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UPDATED: Spark annual profit falls 7.9% as Quantum costs kick in

Wednesday 22nd August 2018

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Spark New Zealand posted a 7.9 percent decline in annual profit as the country's biggest telecommunications company booked restructuring costs as it chases the mantle of being the lowest cost operator. 

Net profit fell to $385 million in the 12 months ended June 30 from $418 million a year earlier, the Auckland-based company said. That included an additional $49 million of costs from adopting an Agile working structure through the company's Quantum programme. Stripping out those restructuring costs, earnings before interest, tax, depreciation and amortisation rose 2.2 percent to $1.04 billion on a 1 percent gain in revenue to $3.65 billion, in line with Forsyth Barr analyst Matt Henry's forecast. 

"We are one of the first large companies in Australasia to make the move to Agile at scale in such a short space of time," managing director Simon Moutter said in a statement. "Our move has attracted a lot of interest from other companies – here and overseas – who are grappling with the same issues of uncertainty and technological and market disruption." 

Spark is already starting to reap the gains from the Quantum programme, reducing its labour costs by $82 million to $499 million. It anticipates further gains, with a view to cut its wage bill to $470 million in the year ending June 30, 2019. Spark cut permanent headcount to 5,266 from 5,554 a year earlier, while employing an extra 21 contractors, for a total of 241. 

The board declared a final dividend of 12.5 cents per share, made up of an 11 cent ordinary dividend and a 1.5 cent special dividend. The dividend will be paid on Oct. 5 with a record date of Sept. 21, and takes the annual return to 25 cents, or $458 million. 

The company used $73 million of debt to reach its targeted dividend payments due to the cost of rolling out the Quantum programme, but expects earnings growth to "reduce the amount of any debt required to supplement dividends". 

Net debt grew to $1.16 billion as at June 30 from $974 million a year earlier, and Spark said it expects to make a five-and-a-half year retail bond offer next week. Westpac and ANZ Bank New Zealand have been appointed joint lead managers. 

Spark gave guidance suggesting flat performance in the year ahead, with forecast ebitda of $1.03 billion to $1.06 billion in the 2019 financial year on revenue of between $3.6 billion and $3.67 billion. It expects to maintain its annual dividend at 25 cents per share. 

"In the coming year, we are focused on capturing the advantages the Agile way of working will deliver for us: highly engaged and productive people; a total focus on what matters for customers; and the ability to deliver new products and services – and improve existing ones - faster than ever before," Moutter said. 

Spark outlined aspirations for 5G moblie technology earlier this month, saying it expects it can upgrade its network within current capital expenditure policy of 11-to-12 percent of revenue. The company spent $413 million on capex in the 2018 financial year, or 11.3 percent of operating revenue, and expects to maintain that level of spending in 2019. 

The company's home, mobile and business division lifted earnings 2.1 percent to $871 million on a 1.2 percent revenue gain to $2.07 billion. The retail unit, which includes the Skinny, Bigpipe and Lightbox brands, was boosted mainly by mobile customer gains. 

Spark digital increased earnings 4.2 percent to $40 million on a 2.1 percent gain in revenue to $1.26 billion, largely through IT cloud, security and managed services.

Its connect & platforms division reported a smaller operating loss of $326 million, while its ventures unit posted a 15 percent decline in earnings to $110 million as it phased out legacy services for wholesale customers. 

Spark said dividends from the Southern Cross Cable fell $11 million to $50 million in the year and are expected to fall a further $10 million to $20 million "as the level of pre-purchased capacity from large customers decreases." The trans-Pacific submarine cable lost its monopoly position with joint venture between Spark, Vodafone and Two Degrees Mobile linking New Zealand and Australia, and more recently the launch of the Hawaiki cable spanning the Pacific. 

The shares last traded at $3.98 and have gained 10 percent so far this year, outpacing an 8.6 percent gain on the S&P/NZX 50 index over the same period. 


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