SKY Sky

(Rewrites, adds detail.)

By Simon Zekaria

LONDON--Sky PLC's (SKY.LN) earnings climbed Thursday as subscriber growth and demand for new products in the U.K. and Germany pushed up revenue, but shares in the pan-European satellite broadcaster and pay-TV giant fell amid concerns over the company's outlook.

Sky, Europe's biggest pay-TV group by customer numbers, said operating profit before exceptional items--a key measurement of business performance--in the nine months ended March 31 rose to 1.14 billion pounds ($1.64 billion) from GBP1.03 billion in the same period a year earlier, and in line with market expectations. It didn't disclose net profit.

Revenue increased to GBP8.72 billion from GBP8.45 billion, also in line with forecasts.

"It's been another strong quarter for Sky," Chief Executive Jeremy Darroch said.

Sky is 39%-owned by 21st Century Fox Inc. (FOXA), which until June 2013 was part of the same company as The Wall Street Journal parent News Corp (NWS).

Still, at 1324 GMT, shares fell 5% to 977 pence, valuing the company at GBP17.7 billion.

Morningstar analyst Allan Nichols said the stock is overvalued, which is depressing market sentiment. He said investors are aware the company faces challenges to its business centered around the firm's ongoing battle to secure prized soccer broadcasting rights.

"The firm reported that revenue increased 5% year over year, with 6% growth in the U.K. and 10% growth in Germany partially offset by a 2% decline in Italy. The firm added net subscribers in all its markets, which is particularly impressive in Italy, considering that it lost the rights to Champions League soccer," said Mr. Nichols.

"That said, we remain concerned with Sky's ability to drive revenue growth in its Italian business. In the U.K., the Premier League is much more important than Champions League, so we are much less concerned about the lost rights in the UK."

"The firm's cost control is continuing, enabling its margins to increase. Its operating margin jumped by 12% year over year, but we expect this improvement will reverse when the next Premier League contract starts in fiscal 2018," said Mr. Nichols.

Charles Huggins, analyst at Hargreaves Lansdown, also said soccer rights are proving a cost burden for Sky.

"Profit progression over the next few years could be lumpy, as Sky seeks to absorb GBP630 million per annum of additional Premier League rights costs. The group are currently in the process of bidding for German football rights, with analysts expecting around a 40% increase in costs. Even so, by June 2018 analysts are forecasting earnings per share of around 70 pence, a 26% increase on the last financial year."

Sky is battling with other media companies across Europe as operators seek to gather in customers by securing subscriptions to services across Internet broadband, telephony and TV. The prize for soccer rights is fierce as broadcasters hone in on the popularity of the sport to win eyeballs.

Write to Simon Zekaria at simon.zekaria@wsj.com

(END) Dow Jones Newswires

April 21, 2016 10:03 ET (14:03 GMT)

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