Spark 1H profit dips 5.6% as Southern Cross withholds dividend

Wednesday 20th February 2019

Spark New Zealand's first-half profit dipped 5.6 percent due to Southern Cross Cables deciding not to pay a dividend while it mulls the investment needed for a new underwater cable.

However, underlying earnings rose 7.2 percent as the country's biggest telecommunications company fattened margins in its mobile, broadband and cloud, security and service management units.

Net profit fell to $153 million in the six months ended Dec. 31 from $162 million a year earlier when Southern Cross paid a $28 million dividend. Spark's stake in the trans-Pacific telecommunications cable was diluted in December when Telstra came on board as an anchor customer for the new NEXT underwater link which is expected to be built by the end of next year.

In December, Spark adopted a new earnings measure and adjusted its guidance to reflect new accounting standards and listing rules, and its own restructuring to adopt 'Agile' working methods - where management structures are flattened.

Earnings before interest, tax, depreciation, amortisation and investment income rose 7.2 percent to $489 million in the half, with the ebitda margin widening to 27.9 percent from 25.9 percent. Revenue edged down 0.4 percent to $1.75 billion while operating costs shrank 3 percent to $1.27 billion. Spark's workforce shrank by 295 jobs from a year earlier, with 5,319 full-time equivalents at Dec. 31.

"Our transformation to a lower cost base, our improved and increasingly digitised customer experience, and the benefits already flowing from our Agile operating model have set Spark up with an enduring competitive advantage," chair Justine Smyth said in a statement.

The board declared an interim dividend of 12.5 cents per share, comprised of an 11 cent ordinary dividend and a 1.5 cent special dividend. It will be paid on April 5 with a March 15 record date.

Managing director Simon Moutter said the company is still working to deploy its 5G - fifth generation - mobile network by July next year at the latest. The company has wanted to be a front runner in rolling out the technology, which it wants in use for the 2021 America's Cup defence in Auckland.

Those plans hit a bump last year when technology from its partner - Huawei Technologies - was rejected by the Government Communications Security Bureau due to concerns over network security. While the initial rejection isn't the final say, the decision has stressed New Zealand-China relations, and a recent decision in the UK to find a work-around for British companies to use the Chinese firm's kit is being watched closely to see whether a similar solution can be used here.

"5G will be a big driver of future innovation – not only for our industry but also for New Zealand’s economy," Moutter said.

In presentation slides to analysts this morning, Spark said it was disappointed with the GCSB decision but hasn't settled on whether to submit a revised proposal. Irrespective of the outcome, Spark said it's confident that it can pursue its 5G plans, because it can use multiple vendors.

The company expects to fund the first phase of the 5G network within its existing capital spending envelope of 11-12 percent of revenues.

Spark affirmed guidance, including for capital expenditure of about $410 million in the year ending June, roughly 11 percent of forecast revenue of $3.53-3.6 billion. It still forecasts annual earnings of $1.07-1.1 billion, up from $989 million in the June 2018 year.

The company also announced the pricing plan for its foray into sports, at $19.99 a month, excluding the Rugby World Cup, with a one-month free trial when it's launched. A beta launch will occur in March.

Moutter said the Rugby World Cup pricing will be announced when the Spark Sport platform is fully launched.

"We are well on track with our planning for the Rugby World Cup in September. Pricing and plans for the tournament will be announced and put on sale in Q4 FY2019," he said.

Spark's mobile revenue rose 1.5 percent to $622 million in the half. Connections increased by 27,000 connections to 2.46 million as more monthly plans outpaced a decline in prepaid customers. And while average revenue per user shrank 2 cents to $27.56 a month, mobile gross margin widened to 60.5 percent from 58.1 percent a year earlier.

Moutter said more customers adopted higher-value plans in the half, with a doubling in the number of people on unlimited mobile plans in the period.

"This trend was also visible in the more price-sensitive end of the market, with a 16.1 percent increase in Skinny customers adopting a recurring top-up plan," he said.

The broadband arm lifted revenue 3.9 percent to $344 million in the half, with an increase in retail prices on copper plans and more customers adopting unlimited plans.

Broadband customer numbers were up 4,000 from a year earlier at 698,000. Of that, copper connections shrank 23 percent to 296,000, fibre connections were up 33 percent at 273,000 and wireless customers climbed 24 percent to 129,000.

"We made a change to copper pricing, to better reflect the higher costs of providing this service to customers versus newer technologies like fibre and wireless broadband," Moutter said.

Spark's cloud, security and service management arms increased revenue 8.9 percent to $195 million on strong customer demand. Voice, managed data and networks revenue shrank 13 percent to $346 million.

Voice connections dropped 22 percent to 431,000, and Spark is in the process of shutting down its old public switched telephone network and shifting people on to new infrastructure.

"We intend to further accelerate wireless voice connections by year-end and are working through how we can better explain the benefits to customers who may feel a bit wary of new technology," Moutter said.

Spark shares fell 0.5 percent to $4.01, trimming their gain the past year to 17 percent.

(BusinessDesk)

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