2degrees increases profit but parent takes big impairment on South American strife

2degrees CEO Mark Aue in his company's new Auckland office, which was opened shortly before the Deltra lockdown. Photo / Dean Purcell

2degrees increased its operating profit during the third quarter and made customer gains in key areas.

But its owner, the Seattle-based, Toronto-listed Trilogy International Partners, clocked a big loss overall after a big write-down on its other major investment, Bolivia's NuevaTel.

2degrees' adjusted ebitda for the three months to September 30 edged up by US$1 million to US$30.6m - a 3 per cent gain on the year-ago quarter as gains in broadband and business mobile offset lower consumer growth amid lockdowns.

Revenue increased 8 per cent over the year-ago quarter to US$127m.

2degrees' numbers were revealed as Trilogy released its latest financials to the Toronto Stock Exchange.

Overall, Trilogy saw its quarterly loss widen from the year-ago US$20.3m to US$127.7m overall as it took a US$113.8m impairment on NuevaTel, with a warning things could get substantially worse in the first quarter of next year, with a potential cash crunch looming (see more below).

Trilogy's debt load remained large but eased slightly to US$621.6m from the year-ago US$630.8m.

There was no update on talks over a potential merger of 2degrees and Orcon Group (formerly Vocus NZ), which began more than a month ago (the talks were first revealed by the Herald on October 6 and officially acknowledged the next day after Trilogy went into a trading halt.)

Earlier this year, Trilogy said it was considering a trade sale of NeuvaTel and an IPO for 2degrees before the end of this year. The trade sale has yet to eventuate. The 2degrees IPO was put on hold for the merger talks.

Trilogy said 2degrees continued its recent growth spurt in two areas where it has historically been week: broadband and post-paid mobile, which grew by 13 per cent and 8 per cent respectively.

In post-paid mobile - favoured by business and higher-spending customers - 2degrees added a net 14,000 connections for a total 540,000.

In the more cheap-and-cheerful prepay mobile, it lost a net 24,000 to finish the quarter with 915,000.

Overall, 2degrees lost 12,000 mobile customers for a total of 1.46 million mobile customers (Spark and Vodafone both have around 2.5 million).

Analysts focus on post-paid customers, which are much higher yielding than the pre-paid market that has traditionally accounted for most 2degrees customers. In the third quarter, average revenue per user per month (arpu) was US$8.34 for 2degrees customers on pre-pay and US$31.47 for those on post-pay.

Both metrics represented gains on the year-ago quarter, when the average pre-pay user was spending US$8.13 per month, and the average post-paid user US$29.87.

The arpu numbers also indicate that 2degrees is boxing its weight.

For contrast, Spark recently reported prepay arpu of $12.29 (US$8.59) and post-paid arpu of $42.82 (US$29.92).

In broadband, 2degrees added 11,000 customers for a total 146,000 against the year-ago quarter's 128,000, ranking it fourth in the rankings of the top five ISPs (Spark has around 700,000, Vodafone around 420,000, Orcon Group around 230,000 and Trustpower around 110,000).

2degrees' broadband arpu was chipper, with the average customer spending US$52.77 vs the year-ago quarter's US$47.86.

"Our New Zealand business delivered another solid quarter of results," Trilogy president and CEO Brad Horwitz said.

"Our sustained post-paid subscriber growth, driven by a 25 per cent year-over-year increase in our B2B [business-to-business] base, more than compensated for lower growth in our consumer business that resulted from Covid-19 lockdowns during Q3.

"More than 37 per cent of our mobile customer base is now postpaid, compared to 34 per cent a year ago, as we continue to make progress in our long-term strategy of shifting our customer base to post-paid. Spark and Vodafone both have more than half their customers on contract.

"Despite disruption in the third quarter related to Covid-19 lockdowns, our service revenues and segment adjusted ebitda in New Zealand continue to increase. The resilience of our New Zealand operation can also be seen in our strengthening market position, as we continue to increase customer and revenue share. While Covid-19 related risks and impacts remain, our performance in Q3 and the continued stability of our business enables us to reaffirm our 2021 guidance range," Horwitz said.

It was the opposite situation in Bolivia, where an underperforming economy has been hit by Covid restrictions, and a government that has imposed relief measures including a holiday on paying bills such as phone service.

Horwitz said as well as the impairment, there had been layoffs at Neuvatel.

A results presentation to investors said: "Increased liquidity and cash challenges for NuevaTel ... could become acute regarding its ability to meet its financial obligations as they become due. Specifically, forecasted cash resources may not be sufficient to fund obligations due in the first quarter of 2022."

It added, "Management is currently working to address issues associated with meeting such financial obligations. These actions may include arranging extended payment terms with suppliers, arranging other external investment or seeking to transition the NuevaTel business to a third party."

Inside 2degrees' new office. Photo / Dean Purcell

Earlier, economist and AUT senior research fellow Richard Meade told the Herald that if a 2degrees-Orcon merger was agreed by the two sides, it should be a done-deal to secure Commerce Commission approval.

2degrees was strong in mobile but weaker in broadband, while Orcon was weak in mobile but strong in broadband. United, they would constitute a stronger challenger to market leaders Spark and Vodafone, increasing market competition.

Associate Professor Chris Noonan, who lectures in competition and company law at the University of Auckland, also saw little prospect that the ComCom would attempt to block a 2degrees-Orcon Group deal, for the same reasons.

Orcon Group told the Herald there was no immediate update on the merger talks.

Trilogy did not immediately respond to a request for comment.

The company's Toronto-listed shares closed today at C$2.09. The stock was languishing at C$1.07 before being pepped up from the start of this year as Trilogy put the potential 2degrees IPO and NeuvaTel trade sale on the table.