Earnings Call: H2 2021

Aug 17, 2021

Kia ora koutou katoa and good morning and thanks everyone for joining us here today for Spark's full year results. Naturally not the day we expected it to be following last night's alert level 4 lockdown announcement for New Zealand, but like most businesses, we've got used to adapting pretty rapidly. With me today on the call is Spark's Finance Director, Stefan Knight. And as always, we're going to leave some time at the end for questions at the end of the presentation. So if I shift now through the environment we've been in, in, during the year New Zealand experienced a stronger than expected economic recovery with low unemployment and GDP back in growth. This moderated the anticipated impact of COVID-nineteen on Spark in some areas. However, with the border still largely closed, we continue to be impacted by the loss of roaming, lower overall growth in the broadband and prepaid markets and increasing talent scarcity. This along with some one off costs meant top line revenues were down 0.8% year on year to roughly 3,600,000,000 dollars That decline marks a strong underlying revenue performance, especially in our established markets of mobile and cloud security and service management, which I'm going to touch on shortly. When that momentum is combined with our disciplined cost management, we were able to deliver FY 2021 EBITDA growth of 1 percent to $1,124,000,000 and that was at the top end of our guidance range. NPAT declined 8.6 percent to $384,000,000 driven by higher depreciation and amortization costs as we invest in a greater share of digital products with shorter asset lives and an increase in tax expense as we cycle the one off reductions experienced in FY 2020. Resilience in our capital demand for our core services and disciplined cost and capital management mitigated the impact of loss of roaming on free cash flow, which decreased 1.1% to $433,000,000 during the year. This enabled us to declare a total FY 2021 dividend of $0.25 per share. That's 100% imputed for our shareholders. At our half year results, we announced a review of our infrastructure assets. And today, we're going to share the outcomes of the first phase of that review, including 2 significant investments planned for FY 2022, our accelerated 5 gs rollout and an expansion of our data center capacity. We have also identified further opportunities to drive value from the passive components of our mobile network and fiber. I'm going to speak to that in more detail shortly. So if I just focus now on the established markets, as we outlined on slide 7, particularly proud that we're able to grow mobile service revenue 0.5 percent to $852,000,000 even when you take out that significant loss of roaming revenues. Stripping back that impact, mobile service revenues grew a healthy 4.3%. We also grew our mobile market share revenue share by 1.1 percentage points to 41.5%. Our focus on generating deep customer insights through data and analytics supported this growth and an 89% increase in endless mobile plan adoption. The broadband market did remain challenging with lower overall market growth, continued competition and pricing pressure leading to a 1.5% revenue decline to 670,000,000 And as a result, our wireless broadband growth was below our target for the year. However, we did see momentum pick up in the final quarter, finishing the year with an increase of 19,000 connections. We remain committed to our long term target of 30% to 40% of our broadband base on wireless and acceleration of our 5 gs rollout will support that goal. However, we are targeting the bottom end of that range by the end of FY2023 given the slower rate of growth. Cloud Security and Service Management revenues grew 5.5 percent to 443,000,000 dollars as businesses continued to digitize and transition to cloud based solutions. We saw particularly strong performances in service management and collaboration and our data center expansion that we'll speak to shortly will continue to support our growth in this market. We've made strong progress embedding the core capabilities we identified in our 3 year strategy as critical to our competitive advantage. And we're already seeing this translate into improved customer experiences and growth in the market. We're a simpler business than we were a year ago. So we've invested in improved digital customer experiences supporting a 32% increase in digital sale and change customer journeys. And we retired 210 legacy mobile and broadband plans that did add complexity into our business. And overall, that's about a 30% reduction in those plans. A key enabler of better customer experiences is having a deep understanding of what our customers need and when they need it. And we finished FY 2021 with a robust data capability that is providing us with that insight. And that helped to increase our marketing efficiency by 16%. Our long term investment in culture is paying dividends with 86% of our squads now scoring 3.5 out of 5 or above for their agile maturity. Our employee engagement continued to grow up 10 points and strong progress against our inclusivity goals with 42% of senior leadership roles and that's beyond the leadership squad and board now held by women. We continue to invest in the smart automated network that underpins our success in the market. So with 5 gs launching in 9 locations, rural connectivity expanding and improved automation and resilience of the optical transport network, Spark's fiber backbone. So now I'm going to turn to the infrastructure review. So in February, we announced a review of our infrastructure assets and that was the aim of giving greater capital efficiency, increased resilience and better customer experiences. We've now grouped our assets into 3 classes based on their strategic importance and their role in providing resilience to guide our future investment decision. The Class 1 assets are important for competitive advantage and resilience and include the active components of our mobile network, multi access edge compute, our critical network exchanges and data center capacity. And we will invest in these assets for growth. When combined with our spectrum holdings, our active mobile assets are currently an important enabler of our competitive advantage. There's plenty of opportunity for us to leverage these assets further. In the future, our 5 gs rollout opens up new commercialization opportunities and expands the addressable base for wireless broadband. Approximately 10% of our network exchanges are critical sites. They provide resilience and will become future multi access edge compute nodes. And our data center capacity supports our ability to participate in a growing cloud market and creates cross sell opportunities across our broader IT and managed services portfolio. Based on the strategic significance of those Class I assets, we're today announcing 2 significant investments in FY 'twenty two. Firstly, we're going to be accelerating our 5 gs rollout. We're already moving apace. But with the rapid shift from physical to digital as a result of COVID and the potential for 5 gs to open up new use cases for businesses to transform, we see a real potential in bringing the next generation of mobile technology to New Zealand even faster. So in FY 2022, we'll invest an additional $35,000,000 into 5 gs, bringing our total investment in mobile connectivity to $125,000,000 for the year. That means by the end of the calendar year, 2022, we'll have upgraded half of all Spark towers nationally to 5 gs. And by the end of calendar year 2023, approximately 85% of our towers will be 5 gs, in turn delivering 90% of population coverage. These forecasts assume the necessary spectrum as made available by government. We've also identified an opportunity to upgrade our Merrell Drive Exchange. We intend to invest in approximately 10 megawatt hours of additional capacity at our Takanin Lake data center, which will make it the largest New Zealand once completed. We are in advanced negotiations to contract at least 60% of this capacity. The combined accelerated 5 gs rollout, exchange upgrade and intended data center capacity expansion marks a significant investment into New Zealand's connectivity and resilience and positions us to capitalize on the strong momentum we have in our established markets of mobile and cloud. So moving now to the Class 2 assets. These assets are important for network resilience and include our regional and local network exchanges, our stakes and subsea cables and our satellite station. We want to optimize our continued investment in these assets. Our regional and local exchanges can be grouped into 2 categories: those that enable resilience and house our modern technologies and those that hold our legacy technologies and are not part of our future road map. So We'll continue to invest efficiently in our exchanges that enable resilience and we'll progressively exit our legacy exchanges over time as we retrial those older technologies. We do not expect the proceeds of these sales to be material. We intend to maintain our long term shareholding in subsea cables, recognizing the value and shared ownership of key data transport assets that provide international resilience. Finally, while our satellite station has lower strategic value currently, it also provides resilient and has potential future value as the satellite market grows and will therefore retain this asset. So if I now move into the Class III assets including passive mobile and fiber, which we've identified as assets that can be shared. So to be clear on the difference between Class I assets and the active components of our mobile network and Class III assets and the passive components of our mobile network, We define active as anything in our core network as well as radio equipment that creates the mobile network including the antennas. These assets leverage our spectrum holdings, providing differentiated customer experiences and support our wireless broadband aspirations and therefore provides competitive advantage. Passive towers are the physical towers that support the active equipment, so they include standalone macro towers, rooftops and lampposts. These assets do not provide significant competitive advantage. We have approximately 1500 mobile sites with an occupancy ratio of 1.07. We've got fiber assets with large amounts of overlap across the border industry in a highly competitive market. We'll therefore explore opportunities to maximize the value of our passive infrastructure assets through efficiency, increased utilization and exploring shared ownership models. You'll note that there have been a number of international precedents across a range of models, demonstrating this can be an effective way of managing infra assets and returns. We're exploring all of the options available to us and having ongoing discussions regarding this opportunity. I will note, however, that it is very early days and there is no certainty that any transactions will proceed. So we plan to provide a further update at our half year results in February. However, we will update the market earlier if there's anything more material in the interim. So moving now to progress in our future markets as aligned on slide 16. We saw solid IoT connection growth of 83% with over 450,000 devices now connected across a range of industries, including utilities, health and logistics. The launch of our new innovation studio in Auckland is improving understanding of IoT and is also driving better uptake in businesses. Through Spark Health, we're supporting the digitization of the health care sector and grew cloud, telecommunications and collaboration revenue 10.6% off a large base. We selected a vendor for the development of our digital health platform and we're targeting a launch in Q1 of FY 2022. Spark Sport delivered its 1st cricket season in partnership with New Zealand Cricket with 99% point 9 percent platform availability and positive reception to the new production format. We continue to build our content introducing a pay per view model, esports and securing the exclusive New Zealand rights to UEFA Champions League and the Rugby League World Cup. So our focus will be on partnerships to drive access to additional premium content, subscription growth and improved returns. And you can expect our future investments to be consistent with current level. A core pillar of our 3 year strategy is to create a positive digital future for all of New Zealand and we set strong sustainability foundations in the business in FY 2021. Boosting digital equity remains a key focus and we grew connections to our not for profit broadband product Skinny Jump by 58% during the year surpassing 15,000 connections by year end. We are focused on playing our role to support New Zealand's transition to a low carbon economy both through taking meaningful action to reduce our own impacts and by harnessing the power of technology to support environmental improvements in other businesses. We introduced a new environmental policy and assessed our climate change risks and opportunities across the business aligned to the TCFD. We see the science based emissions reduction target that has received approval from the science based target initiative. It is an ambitious target, but achievable over time. With 80% of our emissions generated through electricity, New Zealand's transition to a greater share of renewable energy generation alongside our own investments into energy efficiency will be the focus. So lastly now if I turn to our FY 2021 indicators of success, we are pleased to have met or exceeded the majority, growing our position and established in future markets, building the capabilities that will set us up for a long term growth by increasing our competitive advantage and maintaining our cost discipline, building a sustainable future. As I've already noted, the overall broadband market remained challenging from a competitive perspective and experienced slower overall growth, which had a flow through impact to our wireless broadband target as well as our skinny jump connection target. While we did see some improvements in our customer experience in FY 2021, we did not hit our target of an 8 point lift. This is due to a combination of more frequent and neutral weather events impacting our networks and systems, a change to our operating model creating some short term disruption and higher than anticipated attrition in the tight labor market. Over the second half, we have seen a steady improvement in customer experience and a number of recent Digital Journey enhancements are delivering satisfaction scores almost double those of our traditional voice and channel. This remains a focus in FY 2022. So I'm now going to hand over to Stephane, who will take you through the financials. Thank you. Thanks, Johnny, and good morning, everybody. It's my pleasure to step through the full year results for FY 2021. So starting with a summary of the key financials is set out on Page 20 of the result presentation. Spark generated revenue of $3,593,000,000 which was down $30,000,000 or 0.8 percent on the prior year. And we're really pleased to announce EBITDAI of $1,124,000,000 which was up $11,000,000 or 1%. Impact of $384,000,000 was down $36,000,000 or 8.6 percent. The depreciation and amortization and tax expense grew and free cash flow of $433,000,000 was down $5,000,000 or 1.1 percent. And we've confirmed the H2 FY 2021 dividend at $0.125 per share fully imputed and in line with guidance. Now let's see through some of the key elements in a bit more detail so I can provide you with some more color. So let's start with an overview of the key movements and revenues outlined in the FY 2021 operational performance section of our presentation. So while top line revenues declined due to the ongoing loss of roaming, underlying revenue growth continues to be driven by our 2 key established markets of cloud and mobile. In cloud security and service management, we saw revenue growth of $23,000,000 or 5.5 percent as we supported businesses on the digital transformation journeys. The growth in service management was primarily due to increased demand for managed as a service propositions and especially our desktop management offerings. We experienced slower growth of $4,000,000 in cloud as we see the price implications of a changing mix with growth in public cloud partially offset by lower private cloud revenues. In mobile, revenues grew $23,000,000 or 1.8 percent, of which $19,000,000 was due to increased handset and accessories revenues. Service revenues grew $4,000,000 or 0.5 percent. However, this included the loss of roaming revenues and when you exclude that impact, underlying service revenues grew by 4.3%. We're very pleased with our sustained and strong performance in mobile, which was driven by growth in our pay monthly customer base of 56,000 connections and ARPU growth of $0.81 or 2.9 percent. The growth in ARPU reflects customer demand for more data and the benefits of our precision marketing efforts. Our voice revenues were down $78,000,000 or 20.2 percent and that reflects the non recurring refunds of $16,000,000 for historic wire maintenance charges. Connection declined and lower usage as voice becomes a smaller part of our business. Our broadband revenues declined $10,000,000 or 1.5 percent, reflecting lower overall market growth and the very competitive nature of the broadband market. Other gains of $28,000,000 were down $7,000,000 from FY 'twenty and were mainly generated from the sale of mobile network equipment and gains on lease modifications as we renegotiated some of our property leases. When we look forward to FY 2022, our ambition is to return to revenue growth by maintaining the momentum we have in our established markets and continuing to grow our customer base and share of wallet in our future markets of health, IoT and sport. And we expect mobile service revenue growth of around 2% to 4% and cloud security and service management revenue growth of around 5% to 8%. So shifting focus to now look at our costs. So entering the year with the uncertainty that COVID-nineteen created, we knew that cost management would be key. And as such, we implemented an accelerated cost reduction program to mitigate the COVID impacts. As a result of the cost reduction program and the ongoing shift to digital customer interactions, we saw operating expenses fall by 1.6% to $2,469,000,000 The cost reduction program drove lower costs across product, marketing and our general OpEx. Our product costs fell by $4,000,000 and that was driven by declines in voice and in broadband as our wireless broadband base grew. Also our other product costs fell versus the prior, which included cost for light box that's been divested. However, those declines were mostly offset by increased costs in mobile and cloud security and service management that supported our revenue growth. Labor costs fell by $20,000,000 or 3.9 percent as services transitioned to digital and customers accessed an expanded range of self-service options. We also saw a low bad debt expense as the impacts of COVID-nineteen on our collections were less than expected and provisions we raised in FY 2020 were able to be released. And also as we start to see the benefits from investments we've made in biometrics and automation. Looking forward, we continue to see opportunity to drive efficiency in our cost base as we transition to a digital services provider and maintain our long term focus on sustainable cost reduction. As a result of the cost reduction program, the decline in operating expenses was more than the decline in revenues and EBITDA grew by $11,000,000 or 1 percent to 1,124,000,000 dollars Within the result, we estimate COVID-nineteen impacts of around $40,000,000 As previously mentioned, most significant impact was roaming. At the half year result, we've indicated that the impact of COVID was expected to be around $50,000,000 However, with lower bad debt expense than anticipated, it's resulted in that $10,000,000 lower impact. As we look forward to FY 'twenty two, we expect to see a modest improvement in roaming revenues, noting limited travel bump openings with Australia, which is currently paused. While EBITDAI grew by $11,000,000 the increase in depreciation and tax expense meant that impact fell by $36,000,000 or 8.6%. So depreciation and amortization was $13,000,000 higher for property, plant and equipment and intangibles, reflecting the shorter asset lives and $22,000,000 higher for rider use assets and lease customer equipment assets due to increased customer and commercial lease activity. Our tax expense was up $21,000,000 due to one off decreases and tax expense recorded in the prior year for depreciation allowances being reintroduced for commercial buildings. In FY 'twenty two, we expect total depreciation and amortization expense to be broadly flat. We also expect tax payments to normalize and therefore expect to see impact improve as EBITDA grows. Moving now to CapEx and free cash flow. FY 'twenty one CapEx was $354,000,000 excluding spectrum and $405,000,000 including spectrum. Our CapEx spend during the year was heavily focused on improving capacity and resilience across our key infrastructure assets. We've now rolled out 5 gs to 9 locations and our investment in the optical transport network, which is the fiber backbone of our network has provided us with an increase in capacity of 5 times that of the existing OTN and with greater redundancy and resilience. We continue to invest in our converged communications network, which shifts all of our services to IP and provides the foundation for our exit of the legacy PSTN. In FY 2022, we expect to spend around $400,000,000 in CapEx again, but with no spectrum requirements in FY 2022, we'll focus on investing in infrastructure that supports New Zealand's connectivity and resilience. As a result, we've committed an additional $35,000,000 to accelerate our rollout of 5 gs, which will see $125,000,000 of our envelope committed to mobile connectivity. We'll also increase our spend on data center capacity with a modest level of investment required in FY 'twenty two to support development at Mineral Drive. And we are planning for further investment in FY 'twenty three and in FY 'twenty four related to a new development in takanini. We expect to be able to maintain this within our 10% to 11% CapEx to sales ratio, albeit at the top end of that range. Free cash flow for FY 'twenty one was $433,000,000 which was down $5,000,000 on the prior year. This includes the impact of an increase in our tax payments of $48,000,000 reflecting the timing of higher provisional tax payments under the uplift method. The increase in cash tax payments was able to be offset due to the continued focus on managing our working capital and strong cash conversion. So free cash flow when combined with the DRP is sufficient to fund the total FY 'twenty one dividend of $0.25 per share and the renewal of our 1821 megahertz 2,100 megahertz spectrum. For FY 'twenty two, we continue to focus on funding the dividend from free cash flow and aspire to achieve $420,000,000 to $460,000,000 and that will be supported by our targeted return to revenue growth. The impact of the steady free cash flow and the strong DRP participation meant that net debt reduced by $46,000,000 and our reported net debt to EBITDA ratio was 1.16 times within Spark's internal threshold of 1.4 times and consistent with S and P's A- credit rating. So moving on to our FY 'twenty two indicators of success. To help investors monitor progress, we've laid out the critical factors that will influence business performance and free cash flow and report on progress of these at the half and full year. The indicators of success are aligned against our strategic pillars so you can understand the progress we're making towards the delivery of our 3 year strategy. The majority of them are self explanatory and consistent with the success factors we've laid out in the past. I will have to draw your attention to the wireless broadband target of 15 ks to 20 ks growth in FY 2022. I know this is of high interest. So the target represents growth of a similar level to FY 2021. And as Jolie has stated, while we remain committed to the ambition of 30% to 40% of our base on wireless broadband, we now believe we'll be at the lower end of that range by the end of FY2023. We do still see plenty of opportunity to grow our wireless broadband base as our 5 gs rollout progresses. We will not only make 5 gs wireless broadband available in more areas, but we'll also create additional capacity on the 4 gs network for wireless broadband. So now moving on to guidance for FY 'twenty two. We have set guidance subject to no material change in operating outlook as EBITDAI of $1,130,000,000 to $1,160,000,000 CapEx of around $400,000,000 and a total FY 2022 dividend of $0.25 per share fully imputed. Our long term intent continues to be to deliver a sustainable dividend that is fully funded by free cash flow. And finally, we've retained the dividend reinvestment plan for H2 FY 2021 as this is a useful capital management tool and will operate at a zero discount. Shares issued under the DRP will be issued at the prevailing market price as determined around the time of issue. So that now concludes our financial summaries. Operator, we'll hand back to you and open the line for questions. Thank you very much. We'll now begin the question and answer Thank you. Okay. We have several questions in queue. Our first question comes from the line of Kane Hannan from Goldman Sachs. Kane, please ask your question. Good morning, guys. Just three questions from me. I haven't asked in turn, so that's easiest. So maybe just starting on the tower assets and obviously appreciate the co tenancy comments and obviously the infrastructure review progressing. But if I just use some of the earning metrics from your international peers and that co tenancy ratio, and I get to an EBITDA of the sort of tower portfolio in the low 30s. Just wondering if that's the right way to be thinking about it or if there's any comments you can make around what the talco earnings would be? Look, Kate, I understand your desire for a lot more detail in the space. At this stage, we are just considering all of our options. The discussions that we're having remain confidential. So look, it's really just too early to be able to give that kind of level of detail. We're still going to work through the options in that space. Yes. And then just in terms of free cash flow, just given that capital spend comments and sort of the 11% aspirations in 'twenty three, Are you guys still aspiring to that $500,000,000 free cash flow target that you set out at the strategy day? And if you are, could you just step us through the moving parts from that FY 2022 guidance to the $500,000,000 range in FY 2023? So, Kane, yes, we are. We remain committed to that $500,000,000 free cash flow aspiration. What we laid out at the investor strategy, they still remain absolutely valid, which is that we see the opportunities coming through ongoing EBITDA growth that has been something we previously indicated. We still see the opportunities there. Tight management of our working capital, a consistent level of CapEx spend and we'll give further guidance on that in FY 2023. Perfect. And then just finally, just Digital Health, talking about 8% to 10% revenue growth next year. It's on a pretty meaningful revenue base. Just talk about where you're seeing that growth coming through as far as where that business can get to longer term? Yes. So if I can talk to that. So at the moment, we've got a good strong revenue base there and it's the growth is primarily coming in the IT and managed services space. When we look ahead, we see it coming in a number of areas. Firstly, there's some opportunities around the digital health reform that gives us a chance to operate in a national manner. So at the moment, the industry is largely regionalized. As a national operator, that puts us in a very good position. The second area where we are focusing some of those growth opportunities is around our digital health platform. So this is a platform that we are currently developing. We expect to go live in the coming year and build off the current connectivity we have across the DHBs and the various other parts of health industry and we see the opportunity to stand it up, launch applications off the back of it and grow revenues off that. Because if you look at the health sector, a significant amount of still manual paper based activity and the opportunities whether it's around workforce management or other elements of that, digital health platform would provide a strong base, whether that's in data, whether in some of those applications being provided through that. So that's where the broader opportunity sits as well. Okay, guys. Thanks very much. Thank you. Thanks, Ken. Our next telephone question is from Ari Dekker from Jarden. Ari, please ask your question. Good morning. Just starting with broadband, I've got a few questions there. I mean, it looks like when you strip out wholesale, you were down 16,000 connections on the retail brands. You talked about sort of looking to hold connections. Growth in the market is starting to slow as penetration sort of hits a point. Can you sort of talk about what your strategy is going to be there? You're obviously pursuing fixed wireless still, but under indexing and market share on fiber, and you do retain premium and sort of ARPUs above some of your peers. So can you just sort of give some guidance on what you're looking to do on broadband and what your revenue target is for broadband in FY 2022? We don't have a specific revenue target for Guwranari. But in terms of the market, the points that you've highlighted are absolutely right. It's a competitive market. We've seen many different players enter. We have seen a lot of growth in the overall market. It's about 3% growth this year versus 5% in the prior year. Some of that is due to border closure, but in general, the market has slowed. Pricing while it's broadband, we have had a lower gigabyte offering, which has proved quite successful as well for different names. So what we're looking at is the different elements of our product portfolio, but we will always continue to see if are we price competitive in the market or not and what do we need to do to make sure that we are. So that will be a continuing focus for us in FY 2022. Obviously, the entertainment things that go alongside that is an important part too of our offering. So whether that's Netflix or you bought Neon or Sport as well. So we look at all of those components when we look at the offering for our customers. Sure. And then I mean just a question on your fixed wireless ads. Do you I think like your landline fixed wireless product now includes 40 gigabits of broadband as standard. So are those customers now included in your fixed wireless ads as opposed to fixed wireless ads? They will only be included if they've activated broadband. They won't be included if it's not an activated account. So does that make sense? It does look like because you're turning off PSPN and your voice over wireless is very static. So would it be right to assume that there are a decent amount of those being activated? Obviously, they can do Wi Fi on the phone and that sort of thing. And they are part of your fixed a decent chunk of your fixed wireless adds? No. It's not a material driver of the movement. Okay. And then just lastly on the broadband one. Obviously, the ComCom's come out with a greater focus on just marketing of alternate technologies, and it's obviously focused on copper withdrawal in that. But just sort of thinking about your reduced target now to 30%, And I guess what you outlined at the strategy day about being able to direct customers to fixed wireless instead of fiber with the investment you're making in 5 gs, do you think that it's getting incrementally harder to actually to kind of direct your customers to fix wireless over 5 gs? Or is there something else sort of behind the reduction to the lower end of the range? I think when you look at the overall market and where that's at broadband market full stop regardless of wireless or fiber or any component that growth is slow. So that's what has impacted our view around by the end of FY 'twenty three being at the lower end. As we further roll out 5 gs and as you can see we've got a target of roughly 90% population coverage getting towards the end of the year. It becomes more opportunity for us to grow both from a 5 gs perspective, but also what's happening is you're moving traffic off 4 gs to 5 gs, which then opens us up to push equipment and coverage further out from urban more into rural. And that provides some different opportunities as well. So I think from a point of view of overall market competitive, yes, there are no easy wins in the space. So we have to work pretty hard to get what we are getting, But we still see opportunity within wireless broadband, just probably given the slow growth in market overall and what we're seeing a slow build to that, so the lower end of that target. Yes. Just quickly on Spark Sport. I mean, I see that it's come out of the FY 'twenty two sort of objectives. And you've talked about, I guess, investment being consistent with existing levels. And clearly, with the Rugby League going to Sky and that point you made at Investor Day about there not being a lot of content available sort of thing. Like are you sort of where are you at in terms of, I guess, your outlook? I mean, I think your objective was to kind of own entertainment of the home. There's obviously lots of means to doing that with a plethora of value add services you could add that you don't actually provide as principal. Can you sort of just give an update on where you sort of see the relevance of sport being in your future markets? Yes. Ari, I'll pick that one up. So look, from our perspective, sport is a really important part of our BaaS portfolio, which provides really meaningful differentiation to our portfolio of broadband and mobile offerings. So we still see that as being a really sports being an important part of that. But as we've said before, we obviously want it to be substantially bigger than we are and we've got a long term ambition. We obviously want it to be commercially viable. And as we work through that, really the key to it is clearly subscriber growth. And so when we look forward, the biggest opportunities we see to get subscriber growth are really around additional content. We see the best way to do that through partnerships. So it absolutely remains a core part of our strategy. But partnerships will be the key to driving content subscriber growth and improved returns over time. Yes. Okay. So we're essentially you sort of cut the ticket for a partner and they use your platform? It could be a combination of things, Ari, because obviously we have certain content as well. So it could be a combination of sharing different content or it could be, as you say, a combination of clicking. I mean, a number of the things we've done even in our Cricket Association, team members, etcetera. So we've looked at different partnerships of the work. So I think we will continue to explore that across content and that will be the way that we'll be looking at adding to that. Yes. And then just, Stefan, your comment about differentiating for your customers with sports, are you sort of signaling that you in terms of the next iteration of it that you might look to more heavily discount your sport offering to your existing customers. So it is more differentiated from those on other from people that are accessing it on other networks? No, that's not the steer I'm trying to create. It's more effective when you look at our offering. We currently have discounts on things like Netflix on we have the ability for customers to get Netflix at better rates. And at the moment, you can get Spark Sport if you put it on your bill at a better rate. So that's the kind of the way in which we're thinking about it. But ultimately, it provides that differentiation against other offerings. Sure. And then last one, just a follow-up on infrastructure. I guess when I look to the balance sheet and your investment sort of across your right of use assets and PP and E, just a bit of a steer of like where the relative value sits between those three classes of assets. And I guess specifically in Class III, what sort of level of book value investment do you have in each of the passive mobile and the fiber? I think if you Ari, if you think about the passive mobile towers, it's roughly above $100,000,000 In terms of fiber, we've got a combination of value across all both backhaul and the optical transmittance. We haven't broken that up specifically. As we progress through, clearly, we'll do more of that. That sort of gives you a sense at least around the towers piece. About $100,000,000 Yes. Just over $100,000,000 Yes. Great. Thank you. And Sorry, we missed the end. Sorry, we missed the end. Sorry, we missed the end. Sorry, I missed Jake on that. I was just saying, no, no, that's all. Thanks. But well done on producing for a solid result in that COVID environment. Thanks, Harry. Thanks, Harry. Our next telephone question is from Lucy Huang from Bank of America. Lucy, please ask your question. Thank you. And good morning, Jolene and Stefan. I have three questions. So firstly, if we can touch on mobile. I think you're flagging potentially mobile revenue growth of 2% to 4% going into FY 'twenty two. I'm just wondering whether do you think that majority of this growth is likely to come from continued subscriber additions or whether you think majority of it will come from ARPU growth? And if you can comment on kind of the competitive dynamics at the moment in mobile, that would be great. And then just my second question, so just in terms of Yes. Sorry. So in terms of no, that's fine. In terms of mobile revenue growth, I think what we're seeing in our marketplace and probably globally is the shift of data consumption, which is leading to people moving up the data curve and so forth into higher plans. And also if they buy different devices, that's leading to more activity. So there will be a combination like we have seen in this year of subscriber growth stick in that pay monthly postpaid area, but a lot of it's to do with a higher paying a higher rate effectively for more data usage. And we don't see that sort of changing. And obviously, we've largely cycled roaming through this last 12 months. So the implications of that have been experienced effectively. Wonderful. Thank you. That makes sense. And then just my second question. So I think you guys flagged some cost savings in 2021 due to COVID restrictions. So just wondering coming into 2022, obviously, the new lockdown poses some more uncertainty. But just overall, what are your thoughts on whether these costs may like will they creep back into 2022? And then just alongside that, where do you think kind of medium term EBITDA margins for the business could land? Or what are your targets for the next kind of 3 years? Thanks. So maybe to pick those 2 up. So in terms of costs, over many years we've operated a disciplined cost program. So while we saw costs come out in 2021, we did in 2020 and we will continue to see that in 2022. And that's a combination as we move to greater digital technology, we virtualize more of our own networks and we look at our overall cost base each year and retire some legacy elements of that as well. So we don't see any shift out in that approach or program that will always be part of our operating model. And then I think your second question or third question was around the EBITDA margin. So we target around that 31% which of EBITDA margin which is pretty world leading when we look across and so we don't see a huge shift we don't expect a huge shift in that. Great. Thank you so much. No problem. Our next telephone question comes from the line of Encho from Credit Suisse. Encho, please ask your question. Good morning. Encho Rakowski here. So my first question is on cloud and in particular the cloud competitive environment. Just interested in whether you're seeing competition accelerating in that space, particularly with CDC announcing that they'll be pursuing hyperscale development in Auckland. And I guess what does that mean to the longer term projections within the cloud segment? I think if you stand back from the cloud segment in New Zealand, you've probably got a roundabout 30% penetration and a forecast of that growing over the next 5 years to about 60% penetration. You've got a combination of both public cloud, private cloud, on premise and we see customers having a range of those different elements. Generally, we're seeing a shift towards both public cloud. But if you're an organization which has a lot of legacy applications and has been around for a period of time, it's quite difficult to shift your estate just straight into public cloud. So we see a mixture. And depending on what data and workload that is, people are choosing different environments for that. So we offer services that wrap around all of those things. We also work with all of the hyperscalers effectively. There's no doubt there's a shift in terms of the margin profile between public cloud and private cloud. And therefore, you can see that in the mix of our work. When you outline or you look at the volume potential of growth, there's a combination of growth driving that perhaps at a lower rate effectively. Okay. Got you. But so is it fair to say that's a dynamic that you've seen over a period of time, nothing that's really changed? Yes. Yes. We're also considering a lot of the significant data center investments have are a few years out to opening as well. So there's a combination of things happening, including our own investments. Got it. And then in mobile, the transition of prepaid to pay monthly has continued into the second half. I mean, I know you spoke just then about greater take up of higher data plans, etcetera. But just interested specifically in that transition, how much more of it do you see? And is it perhaps something that's been accelerated during that COVID impacted period? I think there's no doubt as more and more applications, more and more working on the move, different locations is leading to people using data in a different way than perhaps they have. COVID has probably contributed towards that as well, but it has been a consistent theme for a number of years for us. I guess our market overall was predominantly more prepaid than postpaid, which was unusual compared to most of the rest of the world. So we're seeing a little bit of a catch up. The other thing we are doing within our prepaid market is our E List plans offered there also have larger data. So we're seeing growth in our prepaid ARPU as well at the same time. Border shutting too impacted the number of travelers that were on prepaid connections as well. So they fell away, but they're generally for short periods of time so lesser ARPU. So you see both of those things affecting us. So if you say what's the longer term trend, we're still seeing that shift upwards across that and we would expect that to continue to happen between pre and post. Got it. And just finally, I know you mentioned it's modest, but can you quantify what sort of driving benefit you've got factored into the FY 'twenty two guidance? I mean, maybe asking in a different way, how much of the $40,000,000 of COVID impact in 'twenty one do you expect to reverse? So I'll answer your question slightly different. I'll talk about it more from a revenue perspective. In a standard year, our roaming revenues, as we've previously said, set a little over $50,000,000 We've had a reduction in FY 2020, a further reduction in FY 2021. So to give you a general sense, in FY 2021, our roaming revenues were about 10% of a normal year. So it gives you a pretty good sense of how significantly they were impacted. We're expected a small increase. Like I'm not going to give you a specific number because at the moment 24 hours ago we were not in lockdown. So the landscape evolves too quickly. What I can say is that the amount we've allowed for is expected to be pretty small and not material in the grand scheme of the overall revenue and guidance. Okay. That's great. Thank you. Thank you. Our next telephone question is from Phil Campbell from UBS. Phil, please ask your question. Yes, morning. Just a few questions from me. Stefan, just the first one was on the new accounting standard in terms of accounting for IT spend. I was just wondering if the FY 'twenty two guidance had any expense for the ERP upgrade that I think is dropping in FY 'twenty two. So that was just my first question. So just for the benefit of others on the call, Phil, I'll just kind of give a quick overview. So basically, there's a new interpretation of an accounting standard, which requires organizations to look at the amount of cost they have incurred in relation to standing up new cloud based software tools. In the past, most organizations, including ourselves, have capitalized that cost as part of the creation of a new asset. The new interpretation is any part of that cost, which is actually related to configuration should be expensed going forward. So we've seen in our accounts, we've got about a $50,000,000 spend over 3 years. A portion of that will relate to configuration. We will go back and have a look at that. There's a bit of work to be done to understand what the impact is. When we look forward to FY 'twenty two, we're not expecting that to have a material impact on our accounts or guidance. Okay, great. That's very clear. The second one was just on mobile. I noticed that you did recently lose quite a large customer. It seems as though competition in the kind of B2B space is intensifying a little bit. Would you be just able to make a bit more comment around that? And I'm assuming there is customers won and lost all the time, but wondering kind of there was quite a large customer. So just kind of what is the kind of response to that? So overall in our business enterprise customers we grew connections. So as you say there is always customers won and lost across that. So we saw greater growth than we saw lost effectively. The business enterprise market has always been competitive. Nothing much has really changed around that particularly in the big end of town in regards to that. So I don't see any significant concern or issue in relation to that. Great. Awesome. And then just a last one for me. I think we've seen a new consultation document from RSM just in terms of spectrum, which would, when you first read it, would tend to indicate that there's a chance that the MNOs may be able to get more than 100 megahertz of capacity in 5 gs. Is that your interpretation of that potential consultation? I'm not aware of that specific thing that you're referring to. There is a continuing review of how the spectrum options might work and the components of what might fit in there. But we can pick that up with you offline if you'd like in terms of we'll follow that up. That would be great. I think they're just reserving the 3.3 to 3.4 for the wisps and for enterprise. And so it just means that that 400 megahertz from 3.4 to 3.8 could be available for 3 MNOs and potentially Maori. But the only sorry, last question. Yes. Yes. Sorry, the very last one was just with the copper withdrawal coming up soon, how do you view that? Some people are talking about it as a bit of a churn event. I'm assuming that a lot of those kind of remaining copper customers are spot customers. So do you think of it as a churn event? Or do you think it's going to be less of an issue and you would just be able to migrate your existing kind of copper customers onto fiber or wireless? I mean we've obviously got quite experienced experienced migration through our PSTN as we've started to remove that from certain markets, done a lot of work around how we work with customers to offer them the right options as they migrate off. So we've done a lot of work with that. And so from our perspective, certainly not complacent about it as an opportunity for customers to reconsider, but we certainly are focused on making sure any kind of migration offers a positive one for them and one that's easily managed. So we don't see it as a significant churn event per se. Great. That's awesome. Thanks. Okay. Thanks, Phil. Our next telephone question is from Brian Han from Morningstar. Brian, please ask your question. Charlie, the accelerated investment in 5 gs in F22, I'm still a little bit confused about how that marries with your thinking that your fixed wireless will be towards the low end of the 30% to 40% target in F23. I mean, are you not counting the potential benefit of 5 gs in lifting your wireless bypass of fiber above and beyond fixed wireless? Or are you seeing No, we are. Yes. We are. But obviously as you roll out, you go into different markets at different times. So it just takes time. We're talking over the space of 2 years. So that's why we're aiming or suggesting it's probably towards the lower end of that. We're not saying that 5 gs won't have a role to play and absolutely it will. We're just as we look ahead, recognize that it takes it's sort of by the end of calendar 2023, we'd be at 85% of the country. So if you think about that, the opportunity probably sits just beyond the end of FY 2023. Right. Okay. And are you assuming the slower broadband market will persist for some time? Well, at the moment, when you look at it, with borders shut and that's not the only reason for why the market is slow, but that has definitely had an impact. We've seen a halving roughly of the growth in the market in the last 12 months. And if you look ahead this year given the situation we're currently in as of today but also globally, it's not clear when we would see them materially open anyway. So that sort of factor for the next 12 months feels like it's potentially in play. And then secondly, when you look at that, it is a well penetrated marketplace. So unless population is substantially growing, which has historically been about immigration coming in, then it's difficult to see that there'll be a significant shift up in the market size in a pretty mature market. Okay. If you don't mind, just one more question. How would you describe the competitive landscape in the consumer mobile space right now? I mean, are you concerned in any way about Vodafone perhaps moving beyond cost cuts and maybe going a bit harder on the market share front? Look, at the end of the day, mobile has always been a competitive market. If you think about what's driving growth in our marketplace, it's a shift up of people in their data usage and that is available for all of the market participants. So I don't see it necessarily accelerating in terms of where we're at because that opportunity exists for everyone. But that's not to say that there won't be I mean, I can't call what they will choose to do or not do. But then there's a lot of focus in just trying to meet the needs as we grow data domains for our customers. Thanks, Julie. Thank you. Our next telephone question is from Ian Martin from New Street Research. Ian, please ask your question. Thanks. I just have 2 related questions around infrastructure investment. So in your class structure, you're obviously investing for growth in Class I and optimizing investment in Class II. What's the ongoing investment focus in Class III while you're going through these exploration opportunities, both in terms of how material and what the focus is? And I'm thinking here particularly small cell. So if you stand back, there'll be some operational investment we would always make. So if you think about fiber, for example, the optical transport network, we're in the process of automating a lot more of that and we've been going through the country doing that. That would continue within our existing capital envelope as you can see it. And then in mobile, our 5 gs investment is really in and around our existing assets and towers that we already have in place. So what we're doing is upgrading all the active components of our network. So therefore not a significant rollout to stand alone or anything like that in the interim period. All right. Just a related question then on the line of use assets. I mean that's quite a material part of the balance sheet. And the additions $129,000,000 in the last year. That's not found in CapEx, I'm assuming. And some of that's also in network infrastructure, particularly mobile sites. So I just wonder how material part of the asset base is mobile sites and right of use assets? The right of use assets change that you're talking about, a lot of that is will be driven by lease activity and the way that that's reflected. So and I think what we talked to earlier was if you look at that passive those passive infrastructure assets, the book value that we carry on those is a bit in excess of the $100,000,000 mark. Including what's in right of use assets? So in effect that's a kind of form of funding already to expand your mobile footprint? Is that Maybe what would be better is maybe Steph you take us offline and come back to team. Yes. I think that's fine. Thanks for that. Thank you. And our final question today is from Aaron Ibbotson from Paul Stapler. Aaron, please ask your question. Hi there. Good morning. Thank you for taking my questions. Just two quick ones from me. So first, just a clarification on your comment around cloud security and service margins or mix shift. So if I look at gross margin drop through, it was around 40% this year. So if I think maybe not just FY 2022, but over the next few years, how should we think about sort of incremental gross margins, if I put it that way? Is that too simplistic to think about it? It's my first question. So I can pick that one up. I mean, I think you will see continuation of current trends to some extent because there is a shift in mix there. So public cloud, we're reselling it, obviously comes with a lower margin. And we are seeing some pricing pressure on our private cloud business, which is in turn being offset by volume growth. So I think that impact of private cloud will hit some price impact and therefore will put a little bit of pressure on the margin there. Okay. Thank you. Very clear. And then I'm not sure what you have given, to be honest. But if I look at your fixed wireless customers, could you give some sort of color on where they are in the sense I know you're targeting low users, etcetera. But what proportion of these are in sort of USB Zone 12? And what are outside sort of on rural at the moment. And if anything you can share with us there? I mean, as an overview, we have customers sitting in both urban and rural areas. Clearly, there are opportunities where there is not necessary access to fiber or copper lines because when you think about the types of users that initially came on to that were people who were more on ADSL or couldn't access the high speed. But there are people also in urban areas that are using it as well. We don't present that information out of more detail like a map of the country or anything like that that shows that or the combination of that. But you should think about it being used in both locations. And really what we're looking at is who is the customer? What are their needs? What is the best available form of technology? Because at the end of the day, we sell all forms of those technologies and making sure that that's met. Okay. And if I ask just on 5 gs versus 4 gs, what proportion is are you already today having fixed wireless customers on 5 gs? And if you look at new sales you're doing today, is the majority going to 5 gs if you look at incremental fixed wireless customers? Or is this still a lot of 4 gs is being sold today? So we're selling wireless broadband on both 4 gs and 5 gs. We have around 9 new locations of 5 gs in this last financial year. So you can see as we add locations the opportunity comes for people to come on board. So if you think about our predominant wireless broadband base at the moment would still be predominantly 4 gs a 175,000 customers or 25% of our broadband base is on wireless. But it would be shifting and the opportunity is obviously arising as we move through with more 5 gs. And so we've got 10 to 15 additional locations, including expansion of coverage in some areas we've already gone over the next financial year. So we'll see the opportunity lift. And then beyond that, obviously, FY '23 as well. Well, I'm basically just trying to get you to answer my previous question without wanting to. So I was just wondering, the 9,000 you signed up this last 6 months, is it fair to assume that the majority of that was on 5 gs or that the vast majority is still on 4 gs if you take your No, it would be a combination of both, so. And we don't provide that. Okay. Thank you very much. Thank you. There are no more further questions at this time. I would like to hand the call back to today's presenters. Please continue. Thank you. Thank you everyone for joining us today and for the conversation. Cheers. Thank you all for joining. You may all disconnect. Have a great day. Goodbye.