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2degrees earnings rise 6%; handset sales underpin revenue gains

Friday 29th March 2019

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Two Degrees Mobile lifted annual earnings 6 percent in 2018 as the country's challenger mobile network sold more handsets, beating expectations on a common-currency basis. 

The New Zealand arm of Trilogy International Partners reported adjusted earnings before interest, tax, depreciation and amortisation of US$90.4 million in calendar 2018, up from $US$85.3 million a year earlier. In New Zealand dollar terms, the increase was 9 percent, eclipsing the 5-7 percent increase it had expected. 

Sales rose 7 percent to US$556.4 million for 2degrees, despite a 3 percent decline in its core wireless service revenue to $US$265.9 million. The broadband revenue from its Snap acquisition rose 8 percent to US$61.8 million, while handset sales jumped 24 percent to US$217 million. 

About 12 percent of total sales were to a local retail reseller, which is the company's single biggest customer. 

The Kiwi telco shifted more mobile customers on to its fatter margin contracts, adding a net 34,100 postpaid connections to 430,200. It shed a net 59,600 prepaid customers, which generate less than half the monthly revenue per user than a postpaid customer, and had 965,400 at Dec. 31. Total mobile connections fell 6 percent to 1.4 million. 

Rival Spark New Zealand added a net 28,000 mobile customers, or 1.2 percent, over the course of calendar 2018, with 2.44 million connections at Dec. 31. Vodafone New Zealand's 2.52 million mobile connections at the end of December were up from 2.49 million a year earlier. 

Trilogy International Partners reported a loss of US$31.7 million in calendar 2018, compared to a loss of US$30.1 million in 2017, on a 2 percent increase in revenue to US$798.2 million. It also owns a telecommunications company in Bolivia. 

"In New Zealand, we entered the year with the primary objectives of regaining our momentum in postpaid and normalising operating expenses," chief executive Brad Horwitz said in a statement to the US Securities Exchange Commission. 

"We are encouraged by our progress on both fronts. As a result, we exceeded our original guidance on the adjusted ebitda line. Our strategy is working and we expect this strong growth to continue into 2019." 

The New Zealand mobile carrier's costs of service shrank US$8.4 million in the year due to lower interconnection costs with a decline in roaming traffic and a stronger US dollar. The cost of equipment sales rose US$36.8 million due to an increased volume of handsets being sold and growing demand for high-end devices. 

Sales and marketing spending rose, largely on US$1.5 million of advertising and promotional costs from a new brand campaign and sponsorship of several rugby teams. 

Capital spending was US$53.1 million in calendar 2018, largely due to an expansion of the 4G, or long-term evolution (LTE), network. 

Trilogy expects capital expenditure will largely be the same in 2019, with local projects including an additional national roaming network build, and fixed LTE investment. 

Chinese telecommunications company Huawei Technologies built the 2degrees network and is a key supplier for the firm, which Trilogy noted as a risk in its accounts. 

"In particular, the company notes that the governments of various countries, including New Zealand, have raised network security concerns in regard to products manufactured by Huawei, a leading communications network supplier," it said.

"If the company is not permitted to procure equipment from Huawei in the future (for example, in connection with 5G upgrades), the company can resort to procuring equipment from alternative suppliers, but the cost of such equipment may be higher than would be the case if Huawei were among the suppliers competing for the company’s business."


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