Spark increases profit 4 per cent to $427m - but warns Covid could hit harder in FY2021

Spark chief executive Jolie Hodson. Photo / Jason Oxenham

Spark has reported across-the-board full-year growth despite the pandemic - but also warned that Covid-19 could hit harder next year. The telco took an estimated $25m hit from the pandemic in the final quarter. With its FY2021 guidance - which anticipates flat profit and a possible dividend fall - it anticipates the virus will take a $75m toll on its bottom line.

Chief executive Jolie Hodson told the Herald the $75m in part reflected the possibility of future lockdowns, but was largely in anticipation that some customers would feel the pinch "once the wage subsidies roll-off".

For the year to June 30, net profit increased 4.4 per cent to $427m, ebitdai up 2.1 per cent to $1.13b and revenue was up to 2.5 per cent to $3.62 billion.

The numbers were in line with guidance issued on April 22 and analyst expectations.

The company announced a second-half dividend of 12.5 cents per share, fully imputed, bringing the total FY20 dividend to 25c per share.

Covid has been a mixed bag for Spark, with increased demand for mobile, voice-calling, broadband and cloud services balanced by the loss of global roaming revenue, and goodwill relief measures such as providing unlimited data for all fixed-line customers, extra helpdesk costs, retail store closures, Spark Sport being made free for a quarter due to the cancellation of live events, and suspending disconnections for late-payments.

Asked if the Covid pros will outweigh the cons in the current financial year, Hodson told the Herald: No. The difference was there in black and white with the $75m figure. "That is the net position of our ups and downs."

Free cash flow increased $146m to $438m year-on-year, but fell short of spark's $460m aspiration "due to a conscious decision to secure 5G mobile network equipment." Spark began its 5G mobile rollout in Palmerston North last month, using gear from Nokia Networks and Samsung, given its 4G incumbent Huawei remains sidelined by the GCSB. Five as-yet-unnamed centres will also get 5G before year's end.

Spark received no dividend from its share in the Southern Cross Cable, vs the year-ago $15m payout.

The telco earlier flagged the temporary suspension of profit-payouts from the joint venture, which faces new competition from Hawaiki Cable and is gearing up for its new Southern Cross Next Cable.

Total mobile revenue edged up 1.3 per cent to $1.3b as a 3.9 per cent bump in service revenue with takeup of "endless data" plans was partially offset by lower handset sales during retail store closures.

Fixed-wireless or "wireless broadband" connections were 156,000 by the end of FY2020, an increase of 11.4 per cent or 16,000 over the year.

And total broadband connections increased from 695,000 to 709,000.

But total broadband revenue fell 0.7 per cent to $680m amid keen competition. Chief Executive Jolie Hodson said Spark aimed to hold the line in total broadband customers - something it hadn't done over the past three years. She brushed off Sky's planned foray into broadband next year.

Cautious 2021 guidance

Spark confirmed FY2021 ebitdai guidance of $1.09b to $1.13b and a FY2021 dividend of 23-25c per share, fully imputed.

David Price, director institutional equities with Forsyth Barr, said there was initial disappointment that Spark's dividend outlook for 2021 was in the range of 23-25c a share – "that was a surprise to the market, though you are still talking a 6 per cent plus yield."

Hodson said, "We are now entering a more challenging period as a country and we expect the impact of Covid-19 to be more material in FY2021."

The company was bracing for a possible tail-off in SME and retail business as employment subsidies rolled off, Hodson said on a conference call.

CFO Stefan Knight said the company was not banking on any roaming revenue in FY2021 as borders remained closed (earlier, analyst Peter Wise said the loss of roaming would cost Spark, Vodafone and 2degrees a collective $114m over the next 12 months).

Knight said Spark would lose around $40m in roaming revenue if borders remained closed for the current financial year. The total Covid-19 impact could reach $75m, but the CFO added that the unusually wide forecast range reflected the difficulty of picking numbers amid the pandemic.

Southern Cross dividends would now resume in FY2023 rather than FY2022 as originally flagged, Knight said. Hodson added in later comments to the Herald that the pandemic had delayed the new Southern Cross Next cable which, along with the delays inherent to large projects had pushed out construction of the new trans-Pacific link - but that the build was now underway. Earlier the CFO warned that once Southern Cross dividends return, they are likely to be below the previous level

Knight did see growth continuing in mobile, and cloud-based collaborative products as the working from home trend persisted. Spark's 5G rollout would help boost fixed-wireless.

Knight said the company was picking fixed-wireless growth would reignite in FY2021 with 40,000 net adds on the back of the 5G rollout.

But overall, Spark was "assuming the NZ economy will remain subdued", the CFO said.

Knight refused to give any financials around Spark Sport, but said "We've got a really clear plan around growth with cricket coming on to the platform and we continue to seek new partnerships."

Softly, softly on Chorus

There has been a degree of feeling in the retail telco industry that Chorus - which has had the most positive FY2020 financials - has not done enough to shoulder the cost of the pandemic.

The network operator has offered to chip in $2 million toward the "wall of bad debt" that the retail telcos anticipate. Earlier 2degrees executive Mat Bolland told the Herald that amount was "calling out Chorus" for providing "too little".

And Vocus consumer GM Taryn Hamilton, whose company includes Orcon and Slingshot in its stable, said Chorus' $1 per month wholesale price rise to its most popular UFB fibre plan from October 1 was "A cynical profit grab – straight from middle New Zealand's wallets."

Hodson, however, was very diplomatic in her comments about Chorus.

"We're grateful for that the help they've provide already and will work with them further as the economic situation evolves," she said. The final level of Chorus support "is clearly their choice, but it's not a done deal".

Spark closed at $5.03 yesterday. The stock is up 15.9 per cent for the year.

Shares were down 1.79 per cent in early trading before the NZX (a Spark customer) was taken offline by a second cyber attack in two days.