Analysts’ verdict on Spark’s three-year plan

Spark’s three-year strategy, revealed just before Easter, included new details about how it would spend $350 million generated through the recent sale of 70 per cent of its cell tower network (the balance of the proceeds from the $900m deal have already been earmarked mostly for shareholders through a buy-back and higher dividends, with some proceeds also socked away to cover the costs of a leaseback deal.)

The telco said it would spend “$250-$300 million in the high-growth data centre market and $40-$60m in 5G standalone” during its 2024 to 2026 financial years.

Without putting any numbers on it, Spark also said there would be “a new focus on converged technologies, and continued investment in subsidiary Mattr”. Mattr deals in the business of verifying your identity online, and earlier won a key contract (on undisclosed terms) to supply user-verification technologies for the Ministry of Health’s new online vaccine register. At its strategy day, Spark announced it had signed a “significant” contract with the New South Wales government. The telco owns 94 per cent of Mattr, founded in 2019 by its departing chief digital officer Claire Barber.

New Zealand is in the midst of a multibillion-dollar data centre construction boom, fuelled by the growth in cloud computing. Global giants Amazon and Microsoft are building their first local data centres. Spark is participating from different angles. The telco has been show-ponied as an anchor tenant for Amazon Web Services new Auckland cluster, but is also investing to upgrade its own Takanini data centre to a 17 megawatt server farm. The dual approach reflects that Spark is both an AWS partner and a provider of its own hybrid and private cloud services.

“5G standalone” is pure-blooded 5G, trialled by Spark last August in what it billed as an NZ first. The first wave of the faster mobile technology, from all-comers, had some degree of dependence on 4G. Spark pitches 5G Standalone as more capable for new technologies, including AI-powered apps, and a vehicle for opening new commercial markets (look for more of a push of fixed-wireless broadband into business. Spark’s success in the consumer market with fixed-wireless has already riled Chorus). The August trial, in partnership with AWS, involved an edge computing technology - or speeding cloud computing by moving intensive apps to a mobile network.

In financial terms, Spark said it was targeting between 2 and 4 per cent revenue growth per year for 2024 to 2026 and low-to-mid single-digit operating earnings growth.

“Underwhelming”

Analysts were not bowled over by Spark’s three-year blueprint, and made no significant changes to their projections.

A Forsyth Barr team (Aaron Ibbotson, Matt Montgomerie and Benjamin Crozier) said the briefing involved “underwhelming targets” but was “reassuring”. They kept their rating at “outperform” and their target price at $5.50.

Jarden’s Arie Dekker and Grant Lowe kept their rating at overweight but chipped their target down from $5.15 to $5.11 for a strategy they said was “meeting expectations” (Spark’s shares closed at $5.04 ahead of Easter. The stock is up 4.1 per cent for the year).

While the headline numbers were in line with existing forecasts, analysts still found some interesting elements.

Forbarr’s team said “Mattr was the highlight of the day” from the three-year strategy briefing.

“Mattr is a globally credible inhouse startup within the small but rapidly growing digital identity market ... which is still in its infancy and is expected to grow at a 90 per cent-plus compound annual growth rate through to 2031,” they said.

Mobile was seen as a continuing strong point but the ForBarr team said price pressure on fixed-line broadband and private cloud would “likely” damage Spark’s outlook.

On the upside, 5G Standalone had the potential to boost Spark’s high-margin fixed-wireless broadband business, the ForBarr team said.

Jarden’s Dekker and Lowe said “visibility remains low” for Mattr and other digital initiatives but that “Spark looks set to benefit from investment in these areas” long term.

The pair said the lack of cloud growth had been a disappointment over the past three years (Spark’s cloud revenue fell 4.5 per cent in the six months to December 31, 2022). And, looking ahead, “The cloud business - largely private cloud - is also set to be a drag, as Spark deals with margin contraction in private cloud and looks to transition more of its offering to hybrid.”

Expect the unexpected

Spark holds a strategy day every three years. But in a fast-moving industry, it’s not always possible to anticipate or at least share, every major development.

Spark’s previous three-year strategy covered FY2021-FY2023. “The period will be remembered for the successfully executed decision to realise value from the passive tower assets,” Dekker said.

But the sale “was in the mix” when the telco outlined its three-year plan in September 2020.

The known unknowns

Late last year, Spark, Vodafone and 2degrees were all directly allocated 5G spectrum, at no cost, in return for a commitment to expand their 5G coverage in provincial and rural areas. The details of where, when and at what cost are still being hammered out with the Government, but in an NZX filing, Spark said it would commit an additional $24m to the Rural Connectivity Group (a joint venture with Spark and 2degrees for public-private rural connectivity projects) as part of the quid pro quo.

The shape of the final 5G deal could now be influenced by the communications failures in the wake of Cyclone Gabrielle, which Digital Economy Minister Ginny Andersen says will form part of the Government’s review into the national disaster (again, on so far unknown terms and timeline).

Spark chief executive Jolie Holdson told the Herald she saw Australia’s response to the 2019/2020 “Black Summer” bushfires as a model. The cost of a two-year programme to make around 1000 cell tower sites more resilient was shared between the government and telcos.

Hodson said many of the communications failures as a result of Cyclone Gabrielle stemmed from road and bridge failures - meaning public infrastructure upgrades would be needed to make telco networks more resilient.

Spark also recently announced it would switch off its 3G network in “late 2025″. That target is outside the telco’s new three-year plan, but it will have to infill during the period. Only very old handsets (such as the iPhone 6, released in 2014) will be rendered inoperable by the move. But today, newer phones still trip down to 3G coverage in areas where they can’t get a 4G or 5G signal.

“We want to assure customers that we will be enhancing 4G coverage in areas where there is currently only 3G available and we’ll continue to invest in both our 4G and 5G networks ahead of the 3G closure,” a Spark spokesperson told the Herald.

One (formerly Vodafone) plans to shut its 3G network in August next year.

2degrees has yet to set a date for switching off 3G.