Spark profit a touch behind expectations, but solid mobile gains

Spark has reported a first-half net profit of $147 million, flat against its first-half 2014 result and a touch light on analyst expectations.

Before stripping out one-offs, including the sale of Spark's AAPT business, net profit was down 13%.

Forsyth Barr senior equities analyst Blair Galpin was expecting a first-half profit of $160 million; First NZ Capital research director Arie Dekker was expecting a net profit of $155 million.

Both had an underperform rating on Spark going into today's result. Galpin has a $2.55 12-month target; Dekker $2.55. Spark shares [NZX:SPK] closed yesterday at $3.31 and are up 6.3% for 2015 and 37% over the past 12 months. In early trading this morning, shares were down 3.93% to $3.18.

Operating revenues from continuing operations declined 2.7%, to $1.8 billion, in line with expectations, largely as a result of the ongoing decline in fixed line and voice products.

Earnings before interest, tax expense, depreciation and amortisation (ebitda) from continuing operations were down 3.5% to $436 million. Galpin had picked a 4% rise to $464 million; Dekker doesn't model a half year number.

Spark affirmed annual guidance for low single digit growth in ebitda and low single digit decline in revenue, with the caveat that it hinged on the Commerce Commission's decision on whether to backdate the regulated price for Chorus's copper line access.

Spark hiked its retail prices for broadband and phone connections after the regulator cut the wholesale price by less than it initially flagged, meaning retailers such as Spark faced a higher input cost.

Spark will pay an interim dividend of 9ca share, from 8c a year earlier, payable on April 10 with a March 27 record date.

CEO Simon Moutter said the dividend payout showed the company was "overall confident around continuing solid market performance and cash generation." He pinned the earnings dip on the one-off costs of rebranding from Telecom and restructuring.

Spark's operational cash flow rose to $230 million in the six-month period compared to $202 million a year earlier. The company spent $158 million buying 4G radio spectrum for mobile use in the period, lifting its investment cash outflow to $427 million from $277 million a year earlier, and leaving it with cash and equivalents of $89 million as at December 31.

Lightbox
Analysts had a keen eye on Spark's new video streaming service. The company pegged its launch-year (that is, FY2015) costs at $20 million as the service went live in August. Today, Mr Moutter said the FY2015 spend had been revised upward to $35 million.

Lightbox was recently made free to all of Spark's 600,000+ residential broadband customers for 12 months.

Spark also recently formed a 50:50 joint venture with Coliseum Sports Media called Lightbox Sports.

Mr Moutter refused to provide any subscriber or revenue numbers, but said that information would be included in Spark's first-year result.

ABOVE: Spark "reset" its total mobile customer number from around 2 million to 1.7 million as it closed its old CDMA network. Since then, it's made a solid comeback in terms of total connections, but mobile revenue growth has been muted.

Mobile gains
Spark's total mobile customer connections rose 9.9% to 108,000 connections in the six month period. That took its total number of mobile customers to 2.11 million or what it estimates is 40% of the market by revenue.

"Total mobile revenues grew by 2.4%. However, the market remains very competitive, particularly in the business segment where revenues have actually declined on the back of continuing price reductions and data bundle expansion," Mr Moutter said.

In its last result, Spark reported an 11% in total mobile customer numbers but total mobile revenue that increased just 1%.

Today, it was a similar story as total mobile revenue nudged up from a year-ago $487 million to $498 million. On a conference call, Mr Moutter described the mobile revenue lift as "muted" due to the competitive market.

Again, although Spark gained in total mobile customers, monthly average revenue per user dropped from $32.78 in the first half of 2014 (and $30.10 in the second half of 2014) to $29.77. Home, business and mobile CEO Chris Quin said the fall in average revenue per user was because of lower handset subsidies, which was better for margins.

Vodafone recently reported 2.33 million total mobile connections. Privately-held 2degrees has not updated on customer numbers since August 2012, when it claimed one million customers, 100,000 or 10% of them on contract. 

Mr Moutter said overall the mobile market "could be shrinking" based on a (not public) IDC survey.

Broadband gains, but lagging in UFB
Spark's home, mobile & business unit lifted operating revenue 1.2% to $912 million, and increased ebitda 0.9% to $331 million as it continued to clamp down on costs, while the mobile uptake underpinned increased handset sales and usage.

Broadband connections increased 2% to 674,000. 

Spark says of those, 21,000 are UFB fibre connections, which equates to a modest 32% of the market (MBIE recently said just under 70,000 customers had connected to the UFB). Spark has around 50% of the broadband market overall, according to Commerce Commission figures. The company also reported it now has 45,000 VDSL connections (VDSL being the fastest type of copper broadband connection, with plans priced at a premium).

Other divisions
The company's digital unit, formerly Gen-i, reported a 3.3% decline in revenue to $622 million and a 5.7% fall in ebitda to $182 million due to stiff competition for mobile and reducing fixed voice and data products.

Spark's Connect division, which operates the wholesale and international businesses, reported a 9.2% drop in revenue to $267 million due a falling number of access lines and calling minutes, and also faced new charges to access Chorus's copper lines. The ebitda loss narrowed to $60 million from $64 million a year earlier.

Spark received a $31 million dividend from Southern Cross Cable during the first half, down on $43 million from the year-ago period but up on the $24 million in the second half of 2014.

The company continued to reduced its costs, lowering operating expenses 2.4% $1.36 billion, with employee numbers down 2.6% to 5618.

The shares last traded at $3.31, and have gained 6.3% this year. The stock is rated an average "hold" according to 10 analyst recommendations compiled by Reuters, with a median target price of $2.91.

More detail is expected after a conference call beginning at 10am.

With reporting by BusinessDesk