Analysts' verdict on Spark's big cloud push

Giving augmented reality (AR) a whirl at Spark's new Innovation Studio in central Auckland. Photo / Supplied

Spark went on a next-generation technology promotional push this week.

The telco presented to analysts on the future of its information technology and managed services operation, which now accounts for around a third of its business, or about $1.1 billion of its annual revenue, from a total addressable market of around $6b.

It expects compound annual growth of 4 to 6 per cent in the sector until 2023 as businesses rapidly digitise and shift to the cloud, spurred, in part, "by Covid-19". But it expects its own IT and managed services business to grow at 5 to 10 per cent.

Spark chief executive Jolie Hodson and Digitial Economy & Communications Minister David Clark at the opening of Spark's Innovation Studio. Photo / Supplied

Spark also launched its new "Innovation Studio" in central Auckland, designed to showcase smart sensors, and how they can be linked to the cloud over Spark's Internet of Things (IoT) network to detect the likes of noise, vibration, moisture levels, traffic flow or when a bin needs emptying.

Conspicuously, Spark named Amazon's cloud unit, Amazon Web Services (AWS) as its Innovation Studio cloud provider. And it announced that, "Together, Spark and AWS will explore and build IoT solutions for New Zealand companies".

In terms of IT and managed services, a Spark presentation by customer director Grant McBeath, product director Tessa Tierney and CFO Stefan Knight said it expects "most market growth will come from the cloud market, with strong growth in public cloud and the services that support customers' digital transformations."

An attendee uses a VR rig to "test drive" a Toyota at the opening of Spark's Innovation Studio in central Auckland. Photo / Supplied

Spark acknowledged that there will be increasing price pressure in the public cloud - or shared space in giant data centre operations. The global public cloud is dominated by AWS and Microsoft - although in Australasia, the half Infratil-owned Canberra Data Centres (CDC) has also become a major player.

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CDC recently announced plans for two giant or "hyperscale" data centres in Auckland, and a $300m build is now under way. Microsoft is also building three server farms in the city, with an undisclosed budget somewhere over the Overseas Investment Office threshold of $100m.

The hyperscale data centres - the first seen in NZ, given Google and AWS have yet to come closer than Sydney - will be attractive for the public cloud, partly because an on-shore server farm dispenses with data sovereignty issues. And partly because on the internet, geography is destiny, and the closer a data centre, the faster and cheaper it is for a business to connect to it.

An internet-connected water quality metre on show at Spark's Innovation Studio. Photo / Supplied

Against this downward price pressure, Spark points out that only about 25 to 30 per cent of NZ businesses have moved their software to the cloud.

And, more broadly, Spark's pitch is that it will take up the slack with higher-margin networking services and IT consulting - it recently launched a new consulting group called Leaven - and that it can act as a one-stop-shop for organisations who want to spread their operations over the public cloud, the private cloud (for example, a company having its own dedicated hardware with a shared server farm) and on-school "on-premise" computing, where some or all of an organisation's servers in their own office.

Spark says its across-the-board approach will allow its IT and managed services business to grow faster than the total market, at least, at least if it can keep cutting costs and nurture its partnerships with the hyperscale data centre operators, which will involve a delicate dance of sometimes competing with, and sometimes partnering with, the likes of AWS and Microsoft - remembering the telco also runs its own data centre business.

Giving augmented reality (AR) a whirl at Spark's new Innovation Studio in central Auckland. Photo / Supplied

So what's the verdict? Jarden analysts Arie Dekker and Grant Lowe upgraded Spark from "overweight" to "buy" after the investor briefing, and nudged up their 12-month target price to $4.73.

As well as giving Spark's cloud strategy a tick - with the qualification that it must continue to reduce labour costs and increase automation - the pair say the telco can boast "strong execution in its core business" and "an attractive [dividend] yield that
looks well supported over the next few years".

Dekker and Lowe says Spark is well placed to benefit from NZ businesses' move to the cloud through various services to support that transition, and its broader partnerships in what they says is still a "reasonably fragmented" market.

Spark shares were up 0.23 per cent to $4.42 in late trading. The stock is up 7.5 per cent over the past year.