Net Profit Margin = (Normalised Profit) / (Operating Revenue)
FY2017: $382m / ($3,505m - $20m) |
= 11.0% |
FY2018: $358m / ($3,533m - $10m) |
= 10.2% |
FY2019: $398m / $3,518m |
= 11.3% |
FY2020: $386m / $3,588m |
= 10.8% |
FY2021: $375m / $3,565m |
= 10.5% |
Notes
1/ Turnover across FY2017 and FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020 and FY2021.
I want to drill down a bit more into that big profit margin lift [ (11.3%-10.2%)/10.2% = 10.8% in one year, which is >2% inflation] between FY2018 and FY2019. If I look at the segmented result (AR2019 p52),
Product Category |
Operating Revenue (FY2019) |
Product Margin (FY2019) |
Product Margin %ge (FY2019) |
Operating Revenue (FY2018) |
Product Margin (FY2018) |
Product Margin %ge (FY2018) |
Mobile |
$1,271m |
$775m |
61.0% |
$1,237m |
$732m |
59.2% |
Voice |
$486m |
$310m |
63.9% |
$573m |
$369m |
64.4% |
Broadband |
$685m |
$344m |
50.2% |
$665m |
$350m |
52.6% |
Cloud, Security & Service Management |
$400m |
$327m |
81.8% |
$370m |
$315m |
85.1% |
Procurement and partners |
$365m |
$43m |
12.3% |
$357m |
$40m |
11.2% |
Managed Data, Networks & Services |
$197m |
$104m |
52.8% |
$207m |
$111m |
53.6% |
Other Operating Revenues |
$114m |
$51m |
44.7% |
$114m |
$49m |
43.0% |
I can see the product categories with the highest 'Product Margin' are:
1/ 'Cloud, Security & Service Management' ' and
2/ 'Voice'.
But 'Voice' was on the decline (-$87m in lost revenue on a year vs year comparison). When a high margin business unit declines like this, it puts pressure on the up and coming 'product unit revenues' to fill the gap. Cloud, Security & Service management is too small to do that on their own (+$30m - equivalent to +$30m x 81.8/63.9=
+$38m in revenue indicative of profit substitution terms). But combine that with the growth in mobile revenue, also very profitable, at: +$34m x 61.0/63.9=
$32m and for broadband +$20m (equivalent to a profit equivalent revenue offset of $20m x 50.2/63.9 =
+$16m) and we are covering those lost 'voice unit' profits: $38m + $32m + $16m = $86m. This means profit indicated revenue offset from the remaining business units is minimal (actually slightly negative). Yet none of this explains the increasing profit margin 'year on year'.
It looks like the biggest contributor to the profit margin increasing was a very significant labour cost saving (a $475m-$513m=$38m drop in the wage bill over the year- see table below). There is a lot of automation behind the scenes that will be contributing to this. But can it continue? Here is what has happened to the wage bill in the five years under review.
Financial Year |
Labour Expense |
Finance Expense |
2017 |
$550m |
$75m |
2018 |
$513m |
$77m |
2019 |
$475m |
$85m |
2020 |
$511m |
$94m |
2021 |
$491m |
$81m |
This table suggests to me that the big savings in labour have already been made. Alongside of this, I have recorded the annual finance expense (the second column of the table).
A fall in the 'under 3 month' NZD Commercial debt ($228m-$155m=$73m), both in capital being borrowed and interest paid on that capital, looks like the explanation for interest payments saved over FY2021 (see AR2021 p89). There are $100m in domestic notes maturing in each of FY2022 and FY2023 too. Refinancing those at lower interest rates should take the pressure off the interest bill in the next two or three years. Yet the picture that is emerging here is that taking cost out of the business looks to be an exercise that will get more and more difficult going forwards. That means it will be increasing revenue on the 'top line' from the up and coming revenue sources going forwards that will be required to 'fuel growth' going forwards.
In summary, I think there is room for 'surprise on the upside' if some of the new business units start to get traction in their specialty markets. I think 5G could yet prove to be a profit margin game changer too. Yet doing this cold hard numbers exercise has reinforced to me that Spark is not a sure bet. The fact that there has been some quite good execution of the business plan over the last five years, while the net profit margin has shrunk - albeit not significantly so - seals the fate of Spark for me when lined up against this criterion.
Conclusion: Fail test