Chorus reported a drop in full-year profit this morning, as expected - and the surprise departure of its boss, Kate McKenzie.

McKenzie will step down as managing director at the end of the year.

Unlike Spark, where Jolie Hodson was immediately named to succeed Simon Moutter, there was no immediate appointment to replace McKenzie. The board says a search is under way.

Ex Telstra executive McKenzie was named Chorus' new boss in December 2016, replacing the long-serving Mark Ratcliffe.


The company gave no reason for her departure beyond that she wants to "spend more time with her Sydney-based family".

"I don't indeed to take another executive role," she said on a conference call.

McKenzie was one of just three women to be running an NZX50 (the others are A2's Jayne Hrdlicka and newly-installed Spark boss Jolie Hodson).

Her tenure saw solid progress on the public-private Ultra Fast Broadband (UFB) fibre rollout, which stayed on time and budget, but was marred by a major scandal involving work exploitation by sub-contractors.

Her floated proposal for a single company to build a single 5G network - as Chorus has done for most of the UFB - ended up going nowhere.

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Chorus' net profit for the 12-months to June 30 was $53 million, against the year-ago $85m.

The company pegged the profit fall on, "the increased interest costs of borrowing to fund the UFB rollout". An ongoing incursion by Spark into fixed wireless, or using mobile as a landline substitute would have hurt, too (keep reading).


Ebitda fell to $636m from the year-ago $653m, in line with guidance, with$625-$645m forecast for 2020.

Chorus paid a final dividend of 13.5 cents per share for a full-year 23cps, and forecast a 2020 dividend of 24cps.

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Total fixed-line connections fell from the year-ago 1.53m to 1.45m - in line with analysts' estimates as Spark makes inroads with fixed-wireless, and Chorus loses copper lines upgraded to fibre in areas controlled by smaller wholesalers Enable, Ultrafast Fibre and NorthPower Fibre.

Chorus said its leg of the UFB rollout (due to wrap up in 2022) was now 80 per cent complete with 842,000 premises passed and 584,000 connected.

Demand for data on Chorus' network also continues to break records, reflecting the ever-increasing range of online streaming content and the proliferation of connected devices in the home, the company said.

Monthly average household data usage on copper and fibre connections across Chorus' network increased by 55GB to 265GB in FY19.

Fibre customers used an average of 357GB.

One gigabit per second fibre plans (the fastest and most expensive) now make up for 10 per cent of Chorus' installed base.

Chorus also squeezed more productivity from its contractors, with the average lead time for a UFB install falling from 13 days to eight days even though the number of installation crews fell from 800 to 670.

Small business customers were a weak point. McKenzie told a conference call that around half of residential customers within reach of the UFB had connected, but only one-third of small businesses had hooked up to fibre, where it was offer.

Restructure will affect 500 roles

McKenzie also said a restructure was underway that would affect around 500 roles or about half of Chorus' workforce.

The restructure was expected to yield significant savings. McKenzie said it would not impact customer service, with technology tacking up the slack - a similar line to that taken by Vodafone NZ before it recently outsourced jobs. The Herald is seeking more details.

What's next?

Looking ahead, Chorus faces a much more stable regulatory environment than it did for much of the first decade of its life.

New telecommunications legislation, which kicks in from next year, will treat it like a utility, complete with a revenue cap.

But there are still three areas of uncertainty for investors to keep an eye on.

1. Fixed wireless threat

One is the rise of fixed-wireless - or a retail telco using its mobile network to deliver broadband into a home as a landline substitute, cutting Chorus out of the revenue loop.

Despite mutterings from competitors that Spark was frog-marching customers from fixed wireless to fibre, due to Rugby World Cup delivery jitters, Spark revealed last week that its fixed wireless customers actually increased by 36,000 over the year to 166,000 or around 20 per cent of its customer base.

And while Vodafone NZ has so far done very little in fixed wireless, chief executive Jason Paris has flagged it as a service his company will push aggressively under its new ownership. His stated goal is to move 15 per cent of Vodafone's broadband customers onto fixed-wireless within two years (2degrees has yet to move into the market).

UFB fibre will always have advantages over fixed wireless. Still, Spark and Vodafone's push inot fixed wireless can take the gloss of Chorus' future results.

And once 5G arrives, which will potentially allow for unlimited data fixed wireless plans at fibre-like speeds, it could really scrape into that gloss.

This morning, McKenzie said, "We continue to see 5G and wireless networks as complementary."

She said 5G cell sites would need more backhaul (fibre that connects them to main networks), giving Chorus a business opportunity. She also maintained that 5G would always cost more to run than fibre, and be subject to a constraint of costly spectrum.

McKenzie cited Sky's streaming of the second Bledisloe Cup test - watched online by 55,000 via Sky Go or Sky Sport Now - as an example of an event better suited to fibre's capacity.

2. The unbundling bunfight

The new telco law allows for the unbundling of UFB fibre from early next year - that is, the likes of Spark, Vodafone and Vocus will be able to add their own electronics to Chorus' network (and those of the three smaller UFB companies), giving them more control over what services they offer, and at what price.

But although the new law says Chorus must give the retailers access, it doesn't say at what price.

A robust round of arm-wrestling is underway, with the Commerce Commission refereeing. Things are finely poised.

3. The wacc-a-mole fight

Then there's a second bunfight under way over how the ComCom estimates the weighted average cost of capital, risk factors such as 5G and other parameters will feed into the annual revenue cap that will bind Chorus after 2020.

Here, again, things are still very much up in the air.

Points of disagreement include the Commerce Commission's assertion that Crown funding for the UFB was at no cost. Chorus CFO David Collins argued today that it was "not free money" but close to 2 per cent because of various conditions attached.

Chorus said today that it would review its dividend policy again in May 2021, when it expected the so-called "building blocks" regulatory model to be finalised.

Shares fall, but not as much as broader market

Closed Friday at $5.14. The stock is up 16.55 per cent for the year.

Ahead of today's result, Forsyth Barr rated Chorus neutral, with a 12-month target of $5.50.

Shares fell 0.78 per cent to $5.10 as the market opened. The NZX50 was down 1.48 per cent overall on trade war jitters.