2degrees boss on profit jump, deal talk, 5G machinations

2degrees' boss Mark Aue. Photo / File

2degrees has just reported its largest operating profit yet since the 11-year-old telco first broke into the black in 2017.

But the telco has also faced Covid-19 headwinds in its first quarter, questions about lagging rivals Vodafone and Spark in 5G, and analyst speculation over possible M&A with Sky TV or Chorus. Chief executive Mark Aue fronted on all of those questions today.

The company says pre-tax profit rose 46% to $28.6 million for its 2019 financial year - which coincides with the calendar year. Statutory net profit was $86.3m thanks to a $57.6m tax credit on previous years' tax loses.

Ebitda was up 12% to $147.5m.

Service revenue increased 4.5 per cent to $512m, but overall revenue dropped 9.7 per cent to $727.8m as a low-margin exclusive handset deal with Noel Leeming was phased out.

Chief executive Mark Aue also boasts that 2degrees enjoyed market-leading growth, albeit off a relatively low base in each segment.

Its fixed-line broadband connections rose by 32 per cent to 108,000, putting 2degrees neck-and-neck with Trustpower, if still some way behind Vocus (owner of Orcon and Slingshot) on 205,000, Vodafone (just over 400,000) and Spark (just under 700,000).

And 2degrees number of contract mobile customers increased 11 per cent to 479,000, or around a third of its total mobile base.

2degrees still lags Spark and Vodafone in terms of the percentage of its customers who are on more lucrative pay-monthly rather than pre-pay contracts, and post-pay as a whole.

But Aue says it continues to make progress. An investor presentation, drawing on Commerce Commission figures, shows 2degrees with 5 per cent of the post-pay mobile market in 2012 and 16 per cent last year (with Vodafone on 39 per cent and Spark on 44 per cent).

2degrees is 73 per cent owned by the Seattle-based, Toronto-listed Trilogy International Partners, which has seen its stock drop form C$3.28 to a recent $1.16 over the past year - primarily over concerns about Trilogy's other major asset, a similarly-sized telco in Bolivia, where political instability has undermined confidence.

Figures released by Trilogy on May 11 show 2degrees growth slowing in the first quarter of 2020.

The revenue decline accelerated to 18 per cent or $24.2m less than the first quarter of 2019 - mostly pinned on the continued unwinding of the Noel Leeming deal, although Aue noted that new customer acquisition slowed as all of 2degrees retail stores were closed for normal trading during the level 4 lockdown.

Aue also noted that high-margin global roaming revenue had all but dried up with the border restrictions, which are expected to last at least 12 months. Analyst Peter Wise earlier told the Herald that Spark, Vodafone and 2degrees would lose a combined $114m in roaming revenue over the next 12 months, going by their 2019 run rate.

Like rivals, 2degrees has just been through an expense review, with 120 or 10 per cent of its staff of 1200 let go.

A hint of life beyond Huawei

Aue welcomed the government's decision to cancel the initial 5G auction and instead dish out spectrum at a fixed low-cost. He said it would help avoid further belt-tightening.

"It was great to get that clarity over the shorter term. It's a pragmatic approach taken by the government given what is an uncertain period we're all going through now.

"We've been working towards the introduction of our own 5G for some time," Aue said.

Analysts have noted that 2degrees has fallen behind Vodafone (which began a rollout in December last year) and Spark (which will kick off from mid-year). The situation has been complicated by Trilogy's relatively heavy debt load (the parent has US$529m of long-term debt), and the fact that the 2degrees most obvious source of funding - vendor-financing from its 4G incumbent Huawei - has been sidelined by the GCSB.

"I've been on the record a number of times saying this [5G] is not needed tomorrow," Aue says, "But we've been assessing vendors and acquiring sites. And now that we've got some spectrum you can expect to hear more about our plans over the coming months."

Aue's "assessing vendors" comment could make Huawei nervous. It marks a change from the 2degrees' CEO's previous narrative that there was plenty of times for what he saw as "political" issues around the Chinese provider to be resolved. Huawei has already seen an impatient Spark turn to Nokia Networks and Samsung to fill the gap.

The upside down

In February, Jarden analysts Arie Dekker and Grant Lowe saw a possible scenario where Chorus bought 2dgrees - to give it a wholesale operation across fixed and mobile - then partnered with Sky TV to give the pay-TV broadcaster the ability to launch mobile and broadband offerings that would take the fight to the home turf of Spark, which of course has moved on Sky's territory with its sports streaming push.

Aue was unmoved. "I can say no comment because there's nothing to comment on," he said.

"I find it amazing. We're either always for sale, or always buying something ... We've established ourselves not as a bit player but as a genuine third operator and we're really the only one that is growing. It's unfortunate that the world turned upside down with Covid but we've got a fantastic business. We were strong resilient going into this crisis and we'll come out probably a bit leaner but stronger as well as the economy recovers."