Spark's wireless broadband key to fatter margins

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Spark New Zealand's plans to fatten earnings margins will largely rely on its ability to switch broadband customers to its fixed wireless network, although the next iteration of mobile technology makes the future murkier for the country's biggest telecommunications group, says broking and research house First NZ Capital.

Last Friday, Auckland-based Spark outlined an aspiration to lift its earnings before interest, tax, depreciation and amortisation margin to more than 30 per cent by 2020 from the 28 per cent level it's currently running at by stripping out costs for accessing Chorus's copper and fibre networks, cutting its wage bill from increased automation and generating bigger revenue gains from it mobile business than what it loses from old fixed-line services.

Chief executive Simon Moutter told analysts at the investor day briefing that the company wants to become the lowest cost operator in the market "through radically simplified and digitised processes, products and services".

FNZC research analyst Arie Dekker said in a note to clients that the briefing laid out "an aspirational and belief led story" with few surprises in the company's strategy while acknowledging the risks in achieving those goals.

Dekker said fixed wireless is set to be Spark's immediate source of cost savings in that it bypasses Chorus's wholesale charges and cuts back on call centre expenses by avoiding copper fault calls.

Spark has been trying to reduce its reliance on Chorus's network by aggressively marketing its wireless broadband service as a viable alternative to copper-based internet, and mounted an unsuccessful takeover for Wellington-based network minnow TeamTalk.

"At the investor day, Spark was positive on fixed wireless and a wireless future but did not over commit - something we view as pragmatic given the early stages of its current initiatives and the variables that will determine its future impact on the business," Dekker said. "The dynamics associated with experience and churn will evolve and will be influenced by customers' usage patterns, competing network load and Spark's ability to manage this and capacity investment - this is an evolving area and Spark's foray into fixed wireless is still in its relatively early stages."

A major uncertainty for fixed wireless is fifth-generation (5G) mobile technology, which Dekker said is still some years away and unclear whether it will lead to wireless broadband becoming a viable substitute for fibre technology.

"It is difficult to say that there will not be a major market opportunity for Spark but it is difficult today to articulate what it looks like; similarly Chorus and the LFCs (local fibre companies) could be well-placed to leverage their infrastructure," Dekker said. "While fixed wireless is being cited as an early usage case for 5G, it may well be that this usage case is less in areas where fibre has been built to pass the premise as is occurring for around 85 per cent of the New Zealand population through UFB1 and 2," he said referring to the government-sponsored ultrafast broadband fibre projects.

Spark didn't provide guidance on its capital spending needs for 5G due to the uncertainty about the radio spectrum needs, but chief financial officer David Chalmers told investors the government understood early policy decisions "will be crucial if NZ is to continue to be at the forefront of mobile network capabilities".

The 5G technology is also seen as being central to machine-to-machine interaction, known as the 'Internet of Things'. An industry report released last week found local firms were reluctant to roll-out 'Internet of Things' services, despite the country's readiness and the potential economic benefits of doing so.

Spark today announced it has started developing a nationwide low-power wide area network to enable machine-to-machine services, with state-owned telecommunications network business Kordia having started initial network design. Spark expects the network to be working from June next year.

That followed an earlier statement from Vodafone that it plans to deploy a low-power wide area network for 'Internet of Things' services in early 2018 after running a pilot with several commercial customers later this year.

Spark shares recently rose 0.1 per cent to $3.785 and have gained 11 per cent so far this year.