UK broadcaster Sky signs deal with HBO in bid to outpace television content inflation

Wilson King: Sky's strong results underpin its ongoing evolution

U.K. broadcaster Sky said it was on track with its full-year earnings on Thursday as the company reported revenues of £9.641 billion for the first nine months of its fiscal year.

A clear bright spot in what were a steady set of results in a rapidly evolving media landscape was Sky's announcement of a $250 million tie-up with U.S. cable network HBO to produce content until 2020. The deal to create high quality major drama series for distribution globally was a demonstration of the innovation for which Sky is known as well as a decisive step towards controlling costs in a climate where content and broadcasting inflation continue to spiral.

The company asked media analysts on a conference call to "look through" the hefty payment associated with purchasing the rights to broadcast Premier League football when reviewing the 11 percent slide in operating profits on a constant currency basis for the period.

Sky shelled out £4.2 billion ($5.39 billion) to secure exclusive rights for a 3 year deal during the first half of this financial year, reflecting the astronomic 70 percent uplift in the price needed to secure the agreement since the last time it won the contract due to steepened competition, particularly from domestic rival, the BBC.

The broadcaster did not reveal third quarter U.K. churn figures (turnover of customers), consistent with its regular patterns of financial results disclosure, and management resolutely declined when pressed on the call to provide further detail beyond its terse statement in the press release that "churn was stable on the prior quarter". The first half figure for churn to the end of December had garnered focus for being unexpectedly high at 11.6 percent versus the year earlier metric of 10.2 percent.

HBO and Sky announce $250 million production partnership

Jeremy Darroch, chief executive officer (CEO) of Sky, spelled out the challenges confronting the broadcaster in its home market, pointing to economic headwinds in the form of weakened retail sales, consumer confidence and house price inflation and noting that "the environment we're dealing with, therefore, at the margin, puts a little more pressure on the business."

However, he emphasized that he did not expect such factors to prevent Sky from reaching any of its goals and highlighted the positive customer satisfaction levels recorded of late. It must be said that these reviews have been achieved alongside the implementation of initiatives that could potentially negatively impact Sky from an operational perspective, such as allowing customers to roll unused data over each month, and a growing base of broadband-only subscribers who tend to demonstrate less loyalty to service providers.

Outside of the U.K., revenue and profits in the company's newer markets of Germany and Italy delivered a strong performance for the period, with Sky signaling a positive outlook for the final quarter of its fiscal year and further ahead.

The results come against the backdrop of the ongoing agreed takeover attempt by the Murdoch family's 21st Century Fox vehicle to secure the 61 percent of Sky that it doesn't already own for a bid price of £10.75 ($13.79). On Thursday morning, Sky's share price was trading at £9.83 – indeed, since the bid was announced, the shares have never traded higher than £10.00 -reflecting significant investor concern about the regulatory and political headwinds facing the deal.

"You'd expect the share price to be somewhere close to that (bid price) as opposed to being one pound away. So there are clearly some big question marks in the minds of investors as to whether the concerns over media plurality and indeed influence will win out and the deal will be scuppered," Richard Wilson, head of research at Wilson King Investment Management told CNBC's Street Signs on Thursday.

The current broker consensus of 'hold' for the stock makes sense, according to Wilson.

"Should the deal go through the share price is going to go up a pound pretty much overnight. If the deal doesn't go through, any premium that it might have had…obviously will be wiped out but that doesn't change the fact that the Sky underlying business is still a strong one."

Miguel Villagran | Bongarts | Getty Images