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UPDATE: Spark first-half profit falls 3.4%

UPDATE: Spark first-half profit falls 3.4% as cost of Quantum transformation offsets revenue gain

(Adds detail throughout, updates share price)

By Paul McBeth

Feb. 21 (BusinessDesk) - Spark New Zealand's first-half profit fell 3.4 percent as the country's biggest telecommunications company ramped up spending on a new transformation programme aimed at making it the nation's lowest cost operator.

Net profit declined to $172 million, or 9.4 cents per share, in the six months ended Dec. 31, from $178 million, or 9.7 cents, a year earlier, the Auckland-based company said in a statement. The telco's favoured measure, earnings before interest, tax, depreciation and amortisation, slipped 1.7 percent to $463 million as operating costs rose 2.9 percent to $1.36 billion, outpacing a 1.6 percent increase in revenue to $1.82 billion.

The shares fell 1.6 percent to $3.40 percent and have slipped 0.4 percent over the past 12 months.

The higher costs were led by an 11 percent increase in operating expenses to $282 million, of which an extra $13 million came from the Quantum plan to widen margins through simplification, digitisation and automation, and a $10 million increase in advertising.

“As indicated at the end of the previous financial year, the transformation programme has associated costs of change, and revenue growth over the half was partially offset by $13 million of such costs," chair Justine Smyth said. "As a result, earnings before interest, taxation, depreciation and amortisation (ebitda) over the period declined."

The Quantum programme has so far delivered annualised gross reductions in operating costs of $74 million, of which $20 million are in labour costs. That helped keep Spark's labour expense line flat at $278 million and the company expects that to drop to an annual $500 million by the end of the 2018 financial year. Spark's full-time equivalent employees fell to 5,384 as at Dec. 31 from 5,554 six months earlier, while contractors rose to 230 from 220.

At last year's annual meeting, chief executive Simon Moutter said Spark was exploring ways to retrain staff halfway through their careers as the changing labour environment was leaving people bereft of the skills to adapt to rapid change.

The telecommunications company was flattening management structures and giving units greater autonomy, known as an 'Agile' model, and Moutter today said that shift shows "significant benefit". Spark is now working out what its new operating model will look like and has identified broadband, managed data, and digital experience as parts of the company capable of making early changes.

Spark affirmed annual guidance for ebitda and revenue to rise by as much as 2 percent, however, it's considering accelerating the Quantum plan which would see the telecommunications carrier take on extra costs in the second half of the year.

"No decision has yet been made, but if the programme is accelerated, then FY18 guidance may reduce due to the associated costs of change," Smyth said. "We will update the market if appropriate."

The broader telecommunications market has been tight for operators in recent years as they vie for customers unwilling to pay too much for broadband, and Spark's broadband revenue slipped 0.9 percent to $341 million, even as it added 7,000 customers in the six months to Dec. 31, giving it 694,000.

To counter that and avoid paying Chorus for wholesale access, Spark has tried to switch customers on to higher margin services such as fibre and wireless, and Moutter said it's had some success and is "on track to be mostly ex-copper by 2020" which is already delivering $46 million of savings in reduced access costs."

Fibre customers rose 20 percent to 206,000 and wireless customers climbed 24 percent to 104,000, offsetting an 11 percent decline in copper customers.

Spark's home, mobile and business unit, which services households and small businesses, lifted ebitda 2.2 percent to $420 million on a 1.5 percent gain in revenue to $1.03 billion, primarily on increased mobile revenue.

The digital division, which deals with large business, enterprise and government, increased earnings 0.6 percent to $179 million on a 3.1 percent gain in revenue to $633 million, driven by increased demand for 'as a service' products underpinning its cloud, security and service management revenue, which Spark said has strong potential to grow.

The ventures and wholesale unit posted a 7.9 percent decline in earnings to $58 million on a 0.8 percent dip in revenue to $119 million as it scales back legacy services to wholesale customers and increased spending on new ventures.

The connect and platforms business, which covers Spark's network performance and investment programmes, narrowed its ebitda-loss to $174 million as it rolls out a 4.5G mobile network and continues decommissioning the PTSN (public switch telephone network).

Capital expenditure rose 17 percent to $262 million in the half and is still expected to be about $410 million for the year.

The board declared an interim ordinary dividend of 11 cents per share and a special dividend of 1.5 cents, leaving the first-half return unchanged at 12.5 cents. The dividend will be paid on April 6 with a March 16 record date.

(BusinessDesk)

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