Spark annual profit climbs 13pc as sales tick up

Sales ticked up for Spark and it is continuing its focus on stripping out costs.

By Paul McBeth

Spark New Zealand boosted annual profit 13 per cent as the country's biggest telecommunications company eked out small sales growth and continued its focus on stripping out costs, and signalled a changing of the guard with chairman Mark Verbiest planning to stand down in November.

Net profit climbed to $418 million, or 22.8 cents per share, in the 12 months ended June 30, from $370m, or 20.2 cents a year earlier, the Auckland-based company said in a statement. Earnings before interest, tax, depreciation and amortisation rose 3 per cent to $1.02 billion on a 3.3 per cent gain in revenue to $3.61b. That was in line with First NZ Capital's forecast for ebitda of $1.01b.

Spark has been focusing on fattening its ebtida margins by switching more customers off copper-line services, which attract a fee paid to wholesaler Chorus, and on to its own wireless networks. It wants to achieve an ebitda margin of more than 30 per cent by 2020, and achieved 28.1 per cent in the latest year.

"The increased ebitda, combined with a reduction in depreciation, resulted in overall net earnings increasing a pleasing 13 per cent," Verbiest said. "While we're proud of what we've achieved so far, and we've continued to execute our long-term strategy well and deliver good financial results, there are signs that fresh impetus is needed for the next phase of our transformation."

Verbiest signalled his departure from the board in November, when he will hand over the chair to Justine Smyth in what they called "part of a well-considered transition and succession plan". More than half the board have served on Spark's board since it spun out Chorus in 2011, and Verbiest said at some point it will be appropriate for other long-serving directors to depart.

"I do not believe it would be good governance to risk having several directors potentially retiring in short order, and, as the director with the longest association with Spark and its predecessor Telecom I prefer to lead by example," he said. "In my view, the foundation for future success is solid, and I feel the time to renew the chairmanship is now."

The board declared a final ordinary dividend of 11 cents per share and a final special dividend of 1.5 cents per share, payable on October 6 with a September 22 record date. That takes the annual return to 25 cents per share, unchanged from a year earlier.

Spark plans to keep that annual dividend return at 25 cents in the 2018 financial year, giving guidance for ebitda to rise by as much as 2 per cent in the current year, with revenue also seen rising by up to 2 per cent.

The shares last traded at $3.92 and have gained 15 per cent this year.

Chief executive Simon Moutter has presided over a transformation of the company from what was traditionally focused on landline phone services under the former Telecom moniker into a mobile and digital focused business, renamed Spark.

Today, Moutter said change remains the "new normal" and that companies most likely to win in that environment "cut through complexity to deliver a highly automated and slick digital self-service customer experience" with a simpler proposition than their rivals.

With that in mind, the company has three target areas and will devote more resources to digitising and simplifying its services to cut costs, better leverage its suite of brands, and meet the growing appetite for wireless technologies.

"We will increase our emphasis on investment in this area to deliver improved mobile and wireless broadband services," Moutter said. "By 2020 we aim to have 85 per cent of our broadband customers migrated away from copper on to fibre or wireless technologies."

Spark has attracted 84,000 customers on to its wireless service, accounting for about 12 per cent of its 687,000 broadband connections, while its 172,000 fibre connections make up 25 per cent.

The company's operating costs rose 3.5 per cent to $2.6b, driven by an 11 per cent increase in labour costs to $550m, while payment to other telcos was largely flat at $690m. Spark's headcount increased to 5,774 as at June 30 from 5,569 a year earlier, with a rising number of permanent employees outpacing the decline in contractors.

Spark's home, mobile & business division, which services households and small businesses, increased earnings 2 per cent to $818m on a 0.8 per cent gain in operating revenue to $1.98b, with growth in mobile and broadband revenue making up for the continuing decline in landline revenue.

The digital division, which deals with large business, enterprise and government customers, posted a 1 per cent decline in ebitda to $407m on a 7.9 per cent increase in revenue to $1.32b as Spark boosted spending on support services after winning a "significant customer".

The ventures and wholesale unit reported a 13 per cent fall in ebitda to $114m on a 9.7 per cent decline in revenue to $223m as customers continued to exit Spark's legacy wholesale services.

Spark Connect & Platforms, which covers the company's network performance and investment programmes, reported a smaller ebitda loss of $321m from $340m a year earlier, which it put down to cost-cutting.