Spark New Zealand Limited

Simon Moutter - Managing Director David Chalmers - CFO

Arie Dekker - First New Zealand Capital Kane Hannan - Goldman Sachs Brian Han - Morningstar Adrian Allbon - Craigs Investment Partners Phil Campbell - UBS Shane Minogue - IDC

Good morning, everyone. Welcome to this results briefing for Spark New Zealand Limited for the FY '18 Financial Year.

I'm Simon Moutter, Managing Director here and I'm joined by David Chalmers, our CFO. Look, now a year of Agile, it's gratifying to deliver a solid set of results across the board and I think with our very visible results now emerging from our strategic programs.

Dramatic improvements in customer experience or even in our Net Promoter Scores, and growth in customer numbers. And these do provide us with some encouragement that we are improving the long-term health of the business.

But the message hidden inside the numbers is that winning in this industry is about doing the hard yards, day in and day out. Despite massive demand for our products showing up in growing customer numbers, a 50% increase in data traffic year-over-year on our core networks, enormous propensity to buy high-end connected devices and still a growth in OTT services, there is no easy way to tune this into earnings growth.

And in our case, we had $132 million coming in the front door through our growth in mobile, cloud and security, but $100 million whistled straight out the back door with the decline in the old voice and legacy data business. I had a quick flick back to 2013, where we set out the growth strategy for Spark and had a look at those 2 drivers.

Mobile today, the FY '18 results of mobile is $350 million increase in revenue over that 5-year period and now contributes nearly 40% of the Spark group's gross margin. That's an incredible growth story, a world-class performance in mobile.

And cloud and cyber, was a nonexistent line of business for us in 2013 and we've built that over the 5 years to the business that's delivering well over $300 million of revenue and throwing over $100 million of EBITDA between them. So we do have some fantastic growth stories, but it's hard to get them to show up in the overall result with the decline of the old business continuing.

So maintaining earnings momentum in this business is largely a cost game, and the search for efficiencies is never over. And you have to go again and again and again and get more sophisticated with every round.

At Spark, we are playing the long growth game and the moves that we've made are consistent with that approach. In June, 2017, we set out our approach to the long term of the business and captured that with a suite of aspirations for 2020.

And our sites remain firmly set on these. And just let me remind you, I went back and dug out one of the slides from that June 2017 pack, was headed where we aspire to be by 2020.

The first was mostly ex copper, enabled by 4G and 5G wireless together with the rapid adoption of fiber access and urban, and we are belting along on that aspiration. We've come through the 50% mark ex copper already and going for a -- to get past 60% in the year ahead.

The second was to take advantage of disruptive technologies like virtual assistance and machine learning at scale to improve our business, better serve customers. We've got 40 bots operating, we've got chatbots alive and well and handling a significant volume, a number of automation systems at work and that has shown up in an incredible nearly quarter reduction in the year on the need for customers to call us despite rising our customer numbers, and extremely strong performance on all our interaction Net Promoter Score measures, so making great progress there.

The third was to benchmark ourselves into the world's best digital companies for digital sales, self-service and customer experience. And again, our strong performance on Net Promoters across the board and some of the leading brands we've built in the industry a testament to progress there.

The fourth was fully leveraging our brand portfolio to address forces of commoditization and lift market share in certain segments, while encouraging market growth. I think you can see they're extremely evident and a very strong performance in mobile, where we're growing strongly, but so too is the market.

And that's been enabled with a very big push with our flanking brand in the Skinny, and we're now leveraging Skinny into the broadband market and Skinny and Bigpipe, our two flanking brands are making most of the contribution to our growth and customer numbers in broadband also. The fifth was to be hosted in the cloud with best-in-class automated software-defined converged network and digital service platforms.

Again, we're performing very strongly in there with the core IT program, adopting cloud-based infrastructure for everything from CRE into our new converged voice networking. So really pleased with progress there.

And finally, was to create value for customers sufficient to sustain ongoing growth and returns to shareholders. And I think you can see, we have a strong commitment to delivering that growth.

So excellent progress towards those aspirations that we set out a year in a bit ago. And we're now going even harder with our Quantum program, especially in the move to adopt Agile at scale.

And while that move did put a dent in the FY '18 reported results, it has provided a foundation for delivery of very strong results in the next couple of years. And I'm genuinely proud of the wider Spark team who have embraced the biggest organizational change we've ever done.

They've implemented it incredibly quickly, and we haven't dropped the ball once in any year of our core operations during the transition and that's something. Agile ways of working are the future.

And it's great to leading out on this for New Zealand. In respect to the numbers, EBITDA was down 2.7% to $989 million, and that was clearly impacted by $49 million of Quantum costs.

The adjusted EBITDA is a better indicator of where the business is tracking going forward, and that was up to 2.2% to $1,038 million supported by modest net revenue growth and labor cost reductions. CapEx was, again, delivered on plan, well inside our target envelope.

And reported net impact fell to $385 million, again, impacted by the Quantum cost. We did work hard to progress our three key areas of focus in the year.

These are set out -- a little bit of a flavor of that progress is set out on Slide 3 of the results summary deck. And these also are consistent with what we explained in the June 27 Investor Day presentation.

I think the emphasis on wireless in this group is very clear and we're thrilled to have delivered a very strong result, a world-class result, again, in mobile this year. We have strong penetration now of wireless into our broadband base.

It is flattening out from here. We have addressed, we have taken that product through, the wireless broadband product, through to the addressable market now and we expect lower growth on that from here.

On pricing sort of customers, as I've mentioned before, the work we're doing with our flanking brands and particularly, the bigger investment in Skinny is paying dividend, and we do have a big promotion running on Skinny today with a much bigger branding exercise and that is helping deliver increasingly encouraging numbers from the Skinny brand. And on the lowest-cost operator plan, we've had a raft of activities running with the Quantum program and the adoption of Agile, and these give us great heart that we can continue to find ways to run this business more efficiently and maintain and extend our leadership as the lowest-cost operator in our category in New Zealand.

So generally, I'm very encouraged by the track we're on and I'll hand off now to David, who will just give you a little bit more insight in some of the key operational results and financials.

Thank you, Simon, and good morning, everyone. So starting off with an overview of the key results for FY '18.

Revenue up 1% to $3.649 billion; reported EBITDA of $989 million and reported NPAT of $385 million. As flagged at our market update on the 25th of May, the acceleration of the Quantum program and the associated $49 million of cost, means that this year, we're presenting adjusted financial results alongside reported in keeping with our internal policy of only adjusted -- providing adjusted financials where we have projects of initiatives that total more than $25 million.

So when an adjustment is applied, the adjusted EBITDA result was $1,038 million or 2.2% higher than reported FY '17; and adjusted NPAT of $420 million and adjusted EPS of $0.229, both marginally ahead of FY '17. Turning now to the key drivers of the FY '18 results, I'll step through these, both the revenue and cost lines.

From a revenue perspective, we delivered net growth of $35 million or 1% in FY '18, but what that understates is the significant growth that we need to drive each year in new revenue given that we typically have, as Simon mentioned, around $100 million of legacy revenue full away each year, and this year was no different. And the reason we're able to deliver that net growth has been a substantial strength in our 2 key areas of mobile and cloud, with new revenue growth of $132 million.

Taking each of those in turn, mobile was up $83 million or 6.9% with both components being mobile -- being both mobile revenue from service usage and also from CPE, both performing strongly. Service revenue was up $36 million or 4.6%, driven by an increase in overall ARPU of 1.2%.

And partly what we saw in there was a shift from prepaid to postpaid -- to pay monthly continuing. We now have 49% of our base on pay monthly up from 47% the last reporting period.

Within pay monthly, we have more customers selecting higher value plans and we've talked for a while about the impact of the move to unlimited price plans, and you can see now again, with 40% of the HMB, so the consumer monthly base, on $55 plans and above up from 35% at the end of FY '17. Demand for data continues at a mobile level.

It's one of the key drivers of prepaid ARPU growth. And Skinny's had a particularly strong year in that area.

And these gains offset the decline we've seen in the prepaid connection base, the result from the strategic decision to remove Skinny from The Warehouse Group and instead focus on margin. And so we've seen an increase in overall prepaid revenue, despite that connection base declining due to that strength in ARPU.

The customer demand for premium handset continues. It's part of why we've seen other mobile revenue growth up $47 million or 11.3%.

Moving on to cloud. Cloud security and service management, up $49 million or 15.1% driven by continuing customer demand for as-a-service products, and we're pleased with the number of important new wins through the year that set the business up well for FY '19 and beyond.

We talked a little bit about the declines in revenue, so this year around about $100 million in decline from our legacy products. That's slightly up on what we had last year, which was at about $95 million.

And the reason for that principally relates back to voice. So voice was 83 -- voice revenue was $83 million lower than FY '17, principally due to that connection revenue where we had a connections falling by 25% over the period.

And that was driven by major wholesale customer migrating customers to an alternative technology. There was also a decline in terms of calling minutes and calling revenue, but that was more consistent with what we've seen in the past and adding to that managed data declined by 17%, slightly slower actually, than we've seen in previous periods.

Moving now to operating expenses. Operating expenses were up $63 million or 2.4%, but it's important to note that that is where the Quantum cost are captured.

So $49 million of that $63 million relates to Quantum costs, showing a tight control on the underlying cost base. Two areas to highlight here: firstly, broadband; and secondly, labor costs.

So broadband, while there was a decline in terms of revenue of $4 million or 0.6%, we're very pleased that we're able to grow gross margin over that period by 6.7%. And the driver for this still relates back to wireless broadband.

So the 116,000 wireless broadband customers we had across the period provided a gross $29 million cost-reduction benefits, which translated into a net $21 million decrease in broadband cost of sales as these savings were partially offset by increased pricing on both copper and fiber. The annualized benefit of wireless broadband of that 116,000 customers is now $51 million at a gross level, and together with the growth we've seen in fiber, means that, as Simon mentioned, we've achieved going past that 50% threshold in terms of our base on copper.

Labor costs has clearly been a focus, and when we gave our last update at the half, we talked about targeting an annualized net labor cost of approximately $500 million, by the end of the financial year. That annualized cost came in at $499 million, so we're pleased with that result.

And consistent with that was the update we gave the market in May. We believe we're on track to achieve the $470 million of annualized labor costs within the first half of FY '19.

Now actual labor costs in the year were at $513 million, so down $37 million or 6.7% year-on-year. And the Quantum cost, as I mentioned, at $49 million, slightly below, but very close to the guidance we gave of $50 million to $55 million back in May.

So relating these overall results back to our FY '18 guidance, which we updated on the 25th of May, we, at that time, had guidance revenue of $3.594 million to $3.666 million coming in towards the top of the range at $3.649 million. EBITDA on a reported basis, the range we gave was $971 million to $991 million, achieving $989 million.

And at adjusted basis, $1,026 million to $1,041 million, and the adjusted result coming in at $1,038 million. A few comments on the balance sheet.

Net debt increased over the period by $184 million to $1,158 million with three key drivers across that period. The first was acquisitions and investments, principally made in the first half of FY '18.

The second was the top up of our dividend, which, as we've set out starting back at the Investor Day more than a year ago, is consistent with that plan. That number is -- that amount of dividend support is slightly higher than in previous years, again, given the $49 million of restructuring costs paid across the period.

And finally, handset receivables increased by $52 million. That's an increase on the previous year's absolute number of $45 million increase, and we do continue to see a strong appetite for our customers to take advantage of both interest-free offers.

What's driving that is both device price increases, which continue to go up, so the average interest rate handset is about 16% higher year-on-year. And we do still see a slight trend towards increasing on the Open Term base, although only by 1%.

So consistent with the movement we saw across the last period. So reported net debt-to-EBITDA from 1.17 times, to give you an update, that's just relative to our internal policy of maintaining long run gearing below 1.4 times EBITDA, which is the internal proxy we use for S&P's 1.5 times threshold of maintaining of an A- rating.

And it's important to note that historically, we've used an internal proxy of 1.1 times, but over the years, that's the number we've effectively used demerger. And there have been a number of small changes over the years in terms of both the methodology that's applied, and also the captive finance facility adoption which we announced back in April has increased that internal proxy to 1.4x times.

Finally, despite the growth of net debt we set at FY '18, we do expect this to decline in FY '19 due to the earnings growth coming through and the investments we've made in the Quantum program. So turning now to the dividend, which is on Slide 20 of the results summary.

The directors have declared a total second half FY '18 dividend of $0.125 per share and that of an ordinary dividend of $0.11 per share, 75% imputed, and a special dividend of $0.015 per share, also 75% imputed. And that brings FY '18 dividends to a total of $0.25 made up of $0.22 per share ordinary and a $0.03 special dividend both imputed at 75%.

Turning to FY '19 and before I go onto guidance, a couple of comments we've made in this slide pack around changes to external reporting. And there are 2 changes that will impact FY '19 guidance on reporting.

The first of these relates to our adoption of 2 new accounting standards, IFRS 15 and 16, which we'll adopt or have adopted as of 1 July, 2018. The combined impact of both these is expected to materially change reported EBITDA, but with minimal change to impact our overall cash flow as both of these changes effectively involve moving line items from EBITDA and above the EBITDA line to below the EBITDA line.

And there's quite a detailed step through in Section 6.8 of the annual report that quantifies the expected change of IFRS 16, which is the major change. Importantly, we're giving FY '19 guidance, excluding these impacts.

So it's important to note that we're giving that guidance on the basis of the current accounting standards. And ahead of the F -- the first half FY '19 results, we will restate FY '17 and '18 financials and translate the FY '19 guidance to include the impact of IFRS 15 and 16.

The second change we've made is the disclosure of our long-term investments in light of the move to IFRS 15 and a stricter interpretation of revenue and also, to ensure consistency across our investments. So currently at the moment, we have share of joint venture profits and losses reported in EBITDA, but that line does not include the Southern Cross dividend, which is reported in other operating revenue.

Despite the fact that Southern Cross is a 50% JV, we do have other 50% JVs that do report in that line. And so we were seeking not only to ensure that we were updating that in reflection of IFRS 15, but also to achieve consistency across our JVs.

So what we're going to be doing there is removing those lines from EBITDA, and reporting as a single line below EBITDA of interest and investment income with levels of disclosure measure it to what we currently provide in relation to those investments in associates and joint ventures. So the overall impact of that, there's no change in overall impact, but importantly, FY '19 guidance is provided including the impact of these changes, which predominantly relates to the change in terms of Southern Cross dividend.

So the Southern Cross dividend, we expect for FY '19 to be more in the range of $10 million to $20 million, significantly below this year's dividend of $50 million. And likewise, in the investor pack, we've also provided a reconciliation of the FY '17 and '18 results applying this new treatment in terms of JVs and associates.

So finally, in terms of guidance on Slide 24 for FY '19. We're guiding to revenues of between $3.6 billion to $3.67 billion; EBITDA of between $1.025 billion to $1.055 billion; CapEx similar this year of approximately $410 million; and EPS of $0.23 to $0.24; and again, our total dividend consistent with this year, the total dividend per share of $0.25 at least 75% imputed.

That concludes the comments I had on the financial summary of the FY 1'9 results. I'll pass it back to Simon.

David. So just continuing the theme on looking forward, if I refer to Page 26 of the results summary deck.

As usual, we do like to set out for investors a view of our -- what we're looking to achieve in terms of driving the long-term health of the business with the Indicators of Success slide. And this year, we've grouped them around 4 things: around technology; ways of working; digital and data adoption; and the areas of focus in the market.

And certainly, on technology evolution, there's no new news in there. I think the strong commitment to wireless shows up with wanting to have a clear pathway to 5G, including certainty around spectrum entitlements within this financial year; a maintained focus on lifting customers off the copper network onto alternate technologies be they fiber or wireless.

There's no question in our results now that you can see the benefit of getting off the service here, the copper network, and onto these more modern better performing solutions for customers. We have an intent to launch our new services on the Rural Connectivity Group network, the joint venture that we're in with Vodafone and 2degrees to provide a better broadband and a full service to much of rural New Zealand and we want to be a strong driver of uptake on that network.

We'll carry on the PSTN wind-down, actually lifting the number of targeted closures this year to another 100 to come out. So building momentum around PSTN requirement.

Pressing on this year with a few of the substitution of our voice-only base to copper. We've already substituted some of that base, but our focus has been on broadband to date where we're now after the -- a decent plug of the landline only customers who remain with us and we're going to shift them across to a wireless alternate in the course of the year.

And we've got a big job to do in September next year around delivering the Rugby World Cup with streaming service, so we'll make sure we've got our technology in place to make that a successful event. Ways of working.

We've implemented Agile in the engine room. We're operationalizing that at pace now.

We're a couple of sprints in and the results are starting to come from that, but just taking a heavy focus from the leads squad and the recent business to get that -- to really get to grips with this way of working and make sure we get strong delivery of outcomes from it. And meanwhile, we're now advancing into the remainder of the business and within this half year will execute a transition to sort of fit for purpose Agile work implementation for all of the remaining parts of the business, some of which are relatively light touch with Agile methodologies, back of which can embrace quite a large portion of them.

So that's progressing along strongly. We're using Agile too to really get us focused on the culture of our company and make sure that we're getting diversity and inclusively, right.

And so we have some strong ambition to see that show up in the feedback from our customers, from our staff. And as David mentioned, we're expecting to underpin our financial results with a labor run rate under $470 million, and we will seek to achieve that within the first half.

Digital and data adoption continues with that very strong commitment to drive our customer journeys, all into digital first. We're around the 70% mark today, so trying to take that up to 85% in the year.

And we seek another significant reduction in customer key workload. As I mentioned before, we're down 24% I think in the current year and we're hoping to achieve at least another 10% to 15% in the year ahead.

And in market seems continuing the progress with the Spark consumer market NPS. We're continuing a steady rise there.

Another very strong ambition for mobile service revenue growth at 5%, continuing to drive our growth lines in cloud, security and service management. Getting out of the blocks on Internet of Things, we've got a digital services tribe, he's accountable for creating that and we have a number of proof-of-concepts underway.

So we want to get to a decent range of commercial products launched during the year and start more actively cross-selling to customers to see that uptake in digital services continue. So look, that's a flavor of the year ahead.

We're clearly in good shape. We've got our heads up.

The organization is confident and feeling strong and committed. We've navigated an extraordinary shift in operating model to Agile successfully.

Our internal feedback from staff is positive. So we're actually quite surprisingly grew our employee Net Promoter Score through that restructuring process where normally, you get the negative of that.

So we do feel -- we feel we're in a good shape to carry on a strong story for delivering both to our customers and to our shareholders. So operator, let me hand -- close there and hand back to you.

And if you could march all the questions for us, we'd appreciate it. Thank you.

So just starting with the EBITDA guidance and just sort of looking at the composition of that. So I guess, in terms of on a reported sense, labor costs could be around 480-or-so in '19, based on where you're sort of heading.

So that savings pretty much offsets the hole created by the Southern Cross dividend. And just excuse me for a moment, I'm looking at it still on the old way we looked at EBITDA when the Southern Cross dividend was included and growing.

So that's an offset there. So I mean, I'm sort of getting that you've got in the midpoint of your EBITDA guidance sort of 2.5% odd growth on FY '18 on an adjusted basis, for the one-off gain that was in there, or about $25 million-or-so.

Is -- in your fixed wireless guidance, are you suggesting that there's another $20-odd million of fixed wireless savings benefits to come through in '19? And is that kind of the key driver of EBITDA growth notwithstanding a bunch of other offsetting things going on in the business?

I think it's probably a little more multidimensional than that. So, yes, in terms of wireless broadband, we'll certainly see the benefit of the growth in the base.

So the $51 million being the growth annualized amount, and clearly, as we're growing through the period of time, we didn't get the full year benefit of all 116,000 customers. So yes, that will continue to play a role as it rolls into a full year impact.

We're still bullish in terms of mobile, in terms of the -- our performance in market and the pace of change there. We've flagged also an initiative in terms of focusing on wireless voice.

So I think there are quite a few different areas would see us driving the results. And a range of other cost-out initiatives we're just getting fired up around sort of other cost categories.

That's right.

And is there is another sort of wave of labor included in that do you think?

I think the labor guidance we've given you is sort of what we've got in the funnel today, Arie. As we've always said, this is a business that will automate.

It's particularly the telco people, what the remnant of telco as I often say we used to have 20-something-thousand people in old telecom. We -- as we automate and the product offering gets simpler and simpler in telco over time, the number of people we require to run that business will decline, but that can be offset by what we do in the growth line.

So I wouldn't read much more into labor than that, but just labor is not the only category of costs we have. We have an awful lot of cost of sales and a heck of a lot of other cost lines.

So we're back working away at those.

And on the fixed wireless voice, I mean, obviously, you've talked about that for a wee while and you've been very keen to make sure you get the proposition right to roll out on sort of a mass sense. Is that something that you're going to push hard on?

And when do -- when should we expect to see you pushing hard on that in the market, like you did in the initial phases of fixed wireless broadband?

Yes, well, I mean, we should be active -- as I say, we already have a product, we just slowed up its sales because it was not the easiest for those customers to -- the setup experience, and we've been honing the product offering. So it's -- we'll be active this half.

The issue with wireless voice and for the voice-only customer is the customer -- the landline only base, does tend to be a bit older and less technology savvy and so actually, the process -- and a little bit cautious about hard sales as well. So we're just being realistic.

I don't think you'll see it run at the pace we were able to achieve with broadband substitution where there was 100,000 customers having a poor experience on copper, and it wasn't that hard to make a sale. And they were broadband-able, meaning they have a bit of a text.

Also, I don't think we'll be able to run at that sort of pace, given the customer base on the end here. So hence our aspiration as set out and the indicators of this is to get up to 30,000 connections by the end of the year.

And that's a little more than double what we've currently got.

Sure. And yes, forgive me, I mean I've got a couple of things going on at the moment, but just on the fixed wireless broadband.

I think my interpretation of what you're sort of saying there is that you're looking to hold customers at a similar level as you've got currently. You came in a little under the 125.

Could you just sort of -- like can you give any visibility on whether that's just ensuring that the quality of service to those guys is sufficient in that, or whether there's a lot of churn in that base and holding them as -- still requires a reasonable sales effort to replace those sort of churning off say to fiber, when it's available or for other reasons?

Yes, just look, I think the real [indiscernible] you'd say, "Well could we grow a little bit?" Maybe The churn is not high on wireless broadband, it's strong.

The natural movement is people because they've had a great experience, the demand for broadband data grows. So they -- when fiber turns up, for the ones who are using large volume, we're active in the migration of them to fiber.

We don't try to hold them back. We do quite the reverse.

We want our customers on the best service for them. So I think at, though, out the top of the wireless broadband as fiber becomes available because a lot of those customers chose the product.

They're on poor performing copper and naturally want fiber. All right, so it's a good thing to get them on that.

And that while we sacrifice a bit of the EBITDA in the process, we do get a happy and well satisfied customer and we certainly wouldn't want to lose them to a competitor. As regards the broadband...

[Indiscernible] with respect to that. If you look across wireless broadband, the average user there is using in the tens of gigabytes per month rather than the 100.

And so we're also increasing the capacity of the plans that we offer in the market. So we think that that's also going to be a good mitigant to make sure that we continue to grow that in line with customer demand.

Sure. And last question just on cash flow efficiency.

Obviously, that's a material step down. David, just in terms of outlook for the year ahead and clearly, the receivables are still sort of reasonably solid, would you expect that cash conversion efficiency to sort of be slightly lower, but still in the 90s going into FY '19?

We're still targeting 95. So you've seen quite a bit of [Indiscernible] half on half.

We were up over 100 in the first half, 97 this half. So we think 95 is still at the right sort of number that we're working hard to make sure we achieve.

Just firstly on the mobile market, just talk a little bit around the competition you're seeing there and I suppose that accelerating decline in the pay monthly ARPU in the second half? And then just on the sports investments you've been making, could you talk through the business case I suppose for the EPL acquisition and Rugby World Cup and I suppose how we should be thinking about assessing whether this has been a good investment of Spark over the next couple of years?

The competition, I think competition in mobile is strong and sensible would be sort of a way to characterize it. It is a lot of investment required in mobile.

We got 5G ahead, so you do have to have a sense of a growing industry revenue and profit pool, which is going to fund the next big wave of very exciting new technological capability. So I think we've got a healthy market with good solid competition.

I think the numbers in New Zealand prove that New Zealand customers get good value relative to other OECD nations. There's an offer that suits everyone.

The innovation in the sector's strong, so I think it's a good solid competitive market. We're in a very strong position with what we think today is the premium brand in the category with Spark, which uses the value inclusion strategy to differentiate from the others by offering things like Spotify and Lightbox with your plan and we've had a great run with unlimited mobile where our competitors very slow to emulate our progress there.

And, of course, at the other end of the spectrum, we have the Skinny brand, which sits very clearly is the most preferred brand in mobile in New Zealand by some margin on Net Promoter Scores, brand performance, all of those, and commands the lowest price position in the market. So that does give us a strong way to operate in that market.

So that's my overall sense. I mean David might like to comment on the ARPU?

Yes, ARPU, and you're right, we're up 1.8% across the first half and 1.7% in the second. There are elements of seasonality in there and so we do see a larger number of travelers, for example, across the Christmas period, which typically spill into the second half of the financial year.

So we're not really seeing any major, if you like, structural change or permanent change we'd call out. We think it's more just a slight mix of composition of the base combined with normal sort of timing elements.

Yes. And look, on sports, I mean we've been -- we were recently clear with our messaging on this a couple of weeks ago, when we announced the additional content win with English Premier League.

But we do see an opportunity at Spark to create a position in the sports media market, alongside others who will continue to operate there or who may also choose to enter. We view sport, media, distribution differently from Lightbox, where Lightbox is a value-added service with broadband.

We will not be adopting that strategy in sports. So I think shareholders should expect us to be in sports media, if we can make a profit from doing it and to exit it if we can't.

And so far, we've bid for some content that we think is a nice fit, that the Rugby World Cup is a very strong catalyst for market change and a big signal about our presence and it certainly has got all New Zealanders sitting up and taking notice that Spark is developing a service. English Premier League is a relatively easy fit too as a product, as a content offering to add to an on-demand service.

We already have experienced that. We owned it for three years several years ago.

And we did well with that. We had it performing positively by the third year, the last time we had that content.

And we bid to regain that. Unfortunately, we were just overbid by another party, but we would have liked to have retained the English Premier League.

So that's how you should view it. And you won't really get much visibility of any outcome from this for at least another year from now.

We're not expecting to launch a platform until sometime in early in the calendar year 2019. So even at the half year, we won't really have a lot of news around -- we won't have any news on how it's going because we won't really be in market at that time other than probably some alpha service that our staff are using or something like that.

And so it will be a year or two from now before there's any way really for the market to assess whether we're doing well or not.

Just on that ARPU. I was talking about the paying monthly ARPU stepped down about three-- about $1 in the second half of '18.

Just wondering if there was anything that actually drove that, I suppose for pay monthly specifically outside of the mix between prepaid and pay monthly?

Yes look, so pay monthly, it's typically the split between consumer and Spark Digital. And so we've got -- ARPU's going in different directions there.

HMB are growing strongly and still some declines in digital pay monthly. And that's why you see the overall effect coming down.

Simon, you had a legacy revenue pool of still about $570 million for voice and almost $200 million for managed data. Do you have a feel for the terminal time line for all these revenues to disappear as they are currently classified by you guys?

Yes, look, I get asked that so many times and I keep hoping we're near the end of the climb but I think they just continue to run. As David pointed out in his intro, we've had a little bit of up-kick this year in the rate of decline, but that was due to a specific event in the wholesale where it changed, where a large wholesale customer adopted a different technology for a -- what we understand is a subset of their base, but we don't really have any knowledge -- detailed knowledge of where that could trend to.

But it's sort of in round numbers $500 million for landline and voice that's left in the business. Not all of that is a dying pathway, and you'd expect quite a long runway on it.

So if you thought about half of it as terminal, I think you're still thinking about years. Business voice, for example, isn't really declining and there are many new world voice products included in that kangaroo video conferencing thing, which are more flatlining.

And they're only flatlining, not an uptake, it's just the technology gets cheaper, so the pricing of that too [indiscernible] videoconferencing is a rapidly growing line of business. So I think you've got to look at that as terminal, but it's probably going to be over 5, 10 years still in my view.

Legacy data on the other -- legacy -- the kind of legacy data, we're a very, very long way through the technological substitution now. And that has been pushed down mostly by the adoption of new cheaper fiber-based opportunists.

So there's not a loss of market share or a loss of interest in the product on data connectivity. Obviously, customers need the service.

It's really just been driven down by the shift to fiber and the fiber offering such low price fiber services alternate to what was possible in the past. But, again, you can see that's starting to taper off today.

So the rate of decline in data was lower this year, and it doesn't feel like we're far away from flattening out there to me, but given some of the price points, but light broadband get awfully close to the input cost.

Also, you mentioned you had some key wins in the cloud business. Can you talk about the revenue pool opportunities still out there for Spark to go after?

Yes. Unfortunately, we're not allowed to name the parties we do business with here.

I mean it would be great to list them for you, but we're unable to due to the confidentiality arrangements in the contracts. But look, in cloud, I think this is a not well understood story about Spark.

And it is an extraordinary story to have built a business this big in the stronger New Zealand, in a market that everyone said we couldn't win in, right. When we were start -- when we entered the market, everyone said, Well, there's an Amazon and Microsoft are going to win that game."

So we are the strongest player in New Zealand, we've -- in cloud and cyber. As I mentioned before, cyber's highly related to that service.

So as we build up the stack, we're well over $300 million of revenue that's running $100 million of EBITDA from over $100 million of EBITDA from that. That's a position of strength that allows us to continue to build out because we're number one in this market by a long way.

And we're here and we've got 1,000 people who can support customers when they need technical help, which is not the case with our global rivals. So we're in a strong position there.

We reckon less than quarter of the enterprise market, IT, is across to the cloud. So plenty of runway.

Obviously, there is more competition in market today from global's and others. And we may not maintain as high a share of that growth.

But there's a lot of growth and there's enough growth for all the players to make strong progress here. And so we feel good about our position there.

This one, if I just come back to the Slide 26, where I think in reference to Arie's question, you were sort of summarizing some of the Agile stuff. When I look at that, is what you're signaling here, and by the end of half 1, is that should we think about that as the major sort of capacity reset from a later respect of done?

Then what flows after that to sort of cover the dividend in the future, we've got a combination of some efficiencies coming in, we've got, I guess, the fixed cost economics coming through from growth in mobile and cloud revenues. And then I think you were mentioning further cost out in some of the other sort of cost of sales lines.

Can you just clarify that's the correct path we should be thinking about?

That sounds broadly, right, Adrian. It's a bit of everything.

As I said in my intro, you win in the hard way in this industry. There's no one lever you can pull that measuredly solves earnings but you get out of bed every morning and you come on here and you sift through every line you've got and you find ways to improve a number, be it grow its margin, lift the revenue, try and solve for a cost and whatever, and so that is the game.

So what we're expressing is an ambition, and with a sense of outlook and guidance that we believe we can find enough value across all of those levers, our growth levers and our cost levers to solve to that ambition. We set out actually back again in June 2017.

We want to get to above a 30% EBITDA margin, and those, if you do the maths on that, that all stack -- aligns to the numbers and we're still striving and believe that we can do that, albeit still in that a statement of ambition rather than a direct guidance, yes.

And just look, in terms of just like the competitive intensity in some of your key markets. Are you -- like, in the broadband market, are you -- is that market sort of plateauing in terms of competitive intensity?

Like I know it's sort of intense, but do you get a sense that it's getting worse, or is that sort of -- is it more just sort of stabilizing around acquisition costs for new customers?

Yes, it's very clear now broadband is relatively saturated, right? You've got a bit of -- you've got some organic growth, but broadband as a product line is no longer a growth product line.

There's no point entering the broadband market thinking it's this big, new growth product category that everyone can have a piece of. It's a mature and saturated.

If you look at IDC forecast, they're very muted around what the future growth in the broadband business is. So we'll call it a saturated or mature business today.

What the issue is in broadband is that competitive arena doesn't -- it looks more like the pricing behavior and acquisition efforts look more like what you would see in a growth market that is only 15% penetrated it's -- or not saturated. And so the competition is characterized by extremely heavy acquisition-focused offers.

They're just served to grow churn at a very expensive acquisition cost. And I think that would be value dilutive.

Now, we try very, very hard to minimize our engagement in that. We've got to compete and we've got to hold our position.

And we work hard by differentiated, it's why Lightbox is so important. And we work also with Netflix and others, so we juice our Spark broadband offer up to make a difference.

So it doesn't get caught in that same utility broadband product that most are offering and in competition with it. And we play the utility game with our Bigpipe and Skinny brands, and we work hard to try to shape a sensible offer that attracts customers for the right reasons not the wrong reasons.

But at the same time, it's very difficult when you've got 70 or 80 brands active in the market and are very acquisition focused and bright. So that's our reality.

Will it change over time? Probably.

When? I've no idea.

And in the meantime, we just continue on hanging onto our position.

Just maybe into mobile. In your service revenue growth ambition of -- well, your target more than ambition of 5%.

What are you sort of expecting the system to sort of grow at in '19, in number?

….service revenue, slightly less than that.

It's all right, yes. So we do think that slightly less than that, and so we do still think there's the capacity to increase share across that period.

And is that share mainly coming again from the sort of the momentum that you've got on this unlimited plan in action bay? Or is there other pockets that you sort of feel that you -- that we probably can't quite see from the disclosures that you're doing quite well on?

It's certainly in there, but also, the team are obviously -- we now launched that coming up to almost a year ago. So the team's always working on new enhancements and sort of newer ideas as well to bring to market.

So I think we're feeling good about where we are in mobile, but also some of the things are coming.

And the material upping of the profile and investment in the Skinny brand, Adrian, play a bigger role. You can see we're running a biggest campaign, with brand campaign on Skinny that we've either done by miles.

As we said we would, in June 2017, we would up the profile of our price seeker brand and we're following through on that with encouraging results. So that's an ambitious target to be fair, right.

That could be easily when we turn up at the end of the year with a red mark, oh it didn't make it. But you've got to go for where you think the value is.

Just a couple of quick ones, more focused on the kind of cash flows. David, I just notice in the cash flow statement there was a $20 million for payments in advance for long-term investments.

I was just wondering if you'd give us a bit more explanation on what that was? And then just a couple of questions around kind of thinking about the modeling a bit longer term.

I suppose one was around possibly 5G spectrum. I noticed that S&P in their report actually had spectrum costs included in FY '19, which looks a little bit ambitious, but I'm just wondering if we should be looking at kind of FY '20 for that or even if that's too ambitious?

And then the other one was just on maybe some of the 5G CapEx costs in terms of whether you might want to use the ICT vehicle to try and reduce CapEx there? Even though it's a macro deployment in the short term.

And then, if you just had any other comments around the Southern Cross upgrade and if there's any more you can kind of talk about on that?

No problem, Phil. So let me take those, maybe the last one first.

So Southern Cross we're still working towards a decision sometime in the FY '19 year. So the progress continues there.

And in fact, that's one of the reasons and in fact the key driver of the increase in long-term investments. So around about half of that number relates to a loan advance in terms of additional work that's going on to Southern Cross next.

The balance of the $20 million is a number of smaller investments we've made over the last 6 months that we've sort of talked about, some of which we've talked about publicly. They're typically in the sort of $2 million to $4 million, $5 million type range, Home StockCo Body is in the example of one of those, so that's what makes up the $20 million.

But as I said, about half of that relates to Southern Cross.

There's no rights payments included, obviously, they were probably post-balanced anyway, so?

Correct, yes. No, there's not those in there.

In terms of 5G CapEx costs, so we continue to provide guidance on the same basis, which is 11% to 12% of revenues, but holding spectrum outside of that range. As we put out a 5G paper a couple of weeks ago, that sets out, I think, our view, both in terms of the -- some of the models that we see emerging in 5G, in terms of some of the priorities, in terms of timing that we think would be beneficial for the whole industry to be leading out and for New Zealand to be leading out in terms of 5G.

We also talk in there about the way we think that RCG could absolutely play a role. And that really comes down to, where appropriate, we think it's a good model that could use in certain areas.

But we see it as being somewhat limited to a case-by-case basis.

And just a quick follow-up one. Just on broadband in terms of your share of the UFB connections.

Obviously, you kind of missed the 40% to 45% share. I suppose I was just a little bit surprised by that just given the focus with Skinny and Bigpipe and even the Spark brand in terms of some of the discounting.

Just wondering if you can give us a little bit more color as to what is going on there, and what's the plan for that. And I'm just wondering if obviously in the last month or so, you've launched the FAN PASS, which is kind of an addition.

I'm just wondering if -- what the reaction to that's been like and whether that's helping try and get back to that 40% to 45% kind of target?

Look, fair question and this is one that we're a little bit frustrated by. But we actually don't -- to be frank, we're not sure if we're chasing a ghost here.

So the 40% to 45% feels like the right place to be in terms of -- and that's expressed as a share of migration, right? So the -- as the up -- taking a 40% to 45% share of the migration to fiber, we're still running a little under that.

And we set that goal based on well, we want to translate our long-term share of broadband to our share of fiber. And, of course, we do have wireless broadband and that has soaked up a lot of share in the last year.

So that'll be part of the reason why we're running slightly below that. But we're also not sure how worried we should be about it.

Because we do have a different profile of broadband user from many other companies. We notice by their disclosures when they announce things like their average gigabyte usage, etcetera, they could be a lot higher than ours.

So we tend -- I think we've got a more conservative customer base and maybe therefore the adoption rate is slower. So it's annoying us, but we don't have a good enough fat base to tell you whether we should be really worried about it or not.

It's a work in progress, so hopefully, by the half year, we can give you a clearer view on whether we can safely set that target at a different level or whether we've still got work to do to find a way to get up to it. And boy, we've certainly tried a few things to get up there.

And that's not about price offers by the way. It's mostly about how you make a sale and engage with customers and put feet on the ground to make the service experience slick, which is still a bit random to be honest with the complex processes around getting fiber installed.

Just look, another quick follow-up one. Just obviously, you're seeing a few economic reports at the moment just with consumer confidence, business confidence declining a bit.

I'm just wondering in Auckland, are you -- it might be a bit too early, but are you noticing any kind of change in behavior of the customer base? Are you saying you still like the size of it, or nothing?

No, nothing at all, yes.

Just a couple of questions. First, on mobile, you mentioned the increased focus on Skinny.

Can you share an update on what percentage of the base or how big Skinny is in your mobile numbers? And in addition to that...

No, we don't disclose that breakdown, Shane.

In addition to that then, David alluded to the Open Term base, can you give us an update on what percentage of the base is Open Term? I think previously, it was around 80%?

It was 86% previously. It's at 87% now.

And if you look back over the last few halves, it's really only been creeping up by 1% a half. So not a lot of movement there.

We expect it to plateau out there.

Yes. So call it plateau, yes.

And then finally, on the content side, Lightbox had 355,000. It's a great result.

I wonder could you give us more detail on that base? First off, how is a subscriber measured?

Is it if they're active in 30 days? Or is just if they sign up?

And secondly, what percentage of that base is a paid subscriber and is that growing or declining at the moment?

Again, we don't provide those disclosures at this time, Shane. So in the area around media, just to be clear, and we made this point couple of weeks ago when we announced it, we will only disclose what the competitor set discloses on media.

And so this is very commercially valuable information. And you won't see that sort of detail from us until -- at least and until that becomes a market norm.

And that would be especially prejudicial to us as an interim relative to others who are already incumbent. So I'm sorry if that frustrates you, but that's our position.

We have to do some things because we're trying to win in a market.

Right. Well thank you all for taking the time to be on the call.

And we'll look forward to talking to you at the half year result of February. Cheers.

Signing off.