Spark New Zealand Limited

So, good morning and welcome to Spark's Annual Results Announcement for the year ended 30th June 2019. I'm Jolie Hodson, CEO, and with me today is David Chalmers, our CFO, and it's my pleasure to deliver my first release as CEO.

CFY19 has been another big year with strong execution of our strategy. We've delivered earnings growth at the top end of our guidance range.

Despite intense market competition, we won in mobile and cloud, while entering new categories. We've accelerated on our wireless network leadership and we've completed one of New Zealand's largest organizational transformation to Agile.

So big agenda in a year that delivered results. Central to our strategy is a commitment to create a wireless future for New Zealanders.

We've maintained growth in mobile connections, revenues and average revenue per user over the year. And that's been driven by the addition of higher value proposition for customers such as our new shareable unlimited plan.

As customers use the mobile phone to do more, many are seeking larger data allowances and price certainty, which provides an opportunity for us to improve ARPU with the right products and plans. The number of customers on fixed wireless broadband and landline products grew by 36,000 over the year to 166,000.

These products are easy to set up and in many cases deliver higher quality customer experience for customers transferring from old copper lines, while lowering our input costs. The future roll-out of 5G network will enable a step change in our fixed wireless broadband offering.

And with that context Spark significantly outperformed our competitors in mobile. We secured over 60% of total market growth in both mobile service revenues and connections, achieving our highest market share since 2012.

So the first half trend of pay-monthly connections exceeding prepaid connections continued on a full year basis. Adding 60,000 pay-monthly connections over the year driven by customers migrating to higher value plans.

The shift to cloud security and service management, we delivered strong revenue growth of 8.1%. We'll be below our 10% target.

The main contributors to the shortfall were the delay in two large customer transitions ad some price pressure on renewals as the customer base matures. It's enabled Spark to hold our operating revenue flat year-on-year at NZD 3.5 billion as our growth markets in mobile, broadband, cloud and security were offset by expected declines in legacy, voice and managed data & networks.

So really solid result in a tough industry. At the same time, we've been growing and improving our margins in key product categories across mobile and broadband.

Cloud, security and service management, also growth that was impacted by a greater mix of lower margin service management offerings during the year. A continued focus on productivity in automation, our operating expenses declined again in FY19 and that resulted in an EBITDA margin of 30.9%.

So really in line with the three-year expiration we shared in June 2017 and an EBITDA of NZD 109 million, up 11% on a reported basis, they're up NZD 60 million, after removing the impact of the prior year Quantum implementation costs. So, overall, our net earnings were NZD 409 million, up 12% or 2.2% if we compare it with the adjusted prior year performance.

And I'm really pleased to confirm our total FY19 dividend per share of NZD 0.25, 75% imputed and that's in line with our guidance for FY19. And on the back of our growing confidence in cash flow generation, we are also guiding the FY20 dividends to be maintained at NZD 0.25 per share and that will be at least 75% imputed and David is going to take you through that more and the capital management approach that supports that later in the call.

If I shift to slide 3 now of the presentation, we've made significant progress against each of the focus here as communicated at Sparks’ June 2017 Investor Day. So when I look across measures, including market share, lowest cost operator, growth in key market, top decile culture and our performance measures against the top 10 telco performance, I'm pleased to report that we are on track for delivery of all of these focus areas by the end of FY20.

While we've made strong progress against most of our key Net Promoter Score measures, with many at the highest levels we've ever ahead, including business interaction NPS and small-business and consumer interaction NPS. Market Net Promoter Score remains below the target of plus 30 and we'll be continuing to focus on that for FY20.

So if I shift to slide four now, moving to our strategy. So FY'20 is the final year of our three-year plan.

We've got a clear and ambitious strategy we're pursuing. So the first year, under that is building greater customer intimacy.

New Zealanders today expect the experience with businesses of all types to be seamless and relevance. If we to deliver against these rapidly rising expectations, we’ll need to provide relevant product and service experiences for our customers across both digital and physical touch points.

Data can help us understand and anticipate the needs of New Zealanders and technology will help us enable these insights to every interaction and they will have a serve our customers better. The next trend to that trading is all around creating a wireless future.

We know New Zealand need strong adaptable infrastructure to power our businesses, communities and our people and Spark has been leading the way by investing in our mobile and into the things networks to provide customers with real class service and innovative products. So we’re moving fast towards 5G with the launch our innovation lab in the collaboration space in Auckland.

But extensive planning for the network build and our partnership with Emirates Team New Zealand, which intends to use 5G services from mid-2020 to assist in its defense of the Americas Cup during trophy. More than 3,700 visitors has been through our lab with a range of applications already tested the customers.

We're completing vendor selection for the build of 5G network with the extensive program already in place. And we'll take a multi-vendor approach to 5G.

Our roll-out plans would not be impacted by the decisions beyond Sparks control around Huawei’s participation. We are gearing to have 5G available as soon as the relevant spectrum is available.

We expect consultation on the auction proceeds to continue through the second half of calendar 2019, with the auction now seem to be late in 2020. But I'm also encouraged the government has recently indicated that it is considering an early temporary allocation of some spectrum within the C Band earmarked for 5G.

This would enable rapid delivery of 5G services, while the details of the longer-term allocation process are sorted through. So if we move to creating New Zealand's premier sports streaming business.

The launch in March 2019 of our new streaming service Spark Sport from a standing start less than a year prior was a huge milestone. In the five months since launch, Spark Sport’s live event performance has rapidly improved and the team is well underway to successfully deliver the Rugby World Cup, which kicks off next month.

We've now delivered approximately 800 sporting events and 12,000 hours of linear channels, while rapidly improving live event performance with availability at 99.9% over the last three months. New sports content is being added Spark Sport, including the Premier League which kicked off in August creating another reason to sports event to consider the streaming.

Rugby World Cup represents an opportunity to make a real step change for us and adoption of broadband streaming in New Zealand. The importance and visibility of the event makes it an ideal catalyst for change.

We've entered sports because we believe there are sound commercial returns to be hedged. As we look ahead will maintain a disciplined approach towards future sports rights opportunity.

So I shift now to grow in key markets in mobile, broadband, cloud, security and data. This is an extension of our previous strategies in each growth markets.

In established markets like mobile and broadband, we’ll continue to innovate where we see an opportunity to offer greater value to our customers, adjusting our product line accordingly. And the business segment, we are critical enabler of greater productivity by helping companies transition their current legacy applications and infrastructure to operate more effectively in a digital world, particularly in cloud.

We're also helping companies manage their cyber security risks as we see exponential growth in connected devices and with that rapid increase in security threats. Next pillar, we've got under that strategy is maturing our Agile leadership since we transferred -- sorry, transition to Agile ways of working in July, last year we've seen encouraging signs that Agile is delivering to our three objectives of improved employee engagement, faster speed to market and greater customer centricity.

For example our eNPS score, which measures employee engagement has increased nine percentage points since the transition. Similarly, using Agile methodologies, we successfully completed the upgrade of Network for Learning’s managed network, which delivers broadband to over 2,500 New Zealand schools in just 10 months, with the customer actively engaged in Agile routines such as daily stand ups.

Transitioning to Agile is an ongoing journey and one that require iteration as we learn more, the environment changes and our customers’ needs evolve and we'll continue to invest in that over the next year. Next pillar is really all around delivering base cost.

So being more productive around improving the customer experience will remain an important focus for us in FY 2020. Our program of simplification, digitization and automation continues to be a crucial means of achieving this.

We now more than 100 bots or automated digital processes, these are performing a range of tasks, from running back-end checks and processes to serving our customers on the front line, freeing up our people for more meaningful work. We will also continue to improve, high-quality service -- self-service options such as the Spark App and the MySpark Web self-service portal, which are experiencing strong usage growth and reducing demand on traditional service channels such as our customer care centers.

We've seen our overall inbound voice interactions reduced by 34% as we migrate customers of older legacy technologies to new wireless technologies with better experiences and through the adoption of high quality self-service options like Spark App, where usage increased by 18% over the year. And then the last pillar, it's really around leading on sustainability, in the past 12 months have seen us review and refresh our approach to both non-financial performance and reporting, as a purpose-driven organization, Spark wants to make a positive contribution to New Zealand and we take our role as a responsible corporate citizen very seriously.

A new sustainability strategy that focuses on four pillars including fairness and inclusion, environmental protection, a prosperous New Zealand and trust and transparency, I laid out in the presentation. When it comes to fitness and inclusion, our Blue Heart programme has evolved beyond its origins as a personal pledge to diversity and inclusion, to become more of a unifying icon for our wider approach to an inclusive and heart-led culture.

Crucial to this transformation has been the integration of Te Ao Māori, recognising the unique role of Māori as New Zealand’s tangata whenua. Digital inclusion is another big focus here to make, particularly through the work of Spark Foundation.

We want to help ensure no New Zealanders is left behind in this currently around 35,000 families who don't have access to the Internet. The big focus to maintain is to removing those barriers to connectivity and working on that, both the public -- and with public and private companies to do that.

And in terms of environmental footprint, our goal is to reduce our greenhouse gas emissions by 25% on FY 2016 levels by 2020. Just a enormous strategy plans, we're also now in the process of developing the next three year strategy beyond FY 2020, and I anticipate sharing this with you early in the new calendar year.

For now shift to other investment updates. I wanted to take the opportunity to update you on a couple of partnership investment processes we have underway.

The first thing Lightbox. So Lightbox has been an important part of our of Sparks value-added strategy by bundled offers to customers, but it's continued successful will require ongoing investment, especially and content.

So accordingly in March of this year, we announced our intention to find a media partner to help grow Lightbox. That formal process is progressing with multiple parties engaged, and we'll update the market as appropriately more information becomes available.

Next one is around Southern Cross Next cable. So shareholder negotiations are ongoing but we expect the cable build to proceed.

The proposed structure would result in Spark's Holding being diluted as a result of Telstra becoming a shareholder. The building cost will be funded with a combination of debt in Southern Cross, further equity investment across FY 2020 to FY 2022.

And retention of dividend streams during that build phase for Southern Cross. We don't anticipate dividends in FY 2020 or FY 2021.

But expect that will resume again from FY 2022 onward's. They are growing to more modest levels of returns than perhaps historical levels.

So finally, like to disclose on the FY 2019 indicators the success captured on slide 12. Of the 17 measures laid out, we achieved or exceeded 10 of these measures.

We made solid progress, delivering on another five of those and we missed a couple of them. So the five areas that we made solid progress on around voice over LTE products.

They are currently in testing with some of our customers and we'll launch commercially next month. Second one was around a shift from voice only copper connections to wireless.

To give you a little bit longer, to get the right approach to communicating the – benefits of this to our customer's. So once we address this, we were able to accelerate the takeout rate in half two, growing to 26,000 connections just sort of short of our 30,000 collection target.

The next one was mobile service revenue, which grew at 2.6% misses target of 3%. So while our half two growth rate was much higher than the first half and we took the majority of the growth in the market, the overall market growth was lower than we anticipated.

It is worth nothing, that growth was in line, same level of growth is FY 2018. So really we were more optimistic than actually showed up in the marketplace.

Next one is really around clear pathway to 5G and that includes spectrum, and I've talked a little bit about that already. So really what we're waiting on is the early exists states, which is still to be confirmed.

And we're working with the government to accelerate this process. The last one was really around Agile.

So we've got a lot right and that shift to Agile including growing employee NPS by 9% points, but we learn the shift in your whole organization to a new way of working takes – takes time and to get to the level of maturity that we have targeted. We need to do a little bit more work, I'm confident we'll achieve this level of maturity in FY 2020 however.

The two areas that we didn't achieve, and that indicated success with the market NPS and I've talked about that already earlier in the presentation. Strong growth and interaction in consumer and business, but we still need to do more work around market.

And the last one was around cloud security and service management, which grew at 8% versus our adjusted target of 10%, and that's been driven by some delays into the large new cloud and digital workplace customer transitions, and the emergence of greater price pressure on renewals. We do expect cloud security and service management will continue to grow in F 2020 however, and a range of 8% to 10% and that we'll see the benefit of the delayed FY 2019 transitions coming into those results.

We've launched a new digital transformation business called Leaven it's really all about helping coming through accelerate the adoption of cloud. We expect to see further penetration of cloud services in the New Zealand market and is more devices and environments become connected.

We expect to see growth in the security revenues as well. I'm now going to hand over to David to run you through the key financials, capital management and guidance.

Thanks Jolie and good morning to everyone on the call. I'm starting with the summary of the key financial set it on page 10 of the results summary pack.

For the financial year ended FY 2019 Spark generated revenues of NZD 3.533 billion flat on FY 2018 with reported EBITDA, up 11.1% or NZD 109 million to NZD1.09 billion. On an adjusted basis and remembering that we presented our FY 2018 results both on a reported and adjusted basis the fact out some NZD 49 million of Quantum restructuring costs.

Our adjusted EBITDA grew by 5.8% or NZD 60 million. We saw higher effective tax rates and increased interest cost during the year, resulting in reported net profit after tax growing by 12.1% to NZD 409 million and adjusted net profit up 2.2%.

This growth in net profit was achieved even with a significant reduction in investment income, which fell by NZD 33 million, largely due to the NZD 35 million reduction in the Southern Cross dividend as we forecast. In terms of the results, there are two principal drivers of EBITDA growth in FY 2019 improved product gross margin of NZD 28 million and reduced labor cost of NZD 38 million, and I'll now touch on each of these in turn.

From a gross margin point of view, we had pleasing results in gross margin across the majority product lines, mobile gross margin grew by NZD 43 million with the majority of revenue growth coming from the higher margin service revenue, which is Jolie mentioned grew by 2.6%. Our consumer and business mobile connections grew by 2.4%, and pay monthly mobile connections grew at more than 5%.

ARPU was relatively consistent across the period growing 0.6% driven by consumer pay monthly and prepay offsetting some of the declines that we saw in business ARPU. At the same time, our mobile cost reduced to supply chain efficiencies and these were mainly lower sales commission costs.

Thanks to the in-sourcing of 26 of our retail stores that we completed late in FY 2017 and getting the full-year impact, and these lower CPE costs also felt as the handset volumes reduced as customers are choosing to hold onto their handsets for longer. Broadband performance was pleasing with margin increasing strongly by 9.2% or NZD 29 million at both with an increase in revenue of NZD 20 million as well as reduced costs as well as broadband expanded by further 24,000 connections during FY 2019.

Cloud and security margin grew by 3.8% or NZ$12 million, driven by an increase in revenue and to get the gross margin across these product lines, more than offset the NZ$59 million or 16% decline that we saw in voice revenue with connection decline in voice moderating to a fall of 10.5% as against a 25% fall in FY 2018. However, the revenue impact of that 25% decline, which came late in FY 2018 was felt across FY 2019 in year with voice revenues falling by 15.2%.

The second driver of our EBITDA growth where reduced labor costs, where we really saw the benefits of the Quantum program in folding FY 2019 with labor cost down NZ$38 million to NZ$475 million for the year, meaning that second half labor costs with NZ$225 million relative to NZ$250 million in the first half. Cloud management of labor costs both of that impact OpEx and CapEx will continue to be a focus in FY 2020.

Moving on now to a capital management update, we've included quite a few pages towards the back of the results summary that stick through Capital Management. I'll just give you a quick summary of those.

You recall the back in FY 2016 Spark first introduced a NZ$0.03 per share special dividend funded by debt to top up the NZ$0.22 ordinary dividend funded by earnings. One of the key objectives or a three-year plan that we set out in June, 2017 was to fully fund dividend of NZ$0.25 or above without relying on debt so effectively to increase the ordinary dividend by NZ$0.03 a share.

We expect to deliver on this goal in FY 2020 meaning an end of the special dividend but no change the total forecast dividend of NZ$0.25 per share. Following the adoption of IFRS 15 and 16, we've also signaled that the key measure for dividend sustainability was no longer earnings per share, but rather free cash flow due to the non-cash changes brought about by those accounting standards.

So today, I just wanted to sit through more detail I think around capital management and in particular, the drivers of our free cash flow. The first building block in this is underlying free cash flow measure that we introduced in the first half this year that focuses on operating cash flow and CapEx and excludes working capital and Southern Cross dividends.

Now one of the reasons for excluding working capital was because we were seeing a lot of timing variances with that payments. Of course, which could swing by up to NZ$80 million half-on-half depending on the timing of working days in the month.

Slide 25 states at the growth in underlying free cash flow, which is grown by NZ$123 million in FY 2019, mainly through growth in EBITDA with CapEx remaining relatively constant since FY 2017. Looking forward, we expect further underlying free cash flow growth in FY 2020 through a combination of continued earnings growth and a change in our approach on CapEx, which will see forward spend moving from 11% to 12% of revenues back to 10% to 11% of revenue.

This is not a one-year change, but a change in our approach, on CapEx spend moving forward. Our ability to reduce CapEx without under investing in our future is primarily driven by three factors.

Firstly, a moderation in IT system spend following the completion of several key projects. We'll see this investment reduced back to more normal historic levels.

Secondly, efficiencies in labor management just as we produced our OpEx net labor costs through our efficiencies in our capitalized labor and in fact, we expect the majority of the reduction in CapEx spend to be through labor rather than through hardware. And finally, the changes in the way, but both we work and our suppliers work also creates changes in terms of the way that software is capitalized.

If we go back in time where we typically had a lot of perpetual licenses that were capitalized. The move to as a service models for some of those software.

I mean that more of those are now being expensed. So we see that move again across from capital through to OpEx.

Importantly though, within this lower capital envelope, we don't expect our investment in our mobile and therefore wireless broadband network to be materially impacted by reduction in the overall total CapEx spend. Moving to underlying free cash flow to free cash flow, which includes the movements in working capital and while we're showing both of these today, really to bridge through to the first half where we introduced the underlying measure, going forward we will primarily refer to free cash flow that is cash flow, inclusive of working capital movements.

Free cash flow in FY 2019 was relatively flat on 2018 due to significant increase in working capital and increase that we don't expect the see again in FY 2020. Working capital increased by NZ$137 million in FY 2019 driven by two factors that have impacted working capital over the last three years.

Our device receivables, and the timing of payments and receivables. Device receivables we note that the growth has moderated there in FY 2019, which we expect to continue moving forward, as customers continue to hold on to their handsets for longer.

In FY 2019 we saw 5% fewer devices purchased and that seem to be part of a long-term trend. Albeit offset by a 9% increase in the average price of those handsets.

Most of the variability that we see in working capital is really driven by payments and receivables, and that tends to be very short term in nature with a large part of the negative movement in June being unwound in July. The results we expect to see from an increase in earnings, CapEx discipline and tighter working capital management, or NZ$170 million increase in free cash flow, meaning that we expect total free cash flow to be sufficient to fully fund, a dividend of NZ$0.25 per share.

Now this doesn't rule out using debt to top up free cash flow, if there were any of these minor negative movements in payable's and receivables, given the short-term nature of the unwind on those. And so, to be clear, our guidance for FY 2020 is for a total dividend of NZ$0.25 per share, not NZ$0.25 only is covered by free cash flow.

Touching briefly on Southern Cross Next which sits outside of free cash flow and Jolie gave an update, before on the transaction. We can provide today some greater clarity on what we expect them to be clear that the terms on that is not final.

But just to give an indication of what impact we expect that to have on our financials. So we provide an update there where we are expecting with Southern Cross Next going ahead.

There'll be no Southern Cross dividends flowing to Spark in FY '20 or FY '21. And we expect those dividends to resume around FY '22.

And Sparks equity investment in Southern Cross, we expect to be staged across FY '20, '21 and '22. Again for the sake of clarity, we don't expect that Southern Cross stopping the payment of its dividend to Spark, will impact on Spark’s overall dividend.

All this sits within our policy on-date -- where we continue to have a prudent approach to leverage with net debt to EBITDA not to exceed 1.4 times on a long run basis and maintaining, A minus rating with S&P. Gearing FY '19 was broadly in line with FY '18, moving from 1.18 times net debt to reported EBITDA to 1.21 times, an increasing debt of $160 million.

Finally coming on to guidance for FY '20 which we're providing subject to no adverse change in operating outlook, we've also reviewed this see the metrics that we're providing on guidance by bench marking both domestic and Australasian comparable's and as a result of that we've simplified our guidance to three key measures. EBITDA which we are guiding to $1.10 billion to $1.12 billion, the CapEx spend of approximately $370 million, an ordinary dividend of $0.25 per share at least 75% imputed.

That now concludes the financial summary. So, we'll open the line for any questions.

Great. Good morning, congratulations.

Great numbers -- in great – great guidance, well done. I had three questions; one is, just looking at the mobile services revenue growth for next year, Jolie, can you maybe give us a sense around how much of this is coming from price.

How much might come from population growth and how much might come from market check? I mean just looking for indications, whereas the kind of the mobile growth coming from or how you seeing it, is it kind of price, population growth or market share, that's kind of question one?

Thanks.

I think. Yeah, good morning, Sameer.

So when we look at the mobile services revenue growth. I think what we're seeing is a transition of customers up from prepaid to higher value plans so like the --and limited and we're seeing that more broadly in the marketplace.

I think we’ll continue to probably be some small market growth, but beyond that we probably won't say too much more in terms of that. It's really is around the shift off.

I think in from Spark Limited.

Great. My second question was around the media strategy kind of thing.

And just wanted to get a handle on how you're thinking about this, do you intend to be sort of EBITDA neutral or I'm trying to understand what's the size of ambition here with what you want to do with Lightbox. Is it going to be a big splash type investment or do you think you can do something that is EBITDA neutral and what are the impact guidance for FY’20?

I think in terms of splitting it into two parts. I think Lightbox we're looking for a partner.

And we've got a process underway on in this, in terms so I don't envision any further investments increased in relation to Lightbox. And if we think about Sport we've committed to continue to really we're not -- we haven't disclosed those numbers yet.

They are obviously commercially sensitive. And we have new content coming on board, but we are looking at Sport is being a segment of the streaming market that does have paying customers today and we see that is, we'll into that with commercial with this appropriate commercial returns.

So that’s our approach in terms of any sports content that comes in front of us.

Thanks. And final question was just on CapEx, could you just explain what and how lower capitalized labor is going to think.

So we basically saying the company's ended up with a lower exit run rate on headcount. There is less people being capitalized working on that phase is that is my understanding correct on that or something different?

It's David here. Yeah, that's correct.

I mean there are several drivers going forward of CapEx reducing. What we're saying is that, some of that is due to lower labor and then some of it is due to some work that was previously would have been capitalized that’s now being expensed.

So I think we've made comments for while about the shortening lifecycle of some software assets to the extent those get too short we're always better off expensing those rather than capitalizing them. So we're seeing quite a few changes in the way that that works.

Great. Thanks, David.

Congratulations on the results. Thanks.

Thanks. Sameer.

Hi, good morning. Firstly, just in terms of labor expense and sort of what you think is going to curve with that in FY20?

Hi Arie. Look, I think in terms of -- we pulled back from giving too much of an outlook view on labor, I mean we were doing that over the last couple of halves because it related to the spending of Quantum costs, but I think what we can say is when you look at that 225, we're always going to be looking for the way we manage cost across both CapEx and OpEx, so you can certainly expect cost reduction is still be a major part of what we do going forward.

And that's on a net basis?

Correct.

Talk about --in automation we're going to play part and our business and they will continue to need to do. So, I think -- but you can be sure in terms of within the guidance, we'll obviously be focusing on cost out as we always have done.

Sure. And then just in terms of the other operating expenses, the non-labor overheads.

I guess that is a good result and second half 2019. I guess just a bit of a guide with what you sort of see for FY 2020 there as well, given a slowdown on a sequential and PCP basis and perhaps just with the investment that might go into sports taking that into account in that you just a bit of a steer what sort of level you sort of see that other operating expenses.

Are there any one-offs to call on the low second half number?

Arie the one-off really was more FY 2018. So, in that other operating expenses line of 447, that's where the NZD 49 million cost of change in relation to Quantum sit whereas there are none of those in 404.

So, 404 is I think a bit of guidance than the 447 because I said that's got that that Quantum one-off in it.

Okay.

And in relation to -- or just to be clear, Sport, when we amortize the content that goes through on Sport, it doesn't go through other operating expenses, it goes through other product costs, which sits within the product cost bucket.

Yes. across mobile and broadband, right?

No. In a separate line.

There's a separate line--

And another -- okay, so it is going to survey, you're not going to put it again. Okay, and, that's fine.

And just the cloud margin, I mean, yes, the revenue growth of 8% margin grew quite a lot less this year. Can you just sort of talk about what the outlook is for margin contraction in that business?

I think when you look at the cloud market; we can see some maturing event, so you see as renewals come through at a lower margin, but obviously, the mix component of what components are made up of that revenue. So, cloud service and security service management so much lower margin revenue source than cloud is, and so we had a greater mix of cash in the back part of the year, which is why you see that lower margin as we shift into FY 2020, I would expect with the re-balancing of some of those larger transition coming on that the cloud.

The margin would increase over the last half of last year and in line with what we've been historically holding and at around on it, but at a nice 10% revenue growth, not at 15% or higher, [Indiscernible] as what we achieved this year, that's slightly higher.

Yes. So, the contribution margin, which has approximated what you're sort of saying is that on a full year basis that sort of set it around 40% plus or minus, you would expect it to continue to sell at those levels?

Yes, that's right.

Yes, okay.

And one other reasons we didn’t deliver, the cloud consulting business is really about helping New Zealand businesses get themselves on to cloud and adopting that. And so we still see there's a lot of runway in this space.

But it's about making sure that we're helping because not many New Zealand businesses are born in the cloud. So, you've got to take over a lot of legacy infrastructure.

So, that's part of the reason why we started the new business that in the back part of FY 2019.

Yes, sure. And just on that, I mean, I guess you've been achieving really good growth in those area, including post -- acquisitions of Revera and CCL.

Simon you always to talk about the good -- runway and sort of expectation that 10% sort of revenue growth could be maintained for a while that is clearly coming down in terms of in FY 2019 and then through your FY 2020 outlook. Do you see much downside risk to the revenue growth, you've outlined for FY 2020 in this space?

It was range we've given our in reflects what where we think the market will be so or in terms of our performance within that markets. I don't see material downside risk to that based on what I know today.

Thank you.

Thanks Arie.

Hi, good morning. Two questions please.

Just -- Jolie just coming back to the strategy update around Lightbox on Page 7, if you are successful effectively, either selling it or outsourcing it to a partner and given the free cash flow focus that you put to this result. Would it be fair to expect that within the other product costs, we should see dropped dramatically outside what you're doing and Sports, would that be the result you're sort of seeking in terms of the KPIs that we look at?

Yeah, look, I would expect there would be some reduction, and I will keep it in mind too. We continue to want to offer value added services to customers.

So, whilst we might not incur all the cost of that and we would still have obviously cost to subscription, the value of that that line. So, yes, I think the short answer is, we would expect to see a reduction, but not the full amount coming out, we're kind of --

Okay.

Yeah.

And as we think about, like, effectively, the investment in 5G, can you just give us a sense like a couple of years out, like assuming you can get the spectrum that you're after and based on your sort of typical business cases. Can you give us a sense of what sort of capacity uplift you would expect relative to kind of your projections on data usage at the moment?

Like, are we're talking about 10 to 15 times multiplier initially with the 5G investment?

I mean, what we can say from what we see on the early, and remembering these of the early trials of 5G, you can see significant capacity uplift, that's probably 10 times. And, clearly, like any generational change, you have to roll it across the whole of New Zealand to get that kind of uplift.

And like 4G, it took five years roughly, broadly to get the network fully rolled out. So we definitely would expect a capacity uplift.

And if you think about the use cases like fixed wireless broadband. For example, this is a perfect example of how this would help to accelerate that segment.

And what we're trying to do for customers and delivering a much better experience for them. And now, our balance is always going to be making sure the experience that the customers get is the right one, which is why we won't rush to deliver.

We'll make sure we've got the right by levels of spectrum, but also the right equipment entity that -- as a result of that.

Okay. So we would expect the multiplier, but it's sort of takes longer than probably what we think in terms of, I was wondering, you've got all rolled out in there?

Yes. Look, in the areas that you'll have it; you'll definitely see immediate uplift in capacity.

But if you're thinking about sort of 9x in population coverage, which is really what 4G offers today, that takes some time to get there. So I think that's how you need to think about this, in terms of -- but when we think about the capital we need at least to do that, it's very much in line with the investment we have been making in mobile, and we've done a significant investment leading into this year, based -- just with our fixed wireless, but also to support the video streaming.

So we have probably down 4 times in terms of the number of sites, et cetera, than we have done in any other year. So we're well ahead on from a network leadership perspective.

Okay. And then just final question.

Just as you sort of look across the other broad cost buckets, can you give us an update in terms of what you're sort of doing around the procurement side and as a sort of the mixed lead from sort of Agile?

So from a productivity perspective, I mean, we look at all of our cost bases, and as you know, with technology evolution there's always an opportunity as we move to new forms of technology to reduce our cost base. The wireless will be one of those, but also as we think about the decommissioning of PSTN and the removal of large component of equipment, cost exchanges across New Zealand that will also provide efficiency more generally.

When we think about minutes, but none of those things are probably related to Agile in terms of Agile, so all the way, the culture and the way we operate as an organization. So I think if you think about those separately, do we expect to see continued productivity across our product costs.

If we do, driven by a combination of both, technology, product improvements and the mix of services our customers have achieved by the shift to wireless.

Okay. So, thank you.

Okay. Thanks, Adrian.

Yes. Morning, everyone.

And just a few questions from me. One question was just on, we've seen Vodafone Group do this and also Trilogy, looking at sale and leaseback of towers.

I just wanted to get your views, David. In terms of where we stand in New Zealand.

And my understanding was that, we don't have a lot of multi-use towers here. But just be interested in your views to see whether in a low interest rate environment there is any scope to basically do a sale and leaseback of towers to maybe release some capital that way.

The second question was, just on Southern Cross next was, given the update, what type of IRR's do you typically looking for on that upgrade. Obviously, with Telstra being in there was an anchor tenant, I motioned, the IRRs might be just slightly less than what you'd normally expect, but obviously you derisking with having Telstra in there.

And then the last one, just on broadband. Just wonder, if you've got any estimates of the broadband market share.

I think at the AGM last year, you were talking about kind of a 42% line in the sand. I just wanted to just see where you thought you were in terms of broadband market share.

Hi, Phil. So I'll answer those in two.

Look, I think, in terms of sort of wholesale sale off. That's not something we're looking at, at the moment.

We are very open to partnering where appropriate. I think with the -- I think it is a good model that's working, clearly, in relation to the rural areas.

So we'll continue to look at those, but it's not a priority for us to go on a sort of wholesale sale off of those towers at the moment. In relation to Southern Cross next, I mean, I guess, I look at our return in two ways.

One is, what you'd expect to be a normal fairly IRR for an infrastructure style investment of this type, as an owner. And then secondly, there are the owner's economics about actually, in terms of the rates that we can buy from.

So I think I'd be reluctant to give any more specifics on that until the transaction finalizes and then we'll see what it is that we can release in terms of information, but I think that's what I think about returns being high for those sort of two areas. And then broadband market share, look, we think it's probably about 40%.

So slightly down from where we were. And that reflects what we've noted in terms of lower connections has been 12 months ago.

Great. Thanks.

Just on the broadband market share, obviously you know the strategy with the unplanned and so forth, but I did think I'm trying to remember at the AGM. There was kind of a target of around 42, so that market share does seem to have been continuing to declining obviously a pretty slow rate, but yes, wondering if there is some sort of level where you have to then look at some incentives and so forth.

Well broadband as you know is a highly competitive markets and our stated ambition is to hold share there in terms of that connection share as we shift people too new technologies like wireless. I think from our perspective unplanned has been a, is a great proposition that customers have really taken up and we're seeing good growth across our based in relation to that, not overall market share, but in terms of customers migration there.

So our focus be continuing on providing services of the customers are really looking for while maintaining that looking to hold how this year and you will have seen obviously from a revenue perspective, we grew our broadband revenue on the back of unplanned removing upfront credits, but people have greater certainty about price and what they could consume for that. So our focus will be to continue to try and how that to you.

Yeah, sorry, just one final follow-up question for David. In terms of the spectrum, renewals are in the spectrum auctions and obviously is not a lot of detail, but I'm assuming like on 1,800, 2,100 spectrum, would you look at like a five-year to payment plan for that.

And would you also trying to advocate for a like a deferred payment. For 5G option spent will this be ab year and that's incurred?

I think we raised the real external. I mean, I think we'd look at what was available at the time.

And then sort of make our decision then. But we take a pretty conservative view on the way we model that internally.

But I think, we just have to have a look at the time and see what makes sense.

Okay, Great.

Thanks Phil.

Hi Jolie. Next year when you unveil your new three plan, will you be talking about, what do you think fixed wireless can -- how much more fixed wireless can penetrate your broadband subscriber base from the current 20% and maybe if you can give us a preview of that right now?

Nice try. But I will give you a preview of that.

Now, obviously when we and this strategy early in the New Year, what we'd also look to do streaming, but sometime close to the half year results would also probably look to have an Investor Day pretty quickly after that. So that will be an opportunity to explore all of the elements of that strategy, and possibly the potential for further penetration of the market that we want to be updating it now.

Okay. Maybe in the meantime, with your biggest mobile competitor now on the sort of private equity ownership, do you foresee any significant change in competitive dynamics going forward?

I think as an organization, there obviously signaled a desire to invest more in the marketplace in terms of having greater capital then that have had in the past in terms of the Vodafone PLC. So, wireless broadband in 5G is an area that are looking to invest, which I think overall if you look for New Zealand is a good thing in terms of lifting the capability for New Zealand customers.

Now there is a lot of work to do to get to the position that way already in, in relation to that a few years, we've been investing in us for a number of years already. So, I think from my point of view, we've built strong competitive advantage over the last few years.

We've got a leading wireless network. No doubt, this strategy make sense to make.

There'll be looking to obviously progress to a similar position is out. But we are going to be competing pretty confidently as well.

So from a competitive point of view, I think growing revenue, mobile revenue services is always going to be an important part for anybody who is playing in our marketplace.

Okay, thanks Jolie.

Thanks.

Hi guys. Yes, just broadband margin, I mean sort of following on from Phil's question.

I mean, you've done a great job on margin in that business over the last few years. Obviously, fixed wireless is played a big role in that.

I mean, I guess firstly, it's a small point given penetration is starting to mature. But, you're looking at holding connections rather than share on because I mean, it does look like you're quite deliberately giving away some connection growth for four margin and not pricing down, can you just sort of comment on that.

And then I guess, as a second question on that line, when you look to FY 2020 and where you're at was the fixed wireless broadband customer base. Do you see scope to increase that further on, say, a move to unlimited plans and do you see further gross margin expansion opportunities in FY20 in broadband?

There are number of questions already. So I think those have the housing it, obviously, our desire is to retain as many of these customers as possible.

The desire to push across the wireless, we've been pretty clear on that. I think if you think about investment we've been making in our mobile networks, particularly.

And the last 12 months has been significant, so that opens up the capacity opportunity to do more. If we look ahead to FY 2020 and to see is more of the addressable base because it's always going to be based on a coverage, where do we have capacity on our sale side to be able to do that.

So I think from that point of view, it will continue to be a strategy of ours and I think we've called that out on the back measures of success to focus on for us for FY 2020. So I think, I would expect to see from a margin perspective visitation people shift across that we will -- we're looking to just continue to improve that broadband margin and the connections and number of people that we have our mix on a wireless proposition without -- asking in a different way the same question that Ryan was asking.

Yeah, sure. And, yeah, okay.

But perhaps that margin expansion will settle, or do you actually see quite good opportunity in terms of what you got on the capacity front?

Well, look, I think time will tell on that. Obviously, it will be a more competitive market, obviously, too with others entering into that space, but we're confident in the, customer base and the share that we have in broadband and the ability to as we create greater coverage and capacity to engage more of those customers within a wireless future.

Thank you. And then just one more, just to follow-up on the, cloud question and margins.

I guess, one of the things you highlighted was the impact of the renewals on the revenue growth. I mean, what sort of price reductions, are you seeing on renewal in that cloud space and I mean, how much of a headwind will that be in the next couple of years?

That's probably -- going to that answers from a point of view. But the reality is, we'll see a mix of cloud services being used both public and private.

They have different margin profiles within them. But that's still what you're seeing as customer shift from on-prem to off-premise opportunities.

And if you think about the world, the digital world, where most businesses are looking to use data more and to create better experiences for the customers online cloud becomes a critical component of that without that you cannot move the experiences to the extent you want or have the level of data. So I think from our point of view as what's the run might look like.

There is still a lot of opportunity in cloud. I think to my earlier point, the renewal pace does have an impact on margin.

But there'll be new revenues and services. I think they come off the back of it as we shift into our consultancy business, and looking at otherwise of growing the cloud base.

Sure. And then just also, obviously, just trying to get a bit of feel of the dynamics, but -- and those customers that are renewing, sorry, not renewing of those customers that were delayed through FY 2019, and will come in FY 2020.

How much of the revenue growth for FY 2020 does that underpin?

I can't -- I'm not able to give you that information on this call. Well, one of them particularly is a significant customer.

Yes.

So from that point of view…

So quite meaningful.

Yeah. It is.

So yeah, I wouldn't have called it. Yes, called out the sort of minor ones.

But it's yet meaningful in terms of that, and ones that were already transitioned on one side. We're into it now, yes.

Sure. Won’t come back a third time.

Yeah. Okay.

Thanks Brian.

Thanks.

Good morning, guys. Sorry for late questions.

Just a couple from me please. Just firstly on the 5G strategy, and given Vodafone is talking about their 5G launch in December.

It's, obviously, pretty positive for the brand and marketing benefits in terms of being the first mover. I'd just be interested if you could comment on a, how you look to mitigate any impact you can end up with a reasonable laid on being why 5G?

Secondly, just around the CapEx to sales and that tend to limited guidance. Yeah, I know you're saying there is no change in your mobile numbers in that base.

But just be interested if you could give a bit more color around the CapEx to sales and how that compares across the different businesses? And then finally just at $15 million in other gains on sale in the second half.

Just comment on whether you're expecting anything similar to that in your FY 2020 guidance?

Okay, I'll just pick up the Vodafone question; I mean we've been the lone voice in 5G for a couple of years. Then finally coming into the marketplace is good, you noticed the announcement was around selected locations.

They also have modest holdings of broadband spectrum. So be interested to see whether they can deliver a 5G experience for customers that’s meaningfully better than 4G, and so we look at the spectrum auctions is being the biggest barrier right now for us and for all of the operators I would suggest.

So I think there you get meaningful levels of spectrum I mean you can deliver great service beyond that, and as I said, 5G is a long game. So I think I'm not going to get too caught up in December or some other point in the future.

Yeah.

And Kane, on your question on CapEx spend, I think the best slide to refer you to of the results summary on slide 16. That sets out the different components of our CapEx spend and within that what we're calling out is that it's the IT system spend where we expect the majority of that reduction to come from.

So that's again because of the completion of some of those long-term projects that we've been working on, it's the move of some of those models again to be -- putting through OpEx some of those labor costs, excuse me, rather than through CapEx and what we're calling out is that, if you look at the mobile network line. We don't, expect that to move much.

So that's really what we can say in terms of the composition of CapEx. You can see it's a relatively modest change.

We're talking about -- you can see we've just been under 12% and I think this takes us down by just under 1% or so. So that's probably the best indication, I'll give you on CapEx.

And your third question would you -- just want to repeating that…

Yes, sorry. Just had few things, other gain on sale, I think you sold some mobile and redone mobile stuff?

Yeah. So -- and I think you're asking in terms of repeatability into the next year, into the next year...

Yeah.

I mean, not with that particular item. I mean we do have -- in the business of our scale, I think we've always got one-off things that come through.

Last year, I think other gains were $10 million, $15 million this year. So you know, there is nothing that would sort of call out, while it's -- its other gain rather than a one-off because we tend to find that there are things that fill that line every year, but they're pretty modest in the overall scale of our of our profit.

Yeah. And just coming back on that CapEx question, yeah, I take the point around the competition into next year, but just trying to think as the mobile business gets an increasingly important part of your business, do we think that the mix changes at all in 3 years, 4 years' time, or it should be.

I know you've given the -- that guidance range, but with the mobile below that?

Well, the mix -- I mean even if you look at our numbers on slide 16, you can see that between 17 and 19 days $16 million, which is a, I guess what, about 15% variance where we see mobile going up or down. So it does tend to sort of move year-on-year and we just rebalance amongst the portfolio.

Yeah. And also to remember as we shift until 5G world things Exito aggregation become important, mobile compete on the showed out my in different lines as well.

So I don't think you should worry that and we won't have enough capacity to do that, we're pretty clear about what that means to look like over the next few years and we're confident and then the capital outlook that we have.

Perfect. And congrats on the results.

Thanks very much. Okay, thank you everyone.

That's the end of the call.