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Spark's net profit falls as Southern Cross withholds dividend

Spark's net profit falls as Southern Cross withholds dividend

New growth businesses fail to offset declining legacy revenues in first half of 2019

Simon Moutter (Spark)

Simon Moutter (Spark)

Spark’s revenue fell $7 million year-on-year to $1.75 billion for the six months ended 31 December, as legacy voice and managed data continued to decline.

The telecommunications giant said an accelerated decline in wholesale voice connections occurred in the previous financial year while revenue growth moderated for mobile and for cloud, security and service management.

Net profit after tax was also down, 5.6 per cent to $153 million, due to a $28 million decline in dividend from cable operator Southern Cross and associated increase in Spark’s effective income tax rate.

Southern Cross shareholders decided to withhold a dividend for the first half to fund the potential construction of the Southern Cross Next cable.

Spark said if Southern Cross dividends continue to be withheld for the remainder of 2019, then full year earnings per share - and associated guidance - will fall by approximately one cent.

However, reported EBITDAI was up $33 million, or 7.2 per cent, on the prior year to $489 million.

Improved margins in mobile, broadband, and cloud, security and service management, and benefits from Spark’s digitisation and automation initiatives underpinned the growth. 

Meanwhile, EBITDAI was impacted by a $5 million fair value adjustment to Spark’s investment in a global internet of things (IoT) start-up.

Chair Justine Smyth said Spark’s programme of simplification, digitisation and automation, and disciplined cost management, meant the business continued to deliver EBITDAI growth despite competition remaining intense and despite the declines in legacy business.

“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,” Smyth said.

“We were particularly pleased to see evidence of this improved digital customer experience come through strongly over the half year.

"The number of voice calls into our customer care teams was down 30 per cent year-on-year, while the number of live chats handled by virtual assistants increased eightfold in the same period.

"At the same time, customers reported higher levels of satisfaction with the experience they had when coming to us for help – as measured by ‘interaction net promoter score’ or iNPS.”

Strategy

Spark managing director Simon Moutter said he was pleased with the calls the business had made in the previous financial year to reduce costs, which were flowing through to a strong EBITDAI result.

Moutter also noted the mobile market shift to a focus on innovation and customer value, rather than chasing low value casual rate prepaid connections, was resulting in stronger margins.

“Over the half, we saw customers continue to choose higher-value plans, with the number of customers on our unlimited mobile plan doubling over the period," he added.

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

Delving deeper, cloud, security and service management revenue grew by $16 million or 8.9 per cent year on year, driven by good demand and volume growth, but offset somewhat by more competitive intensity from local and global providers.

Broadband revenues returned to growth, up 3.9 per cent in a tough market.

“We are seeing a more positive story emerging in broadband resulting from some conscious decisions," Moutter said. "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.

"We also chose to introduce a new 'Unplan' broadband service, which emphasises value in the core offer rather than needing to be propped up with substantial acquisition and retention incentives."

Wireless broadband grew by a further 13,000 connections over the half year and continues to deliver annualised reductions in access costs paid to Chorus.

"These decisions have helped to put broadband margins back on a path to a more sustainable level,” Moutter said.

Voice revenue declined 14.7 per cent, a slightly higher than in the previous period and reflecting the expected impact of an accelerated wholesale connection decline in the previous financial year, and a higher decline in calling volume, which was down 18 per cent.

Spark also saw wireless voice connection growth of 4,000 to a total of 18,000 connections.

“Wireless voice offers customers a high-quality product at a lower price," Moutter added. "We are now in the throes of progressively shutting down the legacy public switched telephone network (PSTN) and want to keep ahead of this change by helping customers move from the old to the new technology, well ahead of any withdrawal of access to the copper network.

“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 that over the half, Spark began to see concrete benefits from the new Agile ways of working.

“Agile is already delivering for our customers," he said. "Agile methods ensure our people have a crystal-clear view of what customers value and can totally focus on their part of delivering that.

"The empowerment framework removes the barriers that might have held things up in the past."

Furthermore, Moutter said Spark sees the deployment of 5G technology as a crucial enabler of Spark’s future growth and vital for New Zealand to keep up with the rest of the world.

“5G will be a big driver of future innovation – not only for our industry but also for New Zealand’s economy," he added. "We are still working towards launching the network by July 2020 at the latest."


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