CHIEF EXECUTIVE'S STATEMENT
For several years, Sky has been pursuing a clear and consistent strategy with the goal of building a larger and more profitable business. This is designed to take advantage of two fundamental trends in today's marketplace, which come together to create a significant opportunity for our business. We see that customers are increasingly willing to pay for a better television experience and they have a growing appetite to take multiple products from a single, trusted provider. In both cases, Sky is well positioned to benefit.
Aligning the business with those trends, our strategy is focused on two legs of growth. First, we continue to grow our overall customer base and, second, we are increasingly focused on selling more products to existing customers. Our approach is based on the combination of disciplined investment in areas where customers see value and a strong focus on operational efficiency, with the aim of striking the right balance between growth and returns.
Our performance over the last 12 months - and over the last few years - gives us confidence that our strategy is working. More customers are choosing Sky than ever before and they are choosing to take more from us. Not only have we grown our customer base by almost 1.3 million over the last three years, we have also sold a total of 8.9 million additional subscription products over the same period. As customers have rewarded us with more of their business, it has driven increased average revenue per customer and helped to maintain our strong levels of loyalty and retention.
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Despite continuing pressure on household budgets and an uncertain economic outlook, our rate of growth has remained strong during 2010. This is testament to the importance that people place on their home entertainment experience; an importance that is now widely recognised. But it also reflects the steps that we have taken over a number of years to make continuous improvements to the value, quality and range of our offering. There are a number of strands to the way in which we are creating more reasons for new customers to consider Sky and adding more value for existing customers.
First, we never forget that the main reason why customers join Sky is for a better choice of TV viewing. That is why we have continued to invest in stand out content, widening the gap between what customers get from free-to-air TV and the enhanced choice they can enjoy with Sky. This year, we have extended our entertainment offering on Sky1 with more original drama such as Chris Ryan's Strike Back and more family entertainment such as Got to Dance with Davina McCall. Sky Arts has gone from strength to strength, reaching almost two million viewers a month with a highly distinctive schedule including the return of live theatre to UK television. Sky Sports has had another successful year, with England's Ashes victory and more live UEFA Champions League, while Sky Movies brought viewers the ground-breaking World War II drama, The Pacific.
Second, we look continually for new ways to bring content to life through innovation. A powerful example of how customers respond to a better viewing experience is provided by the success of high definition (HD), which is now in 30% of our customers' homes with penetration more than doubling for the second successive year. During 2010, we've made HD more accessible to viewers by lowering the upfront cost of the Sky+HD box, while further expanding the range of HD channels, including the launch of Europe's first high definition news channel, Sky News HD. The growth of HD is an attractive area for us to invest, opening up a high-margin revenue stream and differentiating our product from the competition. In October 2010, we'll move forward again with the launch of 3D television to residential customers via the existing Sky+HD box, following a successful launch in commercial premises last year. We'll also continue to extend distribution of our Sky Player and Mobile TV services, opening up new ways for customers to access our content through devices like the iPad and Xbox.
A third area of focus is the opportunity created by our entry into the arena of home communications. Today, one in five customers take all three of TV, broadband and home telephony from us and there is a significant opportunity for further growth. Our proposition is based on value, reliability and simplicity, offering our customers the opportunity to enjoy a high-quality service and save money when they switch from their existing phone or broadband provider to Sky.
Alongside sensible investment in customer-facing areas of the business, we have focused equally hard on operational efficiency. After scaling the business to manage a stepchange in demand, we have made good progress in making our cost base more efficient, in particular by simplifying processes in our supply chain and back office functions.
This approach is translating into strong financial results, with double-digit growth across the board this financial year. Group revenue increased 11% to £5,912 million on an adjusted basis. Adjusted operating profit increased by 10% to £855 million, demonstrating accelerated returns as we move through our investments in high definition and home communications. We delivered record adjusted basic EPS of 31.1p, up 20% year on year, with reported EPS increasing to 50.4p reflecting both the EDS litigation settlement and the partial disposal of our investment in ITV. Adjusted free cash flow grew by 23% to £626 million.
We look continually for new ways to bring content to life through innovation.
It is notable that this strong financial performance has been achieved during a year of continued investment. This indicates that our approach - of combining disciplined investment with a continuous focus on operational efficiency - is delivering the right balance between growth and returns. We intend to maintain this balanced approach going forward, as we believe it represents the best way to create value for shareholders.
While 2010 has been a good year for Sky, there are challenges ahead. Last year, Ofcom concluded its Pay TV Review with a ruling that Sky must wholesale some of its premium channels at regulated prices to other distributors. We believe that this is the wrong decision and that our prices are fair, both for consumers and for the other companies which carry our channels. This is a marketplace in which customers are very well served, with more choice and more innovation than ever. We have begun an appeal process.
Beyond the challenge of unwarranted regulation, the outlook for the economy and consumer spending remains uncertain, particularly as the new government takes action to reduce the budget deficit. At the same time, we continue to operate in a competitive and dynamic marketplace, in which both existing players and new entrants are challenging for customers' attention and business. As we move into the next financial year, we intend therefore to maintain a high degree of flexibility in order that we can respond to both challenges and opportunities as they arise.
It is important to emphasise that the scale of the opportunity ahead of us remains substantial: around half of UK households have yet to choose a pay TV service and almost 80% of our existing TV customers do not yet take both broadband and telephony from Sky. Notwithstanding factors outside our control, we believe that, with a clear direction and a consistent set of priorities, the business is in good shape to take advantage of these opportunities.
We're proud of the contribution that Sky makes to life in the UK and Ireland: opening up more choice, investing in great TV, innovating for customers and contributing to the wider economy. But we want to go further by using our capabilities to make a difference to the issues that people care about.
In addition to our commitment to doing the right thing in our day-to-day operations, we focus on three areas where we believe we can make a real difference: helping to protect the environment and tackle climate change; encouraging participation in sport at every level; and opening up the arts to more people. This has been a year of good progress in each of these areas.
We are taking more action to minimise our environmental impact through a new set of challenging targets, including a 25% reduction in gross CO2 emissions (tonnes/£m turnover) by 2020. Beyond our own footprint, we have launched a new project with WWF, Sky Rainforest Rescue, to help protect three million hectares of rainforest in Brazil. Fundraising is on track and the project is progressing well on the ground.
In sport, around 100,000 people of all ages and abilities joined in our Sky Ride programme of traffic-free events in its first year. For summer 2010, we've doubled the number of cities hosting Sky Ride events and, in parallel, we hope that our new professional road racing team, Team Sky, will provide inspiration as it competes in its first season.
This year also saw the 1,000th school join our Sky Sports Living for Sport initiative, which uses participation in sport to inspire young people to be the best they can be. The initiative, run in partnership with the Youth Sport Trust, has already reached more than 25,000 students to date, helping them to grow in confidence and self-esteem.
Alongside our portfolio of Sky Arts channels, we're also one of the UK's largest corporate supporters of the arts, partnering with organisations like English National Ballet and supporting events such as the Hay Festival. Our partnership with Artichoke, the UK's leading public art producer, has delivered a number of exciting projects this year, including Antony Gormley's One & Other project in Trafalgar Square and the Lumiere festival of light in Durham.
Initiatives like these are not just the right thing to do; they are good business. They give people more reasons to join Sky and stay with us, whether that's customers, employees or business partners. We see this as a vital component of long-term, sustainable success.
Our talented people, as always, are the key to that success. I would like to thank them for the commitment, creativity and energy that they bring to Sky every day.
Finally, it is appropriate to restate here that on 15 June, the Company announced that our largest shareholder, News Corporation, had approached the Board with a proposal that could lead to a future offer to take full ownership of Sky. Recognising that an offer could be in the interest of shareholders, Sky has agreed to co-operate with News Corporation in seeking the necessary clearances from the relevant regulatory authorities.
While this process continues, the Company's Independent Directors have put in place structures to uphold the interests of all shareholders. As part of these arrangements, Nicholas Ferguson, the Senior Independent Non-Executive Director, has been appointed as Deputy Chairman of the Board. The management team remains fully focused on executing against our priorities, delivering for customers and increasing returns for all shareholders.
Total Sky TV customers
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Sky Sports broadcast live cricket almost every week of the year, including coverage of England's victories in the Ashes series and the ICC Women's World Twenty20 2010.
Novelist Will Self takes Sky Arts 1 into his confidence as part of our series of intimate and probing interviews.
ATP WORLD TOUR FINALS
Sky Sports showed more than 60 hours of live coverage from the Barclays ATP World Tour Finals from the O2 in London.