in streaming subscribers year on year, both through organic and inorganic growth. Revenue has similarly grown by 45% year on year, which is an improvement on the 35% growth last year. Streaming ARPU has reduced in the first half of FY 2020 when it was $26 due to the change in the mix of our streaming customers as a result of a considerable growth we have achieved for Neon relative to other streaming products including Skyport Now. ARPU fell $16 in the second half of FY twenty twenty following the acquisition of Lightbox.
But in the current period, we've seen an increase stake up to $18 And while we have continued to grow Neon subscriber numbers, especially following the merger of the Lightbox and Neon platforms in July, we have also increased the percentage of Neon customers that are paying direct rather than through Spark at a wholesale rate. At the same time, we've also grown Sky Sports Now subscriber numbers, which are packaged at a higher price point. Looking now at our commercial and advertising revenues.
You can see pretty clearly from
the chart the impact that COVID had on the first half as well as the second half of last year, but also the signs of recovery in the period relative to the second half of FY twenty twenty. Commercial revenues were down $7,500,000 or 27% year on year as we move to provide discounts and suspensions to customers during the COVID restrictions. All we have seen some recovery in this first half. Licensed premises returned to normal billing on the 1st August other than the 2 week Auckland lockdown during August. And accommodation provider discounts halved from 1st November.
So we expect to see continued recovery, obviously subject to any further impacts as the COVID situation changes again. While there is still some way to go to get back to the consistent levels of commercial revenues we've seen in the previous periods, we have identified opportunities to grow commercial revenues with the impact of a new tiered pricing model for licensing customers and also broadening the customer base across all sectors. Advertising revenues were down $3,700,000 or 14% year on year, consistent with the wider advertising market being down due to COVID, albeit the return of sport and less economic uncertainty has seen some recovery compared to the prior 6 months to June 2020. Sky share of the advertising market was down slightly in the period, reflecting the higher portion of our revenues we generate from sport, which despite returning quicker than expected was down compared to pre COVID levels. Now looking at our costs.
Total operating expenses were down significantly in the period with total savings of $52,000,000 an 18% reduction. Adjusting both periods for the impact of one off costs, the underlying reduction year on year was $44,000,000 or 15% reduction. The one off cost of $3,000,000 in the current period relate to the resignation of the former CEO, while in the prior period the $12,000,000 of one off costs related to redundancies, a satellite reservation fee, consultancy costs mainly associated with the acquisitions of Lightbox and Rugby Pass. The $44,000,000 of underlying cost reductions this year included a mixture of COVID related savings, primarily related to sports rights and production costs, as well as permanent savings of $18,000,000 which represented 42% of the underlying cost reduction. The majority of the $44,000,000 reduction in underlying costs was in programming, which was down $31,000,000 or 18%.
This was mainly due to equity reductions negotiated with rights holders as well as lower production costs as a result of canceled or postponed sporting events due to COVID. The $18,000,000 of permanent savings included the non renewal of domestic cricket rights and savings from Rugby Pass as we've moved significantly reduce the cost base of that business. The subscriber related broadcasting infrastructure and other cost lines all benefited from the carried out in prior periods as well as a range of other cost saving initiatives and streamlining of operations and technology platforms. The reductions in appreciation continues from prior periods and is consistent with our transition to a lighter capital model. We expect to see this trend continuing and also benefit from the move to the new Optus deal in December 2021.
Turning now to bridging the year on year movement in EBITDA for the first half. We firstly added back the one off costs from the first half of FY 2020 of $12,000,000 After adjusting for these, our normalized EBITDA for the first half of FY 2020 was 101,000,000 dollars The direct revenue impact of COVID was $14,000,000 was mainly in our commercial and advertising revenues, which were down $7,500,000 $2,500,000 respectively, as they were impacted by lockdowns and restrictions on gatherings, as well as a greatly reduced sporting calendar. We also saw a reduction over and above the normal seasonality in our sports penetration of around 2% to 3% between July October, the impact of which was a further 1,900,000 dollars We had actually expected to feel worse, but the return of key New Zealand sporting events like Super Rugby, the NRL and the Triad Nations helped limit the impact on subscriber revenue. In addition, the impact of COVID on acquisitions from March to June carried over into the first half by reducing our opening subscriber base, driving a further revenue impact of $1,900,000 On the cost side, we worked hand in hand with our partners in New Zealand and around the globe to negotiate discounts, deferrals and alternative arrangements for the many sporting events that were canceled or postponed in 2020, which resulted in year only content and production cost savings of $19,000,000 $5,000,000 respectively.
The production cost savings from COVID affected events were partly offset by the delayed super broke the ATROA season, which would not have normally fallen in the first half of FY 'twenty one, as well as reinvestments in additional local events such as the Tiny Jamieson Silver Ferns Netball series against England, the North versus South Rugby fixture and the Jacks Ridge rally event to name just a few. As we return to a more normal, but by no means fully confirmed sporting calendar for 2021, we do not expect to maintain this level of savings going forward. Albeit, to the extent that sporting color continues to be suppressed, we would expect savings relative to our contractual obligation. Our underlying subscription revenue in the first half was down $11,000,000 versus the first half of last year. This consisted of a decline in Skybox revenue of $28,000,000 of which $4,500,000 was COVID related due to lower acquisitions, sports penetration and pay per view events, partly offset by $11,000,000 growth in streaming revenues.
The underlying Skybox subscription revenue declined year on year with 6.9%, although as discussed earlier, we continue to stabilize our Skybox customer numbers and much of the ARPU decline in the period was one off or structural in nature. As part of our ongoing activities to create efficiencies and right size the cost base, we've made a number of structural changes in the business in this first half that have resulted in permanent savings of $18,000,000 including the full year effect or the full year impact of restructuring activities during 2020 to FY 2020, the non renewal of domestic cricket including both rights and production costs and we have discontinued both Sky Sports News and the Sky Watch Magazine. We've also significantly reduced the cost base of Rugby Pass and our decision to bring our reseller customers over into a direct relationship with Sky has also saved us commission costs. All of these payment savings will flow through to the second half of FY twenty twenty one. Lastly, the one offs for the first half related to the departure of our previous CEOs as well as the 1 month free reseller migration offer, offset by other income from the release of some RuggedCast content provisions made at June 2020 that were subsequently found not be fully required as we managed to exit rights commitments on better terms than we originally expected.
Looking now at CapEx. Our allocations to capital investment remain tightly controlled as we transition to a lighter capital model. Despite our first half CapEx of $20,000,000 being just under 6% of revenue, we expect second half CapEx to bring the full year back in line with our long term target of 7% to 9% of revenue. Skybox installation CapEx increased in this first half compared to last year due to the higher levels of activations as Sophie has discussed earlier. Comparing the year on year movement, the first half of last year included $10,000,000 of CapEx related to increasing our forecast capabilities and streaming platform enhancements, which haven't been repeated this year.
The soon to be completed sale of OSB has meant that we were not investing in our OSB assets during the current period. And as we previously outlined, selling OSB will avoid at least $50,000,000 in future CapEx spending over the next 5 years. In summary, our message on capital investment is that we are continuing to transition to a lighter capital model and our preferred approach is to partner where it makes sense to do so. Looking now at cash flow. We are very pleased with the level of cash flow from operations generated during the period of $121,000,000 which compares to $92,000,000 in the prior period.
I note that for both of these cash flows from operations figures, we have excluded the movement in working capital in order to get a like for like comparison between periods. This is because we get the very unusual situation in the current period where the cash on hand at June 2020 of $111,000,000 was inflated by a significant level of unpaid payables that mainly related to programming rights for sporting events that are either being canceled, delayed or held under a different format where the value was still being negotiated through an equitable reduction process at June 2020.
To put that into context,
we had a $57,000,000 decrease in payables in the current period versus a decrease of only $12,000,000 in the prior period. So in order to remove this distortion for the current half year, we have removed the net impact of the movement of working capital to arrive at the $121,000,000 figure and at the $92,000,000 figure for the prior period. Cash outflows for CapEx, interest, tax and lease repayments are all in line with expectations in the prior period. As a result, we closed the period with $123,000,000 cash on hand. And together with our $200,000,000 borrowing facility, we have sufficient funds available to repay our $100,000,000 of bonds when they fall due in March 2021 and still have significant funding headroom going forward.
I'm very sure that's enough for me. I'll hand you back to Sophie now to talk about the full year outlook.
Thank you, Andrew. Well done. Before we open the floor to questions, which I'm sure there will be a few, I'll make some brief comments about what we're seeing for the second half of financial year twenty twenty one. First and foremost, we will be focused on further stabilizing our Skybox customer base. Those customers will soon be enjoying the new and improved Skygo app and those who are in fiber ready homes will be the first to be offered our new Sky broadband service.
Our goal is to stabilize and eventually grow the Sky customer base along with preserving ARPU. We recognize that it's important that we further slow our revenue decline in the second half. Streaming customer numbers and associated revenues are expected to continue to grow in the second half, although at a slightly slower rate than experienced at this reporting date. We also expect to see continued uplift in commercial revenues in a post COVID recovery market, although of course we stay very aware of the current situation and the impact on our commercial customers. Programming costs will increase in the second half we enter into our new partnership with Samza and New Zealand Rugby from 1 January and also from the expected return to full contractual rates for other sports partnerships.
Of course, this all assumes that there is no further impact to the 2021 sporting calendar. And if there is a further impact, then we acknowledge the potential for further negotiated equal reductions and or deferring of these costs. The sharp focus brought to the company's cost base in the 1st 12 months will also continue in the second half in the 1st 6 months, I should say, will also continue in the second half. And of course, this is all subject to no further impact of COVID versus today on business performance. So looking at our FY 2021 outlook.
Today, following a positive first half, we are confirming our guidance for FY 2021 as issued to the market on 3 February. The guidance ranges do include the impact of 2 subsequent events itemized in the interim financial statements, being the Commerce Commission's approval of the sale of OSB to NEP and the negotiation of a Rugby Pass earnout settlement. Now these two items, which will be accounted for in our second half results, will impact both EBITDA and net profit after tax. However, they will be recorded in other income, not revenue. Taking into account the impact of the second half outlook, we readily acknowledge that our earnings will be more heavily weighted towards the first half of this financial year.
While we have made significant headway to reduce our operating cost base, we did benefit from COVID related programming savings in the first half and the new deal with Samba kicked in from 1 January 2021 this year will mean lower earnings in the second half as we'd always anticipated. Our second half of FY 'twenty one expenses will include 1 off broadband launch costs and accelerated depreciation on legacy digital platform as we move products such as Sky Go as was touched on earlier to Sky's new digital platform. We currently have a much lower debt profile following our capital raise and therefore interest costs will reduce further once our $100,000,000 of bonds are repaid in March 2021 very soon and we enter into the lower cost 10 year Optus deal in December as Andrew has already noted. So we remain in a strong financial position with cash on hand and undrawn debt facilities providing significant headroom going forward. And we have an exciting program of work ahead with a focus on what matters most, which is adding more value to our customers, our people, our partners and in turn you, our investors.
And I really look forward to sharing more details at our Investor Day in Q4. Thank you very much for listening for the formal part of the presentation. I'll now be handing back to Krissy to move us into questions.
Thank you. First, we'll go to Ari Decker from Jarden. Your line is open.
Good morning and thanks for such a fulsome and detailed presentation. First topic I just wanted to touch on was satellite ARPU.
I guess you've broken out what you sort of see is
the one off impacts versus the structural impacts. Can you just sort of talk to like do you see ARPU back over $80 in second half twenty twenty one?
Harry, nice to hear your voice. I think that, that will be a challenge in the second half. But the commentary that
Andrew gave,
we're conscious and
really leaning into the and really leaning into the $1.50 there
that we think does
look like it sort of sits in. So we're going to be leaning into that in the coming months to really understand what's driving that. So Andrew, did you want to give a bit more detail? I was just going
to add, I think, Ari, bearing one of the first of the items that talked about being that migration impact of customers from the reseller to direct, we've effectively had a 2 or 3 month effect in this half. We're going to have a 6 month effect in the second half. So that will continue to impact ARPU, albeit we're going to get cost savings offsetting it. So I think we're kind of in a bit of a new norm in ARPU terms because we've got something that's moved from above the line to below the line essentially. So that's going to be the first thing we're going to see is more from that.
And then as Sophie said, we're going to lean into the $1.50
That's helpful. And just on that, two follow ups. So it's just you referenced not having made a price increase for some period. Presumably, there's no intention for price increases anytime soon. And then further to that, just in terms of a review of package pricing, which I think you've sort of slated for post the broadband launch.
Can you just talk to what you're thinking in terms of approach to package pricing and time frames?
Yes. I think that's right. It's certainly not a FY 2021 move in terms of price increases. And I actually think as Andrew said, it was the right thing to do in 2020, not to put that on our customers given what everyone was suffering. That said, we do acknowledge the increase, particularly in our sports rights costs.
And so I think it is something that we'll have to look at, albeit, Ari, in the context of an overall review of our value for money work streams, our pricing and packaging, which you're right is something that we're looking at this calendar year. And I think it's in that context that we'll look at the overall envelope that New Zealand's customers have and figure out what the best way for it is.
Sure. Look, Seth, you're really clear about the new set top box and wanting to invest today. But I guess just one question. Clearly, the company has had a bit of a checkered history in rolling out and assessing and looking at these sorts of things. Can you just sort of provide at least some comfort that this is something that you sort of think can be done in 12 to 18 months versus sort of 2, 3 years plus?
Well, the comfort I can give you, Ari, is it's going to be a number one focus to me now that I'm really comfortable with where broadband is. And as I noted when we're going through it, I'm interested to see if there are partners that we can work with that can help us actually get to the right place faster. So that's something I'm looking at very closely. But absolutely, I think there's a worldwide chip shortage, which would impact delivery of set top boxes a hybrid nature DTH and IP into our market. I think it's a 52 week lead time on the Broadcom chipset.
However, that for me is the maximum timeline that I'd be wanting to work with. So yes, it's a big priority off the back of this and I definitely look forward to sharing more information at our Investor Day.
Just a point of clarification, are you saying implicit in the second half guidance that there is an allowance for any negotiation of savings on programming rights outside of your contractual obligations?
We've taken a very conservative view just looking ahead at what might be there. But otherwise, you're right, Ari. We haven't negotiated any agreed reductions at this stage.
And could you talk to where those negotiations so you do have some negotiations ongoing? Do you think in terms of your position on those negotiations that savings are achievable in calendar year 2021?
Yes. I think I mean we're in really conversation particularly with New Zealand rugby on behalf of SAMSA about the impact on the agreement that we signed up to in 2019. We're partners and we're keen to get clarity on those impacts ideally before 30 June.
Sure. And then final one, I mean, I guess the second half guidance implies EBITDA down to sort of circa $70,000,000 and with another half of increased rugby rights costs to absorb, there is a, albeit a minor reference to dividend at the back of the presentation. I mean, presumably, you're not contemplating against that sort of earnings momentum backdrop in any return to dividends anytime soon?
Well, I think the Board was really clear at the time of the cap rate that that's something that we'd look at in FY 2022 for the first time. So yes, not in this half. That's all I'll be up to comment on at this stage, Ari.
Thanks. Thank you.
Thank you.
Thanks, Ari.
And next we'll go to Phil Campbell from UBS. Your line is open.
Good morning, everyone. Just a few questions from me. I just wanted to check, is there a subsequent settlement for the Lightbox acquisition?
When you say subsequent sentiment, are there any payments required? Is that your question?
Yes, yes, in terms of the acquisition.
No, no, we're done.
We're all done and
done and done. We're all done and done and done and done and done. We're all done and done and done and done and done and done and done and done
and done.
Okay. Awesome. The other one I just had was on broadband. I was wondering, Sophie, if you could maybe just give us any feedback from the Sky Nation panel on broadband. And then if you've got any comments around kind of how many subscribers are required to get to breakeven at an EBITDA level?
So I can certainly say that the feedback from the Sky and the Nation panel is incredibly positive. And the Wi Fi 6, Bruce, that we've talked about and also coupling that with our customer service does seem to be resonating. So as I said earlier, this is not about us becoming a telco. It's actually about delivering value to our Skybox customers. And the feedback is so far so good.
And we've been very clear that whilst we've had some cost to date and there is a bit of investment still before we see the revenues come in, we're very comfortable that it's the variable cost model and the way that we're looking to deploy is very sensible. So yes, we're comfortable with the lead in that we've got. Anything else you want to add to that? No, that's covered. Thanks, Phil.
Great. Thanks.
And next we'll go to Brian Han from Morningstar. Your line is open.
Sophie, the conversion of 90 Sophie, the conversion of 90% of those reseller customers from Vodafone, how did that compare with your or previous management's initial expectations? And similarly, did the 1 third of the Lightbox customers, the Neon meet your expectations or was it a little bit below what you anticipated?
Well, I'll say in both cases, we were actually really pleased with the way that it works. Vifone has been a long term partner They decided that it was time that those resell arrangements customers came back to us. So that was certainly in line with what we had forecast. And what the same on the Neon side because we're just conscious that as you move into a paying arrangement, you never know how customers are going to react to that. So, in both cases, we did better than we thought.
Okay, great. And also, the various investments you're making in the what you call the box pay TV and set top box front, were these initiatives always in the pipeline or are these new fresh plants since you've taken on the CEO role?
So we've always been planning to be stepping into a new next generation set top box. And the Sky Go moving on to the digital platform that was something that was worked on in 2019 was slightly interrupted by COVID in 2020. So both of those are initiatives that have been in the pipeline. What I will say on the next generation set top box is that this absolutely does have to move the dial for our customers in our market, which is why we are doing a bit more research before taking the business case back to our Board. And that's why it's an Investor Day timing to give proper updates on that front in terms of the cost and timing of delivery.
Thank you.
Thank you.
Next we'll go to Wade Gardiner from Craig's Investments. Your line is open.
Hi. What's been the commercial customer response to the paired pricing? You mentioned that it was going to be positive for revenue. Can you give us a
number as to sort of what extent we should see that positive?
So what I can say is that our commercial customers really appreciated the way we worked with them during COVID because we obviously realized that impacted and put in decreases during that period to work with them. The way the tier pricing works is effectively if you're a small pub in the Sabaraki, you probably can't quite understand the same price as you can if you're downtown on the buyback. And so that's what we're looking to put through. The feedback has been one of, okay, we can see it's there. In terms of where we expect it to land, it's a little bit challenging just given ongoing COVID impact.
But yes, we're going to think on we can think further on exactly what that looks like. But all I would say to you is that we're very positive about, one, how it's being received by our commercial customers because we've seen a lot of time actually working it out to make sure that it is there. And of course, we're going to respond to the COVID impact for those commercial customers as well. So at this stage, it's definitely going to be positive revenue outlook for us.
You also mentioned the depreciation increase in
the second half one off. What sort of size are we talking about there?
I'm going to hand over to one of Andrew or Gareth on the
Sure. Gareth, I'll take that. Actually, depreciation in the second half will be lower than the first half. However, it's actually still higher than you would normally expect. So as Andrew mentioned, we do have some one off accelerated depreciation, which is actually lifting that number, which is lower to a high level than you would normally expect.
So the number is still coming down in line with prior trends. So our depreciation has been coming down over recent periods. And I guess the comment is just to think about when we move into future periods, we do have a one off hit and drive in H2. And so as you do look forward into future periods, just need to normalize for that impact. And this is kind of low single million, so not huge, but just to be aware of that number.
And finally, have you given have
you disclosed the sort of the size of the Optus savings that you'll get in the second half of twenty twenty two?
Great question. I'm not sure we'll have to go back and see because some of these were baked in when the deal was first banked in 2018 or 2017. And then we obviously achieved further savings when we confirm the deal last year. So that's one we'd like to be able to come back to you on. I don't have that to hear.
They are significant. Yes, they are significant.
Yes. It's a December 2021 picture. So it's not going to hit this financial year. It's an outturn. They might provide more detail and give guidance for full
year, but it is significant.
Yes. Cost of fleet delivery to all of New Zealand.
Yes.
Thank you.
Thank you.
And next we'll go to Phil Campbell from UBS. Your line is open.
Yes, Phil. Just a couple of follow ups. Just yes, can you hear me? Yes, just a couple of follow ups. One was just on broadband again.
Just again, looking at the Sky Nation feedback, I think you said that you were looking at kind of reduction in churn when you do attach broadband. Just wondering if you had any kind of ideas on the reduction in churn. And then the second question was just wondering, obviously, a few press reports about private equity looking at making a stake in New Zealand Rugby. Just wondering if that kind of has any impact
on Sky?
So first up, we're conscious of the external markets that do talk about the tune benefits of broadband, making customers who are sticky. But obviously, we have seen significant improvements in our tune management in any event. So yes, it's going to be positive. Gareth, do you want to add a little bit of flavor and then I'll take the Fulbright query off the back of it?
Yes, sure. Thanks, Sophie. Yes, so looking at when broadband is bundled with either pay TV as we are or bundled with other services, some of the case studies we've done and we continue to update these over the last kind of 12 to 24 months. Do you see on average kind of 20% to 30% lower churn when broadband is bundled with the service? And so of course, depending how many customers attach to broadband, we then obviously apply over the overall DTH base.
So it's not going to significantly drop DTH churn. But for those customers that do take it, we do expect to improve retention and complement those services in one place. As Sophie mentioned, we've made significant strides around customer value management and improving churn rates in the past 12 months. And so, obviously, anything we can do to retain and improve those levels going forward.
Cool. And then picking up on Silver Lake. So we had a briefing with New Zealand Rugby last week. And I think it is a pretty amazing it's actually been amazing investment from the grassroots of New Zealand. We do believe that needs to happen.
And I suppose from a Sky perspective, of course, there's no interruption to our current rights contract that we have with New Zealand rugby and Samba. And I suppose looking forward for me, I'm really interested to see where it lands and have real faith in what Sky does and our partnership with New Zealand rugby as we continue to deliver rugby to all of New Zealand by satellite. And we're going to continue to invest and focus on what matters most to our customers. So at this stage, I'm just looking on with interest as I'm sure you are.
Great. Thanks.
Thank you.
And we have no further questions. So I'll turn it back to Sophie Maloney for closing remarks.
Great, Chrissy. Thank you. Lot of thanks, everyone, for taking the time to join us on today's call. As I said, we have an exciting program of work ahead. I think we've got a clear strategy and the relentless focus on delivery is what it's going to
be all
about. The team and I really look forward to meeting with as many of you as we can over the next couple of weeks and of course, welcoming you to our Investor Day in Q4. Dates will be confirmed soon, hopefully. And on that note, thank you very much. Kia ora and have a great day.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.