SPK- Spark NZ (TELCO)

[Snoopy]

When the FY2022 results came out, 'Spark Sport' was very much 'still in the picture' as part of the 'exciting growth story' (at HY2023, Spark exited Spark Sport for a one off write off of $52m). So how did the total of the exciting new growth divisions -at the time- shape up?

P87 of AR2022 is where the true calculation of profitability starts:

	Operating Revenues	less Product Costs	less Labour Costs (1)	less Other Operating Expenses (1)	equals EBITDA
'Other Operating Revenues'	$152m	$72m	$20m	$16m	$44m

Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 152/3694 = 4.114%; Labour Cost = 0.04114 x $495m = $20m, 'Other Operating Expenses' = 0.04114 x $381m = $16m

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EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.04114 x $520m = $21m

EBIT= EBITDA - DA = $44m - $21m = $23m

The interest charge against 'Other Revenue' = 0.04114 x [$26m - $74m] = -$2m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($23m-$2m)= $15m

On page 89 of AR2022 we learn "Included in 'Other operating revenues' is revenue from Qrious (Artificial Intelligence, data and analytics), Internet of Things, Spark Sport, Connect 8 (the construction contractor, now fully brought back in house by buying out the Electra shareholding) and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have improved by 50%, even if the overall contribution to Spark profit remains small.

I have expressed some doubts on where growth in the operational business at Spark will come from, that is needed to support the current level of fully imputed dividend payments. To that end the 'growth arm' of Spark, captured under 'other revenue', will play a big part. So how is this 'other revenue' growth arm of Spark going?

At HY2023, Spark exited Spark Sport for a one off write off of $52m. So how did the total of the exciting new growth divisions over 2023, -including Spark Sport when it was a going concern - shape up?

P97 of AR2023 is where the true calculation of profitability starts. 'Other revenue' includes revenue from mobile infrastructure, Qrious (Artificial Intelligence, data and analytics),, the Internet of Things, Spark Sport (discontinued mid year), exchange building sharing arrangements and for the first time MTTR (digital identification start up). Connect8, a servicing and installation arm of Spark that was bought back in house in FY2022 has now been amalgamated with the Entelar business unit. Entelar is not listed as being part of 'Other Revenue'.

The much talked about business unit 'Spark Health' is not mentioned either. I therefore have to assume that 'Spark Health' is a grouping for customer service reasons, but for reporting purposes is distributed across many reporting segments. So there are no 'Spark Health profit figures' per se.
My assumption here was subsequently confirmed in HYR2024 on p9:
"Health results are included across a range of product categories."

	Operating Revenues	less Product Costs	less Labour Costs (1)	less Other Operating Expenses (1)	equals EBITDA
'Other Operating Revenues'	$241m	$110m	$32m	$28m	$71m

Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 241/3875 = 6.219%; Labour Cost = 0.06219 x $511m = $32m, 'Other Operating Expenses' = 0.06219 x $456m = $28m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.06219 x $504m = $31m

EBIT= EBITDA - DA = $71m - $31m = $40m

The interest charge against 'Other Revenue' = 0.06219 x [$32m - $99m] = -$4m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($40m-$4m)= $26m

Whatever, the operational NPAT estimate for all those promising future growth initiatives looks to have improved by 73% year on year, even if the overall contribution to Spark profit remains small. But it is a bit hard to compare these figures with the similar numbers generated in FY2022 (see quoted text), because the categories of 'Other revenue' have subtly changed, and will be changing again for FY2024.

From HYR2024 p9
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Spark has reclassified the comparative segment results to:
• Redistribute certain revenues between two new categories IT products (previously cloud, collaboration, managed data and networks) and IT services (previously service management and security
• Move Qrious, Internet of Things, and MATTR from other products into a new high-tech category
• Split data centres out from cloud, and split co-location out from other products to create a combined data centres category.
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SNOOPY