Spark moves into second phase of transformation

Spark New Zealand, the rebranded Telecom Corp, said it was nearing the end of the first phase of its transformation from a traditional telco to a digital services business.

Managing director Simon Moutter told shareholders at the annual meeting in Auckland today said they had done the hard work of restructuring the business from one that relied on dwindling landline use to one that incorporated a landline and mobile phone network, cloud-based business services, big data and a subscription internet service.

“We’ve adjusted what businesses we are in, what countries, what brands and what products we’re selling. We have to move forward from here and the emphasis now is on taking those new brands and offers to market so we really do become a company with the most preferred brands in New Zealand,” he said.

Director Murray Horn, who stood for re-election, said the company was very different today than when he joined the board in 2007 when it was “slowly walking backwards in terms of market share.”

Spark has confirmed a further round of job cuts in its Connect technical department with final numbers to be worked out in the next few weeks. The company had already laid off more than 1200 workers last year and Moutter said there’s still a lot of pressure on revenue with customers expecting continually cheaper prices. He points to telecommunication prices having fallen 17 percent in the past five years while over the same period petrol prices have risen 28 per cent and insurance by 26 per cent.

“I relish the day when we can increase staff and raising revenues will make a lot possible but we’re not there yet,” he said.

Spark’s subscription television service, Lightbox, launched in August, will face competition from December from Sky Network Television’s long-awaited subscription-video-on-demand service, Neon. It will offer movies and shows for $20 a month after facing increased competition for viewers from web-based platforms including Netflix and Quickflix.  Moutter said they had always anticipated Sky’s move and also expected several other new entrants in that space.

“It’s going to be a big battle over the next few years. We were the first mover and have a great product and back what we have.”

Spark shareholders, who failed to ask any questions of the board or management, seemed content with a shareholder return of 28 percent in the past year, with a 38 percent rise in the company’s share price since June last year.  Moutter told shareholders Spark’s market capitalisation had risen $1.9 billion since the 2011 demerger.

Chairman Mark Verbiest reiterated that the company was slightly ahead of its plan to stabilise revenue while reducing costs in the 2014 and 2015 financial years and then maximising revenue growth from the 2016 financial year. In August the company reported annual net profit had almost doubled to $460 million due to the sale of AAPT in Australia. A more telling figure on revenue though was adjusted net earnings of $323 million, down 7.7 percent on the previous year.

The board said there was no change in its earlier guidance of low single digit growth in adjusted Ebitda (earnings before income, tax, depreciation and amortisation) for the 2015 financial year, even as forecast revenue declines by a low single digit.

Moutter said his biggest concern was not whether Spark could deliver on its strategy to win back dominance in the stressed telecommunications industry where competitors were also finding it tough to make money, but whether there would be sufficient uplift in overall market earnings to make the return on investment worthwhile.

Spark shares [NZX:SPK] were trading up 1.6 percent Friday to $3.09.

(BusinessDesk)

Spark 24 month price history (NZX.com)

Above and below comparing telecommunications pricing with other sectors. Click to zoom.