After broadband miss, Spark doubles down on 5G spend, unveils 10 megawatt data centre plan

Spark’s full-year result, released early today, saw its operating earnings edge up, but revenue and broadband customer share dip as it fell well short of its target in the hot fixed-wireless market and border closures saw it lose $38 million in roaming revenue.

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The telco has reacted to the broadband knockback by going on the front foot. Talking to the Herald around midday, chief executive Jolie Hodson detailed plans for accelerated spending on 5G.

She also revealed the telco has plans to supersize its Takanini data centre into a 10 megawatt giant that will New Zealand’s largest server farm – at least for a while. Again, it’s a lean-forward move, aimed at ensuring the telco’s cloud-based business, which now accounts for around a third of its revenue.

Investors reacted positively to today’s result, and the plan FY2022 mobile and cloud infrastructure programme outlined by Hodson, with Spark shares up 1 per cent to $4.77 in mid-afternoon trading, outpacing the broader NZX50.

Spark has not put a dollar-figure on its data centre push, but Hodson said it would turn the Takanini server farm into a 10 megawatt facility “which will make it the largest in New Zealand once completed”.

Or at least if it’s completed ahead of a clutch of new “hyperscale” or giant data centres that are currently being constructed around northwest Auckland by half Infratil-owned CDC (which is building two, each rated at 10MW, CDI (ditto() and Microsoft, which has yet to disclose detailed specs. (Hyperscale data centres are typically classed by their peak power load, in megawatts.) CDC alone is spending more than $300m across the two server farms it has under construction.

A patch of land around northwest Auckland’s Hobsonville had become quite literally a crowded field of cloud tenders, but Hodson says there’s still a lot of headroom in the fast-growing market. She said today, roughly one-third of Kiwi companies have moved their IT systems to the cloud. Spark estimates that will increase to 60 per cent over the next five years.

Although her company took two hits from Covid in FY2022 – on roaming revenue and the fixed-line broadband, where the closed-door on immigration saw growth stall and fall back – Hodson did not see the Delta outbreak as a concern at this point, at least in terms of material financial impact.

“Based on the work the Government has done previously, and how it’s looking to support businesses this time around, we don’t – at this early stage – anticipate anything significant,” she said.

Going into today’s report, Forsyth Barr had headlined fixed-wireless as the customer segment to watch. Analysts – and Spark bean counters – like the technology, which uses a mobile network to deliver broadband into a home or business – because it lets Spark (or Vodafone or 2degrees) cut wholesaler Chorus out of the loop and pocket all of the money from a connection.

Spark set the ambitious target of adding 40,000 fixed-wireless customers during FY2021.

But the telco reported today it achieved less than half its target, with net additions of just 19,000 fixed-wireless customers for the year.

But Hodson said today that a $35m increase in Spark’s 5G spend in the new financial year would help boost the appeal of fixed-wireless – and her company could still hit its target of moving between 30 and 40 per cent of its broadband customers to fixed wireless by FY2023, although she now says the total will be at the bottom end of that range.

Even with its below-par fixed-wireless performance for the financial year just closed, Spark increased its number of broadband customers on the technology by three points to 25 per cent. Vodafone NZ is still at the early stages of a plan to move the same percentage of its broadband base to fixed-wireless. 2degrees, which recently set a 20 per cent target.

Hodson said the fixed-wireless miss was tied to a slowing broadband market overall – which, in turn, could be pinned, in part, by immigration being choked off during the pandemic.

The cost of the spendup

The $35m boost to Spark’s FY2022 5G programme will take its total spend on its mobile upgrade to $125m. And, more broadly, including the data centre project, its capex will increase from last year’s $354m to $400m.

Nevertheless, Spark is forecasting that Ebitdai (reported at $1.124b for FY2021) will edge up to between $1.130b and $1.160b in FY2022, while the full-year dividend remains at 25 cents per share. Ongoing cost controls, and mobile and cloud growth are seen boosting its bottom line.

Hodson said the accelerated 5G rollout would see half of Spark’s celltowers upgraded to the faster, higher-capacity mobile technology this year, and 90 per cent population coverage by 2023.

As Chorus begins to switch off its copper line service – still used by some 500,000 customers over the same timeframe – expect more heated stoushes over whether those copper laggards upgrade to fibre or fixed-wireless.

Chorus recently complained to the Commerce Commission about what it sees as the retail telco’s overly aggressive marketing of fixed-wireless – which resulted in the regulator sending a warning letter to all market participants

Broadband squeezed, mobile, security and cloud grow

Broadband revenue fell 1.5 per cent to $670m as the total number of connections fell from 709,000 to 701,000, but mobile revenue increased 0.5 per cent to $852 million, and cloud and security revenue was up 5.5 per cent to $443m.

Although it added more customers in the higher-yielding on-contract segment, Spark’s total number of mobile connections slipped from 2.52m to 2.42m (Vodafone NZ has around 2.5m and 2degrees 1.6m).

Forsyth Barr had an outperform rating and $5 12-month target going into today’s result. While Spark missed analyst Aaron Ibbotson’s fixed-wireless projection (he anticipated it would fall short, but only by 11,000 not 21,000), the telco handily exceeded his expectations in post-paid mobile – his second key segment to watch. The ForBarr man predicted a net gain of 35,000 subs. Spark landed 56,000.

Dividend light still off for Southern Cross

As flagged, Spark received no profit-share payout from Southern Cross Cables. The financial year saw the Kiwi telco’s stake in the trans-Pacific submarine cable operator fall from 50 per cent to 38 per cent as Telstra took a minority stake. The Aussie telco’s buy-in has been one of the major funding mechanisms for the new US$300m Southern Cross Next cable, due to go online next year. Southern Cross dividends – which have historically run to up $60m per year – are set to resume in FY2023.

Partnership path for Spark Sport

Spark Sport was included in an “Other” category where revenue increased to $137m from FY2021’s $130m, and gross margin improved from the year-ago $48m to $70m (the “Other” category also included Spark’s nascent IoT or Internet of Things business and its Qrious big data unit).

Jarden institutional research head Arie Dekker called Spark’s full-year numbers “a very solid result in the Covid environment”.

On a conference call, Dekker asked about growth plans for Spark Sport, given the last major code up for grabs for several years – Rugby League – had gone to Sky.

CFO Stefan Knight said Spark Sport would seek to expand its content via partnerships, which could potentially involve an existing rights holder using Spark’s streaming platform and the telco taking a clip of the ticket.

Spark currently gives its phone and broadband subscribers a $5 discount on the $25-a-month Spark Sport. Dekker saw more head-room for a larger discount to keep its customers loyal or attract new ones.

Sky TV, which recently entered the broadband market in partnership with Vocus (owner of Orocon and Slingshot) has is offering a heavy Sky Broadband discount to those who stay loyal to its pay-TV service.

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