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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. Telecommunications companies were supposed

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Speaker 1: to be somewhat defensive in a downturn, but now they

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Speaker 1: may have lost some of their spark.

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Speaker 2: You know.

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Speaker 3: The reality is Spark's latest result. We saw clearly impacted

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Speaker 3: by the cycle.

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Speaker 1: When consumer spending slides. Some services can be insulated from

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Speaker 1: the impact because they're necessities, like power, water and the

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Speaker 1: phone bill, but the latter has not been spared from

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Speaker 1: spending cuts across the economy. Spark announced one of the

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Speaker 1: more severe earnings downgrades our market is seen this year,

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Speaker 1: as its annual profit fell around twenty percent on an

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Speaker 1: adjusted basis. It's the biggest player of the three in

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Speaker 1: our talco market, with about a forty percent share when

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Speaker 1: including its brand Skinny. Its competition comes from One New Zealand,

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Speaker 1: which is now owned by Infratil and two Degrees, which

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Speaker 1: is privately held.

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Speaker 2: Two Degrees fighting fair for Kiwi.

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Speaker 1: Business Sparkshare price has declined by thirty eight percent this year,

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Speaker 1: having a nine year low of around three dollars. Forsyth

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Speaker 1: Bar has an underperform rating on the stock, but Jardine

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Speaker 1: thinks it could outperform given its low evaluation. Both believe

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Speaker 1: its dividend is unaffordable. Jardin's head of research, Arideker, says

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Speaker 1: the Talcos investors are in for a painful payout reset,

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Speaker 1: but the company could have an opportunity in data centers.

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Speaker 4: Ari, good to see you, Thanks having me in. Good

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Speaker 4: to be home.

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Speaker 2: Yeah no, I no, that's right, welcome, thank you.

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Speaker 1: I want to talk to you about the telco industry

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Speaker 1: as a whole. What are the dynamics that are really

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Speaker 1: impacting it at the moment. Is it all public sector

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Speaker 1: drop off because of austerity measures?

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Speaker 2: Yeah, look, I think I think there's a combination of things.

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Speaker 2: You know. The reality is Spark's latest result.

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Speaker 3: We saw it clearly impacted by the cycle, you know,

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Speaker 3: and that was in the in the sort of the government,

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Speaker 3: corporate sector, and to a much lesser extent, I guess,

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Speaker 3: sort of in their consumer mobile business. But there are

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Speaker 3: other factors that play as well, like competition has an

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Speaker 3: impact on the results as well. You know, there was

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Speaker 3: areas of I guess heightened competition that impacted the result.

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Speaker 3: And then you know, the other thing that Spark has

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Speaker 3: been grappling with, you know, for the last decade and

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Speaker 3: more is structural change. And so there are also structural

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Speaker 3: dynamics and impacting its revenue mix and earnings.

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Speaker 4: Can you explain that? What are those?

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Speaker 3: So?

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Speaker 2: You know, a good example is their voice revenues.

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Speaker 3: They continuing to decline at you know, circa twenty percent

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Speaker 3: per annum, you know, they it hasn't slowed down even

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Speaker 3: as the base has got smaller. So so that that's

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Speaker 3: an example. You know, I think in services there's product

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Speaker 3: mixed changes.

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Speaker 2: You know, public cloud.

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Speaker 3: Getting more more used and so you know, some pressure

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Speaker 3: on their private cloud business, and broadband there's some competition

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Speaker 3: factors it play in that one. So yeah, it's a

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Speaker 3: mix not just of the cycle, but also of structural

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Speaker 3: factors and competition as well.

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Speaker 1: What about mobile revenue that's been increasing by sort of

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Speaker 1: small single digits over the past few years, but that's

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Speaker 1: also been a result of their ability to increase prices

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Speaker 1: and kind of blame inflation in this environment. Has that

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Speaker 1: had a peak now though they're not going to be

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Speaker 1: able to do that going forward.

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Speaker 3: Yeah, I mean, I wouldn't expect that it's hit a peak.

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Speaker 3: I mean, I guess the other important aspect with mobile

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Speaker 3: is just as you know, traditional voice services have been

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Speaker 3: sort of declining, demand for mobile has been supportive of

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Speaker 3: the growth there. So it's more data being consumed and

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Speaker 3: mobile devices becoming more prevalent. So so I think in

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Speaker 3: the case of mobile, certainly there's a couple of key

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Speaker 3: factors at play that are supportive. One, you know, the demand,

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Speaker 3: you know, consumers are wanting to use their mobiles more.

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Speaker 3: And then also, you know, the competitive dynamics and mobile

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Speaker 3: are supportive as well. There's you know, it's a three

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Speaker 3: player market, not a twenty player market like broadband.

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Speaker 1: Given that, then given the demand for data that we've seen,

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Speaker 1: you might see an opportunity for Spark and data center's

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Speaker 1: talk to me about that.

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Speaker 3: Yeah, so Spark data centers, you know, globally are taking off.

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Speaker 3: There's been some super meaningful transactions in Australia recently too.

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Speaker 2: Yeah here too.

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Speaker 3: You know, I guess the New Zealand market is a

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Speaker 3: lot smaller. Spark's been in the space for a while,

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Speaker 3: you know, it has you know, there's not a lot

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Speaker 3: of visibility into that market segment, but Spark puts its

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Speaker 3: market share it's sort of circle twenty twenty five percent,

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Speaker 3: And there are signs that, you know, the demand for

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Speaker 3: data center space in New Zealand is ramping up, and

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Speaker 3: Sparks only see an opportunity given its presence already to

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Speaker 3: participate in that.

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Speaker 1: If we look at that on a revenue basis, though

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Speaker 1: as a sort of percent of earnings, it's only about

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Speaker 1: sort of three percent. Data center revenue was like thirty

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Speaker 1: seven million, whereas mobile service revenue was over one billion.

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Speaker 4: And the financial year just ended.

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Speaker 1: So is it possible to perceive data center's revenue overtaking

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Speaker 1: mobile and broadband or not?

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Speaker 2: I know, certainly not.

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Speaker 3: You know, I think there's you know, what Spark would

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Speaker 3: sort of see is an opportunity, and they've secured a pipeline,

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Speaker 3: They've got a couple of sites which are really important

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Speaker 3: in terms of growth, and so they certainly see an

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Speaker 3: opportunity to capture some value there. But no that it

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Speaker 3: is not going to overtake their core telco business anytime soon.

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Speaker 1: How much Overtalco's financial success is purely just keeping a

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Speaker 1: lid on operating expenses.

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Speaker 2: Yeah, so I mean Spark.

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Speaker 3: You know, particularly given its I guess incumbent position. You know,

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Speaker 3: it is a relatively mature business. It hasn't generated a

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Speaker 3: old revenue growth in the last decade. You know, areas

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Speaker 3: like mobile have grown, but other areas you know, to

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Speaker 3: the point on structural decline have put pressure.

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Speaker 2: So it's not a revenue growth story.

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Speaker 3: And so you know, management of the operating cost base

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Speaker 3: is very important to maintaining earnings.

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Speaker 1: Well, given all of those challenges, then they have this

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Speaker 1: potential data center opportunity, but they would need to invest

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Speaker 1: in that.

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Speaker 4: You think that this company is.

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Speaker 1: Overpaid their dividends for the past ten years, So what

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Speaker 1: reckoning needs to happen there for them to be allowed

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Speaker 1: or at least have the capacity to invest in an opportunity.

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Speaker 4: Are they going to have to reset the dividend?

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Speaker 3: Yes, so a couple of points I'd mate, Yes, certainly

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Speaker 3: with reference to the cash earnings and even the profitability

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Speaker 3: of the business that their dividend has sat consistently above

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Speaker 3: those levels. Spark is a very strong balance sheet and

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Speaker 3: it has periodically been able to generate some cash from

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Speaker 3: transactions and the tower tower transactions a few go are

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Speaker 3: a good example of that. So, so there's an element

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Speaker 3: in which those dividends have been supported by capital transactions

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Speaker 3: as well. But you know, the clear point is that,

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Speaker 3: you know, the earnings haven't grown into the dividend that

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Speaker 3: Sparks had, So yeah, in our view, you know, particularly

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Speaker 3: you know, with I guess this investment opportunity with Spark,

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Speaker 3: you know, wanting to maintain and it does have a

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Speaker 3: very strong balance sheet in a rating, you know, I

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Speaker 3: think it's probably time to reset the dividend back to

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Speaker 3: where the earnings sit and then you know, increase it

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Speaker 3: with actual demonstrated growth in the earnings and cash flow.

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Speaker 1: Am I correct in thinking that the money they earned

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Speaker 1: from that cell tower asset sale they effectively use that

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Speaker 1: to find to share, buy back, and pay the dividend, right.

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Speaker 3: A combination of things so that they realized, you know,

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Speaker 3: circin nine hundred million dollars of proceeds, it was a

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Speaker 3: very large transaction. They held some of the money back

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Speaker 3: for the Batalan sheet, recognizing that you know, it was

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Speaker 3: a a sale and lease back essentially very long dated one,

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Speaker 3: and so so you know, there is a there is

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Speaker 3: a cash stream that they need to pay for having

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Speaker 3: some of those towers the other two buckets, they didn't

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Speaker 3: do a buyback of about three hundred and fifty million dollars,

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Speaker 3: you know, returning some of the capital proceeds to shareholders,

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Speaker 3: and then they put about three hundred three hundred and

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Speaker 3: fifty million dollars into areas of investment that they wanted

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Speaker 3: to prioritize.

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Speaker 2: Data centers was one of them. They were so brought

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Speaker 2: forward some mobile investment as well.

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Speaker 1: So they were able to pocket some of it, but

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Speaker 1: they kind of just turned what was an asset into

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Speaker 1: a liability because they have to keep paying to lease

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Speaker 1: the asset back.

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Speaker 3: Yeah, it is a financing transaction, I mean one that

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Speaker 3: you know, in terms of the initial yield, you know,

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Speaker 3: in terms of cost to Spark, it is quite low

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Speaker 3: and certainly, like I said, in terms of when they

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Speaker 3: looked at the use of those proceeds, they made some

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Speaker 3: allowance for that as well.

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Speaker 1: You've spoken a little bit about competition. There are only

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Speaker 1: obviously three players, Sparks the biggest if you add its

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Speaker 1: brand Skinny to it. But even though there's few players,

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Speaker 1: it's pretty easy for consumers to switch among the players.

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Speaker 1: Talk to me about the competition in the market. How

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Speaker 1: fierce is it among even just those three players.

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Speaker 2: Yeah, so.

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Speaker 3: In the mobile market specifically, there is essentially three players.

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Speaker 3: There's a very small wholesale market and mobile you know clearly,

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Speaker 3: and broadband in some of their other areas of business

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Speaker 3: as well. There is broader competition than just those three players.

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Speaker 3: But in the mobile market, I guess what we've sort

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Speaker 3: of seen is, you know, all three players have made

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Speaker 3: investment in the infrastructure to support those businesses. You know,

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Speaker 3: the owners of two degrees in photophone have paid a

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Speaker 3: decent amount for those assets, and I guess what we've

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Speaker 3: sort of seen over the last four or five years

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Speaker 3: is a decent amount of market discipline. So, you know,

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Speaker 3: I think the focus in the mobile market of each

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Speaker 3: of the players has been less about fighting aggressively for

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Speaker 3: increased market share you know, that's been relatively stable, you know,

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Speaker 3: particularly in consumer and SMEE, and more about ensuring that

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Speaker 3: you know, they're sort of capitalizing on an investment they've

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Speaker 3: sort of made there. I guess in this last result

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Speaker 3: we did sort of see signs of some competition in

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Speaker 3: the enterprise space. It's an area that it looks like

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Speaker 3: two degrees has been a little bit more focused on

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Speaker 3: getting a bit of share there, and so it's not

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Speaker 3: that there aren't competitive dynamics, but in broad terms, you

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Speaker 3: know that there's been a decent amount of market disciplined

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Speaker 3: by those three.

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Speaker 4: Players you mentioned owners.

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Speaker 1: We've obviously seen the change of ownership worth one New

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Speaker 1: Zealand being fully brought out back in for two, which

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Speaker 1: is listed. So one itself wasn't listed, but rather its

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Speaker 1: owner is Spark is the only sort of outright listed

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Speaker 1: talco play on our market. If you consider them all,

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Speaker 1: what do you think will be there? The defining factor

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Speaker 1: of the ones who will win out of this current

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Speaker 1: structural change in the environment, the economic environment, and also

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Speaker 1: who can make the most of these opportunities is it?

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Speaker 1: Does it purely come down to who owns them and

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Speaker 1: who has the capital to be able to make it happen.

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Speaker 3: No, I'd sort of no, I'd put it slightly differently.

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Speaker 3: You know, the reality is the capital investment that's being

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Speaker 3: made by these players is reasonably stable and it's you know,

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Speaker 3: within pretty confined sort of and defined parameters. Certainly, data

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Speaker 3: centers is an area outside of core tel Co where

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Speaker 3: Spark could choose to invest you know, significant capital in

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Speaker 3: terms of you know, the current market environment and how

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Speaker 3: that plays out, you know, for the different players. And

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Speaker 3: instead of been covering Telco for for a decent period

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Speaker 3: now you know that the rate of change in share

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Speaker 3: and those sorts of things is very slow. So in

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Speaker 3: any sort of set period, we wouldn't expect there to

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Speaker 3: be major changes in the dynamics influencing their share and

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Speaker 3: that sort of that tends to play out over quite

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Speaker 3: a long period of time.

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Speaker 4: Since you brought it up, how long have you been

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Speaker 4: covering Talcos.

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Speaker 2: Are a long time twelve thirteen years.

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Speaker 1: A veteran New Zealand with stalink, you don't think that's

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Speaker 1: going to change the game. Is that just a marketing

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Speaker 1: stunt at this point?

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Speaker 2: Uh?

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Speaker 3: You know, like certainly when that capability comes on, it

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Speaker 3: will be another useful addition, I guess to to sort

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Speaker 3: of you know, the service capability you know of mobile.

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Speaker 3: But but we wouldn't expect it to be a significant

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Speaker 3: differentiating factor. You know, it'll be an incremental offering as

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Speaker 3: opposed to sort of core and you know, we do

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Speaker 3: expect to see you know, Spark and two degrees sign

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Speaker 3: up with other satellite providers.

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Speaker 4: Thanks so much for your time, Iri, appreciate it, Welcome,