For Spark, planned growth exceeds expected decline as profits take a hit

For Spark, planned growth exceeds expected decline as profits take a hit

Costs of change are a drag on Spark's 2018 result at $49 million

Simon Moutter (Spark)

Simon Moutter (Spark)

Credit: Spark New Zealand

Spark New Zealand has reported strong performance in key growth areas of cloud, mobile, security and service management in 2018 but costs of change are up and future earnings from a key asset are in decline.

The telco giant is undertaking one of the biggest change programs in the company’s history, dubbed Quantum, as it transitions to an Agile way of working but such an approach has resulted in a $49 million hit to the business' bottom line as staff are laid off.

Spark reported year-on-year revenue growth of $35 million, or one per cent, taking revenue to $3.65 billion.

Specifically, mobile revenue growth was $132 million, up 6.9 per cent while cloud, security and service management were up 15.1 per cent. 

This was, however, partially offset by declines in legacy voice, managed data and networks revenues, down $100 million.

Overall reported earnings (EBITDA) for 2018 declined by $27 million, or 2.7 per cent, to $989 million.

Meanwhile, dividends from cable operator Southern Cross declined by $11 million to $50 million during the year and are expected to decline between $10 million and $20 million in 2019 as the level of pre-purchased capacity from large customers decreases.

Several alternative networks are now available creating unprecedented competition in the cable market.

Managing director Simon Moutter said Spark’s success in growth areas continued to offset decline in legacy areas of the business.

"Our business customers increasingly recognise the benefits and flexibility offered by “as-a-service” cloud products, and we have launched new security products to capture growth in that market," he said.

"We’re also very pleased to see our strategic emphasis on wireless technologies flow through to further growth in mobile market share, revenue and margins – with Spark the only New Zealand mobile operator to achieve this over the period."

Mobile revenue growth was also now fully offsetting traditional voice revenue decline, he said.

Earlier this month Spark extended its drive into subscription content, securing rights to English Premier League football.

Spark chair Justine Smyth said Spark set out a three-year vision of how the business would maintain growth in a highly competitive environment in June last year.

"Underpinning this vision were three strategic focus areas: an increased emphasis on wireless; leveraging multi brands; and being the lowest cost operator through simplification, digitisation and automation," Smyth added.

"Spark has delivered against these focus areas, while simultaneously making the bold decision to transition the company to an Agile way of working – and this flowed through to its financial results."

Spark chose to accelerate its Quantum business improvement program during the year, incurring costs of change to realise benefits sooner than previously envisaged.

"This decision was based on our increasing confidence that the business could improve customer experience and operate under a lower cost structure in an Agile model,” Smyth said.

Additional implementation costs of $24 million were brought forward into 2018 earnings, which added to the $25 million cost of change Spark had already planned, bringing total costs of change for 2018 to $49 million. 

Excluding change costs, adjusted EBITDA for 2018 was $1,038 million, up $22 million, or 2.2 per cent.

Spark's Upgrade New Zealand program is slightly behind target. More than half of the company's customers now on either fibre or wireless broadband helping to drive a 6.7 per cent uplift in broadband gross margin in a market where, Moutter said, margins are very challenged. 

"Our focus is now shifting to the retention of existing wireless broadband connections and the migration of copper voice connections to our wireless voice alternative," he said.

Moutter said the company made substantial progress on its programme of simplification, automation and digitisation over the year. 

Improvements to digital self-service channels and the introduction of artificial intelligence, through chatbots and other automation tools, reduced customer service voice calls by almost a quarter year-on-year. 

Spark also rolled out 40 different “bots” to automate high-volume and sometimes very complex business processes and tasks.

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