Spark chief executive Jolie Hodson (left) and chair Justine Smyth. Photo / File
Spark has reported a 368 per cent jump in first-half profit to $837 million following the sale of 70 per cent of its cell tower network to a Canadian pension fund for $911m.
But setting aside the celltower windfall, the telco’s adjusted net profit fell 7.8 per cent to $165m. The telco cited higher overhead costs, an inflation-fueled spike in labour costs, and more cloud and broadband competition.
And while Spark stood by its earlier full-year ebitdai guidance of $1.186b to $1.23b thanks in part to the return of roaming (helping lift mobile service revenue 8.8 per cent), cost-cutting and higher-margin wireless broadband customers now accounting for 29 per cent of its base, it said operating earnings are “now expected to be lower in the range”.
Shares fell 3.6 per cent to $5.09 in early trading.
Jarden analysts Arie Dekker and Grant Lowe said that weighted for the celltower sale, the first-half result was “considerably weaker than we were expecting.”
Spark’s cloud computing division, where revenue fell 4.5 per cent, had emerged as a “key risk factor”. The telco would have to watch its costs, the pair said. On the upside, they noted that Spark had stuck with its full-year guidance - albeit now forecasting it would come in near the bottom of its range. Dekker and Lowe maintained their “overweight” rating, with its target price unchanged at $5.19 “on first impression”.
The telco, which previously said around a third of the proceeds would be returned to investors via a share buyback and increased dividends, today announced a $350m share buyback from April, and confirmed its full-year dividend - long-stalled at 25 cents per share - would be 27cps. The half-year dividend was 13.5c.
At the time of the sale, Spark - which has a 30 per cent stake in Connexa - the “TowerCo” created to run its cell tower network - would continue to invest in upgrades.
After Cyclone Gabrielle, the question could become more politically sensitive (more on which below).
Spark said today that full-year capital expenditure growth would now be $145m-$165m - an increase of $90m-$110m funded by proceeds from the tower sale. The extra funds would go to data centre investment and an accelerated 5G rollout. Total capital investment for FY2023 will now be $520m, and $240m-$260m from the Tower sale has been earmarked for “future capital investment”.
The telco blamed other service providers for cyclone communication wipeouts this morning, saying in its results commentary, “While Spark’s services were affected, this was largely due to power outages and fibre cuts – with mobile infrastructure remaining intact.”
Spark also booked a one-off cost of $52m (as previously flagged) and a tax provision of $14m related to the transfer of Spark Sport content to TVNZ. The provision will cover the cost of sports rights through to FY2028. Despite the short-term costs, Jarden’s Dekker and Lowe said it was a “welcome exit” from sports streaming.
Chief executive Jolie Hodson told the Herald that direct costs from Cyclone Gabrielle would be in the “single-digit millions”. Cell tower infrastructure had come through largely unscathed. Outages had been due to power cuts or damage to Chorus fibre cables.
There could be more costs down the track. Earlier this week, new Communications Minister Ginny Andersen told the Herald that telecommunications was likely to be included in a review of the Cyclone Gabrielle response. Hodson said today that a key element would be the quality of overall infrastructure, given telco cables often ran along bridges and roads. The Spark CEO favours a public-private response, similar to the cell tower disaster-proofing that occurred across the Tasman following bushfires in 2019 and 2020.
Revenue was up 34.1 per cent to $2.53m or 3.2 per cent when adjusted for the cell tower proceeds. An 8.8 per cent increase in mobile service revenue - with the return of global roaming delivering a $20m boost - was offset by a 3.4 per cent fall in broadband revenue to $313m and a 4.5 per cent decrease in cloud, security and service management revenue to $214m.
Ebitdai was up 93.7 per cent to $1.04 billion, but fell 5.2 per cent to $510m on an adjusted basis.
Free cashflow fell by a third to $115m as capex increased 14.7 per cent to $250m.
At Spark’s annual meeting on November 4, the telco stood by the sale of 70 per cent of its cell tower network assets to a Canadian investment fund for $911m after a retail investor questioned whether infrastructure should be sold offshore.
Spark chairwoman Justine Smyth said directors had voted unanimously for the sale.
“We looked at an efficient use of our capital. And the nature of what’s sold is the passive towers only. So none of the assets of the tower that give us a competitive advantage to our business - which is the mobile components on the tower - all of those are retained in our ownership,” Smyth said.
Around a third of the money was earmarked to be returned to shareholders through a higher dividend (its profit payout, long-stalled at 25cps, is forecast to be 27cps for the full-year FY2023) and share buybacks, and around a third will be used to pay down debt.
The balance for network upgrades and lease arrangements for the cell sites.
After the telecommunications wipe-out on the East Coast with Cyclone Gabrielle, there could now be more political sensitivity about how the windfall is spent.
Yesterday, Hodson told the Herald that Australia’s response to the “Black Summer” bushfires of 2019/2020 - which saw government money subsidise a two-year programme to make telco networks more resilient to natural disasters - provided a model for NZ’s cyclone response.
She also talked about the possibility of central and local government investment in the likes of generator warehouses. And Vodafone emphasised that more resilient telco networks would require Crown investment in related infrastructure, such as roading and bridges.
New Communications and Digital Economy Minister Ginny Andersen came at things from a different tack in her initial response, saying: “It’s important to remember that these are privately owned businesses and assets”.
Andersen said it was likely that telco network performance would be included in a review of the overall response to Cyclone Gabrielle.
“We know how critical our services are for people during an emergency and our absolute priority has been on urgently restoring connectivity and supporting our customers,” Hodson said this morning.
“As we now emerge from the immediate response, we will turn our focus to the bigger discussions we must have as a country on the level of resilience we will need all our infrastructure to have in the future. Investment in resilient and adaptive infrastructure has been a strategic focus for Spark for many years and this will not change.”
Spark shares closed Tuesday at $5.28. The stock is up 16.0 per cent over the past year.
Going into today’s result, Forsyth Barr had an ‘Outperform’ rating on the telco, with a 12-month target of $5.50.
Can the telco navigate through its perfect storm?