Spark New Zealand Limited

Simon Moutter - Managing Director Jolie Hodson - Chief Financial Officer

Tristan Joll - UBS Arie Dekker - First NZ Capital Securities Adrian Allbon - Craigs Investment Partners Blair Galpin - Forsyth Barr Ian Martin - New Street Research Brian Han - Morningstar Australasia Peter Wise - Senior Research Director

Well, good morning, and thanks for joining us. And I'm joined here by Jolie Hodson, Spark New Zealand's CFO.

And look, it's really pleasing to present a set of results which I think further evidence that the turnaround of the Spark New Zealand Group is well and truly underway, and I think exemplified by the first four bullets on the opening page of our presentation. FY15, the return we achieved to EBITDA growth last year has been reinforced again in the first half of FY 2016, so pleasing to sort of lock that trend.

And we really do have very good sales momentum across the business in both business and consumer markets. We're ripe to have achieved some underlying revenue growth for the first time in many years.

And it's really great to see Mobile and IT Services revenue growth exceeding the declines in fixed legacy revenue lines. So that's an important marker for a better future as well.

We've also seen our cloud strategy working. It's grown.

Not only is it adding significant margins, but it is helping us win large-scale deals with big enterprise and government customers. We've been focusing still on value in the competitive broadband market.

It's a highly competitive market. But to that end, a new development and soft-launching a number of new fixed wireless broadband options.

Our Ventures team has been working well. We're in the first reset of capturing some learnings there, and continuing to evolve our media strategy.

We finally achieved some copper price input certainty, following the closure of the regulatory process there. And that means we can get on with business with a sense of confidence from here.

And I think overall seeing just a general positive impact of the investment we've made in brands, culture, networks, digital services and spectrum; and all of those factors now increasingly evident in our market activity and results. And I think if you-- returning to the key results page, I'd draw out four of these.

I think the solid 4.4% increase in EBITDA is very much in line with the guidance we gave at the commencement of this financial year. A fantastic 11.7% increase in Mobile revenue, excellent 9.2% increase in IT Services revenue, and solid customer growth in quality Mobile customers, which I think further evidence continuing gains in Mobile market share.

So turning to that, and we are-- we do really think we are continuing to close in on leadership in the Mobile market. Incredibly strong growth in customer data, usage around 70% year over year, is still in here.

It is leading the market to try to monetize some of that growth. And I think we are seeing a return to overall Mobile market revenue growth, which is an encouraging positive development for the industry after a year or two of contraction in recent times.

So we're continuing to play our strategy, which is to win through value-added services, multiple brands and customer preference, backed up with a superior network and service delivery. And so the signs are we're getting that right by and large.

The Mobile revenue growth has been driven by incredibly strong performance in the consumer market, partially offset by the continuing challenges with confronting the price pressure in the large bids that we have front into in the enterprise and government markets. Skinny has done a very strong job building its position, now the number-one rated brand in the Mobile market in New Zealand, a tremendous performance for what is essentially a startup business, who used a very disruptive approach in a very digital delivery model.

We're very proud of our Skinny team, and what they've achieved. From here on, I think the focus continues to be on sort of pulling back from the type of offers that drive churn, in the prepaid market in particular, pre-loaded SIMs and heavily subsidized handsets that we've seen too much of in prepaid over recent times.

And we think the only winners from that are the mass-market retailers who are sort of feeding off the churn between Mobile brands here. So we're working hard to find a way to move the market back from that.

We continue to work to monetize demand through our value-added services in the consumer markets, and things like Spotify Premium included with our Mobile, our Wi-Fi network embedded in our offers, and working hard to drive the uptake of M2M and mobility service options in the business markets. On Platform IT, the strategy is absolutely working here.

Spark Digital's shift to focus on repeatable Platform IT services is generating top-line and bottom-line benefits, and now making a significant contribution to replacing the revenue that we're losing from declining legacy Telco price and service substitution in the large business and government markets. So we're very pleased with the performance there.

We acquired the CCL Group in December. And that reinforces Spark's position.

And Cloud CCL is a highly regarded South Island oriented business there. It's a very well-run organization, got an impressive management team.

And we're delighted to have them on board and as part of our Platform IT mix. Deal flow was particularly strong in our big business market in the last six months, a number of very large wins.

And these are large technology and transformation contracts. They're not just small Telco contracts for inputs.

They are large-scale deals with KiwiRail, Foodstuffs North Island, New Zealand Racing Board, Genesis Energy and Inland Revenue, just to name a few very significant wins. And all that's led and contributed to Platform IT services revenue being up 27% year over year, which is a terrific result.

Broadband market, look, it’s tough going in broadband. It's a very, very competitive market.

Last count I did, there were 80 players. I think 79 of them are probably unprofitable.

It is a very challenging place to play, and we can see that now with surging demand and the pressures of fiber adding even more work and more activity into that market. So fiber demand has increased rapidly in the last few months.

We are absolutely capable of acquiring our share when we choose to market. But we do balance our marketing activity with the poor customer experience and Chorus and the local fiber companies and store capacity.

We're absolutely confident when we drive it, we can pick up the share we need. But at the same time we have to be cautious about what is still a very clumsy customer experience, and an experience which is impacting us across the board in our call centers that consumer excess resource.

So price and competition is still driving some loss for us in some segments. We're not yet on top of that.

But we do have a number of initiatives in the pipeline, and our overarching aim here is to maintain our current market share and grow market value through upsell to higher-value plains, and the transition to fiber. So the mainstay approach to that from here on is to stay well-focused on technical offers to define at-risk customers and to work with our value-added service inclusions.

Things like our Lightbox product can play a role here. We're working with now a couple of alternative brands; Bigpipe, the business built; and NOW, a business we bought a stake in recently, a fast-growing regional market ISP.

And we've launched, as I said before, soft-launched some LTE options for fixed wireless broadbands in rural markets and selected urban markets via the Skinny brand. Spark Ventures, been a terrific 2.5 years with Spark Ventures to date.

And as you might expect, after 2.5 years, experimentation, experiencing learnings. We're now in our first material reset for that group to capture those learnings, change the settings for how we manage that business, and set us up for further success in the next phase with Spark Ventures.

And I think primarily though, you can assume that the focus of the Spark Ventures unit will remain on innovation. But the emphasis will shift increasingly to leveraging our core business more, and we'll be a little more cautious where we're moving outside into adjacencies, new markets, and some of the joint venturing activity we've been involved in, which we've found a little bit harder going in some areas.

Skinny, Bigpipe and Wi-Fi were very successful disruptor plays. They were launched and managed by Ventures.

We used those to experiment with disruption and disrupting our own offers. We've learned a huge amount through that.

And those businesses are now being migrated back to the main business, and those learnings applied across the whole Spark Group. Qrious and Morepork are building their reputations and awareness, and sales are tracking steadily up.

And Lightbox has established a very credible position in what is a very fast-changing and developing media market. Ventures is now providing digital leadership and customer experience leadership capability across the Spark Group, and we're soon to embed that more formally in some changes we're making.

And I'll refer to those again in a minute. A lot of valuable learnings, but adjusting strategy to leverage that success and pivot away from some of the areas we found a bit tougher to get traction.

Just on Media for a moment, we are committed to being in the video-delivered entertainment business. And when you look at the simple fact that up to 70% of our paid network traffic now is video, we need to have a role, and we wish to play a role in the home with digital services.

And an entertainment offering is clearly going to be part of that. In 2014 we launched Lightbox as a standalone, over-the-top content play.

And since that launch we've built a very strong, credible, leading subscription VOD brand in New Zealand, with nearly 80% brand recognition and piles of high-quality award-winning content. We've learned a lot at the same time.

And the market has changed a lot in the time since launch. A lot of the market is still nascent.

But the macro trends are very evident. Video over IP in mobile networks is booming.

Content consumption is shifting to on-demand and IP delivery. And we own an IP network, and we know how to deliver services.

So it's a sensible place for us to be. The fragmentation of content consumption has accelerated.

So the role of aggregators is fast-changing in that sense. And customers are finding a new way to content themselves a great deal of the time.

The mass majority is still largely tied to legacy TV providers with premium sports content still key. Sports still matters in New Zealand, and most big sports are tied up for the time being.

Some niche sports have worked well for us on SVOD. English Premier League was a good example of that.

And some have a harder demographic to shift to. Golf would be a good example of that.

All in all, the commercials can be pretty hard to make work, and we're also clear that the game will keep changing. So as you'd expect, we're taking those learnings on board, and we're just in the process now of adjusting our approach to be a bit more flexible.

We're not lessening our commitment to media, but we are evolving to a more platform-centric approach. And that means we'll be moving to a more open platform, with a mix of owned and revenue-share content.

We'll be wanting to partner with more content providers who are willing to do so on a revenue-share basis, rather than having us as the buyer of content, the aggregator in taking all of the content risk. We'll want to be more integrate-- the service to be more integrated with our broadband services.

It will be more integrated with our Mobile and other small screen offerings. We'll be looking to further differentiate away, as we've always intended from the global OTT video services, the likes of Netflix and the others that we like you see come to market in New Zealand.

And overall, we're aiming to be more flexible and to have less risk in the process, as the market keeps evolving. All that said, we've only just decided in principle to evolve our strategy.

So details of how it will show up for customers and content partners are still to come. Operationally, it's an interesting time as we press further and further toward a digital first focus.

And now we've got a big effort to stay ahead of the dramatic shifts that we've seen to a digital world. And to that end, first and foremost, we have to keep ahead of it in network capacity.

So we've significantly increased network capacity, resilience and performance over the first half of this financial year to accommodate the massive growth that we're seeing in data usage. The reengineered IT stack is now a key enabler of digital capabilities.

We're within a few months of the completion of our reengineering program, which has been a 3-year-plus major change program. It is enabling us to do much faster product development, and much more innovation across the Group.

And we're now adding to that an API strategy to make access to those capabilities more straightforward for our internal businesses, but also where we're headed to opening that access up to third-party innovators and developers. We've put in place late in the first half, a more effective and efficient delivery model between Spark Digital and Spark Connect.

And we're now lifting the ante on the back of that by moving toward a split of our Spark Connect business into a Platforms business unit and a Network business unit. Those units will operate at a sort of different speed, and with different development ops models in the future.

I'm excited by the potential of that Spark Platforms business unit to up the pace of our development, and our digital capability, and to embed customer experience-led design into everything we do. Just this morning I announced the carve-out of the slim-down Spark Connect business unit.

That will take effect from the first of July, and will be headed up by a new appointment to my leadership team in Mark Beder, a top-class executive in the business. He's been with us for a while, and well across all of the issues in current and future networking.

And David Havercroft will continue to preside over both units for the time being, and is now working with me to set up the new Spark platforms business unit. One early learning for us on digital first has been that wireless and 4G-based and particular data connectivity, is much easier to do digital first than fixed network data business, with all the complexity of fixed access.

So in that sense, we've pushed out varied digital offerings in wireless WAN for enterprise, a new rural wireless broadband service for rural customers, and Skinny broadband service for urban customers, all operating over our 4G network. And we'll be putting a lot more emphasis on this type of product, because it is so straightforward to create on a digital first basis.

And the customer experience is so good by comparison. We did want to note that we finally have achieved price-- or copper input cost certainty rising unusually, I think, in our country.

We've ended up with a rising copper and fiber input cost pathway. So we've mapped out here the decisions by the Commerce Commission who've presided over the copper process and the Crown Fiber Holdings contracts with the LFCs on fiber.

But the good thing here is we do have certainty, albeit with a rising price path over the next few years. That rising price path will place pressure on retail broadband prices naturally.

And it's interesting to note that there is no difference in the input cost between naked and clothed broadband. So we'd expect to see some movement in closing of the gap between those two product lines over time.

The inflated copper input cost increase does create incentives to drive migration to alternate access technologies. We've ended up with higher price than we expected there, therefore a stronger business case for migration.

And we're certainly working through and considering those options today, particular where it can be done on our 4G wireless capability. So I'll hand over to run through the core numbers to Jolie Hodson.

Okay. Good morning, everyone.

So if I stand back from the results, there's three key things I'd take out. So firstly on an underlying basis, revenue has returned to growth after a long period of decline, with Mobile leading that recovery.

Our investment in Platform IT services is paying dividends with top-line growth of 27%. And continued productivity, lower access costs, offset by costs associated with the growth noted above, is leading to growth in earnings.

If we look on a reported basis, this translates to revenue declining at 4.1% to NZD1.7 billion. However, that's before we re-base for divestments and regulatory changes.

If we do that, revenue grew by 1.6%. Operating costs reduced by 7% to NZD1.3 billion.

And when we re-base those for the same changes as revenues, we see operating costs grow 1%. And as a result, EBITDA grew 4.4% to NZD455 million.

Depreciation remained flat, as reductions from lower capital expenditure were offset by spend on assets with shorter lives. Financing costs increased by 8%, to NZD13 million, as interest income fell following the sale of TRL.

And we also saw some declines in our interest cost, lower debt levels, and reduction in interest costs. The combination of these factors meant that net earnings grew 7.5% to NZD158 million.

If we look at reported EBITDA that grew the 4.4% due to the improving underlying business momentum from solid operational performance. Growth in underlying operating performance of NZD32 million was driven by growing Mobile and IT Service revenues, reduction in the UBA input costs, and productive gains, which helped more than offset the decline in fixed margin.

The prior period included NZD11 million of one-off rebrand costs, which did not repeat in FY16, and NZD6 million of EBITDA from the businesses that have since been divested. Southern Cross dividends were also higher in the first half last year by NZD5 million.

The underlying improvements in the business have enabled us to invest in growth options, including Lightbox TV, Qrious, Morepork, and [indiscernible]. There's also been a lot of discussion about when revenue would turn the corner.

And I'm pleased to say we've achieved this in the first half, with 1.6% or NZD27 million growth on the re-based revenue. There are 100-plus millions of adjustments related to the divestments of businesses, so the Cook Islands, TRL and the International Voice business, and the shift in primary services with Chorus now charging our wholesale customers directly.

Within that operating result, the revenue growth in Mobile and IT Services is particularly pleasing, more than offsetting that decline from Voice and Managed Data. The Mobile business continued to perform well, with revenues up NZD59 million, or 11.7%, driven by our consumer mobile brands.

Growth was strong in both usage revenues and handset revenues. IT Services revenues grew NZD23 million, as customers embraced our cloud offerings, and that's more repeatable, scalable business that delivers good margins, and remains a key focus area for Spark Digital into the future.

Broadband revenues grew as customers upgraded to unlimited plans, and in H2 we will see the benefit of the price increases that followed the copper input cost increases. Voice revenues decreased NZD50 million, in line with previous trends.

Managed data revenue declined as wholesale customers migrated off traditional data products. And in December we added CCL through the acquisition of this business.

So NZD5 million of revenue came in, giving us a total revenue for the half of NZD1.7 billion. If we look at operating expenses now, total operating expenses declined by 7% to NZD1.3 billion.

But when we make the same adjustments to re-base the cost to reflect the divestments and also the primary service change and the rebrand, you can see that cost increased at 1% on an operating basis. Cost of sales increased as mobile handset costs increased 12%, reflecting a combination of volume growth and increasingly expensive handsets.

IT Services cost of sales grew faster than revenues, and part of it has to do with the higher mix in the half of the lower-margin procurement sales. Labor cost reduced NZD15 million, as we continue to drive for efficiency improvement, particularly in back-office delivery functions of Spark Digital and Connect.

Investment in Spark Ventures also increased costs, as we focus on establishing these businesses, and building appropriate support mechanisms around them. And finally, you see the same adjustment in expenses for bringing CCL into the Group in December, so NZD4 million of costs related to that business, with approximately 200 people joining the Spark Group.

We turn to the business units. So Spark Home, Mobile had an excellent first half, as the focus on customer outcomes translated into commercial and financial success.

EBITDA of NZD390 million was up 9.5%, and reflects rising customer preference, a strong focus on deliver of improvement initiatives, and the impact of the copper input decreases. Outstanding performance in Mobile, with revenue up 18%, and service revenues up 12%, driven by providing additional value in music and social media.

Our focus has shifted from connection growth to monetizing the increase in data from existing customers. Broadband revenues have grown 6%, driven by a shift to higher-value plans, albeit offset by small customer losses during the period at the low end of the market.

Voice revenues declined 14%, in line with previous trends. Our broadband costs fell as input costs decreased temporarily.

These costs increased again in December as the EFPP determination was released. However, this increase in cost will be offset by future price increases across our broadband plans.

Fiber provisioning continues to be an issue, and is resulting in poor customer experience. We have increased our resources, and NOW contact centers to improve this, and remain committed to improving the experience for our customers.

Investment in Spark Ventures contributed to the increase in costs, as we brought businesses to market, like Morepork, and grew our existing business like Lightbox. If we look at Spark Digital, Spark Digital's transformation to Platform IT provider continues.

And this is evident in the financial results. EBITDA has been stabilized through growth in IT Services and driving operational effectiveness to offset the price pressure we're still feeling in telecommunications.

Overall our revenues declined by 3.4%, which was driven predominantly by the Telco. Voice revenue declines of 11.6% due to customer consolidation of loans, shift to IP-based services and price pressure from renegotiation of major contracts.

Our Mobile revenues declined 11%, reflecting ARPU pressure, as we focused on re-signing existing customers, some of this being offset by growth in Mobility IT, which covers areas such as M2M and other value-added services enabled via Mobile. We haven't yet seen the previously anticipated slowing in the rate of decline in Mobile.

Platform IT revenue grew almost 28%, as customers embraced cloud, and we migrated away from more of the traditional IT services, which declined by about 5%. Costs continued to decline as we focused on productivity to help offset the price pressure in telecommunications.

And strong business wins, which Simon noted earlier, and a solid pipeline of customer opportunities give us confidence that this strategy is appropriate. If I turn now to capital expenditure, over the last two years we've reduced our capital envelope in line with the changing profile of our business.

We expect to maintain CapEx below NZD400 million, or around 11% of CapEx to sales. We feel that's the appropriate level of investment for a business of this nature.

We have previously guided that CapEx for FY16 would be around NZD380 million. During the half an opportunity arose to purchase spectrum in the 2300 megahertz range at a cost of NZD9 million.

Accordingly, we are lifting our guidance to around NZD390 million for FY16. This spectrum purchase remains subject to Com approval, and guidance will only be lifted if approval is granted.

In the first half, capital expenditure was NZD216 million. We made more progress on reengineering, with two significant deployments.

The first is delivered improvements for customers who purchased fiber online, and is essential to improving customer experience in this area. The second provides new billing system functionality for our pay-monthly Mobile customers.

We continue to invest in the best 4G Mobile network in New Zealand, further enhancing our optical transport network, and increasing capacity in the broadband network to deal with the massive data growth driven by video streaming. So if we shift to capital management now, our capital management principles remain unchanged in FY16, with our preferred method of shareholder distributions to steadily grow our ordinary dividends over time, in line with earnings.

With CCL market buyback as at December 31, the Board has declared an ordinary dividend of NZD0.11 per share, and a special dividend of NZD0.015 per share for Half 1 FY16, a growth of NZD0.035 on the same time in FY15. We also anticipate that special dividend of NZD0.03 per share could continue into FY17, subject to no material changes in the business, and imputed at least 75%.

If I turn now to guidance, our performance during H1 confirms we're on track for our guidance. Specifically our EBITDA guidance remains at 0 to 3% of growth on the reported FY15 EBITDA.

We are increasing our CapEx guidance by NZD9 million to account for the spectrum purchase, bringing our total CapEx guidance for FY16 to around NZD390 million. There's no change in our ordinary dividend of NZD0.22 per share, or the special dividend guidance by fully imputed, and it's subject to no adverse change in operating outlook.

I'll now hand back to Simon.

Thanks, Jolie. And look, as we've said in our strategy briefings last year, I think the business is in the best shape it's been in for many years.

We're encouraged by how we're going on a number of fronts, and how the market is shaping up in the next round of changes that are ahead of us. So specifically, I think strong performance in Mobile and Platform IT do create a strong revenue growth path.

And now these are more than offsetting our fixed decline. The fact the Mobile market has returned to overall revenue growth, and we feel we've played a leadership role in driving that with our multi-brand and value-added services strategy; it's allowing us to shift to a focus on differentiated value, not connection.

So that feels positive. Clearly our investments in cloud capability are paying back strongly, and will continue to do so with the good position we've built with brands with great reputation and solid capability to gain value.

Broadband, the market is evolving. We remain positive about finding a path through that.

And our strategy in it is evolving quickly. And we're very interested in the potential for wireless and 4G to sharply-- with the sharp reductions we've seen in the marginal cost per cellular gigabyte delivered on 4G over the last couple of years.

And it does actually create the potential for new scale options for broadband access. And as I referred to before, we've already got some of those in the market.

And the market feedback on them is very, very positive. And I'm personally very excited to be sort of leading the charge to the formation of the new Spark Platforms business unit, which will help us capture all the learnings over the last few years, to accelerate now our delivery of digital customer experiences and really achieve the transformation that we've been pursuing over the last few years.

So all of that creates a solid foundation for the sort of modest EBITDA and earnings per share growth that we've talked about, and increasing shareholder returns over the next few years. So all in good shape, so thank you for hearing us out on that.

I'm going to hand back now to the operator, who will marshal the Q&A session. Operator?

Morning. How's it going?

Morning.

Good morning, how's it going? Just a couple.

When I look at the guidance for the full year and what's implied for the second half, you've got a reasonably chunky step up. You know, you'd need to be doing by my account sort of [indiscernible] EBITDA.

Now I know you did something like that last year. But there was a 30-odd million gain on sale in there.

And in addition in this half coming, you've got more input costs. So you're going to put pressure on the [indiscernible].

So all this is a long-winded way of saying, by my reckoning you're probably going to grow EBITDA sort of [indiscernible]. What would sort of drive an outcome towards the top end of it?

What would drive an acceleration from what you've seen in the last half?

Tristan, I think that analysis is right. You're right.

We had the divestments in the second half of last year. We've got some timing.

So I think the momentum is strong and continuing. So we would expect that to continue into the second half.

The cost reduction in terms that we experience with UBA is replaced by price increases into the second half. So that's sort of neutralized there.

In terms of IT Services, we've had a lot of contracts sold in the back half of last year, beginning of this year. We'll start to see some of those come to revenue fruition in terms of the difference between sold and told, and continued focus on cost and productivity.

Okay. And then just the second one is just sort of on the IT stuff might tip the envelope, sort if you're going to tell me that margins essentially--the [indiscernible] margins anyway sort of contracted a bit, year on year.

How do we think about margins in the business, given the mix towards platform? Should we be sustaining them, and by what sort of magnitude?

Yeah. There's a shift towards the Platform services.

But you'll also see in this half there was a reasonable growth in your procurement IT revenues, which has nicely driven their low margin, or nicely driving those. But they can be bumpy.

So effectively if you look at cost of sales that had an impact in the cost of sales for the half in terms of that low margin. So I think yes, we see cloud and platform services as being a higher margin than traditional.

And we'd expect that to continue.

A way of thinking about it, Tristan, is to say we're in three types of IT business today. We're in classic sort of enterprise IT.

We're strategically withdrawing from that steadily. So that's a staged exit.

We're in Platform IT, which is the new world of cloud and infrastructure as a service, which is our dominant theme. And we're in procurement by necessity.

And it's bumpy and is not a material margin contributor. But customers need us to do it for them, so as part of the service.

But that can vary the effective margin. So really you want to focus on where we're headed with Platform IT, which is the real mainstay of the future business that we are focused on building.

Right. You're saying that that mix from this half in revenue terms is probably not something we would [indiscernible] forward, and the margin should sustain?

It will vary. Yeah.

It’s bumpy. It's a little bit like our Southern Cross dividends.

It depends on what deals you win and just moves around, but actually margin-wise its low single-digit really is what you get on procurement activity. So we'd rather not do it.

We just need to - because customers need us to do that for them.

Okay. And then just finally, just if I can ask about the obviously the special comment on [indiscernible] is new and helpful.

Can I just ask around the logic in terms not [indiscernible] the ordinary dividend, but continuing to provide specials. Would an alternative be to [indiscernible] the ordinary dividend?

What we've said, Tristan, was that the ordinary dividend will move in line with earnings growth. So we haven't given, obviously, earning guidance for FY17.

And we'll reassess that when we get to a point at the end of this year, once FY16 is complete. So all we're indicating is that in resetting our capital management, we've used special dividends to do that.

And there's effectively capacity to do that. So we're giving a clear indication that that will occur in FY17, subject to no material change in the business.

Okay. Thank you very much.

Well, good morning. Yeah.

First question just on Connect customers. Obviously, there are pressures on that wholesale business from shift to fiber and naked, but the decline was certainly higher than precious in the last two purchase periods, and I guess for keeping on sort of came to understand is what the run-rate was sort of in the latter half of the first half in particular, as we know fiber uptake is accelerating and what that might imply for second half decline?

That's the first question.

Hi, Arie. What we might do, we don't normally comment on those elements within halves and components around customers.

So, I'm sorry, we'll have to take that one.

What would you-- would you say it's accelerating [indiscernible] in terms of the decline you saw in the first half, or was there something abnormal in terms of the way you deal with one of your customers that we should take into account?

No. It's the change in market.

You know, you are right. You're picking up--fiber-- transitions to fiber and things accelerate.

Then of course these products are not required by wholesale customers. So it's really just natural market, what is going on in the market will reflect through there.

We're not losing-- we're not losing contract or veering the contracts or anything.

Great, okay. Next question just I appreciate the color you gave around Lightbox and some of the other stuff in digital ventures.

Just I appreciate the strategy is evolving there. I guess just two key questions on the entertainment side, firstly, in terms of what you might be signaling.

Are you signaling that you will be sort of deemphasizing content, buying content yourself as principle going forward? And also on the Platforms side of things, are you signaling a hardware or a cloud platform-based play?

Yes. So your interpretation is correct.

We have an appetite to continue to be the buyer of rights for some content. And we'll be more selective about the type of content we'll buy.

We've learned an awful lot coming from nowhere in this game, to now understanding what customers value and will pay for, versus what you might regard as a long tail of an exciting content. And so we'll still be buying and reselling some content.

But we're moving to a platform strategy, which is essentially built around the application. So think of it more toward your cloud approach.

But we do have the ability to get the Lightbox app and service in front of large numbers of customers and across a large number of devices. And we want to make that more accessible to parties with content who are struggling with distribution capability on revenue share basis, and with a multiple model.

So that means shifting to a platform with more flexibility in it. And as I said, it's early days.

It's a choice we have just made, and we've got quite a bit of work to do to put that into effect today. Whether or not we engage in any sort of hardware device, these sort of concepts of packs and things is still an open question.

We haven't made any firm decisions around that. But noting that there is a customer base out there with older TVs that can't accept the straight app-based services.

So that's a plausible pathway, but not yet decided.

Okay. And then, just up at a high level on Digital Ventures and more sort of financially focused.

I mean, you talked about this thing the first material re-fit. You're saying that's a level of strategy through investment to that does not probably be drag on EBITDA in the last period has sort of been around the $30 million to $35 million mark annualized.

And since we're - the direction you were looking to take Digital Ventures from this point forward, should we expect that that drag on EBITDA may start to decrease over the next sort of 12 months, 24 months. And if so, will it be more of a reduction in operating costs or more reflective of a growing revenue line?

What would be the main material of those two?

I think in that timeframe you should assume no change in the sort of net contribution. So, we'll pull away from some things.

We've got some new ideas and angles that we'll be putting into here. Sort of the network - certainly in the next 12 months, 18 months, something will be a similar level of investment that I ultimately obviously with Ventures we're looking to make this a contributor and not a cost, but it will take some time.

Okay. Now, that's useful.

And then, perhaps just the last question for me and it's more a little bit of a [indiscernible] sorry, but just in terms of the disclosure, I mean you made a move previously to sort of look at the excess in broadband revenues for broadband customers separately, which makes a lot of sense, but in this change of disclosure that you have done today, you removed the visibility on the voice calling revenues. I just wonder whether you could re-consider that and whether you could provide us with a breakdown of the voice calling revenues by the different business units.

Jolie, can you?

Yeah. We'll look at that, Arie, offline, in terms of your...

Okay. Thank you.

...consider your request.

Thank you.

Just note that, yeah, sort of voice caught you - sort of the implications as you mean [indiscernible] calling, Arie, but I mean the calling now occurs...

Well, the calling revenue, yeah, correct.

Yes. But calling revenues now occur and they are part of what you now see as IT Services, the huge part of Mobile.

We also have sort of change occurring with fixed broadband done on wireless actually is in the fixed numbers, not in the-- it's in the broadband numbers, not in Mobile. You know, these sort of technology choices are obfuscating some of these things that actually begins to not make a lot of sense.

So I think it's worth a dialog around you guys, if there's something you want to understand better. But we need to sort of manage our business and communicate numbers that makes some sense around how we're trying to manage it.

And if we could find a way to do both, we're very happy to listen, and take feedback from any of the analyst community on that would be helpful.

Thanks.

Right.

Good morning, guys. Simon, perhaps a question for you.

Are you able to just give us a little bit more color around how you sort of plan to sort of defend the broadband market a little bit more? Like, are you sort of open to partnerships like Contact Energy sort of earlier in the wake, so just in they're looking at a partnership type approach into broadband in these couple of months?

Do you have just a little bit more thought around some of those activities?

Look, I-- the broadband market-- it's intensely competitive. I think you'd have to say over-competitive really.

There are-- I said last time I looked there were 80 brands in the broadband market. And when you relate that to the input costs which I set out on page--one of the pages in the deck-- both copper and fiber's rising input costs, both heading toward a NZD40 input on what is today a-- once you take off GST of standard retail prices, you're in the 60-odd dollars.

So two thirds of your cost is an input cost from effectively wholesale markets make. So it's an extremely difficult business to make money.

And so sort of I'm intrigued by-- you know I'd love to meet the marketing genius at any other firm who says, gee boss, I've got a great idea for some growth here. There's only 80 companies selling broadband in New Zealand today.

79 of them are not profitable. I'd like us to be the 81st.

Because I think we can make a difference. It just-- it would be a very, very unusual move to make I would have thought.

So look, I don't think it's about partnering. I think it's about solving toward a sensible position where this very complex service which is driving huge customer issues and the need for massive customer service solving very complex problems that's mostly in-home problems and things, is not really sustainable at these market levels.

And I don't think joining up in partnerships is going to make any difference to that. So our approach very much as I said before, very-- we're very tactical in our defensive moves.

But what we're really working on is trying to establish a more differentiated proposition, which part of the conversation we're having in our [indiscernible], where we increasingly use content plays in the way that we have-- with Spotify and Mobile, and things to try to differentiate and add more value into our broadband offerings. We will be working hard with our other network assets, particularly our wireless capability, to explore what the potentially to materially alter the economics of competing, particularly at the lower end of the market are.

And look, that's about all we can say. Because it's tough going.

And we don't have all the answers. I don't think anyone does at this point.

And if we can't solve the service issues around fiber with still 90% of the market still to move to fiber, boy, it's going to be a tough game over the next few years. So that's my sense of it all.

Okay. Appreciate it.

Just another question. In terms of the mobile growth, which obviously was very, very strong in the half, are you able to sort of give us a sort of seats of whether that is accelerating, I guess, through the second quarter, this is the first quarter.

I think, Jolie...

Fairly consistent improvement over that period, so.

Okay.

Yeah.

Very good. Thanks, guys.

Thank you.

Hi, good morning, guys. I've got a few questions that relate to some of the topics that have been raised as well.

So [indiscernible] in terms of mobile [indiscernible]. Obviously we saw there's an uplift in the monthly subscriber [indiscernible], but also in the connection cost, connection side of things-- so the connection cost.

So it looks like there's some [indiscernible]. At the same time we saw increasing cost.

What [indiscernible] is in the net cost line, or by the cost of sales line?

Well, couple things-- oh sorry, so to address your questions, firstly we had indicated a strategy to shift towards more to monetization of our current existing customers and data growth, rather than a pure focus on connection growth. So you should expect to see a moderation of that over time in terms of that connection growth.

On the second part of your question, in relation to cost of sales, one of the drivers is that increasingly expensively handsets and the growth in people purchasing handsets has led to that cost of sales growth. That's one of the big drivers about that.

The other thing obviously is Spotify is a very successful value-added service that's growing. That sits in cost of sales as well.

So as that grows, the cost of number of people on that service grows for us as well.

Okay. And so down to costs in general, if we’ve given there was a challenge in the second half of 2015, as you sort of indicated, if we were to strip off the higher cost charges, and look at the remaining costs, shouldn't there be a significant drop in those costs, so that's evening out [indiscernible] charges in the second half of 2016?

I think we continue to focus on ongoing productivity improvements and saying that obviously we have acquired some new businesses. So that will offset from a labor perspective.

But I think on a general basis, I think the cost lines will largely run in the trends that they've been in the first half, absent the UBA, which we talked about converts from being a cost line effectively to a price line.

Again, a final question here again, I would like to ask another question which is around the Voice side of things. If we look half on half, so second half 2015 versus first half 2016, quarter to quarter we dropped in net voice line.

Is that a combination of calling and connection [indiscernible] one or the other?

It's a combination of Spark Digital impacts in terms of shift over to IP, and then effectively also price pressure that we're seeing on Voice.

Isn’t it guys, isn’t it where the big voice over fiber transition occurred to?

Yeah, we do have combination of...

Yeah. So we had a recalled - we built in the first half of last calendar year, we were building a large customer base on fiber, but we had copper alongside them.

It means in the first half, we have had a major migration program moving those customers off the copper to our voice over fiber service, which launched in June 2015. So I think that's a sort of a one-off impact that's showing up in the first half of this year.

Yeah, we do have combination of that.

Yes. We had a-- recall we built in the first half of last calendar year, we were building a large customer base on fiber.

But we had copper alongside them. And then in the half, in the first half we have hit a major migration program, moving those customers off the copper to our Voice over Fiber service, which launched in June 2015.

So I think that hit-- that's just sort of one-off impact that showing up in the first half of this year. I think we’ve…

[Indiscernible]

Yes. I think we're most--

Yes. We're mostly through the migration.

Yes. We're nearly finished that migration now.

So, yeah. We might have a little bit of impact still in the second half.

And naked obviously continues to grow as a product.

And when customers move [indiscernible] activities from the old-style fixed line to a voice over fiber service, did they stay within the voice-- did the voice component stay within the voice revenues? Or did it move broadband?

That stays within the voice--should-- the revenues?

I don't know.

Yeah.

We can [indiscernible]. But that’s fine.

That’s all from me. Thanks.

Good morning, and [indiscernible] good results. I know you just talked extensively on the broadband market.

I just wanted to explore that a little bit more, particularly around how the contributions vary as you move from copper to fiber. Just some specific questions, the drivers of that demand, obviously video traffic, subscription video and so on.

Obviously that's continuing. So it's not just a one-off-- actually if you've got services coming into the market, is that volume of traffic going to continue?

To what extent does the change in pricing between copper and fiber have an impact there do you think? What's your view on the timing over which the copper network might be phased out?

And how do you see that playing out? And just most importantly, given that trend in migration from copper to fiber, how does that affect the contribution margin?

How does the contribution margin differ between copper and fiber? Obviously we've got the excess prices listed on slide 10 there.

There's a bunch of other costs, the content cost, content management, cost of relationship and so on that really play to scale. And you mentioned these other 79 operators.

Surely you're just going to find it more and more difficult to make money as this migration from copper to fiber [indiscernible] and video content grows.

Boy, Ian that was a set of questions. But look, on video I think it's fair to say video streaming at scale is a more recent-- you know the services to enable it with Lightbox and Netflix being the two main players in that market, are more recent, having come to market in New Zealand, then in some other countries where they've been more available.

So there's been a bit of a catch-up. But that said, the penetration still of streaming services is modest.

So we would expect to see it continuing for some years, very strong demand for video. And of course that will be compounded as we move to these 4K TVs and things, which triple the streaming rates required to get those images.

So I don't see that sliding down. So you've got a natural driver in terms of service quality that fiber is increasingly well-placed to solve.

I think the pricing impact-- there's no question when there is a price disturbance on copper that it will materially affect demand for fiber. And we've certainly seen that today.

And you might have heard at the industry session a little over a week ago where we had the CEOs of various companies. And we put out an industry report on sort of the state of the nation with New Zealand's infrastructure and pricing and things that the fiber companies noted the surge in very recent demand for fiber.

Some have seen a doubling, and some have seen a tripling in the rate of orders coming in. That has definitely been impacted by the price impacts on copper.

So when the commission surprised us all with yet another increase in the input costs that flowed through to market as most of the large, if not all of the larger broadband companies, announced price rises. That's definitely stimulated demand for fiber, as you would expect.

Look, I've no idea on the timing of copper phase-out. That would be a question for [indiscernible] at Chorus, really.

We're not in that business anymore. We're very ambivalent about access really.

We just want customers to be on the best access that works the best for them. So we wouldn't have any particular opinion on that.

And on margins, copper relative to fiber, I'd say pretty similar. You can see from the input cost pathways, they're the same.

Retail pricing nowadays is about the same. I don't think there's any-- one's more complex than the other.

The process of getting from one to the other is extraordinarily complex. But once you're on fiber, serving a fiber customer, I don't think is materially different.

Sorry, Jolie. Is there anything you'd add?

Yeah. So I had a question around the content costs across the network.

Obviously, all of that data growth is not just driven by our products. It's various sort of [indiscernible] products driving that data growth.

And we continue to invest in our broadband network or our parts of the network in terms of the [indiscernible] feature to make sure we can manage more content costs onshore and cash onshore.

Yeah. We're trying to lower the cost of delivered gigabyte all the time.

We're very focused on building that capacity, but at lower cost per gigabyte. Next question operator?

Good morning. Thanks for taking my question.

Just respect to the broadband market, just quickly one thing with - you could play the role of a consolidator in that market. Do you feel that you have all the tools to get your fair share of the subscriber base as natural attrition exercise?

Brian, I think the consolidation; it is a very consolidated market, actually. So look, I don't have the exact sheer figures to hand in New Zealand.

There are three companies who represent I think over 90% of the market. So in round numbers, you've got Spark at around 45%.

We think Vodafone last time they said something about 32% I think. And the M2 Group with about 15% or 16%.

So when you talk about consolidation, you're talking about dozens of very small businesses, as I said, most of whom are-- potentially they can pay the wages of their staff, but they're not profitable businesses. And consolidating them would be a slow path.

So it doesn't feel like a strategy for us. But I suspect that might be a strategy for others to continue to acquire those.

We've taken a position in probably the best of those regional players. The NOW business, as I mentioned before, and we're interesting in learning about that model.

And we have our own flanking brand in Bigpipe, which is a successful startup business in broadband. So I don't think us participating in that consolidation is a productive pathway.

So Simon, you're saying that there's 80 brands in the broadband market are actually controlled by mainly three players?

No. About-- the number of brands that are under that-- that top three would be about seven or eight brands.

But then there's just this very long tail of smaller brands, probably Trustpal would be the next-- MyRepublic-- they're the sort of next tier, and then you're going a long way down to…

Very fragmented tail basically, yeah.

All right, okay. And also, Simon, just one last one.

Can I just clarify that in your evolving media strategy, you're saying that if say a big market post contract came up for renewal, you will be interested in that?

I missed slightly-- what-- ah, a big sports? Look, I'm not saying anything specifically on sports.

But just suffice to say sports is of interest. We've learned a bit.

Now we've been an investor in a partnership with the Coliseum team in Lightbox Sport. We've tried some things.

So sports interesting, we are interested in sport, but only on the basis where we've got a reasonable shot at monetizing it. So we're certainly not going to line the pocket of sports content owners at our expense and do all the work for them, and then be passed onto whoever's next-- outbids us for a large number.

So we'll be pretty selective about anything we do there. And as I noted in my earlier comments, the big sports in New Zealand are tied up for some time now anyway.

So that's not something you'd likely see from us. But are we interested in some sports?

Definitely.

Okay. Great.

Thank you, guys.

Good morning.

Good morning, Pete.

I understand there's a new financial reporting standard 15 which has sort of got a potential to change revenue recognition in the industry. And I bring it up just around mobile handsets.

So I guess my first question is, well, I guess the background is when it's introduced, as I understand it, it's got the potential to front-load handset revenue. So I just wondered, have you actually implemented it or whether you're likely to?

And if so, is there a material sort of mobile handset revenue figure in your accounts to date?

Peter, we have implemented that a number of years ago, so there won't be a significant change in our accounts, it's been through the results for a period of time in terms of the way we account for mobile stock and handsets.

Okay, got it.

Yeah.

[Indiscernible] so it's - that front-loading is already happening?

Yes. So I think a number of people will come to it later.

But we've already progressively adopted these probably first two years ago or even longer than that, actually, around the time I commenced here.

Great. Thank you very much.

Great. I think, operator, just time for one more if there is one.

Otherwise, we'll close here.

Great. Well, let's close the call then.

Thank you very much for your participation. See you in another six months.