UPDATE AND CORRECT: Spark shares rally

UPDATE AND CORRECT: Spark shares rally as cost-cutting drive pays off

(Fixes profit figures in 2nd paragraph, updates and recasts on share price, adds broker comment in 8th paragraph)

By Paul McBeth

Aug. 21 (BusinessDesk) - Spark New Zealand shares hit an eight-month high after the country's biggest telecommunications company lifted annual profit 12 percent as it stripped out costs through a company-wide transformation programme.

Net profit rose to $409 million in the 12 months ended June 30 from $365 million a year earlier, with operating revenue unchanged at $3.53 billion. The telco cut operating spending by 4.3 percent to $2.44 billion, which helped boost earnings before interest, tax, depreciation, amortisation and investment income (ebitdai) by 11 percent to $1.09 billion, in line with guidance.

Spark expects to eke out more gains in the current financial year, predicting ebitdai of $1.1-$1.12 billion.

"We’ve grown our business in the highly competitive mobile and cloud services categories, held our broadband position, entered new markets like sports streaming, led on cost management and transformed our company culture," chair Justine Smyth said.

"It’s very pleasing to achieve these positive outcomes in a year during which we implemented and embedded massive organisational change with the move to agile ways of working."

The company's board declared a final dividend of 11 cents per share and a 1.5 cent special dividend. That takes the annual payment to 25 cents, unchanged from a year earlier. The dividends will be paid on Oct. 4 with a record date of Sept. 20.

Directors expect to maintain that level of dividend payments in the 2020 financial year.

Peter McIntyre, an investment adviser at Craigs Investment Partners, said the result was a solid one based on mobile revenue growth, better gross margins, and higher average revenue per user, but that the outlook for dividends was really important for investors.

"You don't often see Spark rally close to 5 percent in one day, and it's doing it on really good volumes," he said.

The shares rose as high as $4.225, the highest since late December, and were recently up 4.7 percent at $4.20 on a volume of 12.6 million shares. That outperformed a 0.9 percent decline across the S&P/NZX 50 Index this morning, dragged down by A2 Milk missing investors' expectations.

Spark's three-year 'Quantum' transformation programme introduced the flatter, more autonomous decision-making structure known as Agile. It also aims to simplify services, boost automation and digitisation to cut costs, use the company's suite of brands more effectively, and sell more higher-margin services to customers. The end goal is to lift ebitdai margin to at least 31 percent, which it almost reached in the latest year, at 30.9 percent.

The company's total mobile revenue grew 2.7 percent to $1.27 billion, with a 2.4 percent increase in connections to 2.49 million. Average revenue per user increased 0.6 percent to $27.41 a month, as gains in pre-paid services offset a contraction in monthly plans.

Chief executive Jolie Hodson, who took over the reins on July 1 from Simon Moutter, said the company outperformed its rivals in mobile, grabbing 60 percent of the market's growth in the 2019 financial year.

"As customers use their mobile phones to do more, many of them are seeking larger data allowances and price certainty, which provides an opportunity for Spark to improve ARPU (average revenue per user) with the right products and plans," she said.

Spark's capital spending rose 1 percent to $417 million, some $7 million above guidance, of which $132 million was spent on IT systems and $118 million on its mobile network.

It expects to spend about $370 million on capital projects in the 2020 financial year, although that excludes buying radio spectrum for mobile services. A key component of that expenditure is building a 5G mobile network, which Hodson said will provide a step-change in the company's fixed wireless offering.

A major attraction of the upgraded technology is that it allows greater capacity at a lower cost than on existing 4G and 4.5G networks.

However, Spark's plans for an early 5G roll-out suffered a hitch last year when its partner, Huawei Technologies, was blocked on national security grounds by the Government Communications Security Bureau.

Spark said it's still working through possible ways to mitigate the intelligence agency's concerns, but hasn't decided on whether or when it should put up a new proposal. The telco will use multiple vendors - which is becoming the international norm in adopting the new technology - and said its plans won't be affected by whether or not the Chinese company is involved in the network.

The telco's broadband revenue increased 3 percent to $685 million, even as it lost a net 5,000 connections, leaving it with 695,000 broadband customers at the end of June. That was largely in copper connections, which dropped 28 percent to 249,000, while fibre customer numbers rose 29 percent to 306,000 and its wireless hybrid connections were up 21 percent at 140,000.

The company ramped up its spending on content rights in the year to support its roll-out of Spark Sport, which it's showcasing with the lead rights for the Rugby World Cup in October. Spark's content rights inventory rose to $35 million as at June 30 from $13 million a year earlier.

Spark is still seeking a partner for its earlier foray into online entertainment streaming - Lightbox - which needs more investment, especially in content.

The telco's decline in traditional voice connections continued, down 11 percent at 417,000, and revenue from that sector dropped 16 percent to $310 million.

Revenue from Spark's cloud, security and service management services rose 33 percent to $73 million while managed data and networks revenue fell 3.1 percent to $63 million.

Its procurement and partners revenue - where Spark sources hardware, software and IT services for customers - was up 1.6 percent at $322 million.

(BusinessDesk)

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