2degrees in profit for fifth year straight, names D-Day

Comedian Rhys Darby - who fronted the telco's "giant logo" campaign when it launched in 2009 - has been back this year for its landline broadband push. Photo / File

2degrees has reported its fifth-straight year of operating profit, on the back of business market gains, as it gears up for a possible IPO.

NZX executives waiting nervously for news on the local listing could know as soon as Thursday. The local exchange has recently been on the cusp of two telco IPOs, for Vodafone and Vocus' NZ operations, only to see each lost to a trade sale at the last minute.

In March, 2degrees' Seattle-based, Toronto-listed parent company Trilogy International Partners, said it was "exploring a partial public listing" of 2degrees in the second half of this year.

This morning, 2degrees chief financial officer Drew Davies told the Herald that Trilogy will likely update on the IPO plans when it releases its 2021 first-quarter result on May 12. "That's when we expect an update," he said.

Trilogy, whose shares have been in the doldrums, is going through a major shakeup.

As well as the possible 2degrees listing, it has also put its other major asset, Bolivian NeuvaTel (trading as Viva), on the block.

Market watchers should expect something to happen. Trilogy chairman John Stanton - the billionaire investor who also sits on the boards of CostCo and Microsoft - has bought and sold a string of telcos over his career and is not one to sit on a holding for life.

Earlier this morning, 2degrees confirmed its financials for the 12 months to December 31, 2020 - most of which had already made the media in March after being included in a Trilogy market filing (Trilogy booked a loss after a relatively strong performance by its NZ investment was undercut by red ink in politically chaotic Bolivia).

2degrees said its full-year 2020 underlying earnings rose 6.5 per cent to $180m.

Net profit before tax was up 15 per cent to $32.9m (the company did not immediately supply an after-tax number).

Revenue from services increased 7.4 per cent to a record $545m, but total revenue - including handset revenue - fell 5.0 per cent to $700.1m.

Analysts typically focus on service revenue. Davies pinned the fall in total revenue on the termination of a major handset deal with Warehouse Group-owned Noel Leeming, which he described as "very low margin".

Like all of the telcos, 2degrees has felt competing pressures during the pandemic, with a rise in broadband and mobile use counter-balanced by the loss of lucrative inbound and outbound global roaming revenue. As with its peers, there has been belt-tightening. An April 2020 restructure saw 120 staff or around 10 per cent of 2degrees total workforce laid off.

Separately, Trilogy announced today that it had refinanced US$350m in debt, which had been due in May 2021, with new notes issued at 8.76 per cent that mature in May 2023. In its fourth-quarter 2020 filing, Trilogy said its long-term debt and financing lease liabilities stood at US$630m from a year-ago US$528.7m

Business market inroads

2degrees has been historically strong in the pre-pay consumer market, with ground to gain on Spark and Vodafone in the business mobile and fixed-broadband markets.

Davies told the Herald, "2degrees also made strong inroads into the business market, where it now serves more than 106,000 mobile corporate customers, an increase of 20.5 per cent.

"In the consumer market, the number of Mobile Pay Monthly subscribers grew to more than 400,000, an increase of 3.9 per cent.

"Broadband subscribers rose 13 per cent, with 2degrees now providing broadband to 115,000 homes."

Spark and Vodafone, which each has around 2.5m total mobile customer connections, also lead in fixed broadband, where Spark has just over 700,000 customers and Vodafone just over 400,000.

2degrees CFO Drew Davies: Expect an update on IPO plans this Thursday. Photo / File

Third-placed Vocus (which includes the Orcon, Slingshot and Flip bands in its stable) has around 225,000 customers. 2degrees' 115,000 puts it neck and neck with Trustpower for fourth in fixed-broadband.

2degrees, which got a foot in the door of the fixed-line market by buying Snap Internet in 2015, had just 32,000 broadband customers in 2018 and reported 87,000 in 2019.

Earlier, 2degrees CEO Mark Aue said the fixed-line broadband and mobile business customer numbers were the fastest growing in the industry, according to IDC.

This morning, Davies said 2degrees was still on track for its 5G mobile network upgrade to begin before year's end.

Earlier, Aue said the upgrade was fully-funded, and was not contingent on the IPO going ahead.

2degrees chief executive Mark Aue says his company's pending 5G upgrade is fully-funded and not contingent on its possible IPO going ahead. Photo / Supplied

2degrees has partnered closely with Huawei since it launched in 2009. But with the Chinese giant still sidelined by the GCSB, Sweden's Ericsson has been named as 2degrees' 5G supplier.

Ericsson will provide both the edge and the core of 2degrees' new 5G network. Huawei's 4G kit will also be ripped out and replaced with Ericsson product.

Third-time lucky?

If a listing for 2degrees does go ahead, it will be third-time lucky on the phone company front for the NZX.

In 2019, Vodafone's plan to list its NZ business on the local bourse was headed off by a $2.4 billion trade sale to Infratil and Brookfield Asset Management.

And on March 9 this year, Vocus Group scrapped its plan for a $722m NZX listing of its local operation (which includes Orcon, Slingshot, Flip and 2Talk) after entering an agreement to be bought by Macquarie Group and Aware Super in a A$3.4b deal still subject to shareholder and regulatory approval.

Technology Users Association head Craig Young told the Herald, "This is good news for New Zealand if the IPO goes ahead. New Zealand ownership is always welcome as they are then focused on this market and users here. It's also good for the company to be listed on our stock exchange and the profits to be invested and remain in NZ."

If the listing does proceed, it remains an open question whether it will be ASX, NZ or dual.

Aue said: "2degrees' 1100 staff are 100 per cent Kiwi-based, so an NZX listing makes sense."

But it was too early in the process to say if the stock would be dual-listed on the ASX.