Spark New Zealand Limited

Simon Moutter - Managing Director David Chalmers - CFO

Sameer Chopra - Bank of America Adrian Albon - Craigs Investment Partners Arie Dekker - FNZC Roger Samuel - CLSA Brian Han - Morningstar Guy Hallwright - Woodward Partners Peter Wise - IDC Matthew Theunissen - New Zealand Herald Jefferson King - IDC

Good morning everyone and welcome to this briefing from Spark New Zealand on our results for the full-year ended 31, March 2017. I’m Simon Moutter, the Managing Director, and with me is David Chalmers, our CFO.

We’ll be trying a new approach today. We are not planning to sort of step through a presentation.

And this year, our summary pack is a much more fulsome document than we’ve used previously. It’s intended to be a more useful document to investors with more disclosure in it.

So, we’ll be speaking about it but not speaking through page by page. David and I will make introductory comments and point to a few particular highlights and issues and then we go and try to make most of the time available for your question and answers.

So, we would welcome your feedback, post the session on whether this is a better approach for future, always trying to give you what you need from us. So, let me start by referencing back to our 30th of June investor update.

We put a lot of work into that update and tried to lay out for investors our plan to build new momentum in this business in the face of very significant market challenges but also some exciting opportunities that arise from the role we play in technology. We did indicate then that we put the wheels in motion around three new themes, underpinning our growth strategy, wireless, moving more emphasis on wireless and being very focused on getting off the copper network; our second theme was around using multiple brands better to address pricing to the customer markets; and the food plank was the lowest cost operator plank.

And I think there is plenty of evidence in the results that we’ve presented around our intent playing out in the execution of these themes is pretty clear-cut as well. And I think also there’s plenty of evidence that the benefits from the strategic initiatives that we’ve played out over the last two or three years are still delivering value.

Most pleasing for me is the huge gains we’ve made in the last 12 months on customer experience. And when we think about building a sustainably better and more valuable company, getting the customer experience right has to be the number one focus.

And you’ll recall, at this time last year, we were really struggling. In some of our service areas, we’ve gotten sidelined by the winter problems on the copper network and we were in a bit of difficulty.

But, it is very pleasing that we have run through this winter with no issues whatsoever, we are holding excellent levels. The Upgrade New Zealand program where we’ve driven aggressively to move customers off the copper, we now have 37% of our base already shifted off copper, has made an enormous difference to the workload in there, notwithstanding the fact that the copper network continues to be testing in terms of reliability and service levels.

And we also have behind us the Yahoo era. Yahoo were a great provider in the early years but became very poor service provider to the company in the last few years, and we did take the big decision to migrate away from Yahoo email during the last year.

It was an enormous exercise that we threw it in and we have a much more satisfied customer base working on the New Zealand story with SMX email provider, the email today. And we’ve done a great job improving big project customer with delivery in our larger customer market this year.

We have green lights on with our large accounts, which is a terrific position to be in. And we’ve invested substantially in upgrading a number of digital customer journeys, all of which has contributed to a market NPS uplift in the last year of 5 points, which Maritz, the company, who drive the NPS methodology around large corporations around the world, tell us as a very strong performance in a single year.

So, we’re pleased to be making progress there. It’s helped us make some gains on the top line.

And we have delivered top line growth again and I think we point to the fantastic uplift in mobile with a 4% increase in service revenues that’s materially better than some companies in our region delivering today and a fantastic performance in IT services, up 19%. And I think both of those standout revenue drivers reflect huge investment in capability, be it our network or technology, brands, customer experience, partnerships with the world leaders and digital services and the analytics capability to back all that.

And I think all of that growth still being achieved, 3% increase in revenue in the face of heavy decline in yesteryears voice and legacy data is a significant achievement. In the second half, we made gains in market share as well in all three categories, IT, mobile and broadband, so very pleasing to see a multi-brand and wireless broadband play is contributing to our first growth in broadband connections in at least a couple of years.

So, we’re pleased to be back in the game there. And that is a direct result of putting some effort -- and more effort and more emphasis on the proceeds of customer markets.

We think we gained more connections in the second half than any other company in New Zealand. So that’s quite a turnaround in performance.

It’s no mean feat making gains in broadband. And I think page 12 of the summary page does emphasize the challenges we have in the broadband market in New Zealand with over 80 retailers of product relying on common inputs and coordinate vigorous price squeeze between very competitive retail pricing markets, but with rising input prices, government mandated rising input prices through the regulator on copper and even more aggressive input price rises over next few years on copper -- on fiber through Crown Fibre Holdings contracts within.

And the chart on Skinny broadband, which is a low price offer broadband service. There is a really interesting chart on the pie chart there.

We are now looking at two thirds of costs of a broadband service going straight through to the input providers on fiber, and that’s up from about half, only a couple of years ago. So, it really is a very challenging to make a margin here.

And I wasn’t surprised at all to read yesterday that Vocus had to write down their New Zealand business to the tune of nearly 200 million on the realization that they could not deliver the forecast of those businesses initially sold to them on. I think something has to give in this part of the market, that’s for sure.

From a business unit perspective, I’m particularly proud of these things from each of our main units. HMB’s performance in mobile has been absolutely outstanding in the year, 7.5% service revenue growth and uplift in gross margin of over $70 million, a tremendous performance on mobile.

Spark Digital’s performance wining big government telecommunications as a service and IT contract has been fantastic; it’s had them coping with very high volume of delivery activity; they are somewhat drinking from the fire hose. You can see that a little bit in the results and David, I’m sure will comment on those further.

But we’ve managed to deliver those projects with a very high level of customer satisfaction and good shape there. Spark Ventures, the expansion of our analytics business and pushing further into Internet of Things I think becoming a real proof point for investment in some of our future options and delivering revenue and value to the company in the past year.

Spark Connect has done an absolutely outstanding job expanding and strengthening our network, especially in mobile with the rise of wireless broadband now at year end 84,000 wireless broadband connections running off the mobile network, has seen data volumes on our mobile network increase by over 200% in FY2017. That’s a staggering performance, typically mobile networks grow more like 60% per year, that just shows what a fantastic network we’ve built to cope with that sort of volume that have no real issues in terms on going service delivery.

We’re very proud of that achievement. And Spark Platforms has been doing some very innovative things on post reengineering now with our machine learning and automation robots coming into service and some terrific new capabilities like our second generation Spark app which has three quarters of 1 million active users now during our own self service through that end.

And finally, I think all of this excellent market activity has been underpinned by a fast start on our Quantum Program. We pulled the trigger in May actually.

So, when we were talking to you on 30th of June we really lead on that we’ve already got underway but we had got underway in mid-May. We have incurred some cost of change in the FY17 result that we took the decision to press on and with the view that shareholders would bake an ambitious program to elevate the returns from this company over the next two or three years.

And we’re looking to help us with momentum until, FY18. FY18 guidance reflects the commitment we made at the investor update, to go hard on a Quantum shift toward the lowest cost operator status in this game by simplifying, automating and digitizing this company.

And it means we will incur significant cost of change in FY18. That said, we won’t be taking any soft options.

We still want an earnings uplift in FY18. But investors should be clear that our real aim is to deliver a significant and sustainable uplift from FY19 and beyond, reaching the targeted EBITDA margin in excess of 30% of revenue.

So that’s my opening thoughts, and I’m now going to flick over David now who is going to take you through some of the key numbers.

Thank you, Simon. Good morning, everyone.

I just wanted to give you a few comments on the FY17 results being the 12 months at 30 June 2017, and then make some comments on some of the key drivers before stepping through capital management, dividend, and finally ending on guidance. So, the overall result, as Simon said, reported revenue guidance of 3.3% to $3.6 billion and EBITDA growth of 3% to $1.016 billion.

When we adjust for the sale of Mayoral Drive carpark, consistent with our guidance that we gave 12 months ago, that gives EBITDA of $996 million, which is 1% up on last year. And you might recall that we’ve given guidance for the year of 0% to 2%, so we’ve come in right in the middle of that.

Pleasingly though, this increase in earnings has actually led to -- has been magnified when we look at the NPAT line. So, because of the capital discipline business is heading over a number of years now, our depreciation is still coming down year-on-year.

Depreciation and amortization combined that with also lower financing costs and stable tax expense means that results 1 -- 3% of EBITDA line translates to a 13% increase at the NPAT line. In terms of what drove the results, there are really three things we call out, consistent with some of the things that Simon has spoken to.

Firstly, within mobile, mobile has delivered very strong performance across the board, particularly with HMB, digital achieving good growth in CPE margin, albeit with challenging conditions there in ARPU. When we look at the revenue growth year-on-year, it’s $63 million uplift, that split dollar-wise evenly between service revenue and increases in CPE revenue.

You will also notice that at the as driving our revenue growth, our costs in mobile have gone down by $12 million, meaning $75 million gross margin increase in mobile. And the key reason for that cost reduction is that we have actually purchased fewer handsets during the year and our exit from some of the mass market, retail channels has meant the subsidies that we have to provide, go down and therefore our costs go down commensurately.

In terms of connections, we had 99,000 connections growth in this now, across both HMB and Spark Digital and that was offset by a small reduction in overall ARPU with that reduction weighted towards Spark Digital. Broadband, the key there is growth after several halves of flat connection numbers.

We had a 12,000 connections year-on-year. Thanks partly to the entry of Skinny at the start of the year into the market, again focusing on those price-sensitive parts of the market, and in addition to that, the strong customer response to both Lightbox and also the Netflix offer which we put on for Spark customers.

We talked about 37% of our base being off copper; we moved roundabout 74,000 of across fiber and similar number across wireless broadband. And wireless broadband really has been a success story when we look at 84,000 connections across the year.

As you can see original target we had 12 months ago, 50,000 which we upgraded to 70,000 at the half. And that really speaks to the resonance that it’s having with customers and how they are finding the service.

When we focus on the year-on-year benefit, there is roundabout $20 million of cost benefit in that result as a result of wireless broadband, very much weighted towards the second half, given the ramp up that we had from a base -- starting the year-on-year of only 10,000. The third area I wanted to touch was Spark Digital, and the transformation Spark Digital continues where we still do see declines in some of the high margin legacy businesses and particularly in voice and managed data, with very significant growth coming through in actually services.

So, 19% lift in terms of our IT services revenue, $125 million. Nevertheless, as Simon said, when you look at the EBITDA performance of Spark Digital, we have come off a bit by about 1%.

And the reason for that is in combination with those -- with the increased decline in terms of those legacy businesses, has also been some increasing cost that we’ve borne just to get those new contracts, new customers up and running. So, we think that that sets the platform for an improved profit performance in FY18 and the number of contract wins and new customer wins we made, the Spark Digital team gives us good reason to be optimistic.

Turning now to capital management, we have had stable cash conversion for the year at 89% albeit with an improved second half cash conversion in the mid-90s. As we forecast the first half, we had some movements in between first and second half cash conversion.

So, when we -- as we said out at the Investor Day, we still see similar themes in the high-80s, low-90s as being what we should expect for FY18, and we are working on ways to improve that as we move forward. When we look at the drivers of that cash conversion, it reminds the two key things of being our handset receivables and the great profitable move away from providing subsidies towards interest free repayment terms over 24 months for our customers; that continues to grow.

We are now up to that 85% of our customer base who are on open term plans with no device subsidy; and the second one being the cash impact on Spark Digital of their growth. And you see that coming through, both in terms of what we call, the balance sheet in terms of deferred acquisition costs as the forward contracts hit run state, and secondly in terms of our procurement business which has had a large increase of revenue and in particular June was a busy month for that.

The impact of this on data is that our data has increased over the period as we sort of -- in line with our forecast by about $117 million but still with sufficient headroom to our target, A minus credit rating. In terms of the dividend for FY17, for the second half, the Board has declared an ordinary dividend of $0.11 fully imputed and a special dividend of $0.015, 75% imputed, taking the overall annual dividend to $0.25.

I’ll specifically refer to slide 25 of the presentation, which contains our FY18 outlook and just get through that line by line. So, the basis for our guidance is excluding the gains from Mayoral Drive carpark, and that’s the --- the number there of $3.59 million -- or $3.5 billion on total revenue.

So, we are forecasting 0% to 2% growth of the revenue and EBITDA lines. CapEx, broadly in line with this year.

As you may recall, we increased our CapEx guidance from $400 million to $415 million on the back of some one-off costs incurred with the earthquake in late 2016. Our earnings per share consistent at $0.22 and dividend per share, again consistent with the outlook we gave at the Investor Day of $0.25 per share, at least 75% imputed, so the imputation changing there from FY17 into our FY18 guidance.

So that covers off the key elements of the financials. So, I’ll hand back to Simon.

Thank you, David. And that’s us this morning, so we don’t -- we didn’t intend to run through all the slides, so let’s throw it over the operator to manage the Q&A.

Good morning. I had three questions.

By the way, great set of results and strategy move on. Three sets of questions.

One was on the Quantum itself. Can you give us a sense whether the program was running at -- what sort of cadence was it running in Q4 and should we expect that the guidance for 2018 includes a similar sort of $8 million per quarter run rate?

That’s my first question?

Sameer, thank you for that and I’m sure Mark would appreciate the acknowledgement too. He’s been a fantastic Chair, and Justine will be a fantastic Chair as well.

So, she’s been a great Director through that period. But, look on Quantum, we’ve really elevated the cadence of the Quantum Program in probably May when we started to execute on what had been two or three months of planning and setup, prior to that.

So, when we spoke to Investor Day, we were on the way but that was a relatively recent move. I think relative to -- we’re going to ask investors to and analysts to make their own assumptions around cost of change.

I think we’re reluctant to be drawing or provide specific advice on a number around there. And the reason is that the way we approach a program like Quantum is to establish a seat of outcome targets well ahead of the specific initiatives to enable them.

And indeed, we don’t yet have a strong enough bearing on what those initiatives are, what the timing of them will be, and exactly to what extent that will incur cost of change. And cost of change comes to us in a number of ways.

It can be restructuring but a lot of the cost of change can be things like bubble forces, et cetera that are required to affect a second event change in say a product portfolio or something similar. So, look, I think you’re going to have to make your own call on the number at the moment but it is correct that we spent $8 million, quite late in the pace, mostly in that case on restructuring expense.

And my second one is, tracking results in wireless broadband, 84,000 connections. And I was just wondering is it your sense that the market is now saturated or do you still have a lot of run way ahead on that?

With wireless broadband, we’ve put in our statement on page 28 where we give some indication of what we regard as our year-end success factors that investors should be looking at. So, we’re aiming for a 125 but I’d like to think, we might be able to doing better than that.

But sort of call it 50% uplift on the number we’ve come through the year-end with. And that would reflect normal market parameters.

We’ve been through the areas, the addressable areas where we have the service available most of the customers, I mean we’re very targeted about who we offer wireless broadband to; it is really for lower volume users on copper and hit one or two or three sometimes marketing passes already. So, you have to expect a lower sales rate.

The actual end number will depend to some degree on what the addressable coverage turns out to be and how we far we take 4.5G technology, which does give us another step up in capacity. But, I think comfortably, we should achieve the 125, we’ve got in the page at the back.

Thanks, Simon. And the last one is, if you look at the Spark Digital business and you look at mobile ARPU, it looks like -- they seem to have stabilized, there was a period two years ago or so when mobiles was on re-contracting pressure.

Is it your sense that there is many big headwinds ahead, and can we actually expect to see mobile growth?

I’d love to think we can get to growth, I don’t know if it’s still a realistic expectation. But if you remember, in the past, the biggest driver in Spark Digital, mobile performance was the government contracts, which when they went into those all of government arrangements, the purchasing power of government drove very, very significant price reduction and it’s flowed through.

So, I mean, I’m really thrilled that we’ve stabilized performance of mobile and digital this year. David, do you have any further comment on sort of ARPU mix, or what might be possible there?

I think we do see it moderating somewhat; it’s been still a good performance there as Simon said on overall label, we’re holding pretty much firm, depending on the mix of prepaid, postpaid that sort of goes in there, as well as being a good result on the handset side. So, it is difficult to make a call too much about how that’s going to revolve but I guess we do try and manage it also on an overall basis, and on that basis as you can see there, it’s been pretty stable on an overall level but certainly with weight on the downside with digital.

One positive, Sameer, I think in the Spark Digital segment would be that we are now managing to get some traction on the trend away from devices included in the plan in that customer segment as well. So, you might see a similar dynamic in a shift -- being a total mobile performance with handsets being bought or at least in different mechanism rather than being included in plans which probably has a margin benefit but may confuse the numbers.

But they were certainly a part of the improved performance this year.

Perhaps, the first question for you, David. Are you able to sort of just decompose, I guess the labor increase, for us, in terms of the total cost?

I know that your FTE is sort of falling in the second half, but it was come out of bucket of cost that was a little higher, if you could touch on it?

Yes, your right. So if you take a look at our numbers year-on-year, we went from FTEs of 5,600 at the start of the period and we ended up at 5,774.

So an increase when we look at it sort of year-over-year. We probably got up as high as about 6,000, probably by sort of March, April, May in that period of time.

So, it has varied over time. And I think what that reflects is, partly some of the workforce increases that I flagged earlier in terms of Spark Digital where we’ve been bringing people on more specific projects.

So, we have been seeing the variability there as people come on for specific areas or specific initiatives we’re working on, for example Yahoo, also consumed a lot of resources over that time, and we have seen that over the period come off. So overall, while year-over-year there is not a large change, there has been a more significant change over the last few months.

In dollars, just the cost of increased customer care, which we took on to handle call center underperformance last winter and then to navigate us through Yahoo. It was in the order of $20 million which we would view Adrian as a temporary cost, albeit that has not all gone yet.

So, it will come out as we would not allow ourselves to slip back on customer service experience. So, we will drift down as we get our simplified, automated and digitized capability into backend there and make sure customers still have outstanding experience as we drift down.

Okay, it’s useful. And just second question.

Are you able to just give us a sense of maybe the three main units of your -- I’m just trying to get a sense of how the business is usually turning third quarter into fourth quarter?

Probably not more other than detailed KPI books. I think we’ve got some indicators there where you can look at sort of half on half.

That’s probably going to be the best overlay for the moment. And we make some specific comments in the paper, particularly around mobile where we talk about performance in the second half and particularly in Q4 as being strong.

But I think I would be reluctant to sort of dive much further than that. But I think half on half comparison, most of the numbers are talked about here, and we talked about it year-on-year, but half-on-half, book should help in there.

I would just add, Adrian that if you think about FY18 as an investment year to get a better FY19 and we have indicated some cost of change before, given the guidance, we have been looking at an underlying performance which is significantly better than the guidance we’ve given on our reported number. That is achieved in plan with a positive contribution from all five of our business units.

So, that is HMB, Digital, Ventures, Connects and Platforms, all five of them have to deliver better results and underlying level to achieve this. So, it makes encouraging position.

And just sorry -- follow-up. In terms of the Quantum Program, do you feel that in 2018 you would accrue the cost of that, and then net benefit also start to flow from Montana.

Is it the right way to think about?

We would anticipate 2018 as the biggest year of change in the Quantum Program that it will certainly have some drift through into 2019.

Good morning. Yes.

So, firstly, just on broadband which was good result, as you mentioned Simon, it is very competitive out there. One of the things that’s interesting is that when you look at your offer with the premium bandwidth, you’re having to give three months away on a 12-month plan.

The pricing is not that different to Skinny over 12 months period and you have obviously got your other premium offerings like Lightbox and Netflix that you are including in there. I mean, do you see that as being something that you are going to have to continue to do for the foreseeable future, and what’s your view on what would happen if you actually stop that?

Yes, Arie, broadband is -- if you are talking about disappointments in this business that would still be the broadband market which is -- it just completely cannot deliver value to the providers of broadband. It is a margin-less business effectively for most players in it.

And with so many of the retailers and broadband driven on sort of acquisition or market share or acquisition parameters funded -- mostly funded by equity contributions, not operating unions. It’s tough going.

My gut is that something has to give in the -- I think most broadband providers today have run out of growth, particularly the smaller ones. I think that’s evident in the subtext of yesterday’s Vocus announcement around write-downs.

And so, yes, I just think the laws of economics got to have some effect. I’d expect to see some market consolidation.

My gut instinct it will be cheaper to buy customer basis by through M&A than it would be to acquire them with the sort of offers today. So that threshold of whether consolidation activity is a better pathway for those aspiring to a bigger broadband business relative to trying to advertise or market or throw in value as a way of getting customers, I think my gut it’s we passed that line too.

So, it’s not a market we have great aspirations for in our plan. In terms of outlook, we are doing better; we’ve faced our reality and so we are going to have be a player in this low priced -- in the low price segments, but it’s generally an unattractive business, certainly as the fixed broadband business.

And as explained, I think to a significant extent why we are so motivated around wireless broadband, there is no question, we get a service benefit, we get a customer experience uplift and we make a higher margin as provided we select the right customers to place on that product.

Right. On mobile, there has been on a six monthly basis, a slowing in the growth and connections but the services revenue, obviously some lagged effect there, which has been positive.

Is there anything in terms of how you have approached that market that’s going to change because clearly with ARPUs flat, your services revenue growth has largely come from growth in connections. How you are sort of looking at your connection outlook in mobile and how you are going to tackle that in the next 12 months?

Arie, just to answer that, you’re right that there has been a fewer number of new connections this year rather than last year. What I would comment on here though is the removal as we took our products out of some of the MMR retail chains, and what that meant was that we did find the connections came off, but that was probably contributed to why it is that our cost also came down because typically in there, we are providing subsidies on handsets.

So, that was very much a conscious choice in terms of that mix of CPE margin versus connection growth. As we role forward to the year, we do still see -- and going back to the Investor Day, we do still see good growth opportunities in mobile.

We’ve been working hard in terms of innovations in that segment in terms of the offerings and the bundles that we put together. So we do think that the outlook is good but we are not just chasing connection growth at the -- for the sake of margin.

Particularly, that’s why in prepaid market which we pulled back away from -- and I see how those moving, to a degree recently announced they were going to seize handset subsidies in the prepaid market for example. So it’s clearly something that other operators are noticing and we’ve called that area up in prior years, it’s just a churn machine down the bottom of the market.

So, we’re teaming to focus our effort more on a customer that’s going to be more valuable and more life-time value in the contract or the arrangement with them.

On full year basis, Southern Cross has been pretty consistent for 2016 and 2017. Do you see any reason to think how 2018 won’t be at similar levels?

We do, it’s been about $5 million reduction year-on-year. At the Investor Day, what we forecasted there is that we do see a reasonably significant decline in Southern Cross dividends as it pertains to the outer years.

And the reason for that really is the structure of pre-sales that Southern Cross has been doing as we move towards the end of life. End of life for the cable is not until 2030 but a lot of that capacity has been presold.

So, yes, we do see a reasonably significant decline there. The question of how much that could be offset by Southern Cross mix is still an open question.

It’s one that we would hope to have by the time we get to our first half 2018 update and results in February, we hope to have a good update for you then.

And another quick on, just CapEx envelope in RBI2, is there any allowance for RBI2 and the CapEx envelope?

Yes, there is. Yes, so that’s a $25 million statement over five years and it’s fully inside the capital envelope.

[Question inaudible]

That of course presupposes we win it, which we have no -- we’re not in a position to say we’re in that project that obviously Crown Fibre Holdings proceeds. We don’t at this point have an outcome from that.

We’ve made allowances in our capital envelopes for any potential spend, should that happen over five years.

Okay. The last cabinet meeting is next week, isn’t it?

And then, just on Lightbox in the platform and potential launch of that inside this calendar year, is that what you’re still sort of working towards?

Yes. So, the replatforming is well underway.

So ,that introduces what we call the marketplace capabilities. It allows us to use different revenue models to create different options for content donors to participate without necessarily us buying all of the content, taking all of that risk, or packaging it as a single offering; it’ll bring things like transaction video, on-demand capability and different channels et cetera.

So, we still expect that new capability to come to market on this side of the Christmas holidays. But, that’s all going well.

And then, the last one for me is just -- I mean, the voice-only connections and the wholesale connections, there was a step up in the level of decline there in the half. I mean, it’s always going to be sort of coming at some point.

Is there anything you’d call out in terms of abnormal that impacted the fixed monthly change or...

It’s pretty consistent, I think -- we’ve seen a sort of uplift in our own direct sort of voice-only and broadband base as we move more to naked. I think it’s just the rise of naked broadband service, which is accelerating as a proportion of the broadband market.

And I guess, that’s happening with competitors who rely in wholesale service as well. So, it is what it is, Arie.

And we’ll work it while it’s there, but we don’t actually put any effort into particularly managing that. There is nothing you can do about it really.

I’ve got three questions if I may. Firstly, just on fixed broadband.

Can you tell us what the trend was in the second half or perhaps the fourth quarter, and what’s the outlook for the industry ARPU, given that the wholesale prices are ticking up every year?

The trend for us in fixed broadband, because we brought our price seeker brand Skinny into that market and took on the more aggressive price points that were previously driven by some of our lower priced competitor set, we have seen our performance in fixed broadband improve, as a result of playing a role in net price seeker segment. So, our trend is favorable.

I think the trend though is we tried to indicate for the industry around returns and broadband, continue to be very negative. We are in an absolute margin squeeze now.

And it with input prices rising, it’s a difficult place to play. It would not be appropriate for me to talk about market pricing.

But it is in the end -- something has to give in the equation. It is very difficult position for all players in the broadband market today, having been caught in that price squeeze with these clear, mandated and certain input price increases for the wholesale products coming at us.

They do put an upward pressure on market pricing which to be frank, sounds a bit illogical relative to the rest of the world where broadband prices typically are coming down over time, so.

And just my second question is on IT services. So, I noticed that costs went up because of the cost incurred in winning large contracts.

Do you expect that cost to stabilize or to normalize in FY18?

When you win a lot of business like we have, and you have to put a lot of labor on to manage the transition into those contracts, the majority of that will go -- will hold that. And we account for that by taking that into the balance sheet and then allowing those transition costs to be amortized across the term of the contract.

However, by its nature, you still get an uplift in sort of run state, if even there’s a cost in that’s going to the OpEx line as well where you’d manage these things with a high manual process early, and then you get them automated and onto the platforms and digitized over the process of it. So that will be the effort that Spark Digital put in this year, and we would expect to see that improve the margins as we get all of that new business consistent with our operating model and managed more efficiently.

And just my last question on the FY18 guidance. So, you mentioned that the earnings per share is expected to be 20 -- or about $0.22 per share.

But if EBITDA is pretty much flattish and your depreciation is declining, why is the EPS flat year-on-year? Just wondering if I’m missing something there.

No, I think there is some variability in terms of some of those depreciation rates over time. And so you might recall that our CapEx spend in sort of particularly 2014 and 2015 has spiked up a bit.

So some of that effect comes down, some of it is due to Southern Cross. And any potential decline in Southern Cross dividend impacts our tax rates, effective tax rates moving forward.

So, those are probably some of the key factors there, and as well as our increasing debt profile as well.

Good morning, gentlemen. Just on your long-term aspiration to increase margin to 30% plus, is there an implicit assumption on the potential impact of 5G, in that goal?

No, we don’t. As we said at Investor Day, Brian, we are very excited about the potential of 5G.

We intend to be at the forefront of it once all the standards are enabled. We are starting with our 4.5G work and things.

We’re laying foundations, we call it on the pathway to 5G. But at this point, it’s not modeled into any of our thinking.

We just simply don’t have enough information to credibly model up any beliefs about 5G, be it what it would cost to build it, to deploy it, to manage it or what it might do in terms of revenue or earnings opportunities. So, we’re keen, but we don’t build it into the numbers yet.

And also, are there still many acquisition opportunities in the IT services market, especially in the platforms space?

No, I don’t -- I think it’s unlikely now that there are anything that add to our core IT being our strategic focus, being what we call platform IT, but what most others would refer to as cloud infrastructure platform as a service functions. We are a very strong player in New Zealand.

We have the best capability in New Zealand already. And so, I think it’s unlikely that there are opportunities there for us.

What we are interested though is in building our portfolio of IT value-added services. So, we are rapidly expanding in cybersecurity and data analytics capability.

So, our most recent acquisition, a business called Ubiquity, brought us some new capability in data-powered marketing which we’ve merged in with Qrious. And so, we’re very, very interested in opportunities to expand our portfolio of high-end digital services and those sort of spheres, cyber, data, data analytics, IoT, which is going to be a big play.

And lastly, David, can you please confirm the tax booked on the land sale?

There is no tax on the land sale. So, the proceeds, they’ll flow all the way through.

Just a few questions for me. Simon, just a small clarification on page 13 of the pack, on the wireless broadband.

It talks about the NPS numbers. And it’s got two NPS numbers relative to the fiber and VDSL, one is the market NPS and the other is the join NPS.

I just wanted to get some clarification on what that actually means?

They are not the absolute NPS scores. So, we would never disclose absolute scores, because they would quickly turn up our competitor’s activity.

So, these are the number of net promoter score points that these services exceed standard DSL broadband services net promoter score. So, what it’s saying is wireless broadband and what we call the market NPS is the customers’ overall view of the product and service.

So, it’s like -- when you ask them a question, would they recommend or not this overall service. That’s what we call the market NPS.

And the join NPS is the experience when you buy it and get it set up. So, it’s the process of purchasing and having it through to getting it up and running in your home.

And so, what it tells you is, is wireless broadband and fiber are materially better overall preference from customers relative to ADSL, so too is VDSL where it’s available. But in the join process, wireless broadband is far easier to buy and to set up.

So, it outranks all of the fixed broadband products materially on customer experience. And I wouldn’t be surprised, by the way, if we report next time that that gap will be even wider, because we are rapidly enhancing the process for the join experience.

So, it’s what they mean.

So, when you do the NPS testing on your products, like particularly with fixed wireless, are these done pretty soon after the purchase…?

Yes.

I’m curious to see what the NPS was like on fixed wireless kind of 6 or 12 months down the track to see if there was any difference from when it was first purchased.

Yes. So that is exactly right.

So, these type of parameters are an automated process. So, we are an NPS company today.

We have literally dozens of NPS metrics through the business. And every day, we’re probably inviting thousands of customers to give us a promoter score feedback, be it across a call center interaction or a buy experience or something online or a chat or quality of relationship with the business customer, with our business hubs or whatever it is.

So, this is our key mechanism for evaluating experience. So, those numbers are taken directly after.

So, once the service is delivered, they now will get an automated process, which allows the customer to give us that feedback. Where we get detractors or people who give us a poor feedback, we often call them up to figure out what went wrong so we can learn from the experience and that sort of thing.

I think part of the reason, by the way, for putting this page in here is, we did want to clarify our positioning around wireless broadband relative to copper broadband. And there’s been a lot of assertions around the communication of what’s better or what’s worse or how do these products perform.

And hence the little graph on the right of page 13, which is showing you that wireless broadband by its nature because it has a single trunk in the back-end being the fiber capacity out of the cell site is more variable between off-peak and peak than a fixed broadband service, which gives you a more consistent experience because you have a single line for your customer on wireless. Obviously, multiple customers are sharing something.

But, we size the wireless broadband product to not dip below 10 megabits per second at peak. And this graph is showing you that on the average, across our whole network, it’s actually running at over 20 megabits per second at its lowest -- at the peak time, which is the 9 pm slot, which is Netflix hour in New Zealand.

And so, it’s a very good product relative to standard copper broadband. It will outperform it during the day.

We don’t argue it’s better than VDSL or fiber, of course we don’t. But for the type of users we put on it, it’s a fantastic service and much better in many cases from poor performing copper that they have been living with for some years.

In terms of the product, you may not want to answer this question. But, have you ever considered, like, rate limiting the fixed broadband product?

So, obviously, you could be constraining the speed a little bit, so you wouldn’t get that dip around the peak time.

We have. We just recently introduced the ability to manage that.

That takes a -- you need some, I think what the engineers call it PC -- policy control capability in the data networks. So, those are possibilities for future and how we design product, but that new technology that allows you to manage the speed, the bit stream on a mobile network, be it to a phone or a wireless broadband modem, is very new in our networks.

So, currently, I don’t think we use it or -- I don’t think we’ve deployed it in a product yet, but it’s certainly starting to come into our thinking in terms of how we could give a more clear-cut and more consistently managed service if customers would value that.

And just a couple of more questions. You might have mentioned this at the strategy day, but unfortunately I wasn’t there.

But in terms of your targets for the fixed wireless customers next year, 125,000, can you give any guidance in terms of split between like urban and rural?

It’s mostly urban. The vast majority of the market is urban.

So, I think today, it would just reflect the split of urban and rural residents, I think so.

Just another one was, in terms of the -- do you have an estimate of, in terms of the broadband and mobile market of the kind of more price-sensitive area of the market? I think Telstra in its result yesterday was talking about a kind of a 25% to 30% percentage.

We’d like to think that was price-sensitive. Do you have a feeling for what that is in New Zealand?

Is it kind of the same or do you think it’s lower?

You mean the proportion of customers who will buy on price rather than non-price?

Yes.

Look, I don’t actually, but it’s funny enough, a question I’d ask my HMB market strategy team to have a crack at making a better assessment around next Strategy Day. We’ve not really in the past, been overactive in those markets.

So, we had the Skinny brand in mobile but that was a play that we were using, but not overly aggressive in expanding, but we have dialed up our efforts. So, we are trying to have a better view of that from here on, but I don’t know the answer today.

I’m sorry.

Okay. And one kind of follow-up question on RBI2.

I was just wondering if the shareholding agreement between the three parties have been finalized yet.

We’re not permitted to talk about the RBI2 process. So, it is in a government run process today.

And unfortunately, I can’t tell you anything about where it’s at, other than what we’ve publicly said, that is correct, we’re in a -- we have a proposal we’ve put forward in a consortium with 2degrees and Vodafone. But at this point, it’s the government’s decision to be taken yet on whether we will win that or not and their time line for any announcements on it.

I just had a couple of quick questions. Firstly, Simon, I know you said that you don’t like to give too much more detail about this, but just on the cost of the Quantum Program in FY18.

If I said what seems like kind of like an obvious thing to do, which is take the $8 million, which is effectively half a quarter and modify that up, it comes to something like $64 million for FY18. Would you discourage me from doing ahead if they are going to give me a number that is sort of out of the ballpark?

I think that would be a little bit vigorous, Guy. Yes, I wouldn’t -- it wouldn’t be as high as $60 million.

All right. thank you.

And the other thing was tax. I mean, tax rates, they do bounce around year-by-year for Spark, I mean they were quite low in 2015 and more normal in 2016.

This year, they’re quite low again. Can you give me any sort of detail on what’s driving that?

One of the major contributors was the tax impact of Southern Cross. So, the tax that we pay is the net of our CFC income and the dividends that we receive.

And there was a large level of CFC income in FY16, because Southern Cross had had a number of contracts that were terminated, therefore brought forward revenue. So, it’s the difference in those two years, as to why you see more of an impact this year than last year.

Maybe, Dean, could help analysts understand that a little bit better, post the briefing.

And next year, you are thinking that the tax rate will be somewhere closer to the normal tax rate.

Yes. It’s a bit too early to be too specific on that.

Obviously, it depends on the makeup of earnings. But I think what we’d say is, as I said earlier, we do see the dividend stream from Southern Cross likely to decline.

We’d have to wait as we get through the mix of those any sort of one-offs in the result and in particular any impacts of Quantum before we give too much specific guidance around the tax rate.

Good morning, guys. I’ve got a couple of business market trends to get your views on.

So, the first one is just around platform or cloud. Just wondering what you think the short term and longer term demand is for that.

Obviously, you’ve got your local data centers but there is also a big trend to move to AWS. And you’re probably broking at sort of a mix of both of those.

So, I’m interested in firstly that. And then the second one is UFB.

Overall, we’ve got a great uptake across the nation but business, particularly SME is lagging quite a bit, and I just wonder why you think that’s the case.

Look, the trend to cloud is -- in our view is everyone’s going to the cloud. Everyone’s going to what we call a hybrid cloud.

As you’re going to have, in many cases, some on enterprise cloud, some private cloud in a facility like ours or a subdivided service that can have private cloud capability, not like Microsoft Azure, and some public cloud. And so, our view is most customers are going to be a multi-cloud organization.

There is a continuing role for us in there as a trusted provider and an integrator. Large organizations typically need quite a bit of assistance in embracing the cloud, particularly as it relates to their legacy environments, because it’s a challenging process to get a legacy environment across to the cloud.

It is not straightforward like building a startup from day one and cloud-ready format on Amazon Web. So, we’re a believer, a big believer on the trend.

We think only about 20% of the businesses has already -- has moved. So, there’s a long runway here.

And we’ll work hard to make sure we have a relevant role in it. On UFB and SME, look, the answer is pretty simple.

SMEs are busy; they’re not very demanding users of broadband, actually. They don’t watch Netflix.

And it’s actually Netflix that is -- Netflix and YouTube are the main drivers of volume on the broadband network and they have demanding applications. So, SMEs are not sitting around watching video all day.

Their volumes are relatively light and running their business applications isn’t particularly demanding and they typically will get a pretty good service off any form of broadband. So, they’re just not as motivated to move.

And when they become motivated, they are often in shared premises or with a more complex ownership arrangements around access and things becomes a bit of an impediment. So, the time lines to get a SME UFB service are much longer than in the consumer market.

And finally, most of them are very mobile businesses. So, they tend to favor anything wireless before they worry too much about fixed.

They move a lot, they have a lot of moving people. So, those are the, in our view, the drivers of it.

And then just one more if I may. You’ve obviously expressed interest in getting control of fiber assets in the past.

I just wonder if there’s any update from that or are you still looking at that as an opportunity?

Yes. So, they tried.

We were interested in CBD fiber and that principally meant Wellington and Auckland. We had a good tilt.

It’s team talker in the year, but in the end couldn’t meet the aspirations on value that the owners of that business had. So that didn’t work out.

We’re still working with parties in Auckland. And look, it’s not do or die for us.

There is some benefit in it. If we can make it happen, it’s good; if not, we’ll be fine.

I just hope you can clarify a couple of numbers for me. Just after the household number of Spark customers across your mobile broadband and other areas of the business.

Also, can I just ask -- I see that mobile and broadband numbers are up but market shares remain relatively steady over the past 12 months or so, and what’s going to account for that?

So, in terms of broadband, we’ve set those numbers out for both broadband and mobile in the attached Excel doc. So, there’s about 687,000 broadband customers and just under 2.4 million mobile customers.

And with the broadband -- I’m sorry, with those mobile numbers -- are you able to split those between prepaid and postpaid?

Yes, the split to this, so the prepaid is about 1.25 million and 1.15 million for pay monthly.

All right. That’s all for me.

Thanks a lot. Cheers.

Good morning, guys. Just looking at how Lightbox is positioned, now that you’re operating Netflix, has the uptake of Lightbox been affected by your Netflix offer at all?

And can you provide any insight on changes in the makeup of your paid Lightbox customers?

Yes. Lightbox has been impacted upwardly, so we continue to grow Lightbox.

And as we’ve always said, there’s a rising tide in this category around video-on-demand. So, we’re still adding customers to Lightbox.

In some of our recent success with lead content like, The Handmaid’s Tale has made the product pretty compelling actually. And about a month ago The Herald ran a story on the seven best series on TV in New Zealand this year, and three of them were Lightbox exclusives.

So, we are very satisfied with the track we are on and we’re very satisfied with the marketing promotion we’ve had with Netflix, and so are they. So, we think the more we grow these products as a group, the higher the tide will rise around the category, generally.

So, that’s our game plan. We continue to add non-Spark customer subscribers to Lightbox, but for competitive reasons, we won’t be disclosing any of the details on that.

But, we do have growth there.

Okay. Thank you.

I think that -- does that end the questions?

All right. Well, thank you everyone for participating.

We’d very much welcome your feedback through to Dean on the nature of the briefing pack material. We have tried hard to give you something we thought might be more useful and to the style and the way we’ve approached this call.

And whether that feedback is positive or negative, we will certainly have regard to it. So, thank you for joining the call and look forward to the next update in six months’ time.

Cheers.