Spark New Zealand Limited

Thanks, Jolie, and good morning to everyone on the call. I'm Stefan Knight, and it's my pleasure to speak through my first interim result as CFO.

So starting first up with a summary of the key financials as set out on Page 5 of the results summary pack for the half year ended 31st of December 2019.Spark generated revenue of $1.824 billion, up 4% on the prior period. EBITDAI was $500 million, up $11 million or 2.2%.

EBITDAI growth, combined with lower depreciation, mean that net earnings for the period were up $14 million or 9.2% to $167 million. The increase in EBITDAI is primarily driven by the strength of the revenue momentum over the period, and I'd like to step you through that in more detail now.So over the period, we saw a positive revenue momentum across all the key product lines.

A very pleasing outcome is the benefit Agile ways-of-working start to become evident, particularly in speed to market and customer experience. Mobile service revenues were a highlight with 5.5% growth, generating an additional $20 million of high-margin revenue.

This growth was the result of a 3% lift in ARPU as we see demand for better data and as our customers transition to pay monthly accounts and drive take-up of unlimited data plans in both consumer and SME markets. And reconnections on these plans have now doubled since the same time last year.We've seen strong improvements in conversion rates as we implement new campaigns based on data-driven insight around propensity to buy.

So our total mobile connections grew 37,000, but most pleasing was the growth in the pay monthly base of 62,000. This was a key contributor to a 1.2% growth in mobile service revenue market share on the prior period.

As a result of this momentum, we've increased our full year outlook for mobile service revenue growth to 4% to 5%, up from 2% to 3% target we've previously advised.Moving on to cloud security and service management revenues, which increased 12.3% or $24 million. The growth here was driven in part by new large customer outsourced contracts that were previously transitioned and are now starting to move into service, along with a number of other smaller ones.

Again, this is a really pleasing result. And as a result, we have good confidence in achieving our targeted revenue growth of 8% to 10% for the full year.Voice revenue declines for the period totaled $26 million compared to $42 million in 8/24/19, as wholesale rates have declined moderate to more normal levels and voice becomes a much smaller part of our business.

I'll also draw your attention to other revenue, which has increased $19 million. The largest driver of this result is the launch of Spark Sport.

However, it is worth noting that this category also includes revenues from our Internet of Things business and our data and analytics business Qrious, which also includes the impact of the acquisition of Now Consulting during the period. We will not be disclosing sports revenues or costs due to the commercial sensitivity in a highly competitive market.As revenues have grown, we've also seen cost lift in support of this.

Our cost of sales grew $44 million to support the revenue growth. Our labor grew $17 million, and this growth can be folded in 3 parts.

So firstly, we added labor to support growth businesses. Examples include: the acquisition of Now Consulting to support Qrious, our data and analytics business; growth in IT services; and UFB for our new businesses such as Mattr, Leaven and Spark Sport.

(inaudible) changed with lease efforts into building new assets as some of our large IT programs have now completed, and more of its effect spent on simplification and improvement of existing products, which results in more labor [spend] being expensed. This is in line with our full year CapEx forecast.

However [indiscernible], we continue to actively rebalance our workforce. And as legacy businesses shrink, we augment the workforce to match.

And these reductions have partially offset the increases that I previously mentioned. Tight management of costs that impact both OpEx and CapEx were a strong focus in H1, and we delivered $29 million of benefit during the period and will continue to be a focus for the remainder of FY '20 and beyond.So moving down now to net earnings.

Lower depreciation meant that new earnings for the period were up $14 million or 9.2% to $167 million. We note that while depreciation was lower for the half, the full year outlook is for depreciation in line with the prior year as we invest more in software-based assets with shorter lives and lease expenses increase as we open new stores, and we also moved into our new Christchurch office site.

These costs are now included within depreciation and amortization.As we look forward to the full year, I just wanted to touch on free cash flow, which was $50 million for the half. At the full year results previously, we communicated our aspiration to deliver $460 million of free cash flow.

We remain confident in the delivery of the $460 million as our heavy H1 investment abates. And the 3 key areas that will drive substantial increase in H2, being the delivery of FY '20 EBITDAI growth, as per our guidance, ensuring that CapEx outcomes are delivered within the $370 million envelope and that working capital grows by no more than $50 million.

And I'll just step through each of those now in turn.So firstly, EBITDAI. Following the revenue momentum that we've seen in H1, we remain confident of delivering EBITDAI growth within the guidance range.

And given the historical weighting of EBITDAI to the second half, this will provide a strong lift in cash flow. Secondly, CapEx.

So CapEx is traditionally higher in the first half than the second as we invest in hardware and capacity to prepare for busy Christmas period, and particularly in this half as a result of a substantial upgrade to our mobile network. In H1, we incurred approximately 2/3 of the annual spend and will remain in line with our full year outlook of around $370 million.Third, working capital.

Our expected full year working capital growth of no more than $50 million would represent an improvement of at least $87 million on prior year growth. During H1, we saw growth of $31 million, which was $7 million better than the prior H1 FY '19 working capital growth.

However, H1 FY '20 included us making 6 payments to Chorus in the half rather than only 5 in H1 FY '19. So when normalized, working capital growth for H1 FY '20 was $50 million better than the prior period.

We've implemented new working capital policies to tightly manage cash conversion, and these are expected to restrict growth to no more than $50 million.Moving now to net debt, which increased by $210 million in H1. This was the result of the seasonal timing of EBITDAI and CapEx and an additional tax payment, with 2 payments made in H1 and therefore only one in H2.

However, in line with our expectation around growth and free cash flow during H2, we would expect net debt to reduce in the second half.And finally, moving on to guidance. We are reaffirming FY '20 guidance with no changes, subject to no adverse change in operating outlook.

For completeness, that's EBITDAI of $1.1 billion to $1.12 billion; CapEx of around $370 million and dividend per share of $0.25, at least 75% imputed.So it now concludes the financial summaries, and so we'll open the lines for questions.

Can I just ask a follow-up just on interest and depreciation sort of things? What's the pacing in terms of debt that's coming up for refi?

And then you mentioned that D&A would be similar in the full year as it was last year, which means the second half we'll see a little pickup. Where is the software investment happening?

Kind of think where in the CapEx would I kind of see it? Is the vast majority of your CapEx right now software?

So I can pick up. So first of all, if we pick up the question on depreciation and the investment in assets.

So mostly, it's in software assets, and particularly, we're investing heavily into both IT systems, which we've been previously invested in over the past number of years. But going forward, it's into database platforms and also into journeys for our customers' development of app, things like that.

So that will come through in some of their intangibles lines. And those assets, obviously, have a shorter life than some of our physical hardware.

So as a result, we see a shortening of asset lives over the period, and that will drive depreciation back to more normalized levels. We also have -- following the changes in IFRS 16, we have now lease expenses sitting in the depreciation and amortization category.

And with some new stores coming online, plus a new Christchurch office site, those things will increase that spend. So as I've previously said, we would expect the long-term outlook for depreciation and amortization to be similar with what we saw last year.

Just firstly on fixed wireless. The momentum slowed, obviously, over the last sort of 6 to 12 months in both voice and broadband.

I guess sort of looking ahead, what sort of initiatives over the next 12 months have you got in that space? And I mean, you've got 20,000 guidance for the rest of this year, but do you sort of see the availability of 3.5% spectrum around the middle of the year is giving you an opportunity to kind of push harder into that space again?

On voice?

Yes.

Yes.

Jolie, you have made a distinction between Lightbox and Sport streaming. I was wondering what makes...

Is that better?

Yes. So Jolie, you have made a distinction between Lightbox and Sport streaming.

I was wondering what makes Lightbox a noncore business versus Sport streaming, which remains a core business. And my second question, perhaps to Stefan is, on the legacy voice business, how does its contribution or EBITDAI margin now compare to the mobile EBITDAI margin?

Okay. So if I just pick up the question around difference between Lightbox and Sport.

I think if we look at the general entertainment, its broad market and how that's developed over time, I think what we've seen is there's probably room for one local player. In our perspective, we're not the best natural owner of that -- the entertainment content, and we see the combination with Sky and the opportunity to provide that to both our customers and others in the market is a better outcome.

I think what's different in terms of there's a lot more local events within Sport. We've identified rights that we think are valuable.

We have a wide range of rights already in terms of like Formula 1, English Premier League, with the NFL. We've obviously got cricket starting later in the year.

And so we'll always look through that lens at Sport in a similar way in terms of 2 lenses: customer desirability and commercial value. So from my perspective, they're 2 different categories, and we don't see ourselves as content holders in general entertainment because of the global trends we've seen, which describes a bit of owners and ourselves.

But in Sport, we do maintain that platform but also the content that we have.

Thank you. Okay.

Okay. Thank you, everyone.

We'll end the call now.