Edited Transcript of SPK.NZ earnings conference call or presentation 18-Feb-20 9:00pm GMT


Auckland Feb 19, 2020 (Thomson StreetEvents) — Edited Transcript of Spark New Zealand Ltd earnings conference call or presentation Tuesday, February 18, 2020 at 9:00:00pm GMT

BofA Merrill Lynch, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research

(inaudible) and welcome to Spark’s half year results announcement for the period ended 31 December 2019. I’m Jolie Hodson, CEO, and it’s my pleasure to welcome Stefan Knight as our CFO. I know Stefan will be known to many of you from his time in various capital markets, investor relations, financial and commission roles within Spark.

So I’m really pleased to share we’ve had a strong start to FY ’20 with revenue growth of 4% to $1.824 billion for the half year to 31 December. In my time at Spark, I had to remember the time when we’re seeing consistent performance growth across all of our key revenue areas, delivered through (inaudible) execution of our strategy.

Revenue growth was achieved by a particularly strong performance in mobile, with high-margin mobile service revenue up 5.5%, translating to a market share increase of 1.2 percentage points to 40.1%. And essential to strategy is our commitment to create a wireless future for New Zealanders. We’ve maintained growth in mobile revenues and average revenue per user over the first half, and it’s been driven by growth in higher value proposition for customers, such as our unlimited plans. As customers use their mobile phones more to do more, many are seeking larger data allowances and price certainty. And this, combined with some of the data-driven insight we’ve been doing, is providing an opportunity for Spark to improve ARPU with the right products and plans.

So with that context, Spark significantly outperformed our competitors in mobile, securing approximately 90% of the total market growth in mobile business revenues and achieving our highest market share since 2012. Revenues were also buoyed by cloud, security and service management with growth up 12.3%. Introduction of Spark Sport and a moderation in the rate of legacy voice declines is fixed. Line voice becomes a much smaller part of the business.

The broadband market remains challenging in the first half through a small decline in connections, following a deliberate decision to limit wireless broadband sales in the lead up to the Rugby World Cup. It was a conservative measure to ensure customers had a great viewing experience while introducing our new streaming service. Our capacity was more than sufficient, so we expect this to be a one-off in connection growth to return to trend in the second half with new wireless broadband plans and campaigns underway.

Our operating expenses increased as the benefit of cost-out activities were reinvested to partially fund current and future growth. This included the launch of the cloud and business transformation consultancy Leaven, the growth of Spark Sport, the acquisition of Now consulting as part of data analytics business Qrious, and the launch of the emerging technology business Mattr. We’re operating — obviously operating in a very dynamic industry. We need to maintain our focus on cost and productivity so that will continue to be part of our performance and focus to come into the second half of the year.

Just in terms of our broader media investment, we’ll continue to consider any new rights through the dual means of customer desirability and commercial return. We expect our overall investment in media to remain at a similar level to what it is today. A continued focus in Agile ways-of-working is delivering better experiences for our customers and our people. We’re seeing our customer satisfaction scores already hit its full year targets and customer care interactions are down 15% on the same time prior year. At the same time, we’re innovating in the market, at [Pike’s], we launched the Apple Watch with cellular a month ahead of the rest of the market, and it was delivered twice as fast as it would have been under the old model. And it’s one of the benefits that we see as a cross function of Sports and Agile.

We’ve also tightened our focus on the core with the divestment of Lightbox and CCL’s network assets and the merger of the cloud and ICT businesses CCL and Revera. At the same time, we’ve secured critical long-term access to international capacity for New Zealand, with the build of Southern Cross Next now underway.

So we’ve delivered first half net earnings of $167 million. That’s up 9.2%, and that’s despite intense market competition. We’re winning in mobile and cloud while entering new categories. We’ve accelerated our wireless network leadership. We’re tightening our focus on the core through targeted divestment and maturing one of New Zealand’s largest organizational transformation to Agile.

So we maintain our full year FY ’20 guidance for EBITDAI, CapEx and dividend. And Stefan will elaborate more on our capital management shortly. In terms of our 3-year strategy, that will build on the momentum and foundational capabilities we’ve established through the execution of our current strategy, and further context in detail will be communicated on our Investor Day on the second of April.

If we move to Slide 3, I just want to do an update on the wireless future of 5G. So Spark led the way by investing in our mobile and Internet of Things network to provide customers with world-class service and innovative products. We launched our 5G service in November 2019 with wireless broadband, which we see has the most immediate value for New Zealanders. We’re supporting Emirates Team New Zealand out on the water with our 5G solution, while our 5G lab continues to be a catalyst for R&D of 5G services as we work with our enterprise customers.

The early access 3.5 gigahertz spectrum auction, which commences in March 2020, is a key enabler of the broader rollout of 5G services, and we expect consultation on the longer-term rights to continue throughout 2020, with the long-term rights auctioned potentially in 2021. We’re well positioned for the rollout having already completed one of the most substantial capacity upgrades across our wireless network. Capital investment will remain weighted towards mobile as we roll out 5G, and we remain confident of our ability to achieve this within our capital envelope.

During the first half of FY ’20, we completed our 5G vendor selection. And as previously advised, we are taking a multi-vendor approach. This will enable us to adopt a best-of-breed approach to the technology. We have noted the U.K.’s recent decision to allow Huawei limited participation in its 5G mobile RAN network. Having already gained government approval for the use of (inaudible) equipment, we’ll work through the approval process for other RAN vendors, Samsung and Huawei, in due course, although our immediate focus over the next few months will be the spectrum auction which will help inform our 5G rollout plan.

Finally, I’d like to close on the scorecard, our FY ’20 indicators of success, and that’s captured on Slide 18. So we’ve made strong progress on many of these key indicators. And based on our performance to date, we have updated 2 of those key targets. Firstly, the mobile service revenue growth target has been updated from 2% to 3% growth to 4% to 5% growth, really to reflect the strong first half performance. Speaking on the other side of the equation, our first half target for wireless broadband is not achieved, as I noted earlier on the call. As a result, the growth target has been adjusted downwards from 30,000 to 20,000 to reflect this. We are confident in the plans we have for the second half to continue to grow our wireless broadband base, and it’s supplemented by the recent launch of our highest 600 gigabyte plan in Auckland.

We also continue to make progress towards a high-performing Agile organization. Our target is to increase Agile maturity to at least level 3 for 85% of our squads. While there’s still more to do to deliver this level of maturity, we are confident we will have achieved that target by the end of FY ’20. Finally, the target is successfully delivering the Rugby World Cup tournament with a platform uptime of 99.9% was not achieved due to the well-publicized issue in the early call game of the All Blacks versus South Africa. However, when we stand back and look at the tournament as a whole, the subscribers and performance against our plan, we’re pleased with our overall performance.

I’m now going to hand over to Stefan to run you through the key financials, capital management and guidance.

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Stefan Knight, Spark New Zealand Limited – Finance Director [2]

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Thanks, Jolie, and good morning to everyone on the call. I’m Stefan Knight, and it’s my pleasure to speak through my first interim result as CFO. So starting first up with a summary of the key financials as set out on Page 5 of the results summary pack for the half year ended 31st of December 2019.

Spark generated revenue of $1.824 billion, up 4% on the prior period. EBITDAI was $500 million, up $11 million or 2.2%. EBITDAI growth, combined with lower depreciation, mean that net earnings for the period were up $14 million or 9.2% to $167 million. The increase in EBITDAI is primarily driven by the strength of the revenue momentum over the period, and I’d like to step you through that in more detail now.

So over the period, we saw a positive revenue momentum across all the key product lines. A very pleasing outcome is the benefit Agile ways-of-working start to become evident, particularly in speed to market and customer experience. Mobile service revenues were a highlight with 5.5% growth, generating an additional $20 million of high-margin revenue. This growth was the result of a 3% lift in ARPU as we see demand for better data and as our customers transition to pay monthly accounts and drive take-up of unlimited data plans in both consumer and SME markets. And reconnections on these plans have now doubled since the same time last year.

We’ve seen strong improvements in conversion rates as we implement new campaigns based on data-driven insight around propensity to buy. So our total mobile connections grew 37,000, but most pleasing was the growth in the pay monthly base of 62,000. This was a key contributor to a 1.2% growth in mobile service revenue market share on the prior period. As a result of this momentum, we’ve increased our full year outlook for mobile service revenue growth to 4% to 5%, up from 2% to 3% target we’ve previously advised.

Moving on to cloud security and service management revenues, which increased 12.3% or $24 million. The growth here was driven in part by new large customer outsourced contracts that were previously transitioned and are now starting to move into service, along with a number of other smaller ones. Again, this is a really pleasing result. And as a result, we have good confidence in achieving our targeted revenue growth of 8% to 10% for the full year.

Voice revenue declines for the period totaled $26 million compared to $42 million in 8/24/19, as wholesale rates have declined moderate to more normal levels and voice becomes a much smaller part of our business. I’ll also draw your attention to other revenue, which has increased $19 million. The largest driver of this result is the launch of Spark Sport. However, it is worth noting that this category also includes revenues from our Internet of Things business and our data and analytics business Qrious, which also includes the impact of the acquisition of Now Consulting during the period. We will not be disclosing sports revenues or costs due to the commercial sensitivity in a highly competitive market.

As revenues have grown, we’ve also seen cost lift in support of this. Our cost of sales grew $44 million to support the revenue growth. Our labor grew $17 million, and this growth can be folded in 3 parts. So firstly, we added labor to support growth businesses. Examples include: the acquisition of Now Consulting to support Qrious, our data and analytics business; growth in IT services; and UFB for our new businesses such as Mattr, Leaven and Spark Sport. (inaudible) changed with lease efforts into building new assets as some of our large IT programs have now completed, and more of its effect spent on simplification and improvement of existing products, which results in more labor [spend] being expensed. This is in line with our full year CapEx forecast. However (inaudible), we continue to actively rebalance our workforce. And as legacy businesses shrink, we augment the workforce to match. And these reductions have partially offset the increases that I previously mentioned. Tight management of costs that impact both OpEx and CapEx were a strong focus in H1, and we delivered $29 million of benefit during the period and will continue to be a focus for the remainder of FY ’20 and beyond.

So moving down now to net earnings. Lower depreciation meant that new earnings for the period were up $14 million or 9.2% to $167 million. We note that while depreciation was lower for the half, the full year outlook is for depreciation in line with the prior year as we invest more in software-based assets with shorter lives and lease expenses increase as we open new stores, and we also moved into our new Christchurch office site. These costs are now included within depreciation and amortization.

As we look forward to the full year, I just wanted to touch on free cash flow, which was $50 million for the half. At the full year results previously, we communicated our aspiration to deliver $460 million of free cash flow. We remain confident in the delivery of the $460 million as our heavy H1 investment abates. And the 3 key areas that will drive substantial increase in H2, being the delivery of FY ’20 EBITDAI growth, as per our guidance, ensuring that CapEx outcomes are delivered within the $370 million envelope and that working capital grows by no more than $50 million. And I’ll just step through each of those now in turn.

So firstly, EBITDAI. Following the revenue momentum that we’ve seen in H1, we remain confident of delivering EBITDAI growth within the guidance range. And given the historical weighting of EBITDAI to the second half, this will provide a strong lift in cash flow. Secondly, CapEx. So CapEx is traditionally higher in the first half than the second as we invest in hardware and capacity to prepare for busy Christmas period, and particularly in this half as a result of a substantial upgrade to our mobile network. In H1, we incurred approximately 2/3 of the annual spend and will remain in line with our full year outlook of around $370 million.

Third, working capital. Our expected full year working capital growth of no more than $50 million would represent an improvement of at least $87 million on prior year growth. During H1, we saw growth of $31 million, which was $7 million better than the prior H1 FY ’19 working capital growth. However, H1 FY ’20 included us making 6 payments to Chorus in the half rather than only 5 in H1 FY ’19. So when normalized, working capital growth for H1 FY ’20 was $50 million better than the prior period. We’ve implemented new working capital policies to tightly manage cash conversion, and these are expected to restrict growth to no more than $50 million.

Moving now to net debt, which increased by $210 million in H1. This was the result of the seasonal timing of EBITDAI and CapEx and an additional tax payment, with 2 payments made in H1 and therefore only one in H2. However, in line with our expectation around growth and free cash flow during H2, we would expect net debt to reduce in the second half.

And finally, moving on to guidance. We are reaffirming FY ’20 guidance with no changes, subject to no adverse change in operating outlook. For completeness, that’s EBITDAI of $1.1 billion to $1.12 billion; CapEx of around $370 million and dividend per share of $0.25, at least 75% imputed.

So it now concludes the financial summaries, and so we’ll open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Sameer Chopra from Bank of America Merrill Lynch.

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Sameer Chopra, BofA Merrill Lynch, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research [2]

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Great result. I had 2 questions, maybe one for you, Jolie, and one for you, Stefan. So Jolie, what are you seeing in terms of the mobile market right now? Like, it was really good to see the ARPU step up. I was just wondering, do you see this as being sustainable? Are the competitors following through? Should we continue to expect to see sort of good ARPU momentum in the business?

And the second one, Stefan, just for you. We’re in a low interest rate environment. And I was just wondering, in your discussions with rating agencies, what are you hearing from them about your gearing target? Do you think there’s room to increase gearing further? Do you think the rating agencies will give you that sort of flexibility?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [3]

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Okay, Sameer. Thank you. On the first question around ARPU momentum and what we’re seeing in terms of the mobile service revenues, a lot of it has been driven, obviously, by consumer demand. And we see them using more data to do more and more on the move, and that’s what’s driving this (inaudible) from both prepaid to post-paid within postpaid up into unlimited. And that’s leading to a higher service revenue.

So when you look at the trends and you look at everything that’s happening, it’s hard to say that we won’t continue to see a trend of consumers wanting to use more data. And then you think about the context in our markets as well, which has been more predominantly weighted to a prepaid market than many international markets. I think we can look at that trend and say we would expect it to continue.

The other thing to just call out in relation to that is what we have seen is some abating of the business. (inaudible) previously, we’ve had quite good growth in consumer ARPU, but business has been declining at a rate over a number of years. What we’ve seen is SME customers are also opting into the unlimited type plans, which is also leading to a growth in terms of more flattening of that rate of decline. It hasn’t completely stopped, obviously, but it has looked to abate. When you put those 2 things together, I think that’s what — why we’ve also made a decision to upgrade, obviously, our growth target for the FY ’20.

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Stefan Knight, Spark New Zealand Limited – Finance Director [4]

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Okay. Thanks, Jolie, I’ll pick up your second question now, Sameer. So we’re obviously in constant discussion with the rating agencies. So while the cost of debt does get cheaper, we’ve had no formal indication from the rating agencies that the D&A change in our — in the way they calculate the headroom for our ratings purposes. And therefore, we continue to focus on net debt-to-EBITDA of 1.4x on a long run basis. Yes. So that — we consider that policy to remain appropriate for the time — for now.

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Sameer Chopra, BofA Merrill Lynch, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research [5]

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Can I just ask a follow-up just on interest and depreciation sort of things? What’s the pacing in terms of debt that’s coming up for refi? And then you mentioned that D&A would be similar in the full year as it was last year, which means the second half we’ll see a little pickup. Where is the software investment happening? Kind of think where in the CapEx would I kind of see it? Is the vast majority of your CapEx right now software?

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Stefan Knight, Spark New Zealand Limited – Finance Director [6]

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So I can pick up. So first of all, if we pick up the question on depreciation and the investment in assets. So mostly, it’s in software assets, and particularly, we’re investing heavily into both IT systems, which we’ve been previously invested in over the past number of years. But going forward, it’s into database platforms and also into journeys for our customers’ development of app, things like that. So that will come through in some of their intangibles lines. And those assets, obviously, have a shorter life than some of our physical hardware. So as a result, we see a shortening of asset lives over the period, and that will drive depreciation back to more normalized levels. We also have — following the changes in IFRS 16, we have now lease expenses sitting in the depreciation and amortization category. And with some new stores coming online, plus a new Christchurch office site, those things will increase that spend. So as I’ve previously said, we would expect the long-term outlook for depreciation and amortization to be similar with what we saw last year.

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Sameer Chopra, BofA Merrill Lynch, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research [7]

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Just into debt refi, is there anything significant coming up?

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Stefan Knight, Spark New Zealand Limited – Finance Director [8]

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Nothing substantial. We have got some — our portfolio has a mix of 10 years across periods. And so we will have some refinancing coming up in the normal course of events, but nothing out of the ordinary.

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Operator [9]

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Your next question comes from the line of Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division – Research Analyst [10]

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Just 3 for me, please. Firstly, just again on the mobile outlook. Just in terms of your 5G mobile pricing, can you just remind us how you’re thinking about monetizing that investment and so if — whether you think about charging for access separately? Secondly, just on the labor cost growth. I’m sure we’ll talk about it a bit more at the Investor Day, but can you just comment on how we should be thinking about this outlook, given what looks to be a stronger revenue environment? And then finally, just the Southern Cross Next cable. Now that investment has been finalized, can you just talk about how we should be thinking about the dividend profile from that in FY ’22 and beyond?

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Stefan Knight, Spark New Zealand Limited – Finance Director [11]

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Okay. So if I can start off by picking up the questions on 5G pricing. So the only price we’ve released today is around our wireless broadband product, which is where customers see the most (inaudible) rates. so that’s what we’ve launched first. Due to the additional value that we believe the new product offers, we’ve launched it at a $10 premium. However, because it is a new product and we are keen on driving uptake, we have got a 12-month discount on that $10 premium and to drive take-up, as I mentioned. We haven’t yet released pricing on 5G mobile, we will do so in due course, as we’re ready to come to market with that.

In relation to labor cost growth. So as I mentioned, there’s 3 drivers of the current. So first of all is the investment in the new, particularly into our growth areas. Second is a shift in mix as we see more of it expensed as our people spend more time to — we’ve gone existing products rather than building new capital assets. But it is important to note that while those 2 things have turned labor cost up, we’re continuing to rebalance the portfolio. So as parts of our legacy business are in decline, we continue to look for ways to drive efficiency.

So thinking about it, and then longer term, we would expect that same trend to continue and we’ll continue looking for opportunities to drive more efficiency of our labor workforce, particularly as we automate more of the — more of our systems and there’s more digital interaction between our customers and our contact centers, so a combination of those things. I mean, in the long run, we would still see opportunities to drive growth efficiently.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [12]

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I mean the reality is we work in an industry where we constantly need to manage by cost and revenue growth. And we’re very aware of that, so the programs we have in place focused on that. And you’ll see in the first half, we delivered savings around $29 million, which was reinvested in the growth of some specific acquisitions and growth lines first half. But no — definitely no effect in the second half.

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Stefan Knight, Spark New Zealand Limited – Finance Director [13]

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And I think the third question, which was around Southern Cross. So in FY ’21, we would expect minimal dividends in relation to that and then there’ll be some growth from there. To be honest, it’s still too early to say, so we will update you as we learn more of those. I wouldn’t even think substantial in FY ’21.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [14]

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And obviously, it would depend on capacity sales, how much of that is an advance, will affect by the equity investment levels and the dividend profile within that. So as we get closer to that time, if we have more information, then we will share that with you.

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Kane Hannan, Goldman Sachs Group Inc., Research Division – Research Analyst [15]

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Just, I suppose, given the premium in the wireless broadband 5G product. Is there any reason you wouldn’t be on a charge of premium on the mobile product?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [16]

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Look, we need to stand back in order to — but from a community point of view, we need to look at that when we’re ready to launch a 5G consumer. But obviously, you can see our intent around broadband.

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Operator [17]

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Your next question comes from the line of Arie Dekker from Jarden.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [18]

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Just firstly on fixed wireless. The momentum slowed, obviously, over the last sort of 6 to 12 months in both voice and broadband. I guess sort of looking ahead, what sort of initiatives over the next 12 months have you got in that space? And I mean, you’ve got 20,000 guidance for the rest of this year, but do you sort of see the availability of 3.5% spectrum around the middle of the year is giving you an opportunity to kind of push harder into that space again?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [19]

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Yes. I think I’ll recommend you to the 2 categories in terms of wireless broadband. In part, obviously, we made the decision around where we will cut to slow that. As we look into the second half, though, we’ve launched larger plans, the 600 gigabyte, which obviously opens up your addressable market, too, in terms of the people that will choose to consume that. And we continue to look at that across the country to make decisions in relation to that. I think with 5G, clearly, that provides greater capacity. And as we get past the early auction for the spectrum and we start to roll out our broader plans. We would be focused on (inaudible). So we see opportunity within that. And they’re going to be the main types of areas that we will see growth come from because of, basically, you’re opening your coverage area and you’re opening your capacity up to more addressable households.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [20]

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On voice?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [21]

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Sorry. And on voice — so on voice, we obviously had lighter share. We had the recall on the battery pack. And so we have been working through that and looking at opportunities around that, that are stored really for this half. As a result, we’ll continue to focus on that. There isn’t necessarily any easy ones there. So I think at this stage, I’d say moderate. It’s something we’ll focus, but it’s not a — I won’t say the big driver of change in our results over the next 12 months.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [22]

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Yes. And just in terms of broadband connections, are you happy to continue to take the current approach, which is to like — to perhaps a pretty small amount of customers are in favor of just talking — focusing on gross margin and your initiatives in more with wireless in particular.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [23]

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Look, I think from my perspective, we need to be retaining those customer relationships, and we will want to do that. Clearly, while it’s probably a bit of a drag for us over the last few years, as well as fiber and the claims that we have with unplanned, so our focus is certainly not to just let it fade away and saying that it’s a highly competitive market with over 80 other competitors there. So I think whilst we’re coming back on track, I’d expect us to see that lift up.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [24]

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Sure. I mean — and other — just turning to other products. And I guess, there’s a few things in there that you’ve called out like Sport, obviously, a reasonably big one. There’s — there was a transition, I guess, in that first half in terms of where you’re directing some of your spend. And you’ve obviously looked at the white box. Should we expect the same sort of negative in terms of further reduction in other product gross margin in second half associated with Sports having a different cost and revenue profile to white box?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [25]

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Yes. How I think about it, Arie, is if you look at our total investment in media over the period, it should speak to a similar investment profile in the second half within that.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [26]

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So you would expect to see through the — like the level of other product gross margin sort of stabilize around the first half ’20 level? Or do you think it will go back further?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [27]

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No, I think it just stabilize around it. When you look at overall (inaudible), obviously, a lot look familiar as well and so it…

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Arie Dekker, Jarden Limited, Research Division – Head of Research [28]

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I mean — I guess that you’ve called out and then it’s pretty apparent in your investing cash flows that there was a big first half (inaudible) and there are a few other things that sort of working capital, but it had grown in terms of quantum. Looks like it will finish this year, I don’t know, maybe $100 million to $200 million. Are there any plans when you sort of look across your activities to sort of divest to increase the headroom for growth investment?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [29]

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I think when you look at our portfolio, I’ll always be looking at — we should we be in business in and it doesn’t just make sense to do by the time of the call. But it’s potentially — that review, obviously, it’s part of the strategy. But we can stand back from that already. So the (inaudible) networks, the Lightbox part of that activated on that. We have the investment in (inaudible) in Australia. But that is obviously tied up in the whole transaction that’s secured in Australia, and we’re very much — we’ll be very interested at it. We probably don’t get huge amount control in relation to that right now. So it will be something we will keep an eye on. And then in terms of acquisitions, it really would be similar to what we’ve had in the past years around there’s something of material impact to our growth with revenue opportunity and to make the right return, then we’ll consider it within that.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [30]

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But you’ve been comfortable for now — so be you’d be comfortable for now running with that?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [31]

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Yes.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [32]

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So you’re comfortable running with that quite low headwind for now?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [33]

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Yes. I think with the discipline around both capital and working capital and then the earnings growth that we are seeing, it’s appropriate for the business as it stands today. Of course, we always seize an opportunity that came that we thought was significant, we would register position there.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [34]

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Sure. And then last question, just in relation to voice. And I think you gave a breakdown in the presentation between consumer business and wholesale. I mean is it still your view — it looks like there’s a little bit of decline happening in business as well. Is it still your view that the voice revenues will kind of stabilize eventually around that business core? Or are you also sort of saying businesses moved away from fixed voice to mobile only?

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Stefan Knight, Spark New Zealand Limited – Finance Director [35]

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Look, I’ll take that one, Arie. So in the longer term, there’s obviously 3 parts to our voice business. We would expect wholesale — the rate of decline here has moderated substantially, but we do think that will continue to abate but at a more consistent level. And business, yes, I think you’re right. The — there is a long-term market here, but I doubt it’s at the same levels. So we know that businesses continue to have need for a fixed line or for their business purposes. We know that the trend will also be for a shift from the legacy copper-based products onto IP-based products. So it will — there’ll be a market here, but it into mobile, so there’ll be a market there but lower ARPU, but also at lower cost. And then consumer will continue to decline at kind of similar rates would be my estimate.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [36]

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Yes. It’d be positive for us as we look at this as we have such a smaller part of our business now. So even at that rate of decline of [57] and around that 12% ongoing, the actual impact to us the capitalized smaller.

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Stefan Knight, Spark New Zealand Limited – Finance Director [37]

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Yes.

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Operator [38]

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Your next question comes from the line of Brian Han from Morningstar.

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Brian Han, Morningstar Inc., Research Division – Senior Equity Analyst [39]

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Jolie, you have made a distinction between Lightbox and Sport streaming. I was wondering what makes…

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [40]

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Sorry, Brian. I can’t quite hear you. Are you able to just pick up?

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Brian Han, Morningstar Inc., Research Division – Senior Equity Analyst [41]

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Yes, sure. Can you hear me now? Is that better?

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Stefan Knight, Spark New Zealand Limited – Finance Director [42]

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Yes.

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Brian Han, Morningstar Inc., Research Division – Senior Equity Analyst [43]

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Is that better?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [44]

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Yes. Can you hear?

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Brian Han, Morningstar Inc., Research Division – Senior Equity Analyst [45]

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Yes. So Jolie, you have made a distinction between Lightbox and Sport streaming. I was wondering what makes Lightbox a noncore business versus Sport streaming, which remains a core business. And my second question, perhaps to Stefan is, on the legacy voice business, how does its contribution or EBITDAI margin now compare to the mobile EBITDAI margin?

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [46]

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Okay. So if I just pick up the question around difference between Lightbox and Sport. I think if we look at the general entertainment, its broad market and how that’s developed over time, I think what we’ve seen is there’s probably room for one local player. In our perspective, we’re not the best natural owner of that — the entertainment content, and we see the combination with Sky and the opportunity to provide that to both our customers and others in the market is a better outcome. I think what’s different in terms of there’s a lot more local events within Sport. We’ve identified rights that we think are valuable. We have a wide range of rights already in terms of like Formula 1, English Premier League, with the NFL. We’ve obviously got cricket starting later in the year. And so we’ll always look through that lens at Sport in a similar way in terms of 2 lenses: customer desirability and commercial value. So from my perspective, they’re 2 different categories, and we don’t see ourselves as content holders in general entertainment because of the global trends we’ve seen, which describes a bit of owners and ourselves. But in Sport, we do maintain that platform but also the content that we have.

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Stefan Knight, Spark New Zealand Limited – Finance Director [47]

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So picking up your second question around margins. So obviously, now that we are no longer the owner of the core network infrastructure business, the margin across voice and mobile is far more similar. So — and I think we disclosed it in our KPIs and in appendix around our product margins. So I think your question was, how do the margins compare? And the answer would be they are relatively similar.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [48]

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(inaudible) after the call

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Stefan Knight, Spark New Zealand Limited – Finance Director [49]

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That’ll be fine (inaudible)

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [50]

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Yes.

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Operator [51]

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(Operator Instructions) Your next question comes from the line of Phil Campbell from UBS.

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Philip Campbell, UBS Investment Bank, Research Division – Analyst [52]

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Just 3 questions from me. The first one, Stefan, was just when I look at the first half second half split, obviously, looks as though the seasonality has gotten more skewed than what I was expecting. And it kind of obviously implying probably, I don’t know, 35% type margins in the second half. I was wondering if you can kind of run us through, obviously, that would require some, I suspect, cost reduction in the second half compared to the first half. So I was just wanting to get a bit of an idea of where we’re seeing that. The second question was just on the 5G limited-use spectrum. I just wanted to get a view on what you thought in terms of the spectrum bands, if there’s any challenges there, given it’s going to be for like 2.5 years and then obviously the proper spectrum will come online in late 2022.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [53]

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So sure, I think that’s a spectrum conversation. So obviously, the early access rights. We’re still doing as we work through the auctions to staying the bands that will be available. And it is a 2-, as you pointed out, a 2-year, 2.5-year rights, depending on how long the consultations take. What we ideally have had 1 long-term auction and get the bands for a period of 18 to 20 years. Absolutely. But we’re also very cognizant of the need to get in market with 5G. So we think early access auction is our best opportunity for that. So we’ll continue to work with both government and in our own teams to ensure that we position ourselves in the best place to either maintain it in the same spectrum bands that we will get through or hope to fit for through the early auction process.

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Stefan Knight, Spark New Zealand Limited – Finance Director [54]

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Okay. And so to pick up your question on seasonality. So first of all, I’m happy we can take it offline with you after. But when we look at the numbers, we think the seasonality looks to be pretty consistent with what we’ve seen for the last couple of years. So certainly, last year, it was a 45-55 split, and we’re tracking towards a similar type result. If we then look at margin, there’s — there’ll be 3 things that are really driving uplift in the EBITDAI margin in the second half. So firstly is the strength of the mobile service revenues that we carry into the period. That obviously will be a key driver. Secondly, there will be some continuation of strong IT services. And third, the majority of the cost-out programs that we run, we establish the programs in the first half. We get them up and running, and the majority of the benefits tend to fall in the second half of the year. So when you kind of weigh up all those 3 things together, it gives us confidence around the delivery of second half guidance.

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Philip Campbell, UBS Investment Bank, Research Division – Analyst [55]

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Yes. Great. And sorry, just have a quick follow-on just on the mobile again. I noticed the postpaid ARPUs are pretty flat. I still felt there was pretty intense competition in the enterprise space. I was just, yes, surprised that was obviously a pretty good outcome…

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [56]

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When you look at that business, we do (inaudible) huge amount of SMEs businesses as well. And I guess that there will continue more data in a similar way and on the move. We’re seeing unlimited plans, like they are for consumers, attractive. They also have the business and that’s leading to probably people moving from more fixed uplift to small mobile. So at the enterprise level, it is very competitive. But it’s not really within

that may move us.

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Stefan Knight, Spark New Zealand Limited – Finance Director [57]

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Yes.

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Philip Campbell, UBS Investment Bank, Research Division – Analyst [58]

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Okay. Awesome. Thank you.

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Stefan Knight, Spark New Zealand Limited – Finance Director [59]

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Thank you. Okay.

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Jolie Hodson, Spark New Zealand Limited – CEO & Executive Director [60]

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Okay. Thank you, everyone. We’ll end the call now.



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