SPK- Spark NZ (TELCO)

[Snoopy]

Put an smart band on the wrist with some other sensors and away you go...

There is a company in the US with over 11,000 developers using Bosch accelerometers running on multiple OS's. They have multiple tracking software solutions across a range of industries including human daily option.

we are just waiting for a multi junction box with wake up mode for field trails in Europe to run with the new IOT scripting engine platform..

of course there is Apple and its emerging platform for health but more specific health platforms have been under development in the US and Europe for few years now.

Wow, it sounds like you are right at the cutting edge of 'Internet Ossisted Training' Waltzingman. It does sound though that, to be useful, much of the IoT is going to have to be wireless. How would it work if you were doing an ironman race? Do you have a sensor on you that pings a central database (at a cost of 20c per ping) so it can produce a Geo-trace of your race? What do you do for a sensor on the swimming leg? I imagine some bulky rubber encrusted device stuffed down your swimsuit. That might get in the way on your bike and run legs. Accelerometers measure acceleration don't they? Are you really changing gears that aggressively that such numbers make a difference?

What I am trying to get a handle on Waltzingironman, is that I can imagine you sweating away doing all this superhuman ironman stuff. Meanwhile as a Spark shareholder I am quietly ensconced in an armchair my lounge watching you on 'Spark Sport'. So I am paying myself via my Spark Sport subscription. But how am I making money from you with all your fancy telemonitoring gear in live action?

SNOOPY

[Snoopy]

An obvious IoT (Internet of Things) application is the 'asset tracking' of loaned hospital equipment (walkers and wheelchairs for example). But more 'cutting edge' is the application of this technology to directly help people.

Many organizations have assets and things of value that need to be tracked. 'Mainfreight's' New Zealand operations need to know where each of their 400 'Hazardous Chemical Segregation Bins' are, so that the empty bins can be returned to Hamilton and Auckland (there is an imbalance of demand north to south).

'Mainfreight' were facing the extra cost of buying 50-100 more $3000 bins per year. Now, a computer dashboard, with bin locations, is 'display accessible' all over the country. Those missing bins are no longer missing! The fact that customers know the bins are being tracked, means they tend to be faster to return them too.

https://sparkiot.buzzsprout.com/3898...asset-tracking

The bins tracking solution requires three component parts:

1/ A Network,
2/ A Physical device (a hard cased functional rugged hard plastic box), AND
3/ A Platform (way to visualize information feed back)

The challenge is to be able to do all this with the right cost structure and the least maintenance:

1/ Find the technology needed, CHECK
2/ Cost it out, CHECK
3/ and CHECK the physical device battery life (three to five years is what is needed).

The Spark 'LoRa' network is that solution. Spark’s national 'LoRaWAN' network was built by specialist network provider, and IoT rollout experts, Kordia. It suits low-power, low-data (like single ping) uses. This complements Spark's second high-power LTE ('Long Term Evolution' signifying a fast download rate utilising the 4G network) particular tracking network "LTE Cat-M1", called ‘M1’ for short. M1 can transmit text messages.

So in terms of hardware, what is 'LoRa'? Physically LoRa sites consist of a box and antenna (known as a ‘gateway’) installed, for the most part, on Spark 4G cell sites. Where appropriate, Spark can install LoRa boxes on third party sites. Alternative cellular tracking technology based on 3G and 4G technology takes more battery to power up. With LoRa, everything being tracked 'phones home' once a day (although you can set it to phone home as many times as you want). As far as utilising extra information from the data collected goes, knowing turnaround times means 'Mainfreight' know how to optimize the number of boxes they actually need in the future .

'Blackhawk', an Auckland based company with global ambitions, are the Spark partners in this project, handling the 'device' and 'dashboard' end of the installation.

https://www.blackhawk.io/blackhawk-iot-saas-home

Spark are good at

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in their business.

Spark are not product designers, which is why Blackhawk became involved. A particular need of Mainfreight was to be able to continue to track bins in an inside environment (note concrete walls impede wireless tracking signals). Spark's solution was to install 'repeater devices', like a broadband modem, into each of the depots that extend coverage into the building environment. Technologies that can be used inside are Ultra Wideband, RFID (Radio Frequency IDentification), and WiFi. Spark can use all three technologies.

Why use Ultra Wideband? Ultra-wideband refers to the significantly larger spectrum (up to several GHz) employed over a short range. It measures distance by signal time of arrival. Other short-range technologies determine distances by signal strength, which is less accurate. How does RFID work? When triggered by an electromagnetic interrogation pulse from a nearby RFID reader device, the tag transmits digital data, usually an identifying inventory number, back to the reader.

Future Applications for IoT asset tracking technology:

1/ Agriculture: tracking fruit bins or wine vats,
2/ Healthcare: tracking beds and blood supplies,
3/ Manufacturing: tracking just in time components in an assembly process.

SNOOPY

[Snoopy]

Spark are good at

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in their business.

Spark are not product designers,

Trying to put a cash value on Spark's growth streams is not an easy exercise. For example, I couldn't find where the 'Internet of Things' revenue was reported in the Annual Report. It turns out it is part of 'Other' revenue, along with 'Digital Health' and 'Sport' (and 'Qrious', the data analytics business unit). I only found this out by looking at the 16th September 2020 'Investor Strategy Update' investor report.

https://investors.sparknz.co.nz/Form...gy%20FINAL.pdf

Total revenue for 'Other' of FY2020 was $130m (AR2020 p61).

Slide 59 of the aforementioned strategy update document suggests a substantial business revenue case for the three new growth areas from Spark: 'Digital Health', 'The Internet of Things' and 'Sport'.

'Digital Health' is already a billion dollar revenue earner in NZ, with a projected growth rate of 5% per year. Yet total St John's Ambulance (one of the Health divisions significant customers - apparently) 'Property & Infrastructure Expense' (which includes 'significantly' information and telecommunications infrastructure) spend was just $14.4m in total over FY2020. Even if $7m of that cost went to Spark, I am really struggling to see total Spark Health division revenue topping $30m over FY2020. The rest of the 'Spark Health & Wellness' podcast sounded like hoped for future earnings.

The 'Internet of Things', already a billion dollar market in NZ, is forecast to reach $3.5billion by FY2024. That is a compounding growth rate over three years of:

1b(1+g)^3=$3.5b => g=50%

That is impressive. But you would have to think, at least initially, that a lot of that spend would go to capital equipment, setting up new systems. Spark's game is monitoring those systems once they are in place. So it could be that much of this surge in IoT revenue is not reflective of down the track earning power of that revenue for Spark. For example, tracking 4,000 specialist Mainfreight bins at $20 each per month (price made up) would be just shy of $1m per year. 30 such customers would bring in $30m per year. Did Spark have 30 such customers over FY2020? I would guess not. Spin off 'data analytics' work by Qurious on this tracking information might be worth $30m over a year (Qrious staff are sure to be highly paid and have a charge out rate to reflect that.)

Sport in general is seen as a $500m revenue market in total, which leaves plenty of room for growth from whatever relative meagre revenue that Spark Sport currently has. Yet Sky TV total satellite subscription revenue was $582m (which includes more than just sport). It is hard to know how many Sky subscribers are 'sport subscribers'. If it was 75% that would give SkyTV 0.75 x $582m = $437m (Total programming fees paid by Sky for content were $342m, and I would pick the lions share of that was for sports rights). If the rest of the 'Sport' market was split between 'Spark' and 'Others', we would be looking at normalised 'Spark Sport' revenue of just over $30m. For the FY2020 operating period, we include the dates 20th September 2019 to 2nd November 2019 - the dates of the 2019 Rugby World Cup. The RWC certainly boosted Spark Sport. But given the dearth of subsequent rugby content, how many of those 'rugby sport' customers were maintained? When live sport 'turned off' early in the pandemic, Spark gave away 'Spark Sport' for free. So maybe only a sustainable $20m revenue from 'Spark Sport' was earned over FY2020?

Summing up, I get the revenue contribution from the areas of new growth to be: Digital Health $30m + Internet of Things $30m + Qurious $30m + Sport $30m = $120m. That leaves $10m unallocated for 'other' "Other Revenue".

SNOOPY

[Snoopy]

Continuing my summising of the Spark IoT podcasts

https://sparkiot.buzzsprout.com/3898...-without-wires

A brief History of mobile phone generational evolution.

1G/ Voice,
2G/ SMS texting,
3G/ Blackberry with e-mail access,
4G/ Much wider bandwidth to support Social Media, Video + alternative to fixed access (80% of traffic now video)
5G/ Supercharged bandwidth, MB to GB on Wireless Broadband, Super Low Latency (fast reaction), Ability to bring millions of devices on line.

Diagnostic and location reporting are liable to be the most popular early applications for IoT. Anything with a power source on it could be considered a candidate for putting on 5G. Release 16 of 5G (dare I call it 5.5G?) upcoming will bring in IoT specific elements. Spark intends to run 3 IoT networks that are optimized for different applications.

1/ The Spark 'LoRa' network stands for 'Long range' (low power and long battery life) and very spectrum efficient (best for responding to a simple ping signal).
2/ The Spark 'Cat M1' (a machine based standard for the 4G network) will transmit up to 1MB per second (suitable for sending text based updates).
3/ NBIoT (Narrowband Internet of Things) is the 5G Internet of Things standard (can send much more information, albeit with a higher power cost).

Which companies have shown early interest in 5G? Paymark (the EFTPOS provider) are experimenting with facial recognition for micropayments. Such a solution doesn't need physical wire infrastructure overcoming the problem of bandwidth and latency and correcting lots of different devices (camera, AI machine for optical analysis, bank account computer).

Spark are also working with Ohmio, the Auckland based driverless car company start up. Trials are going on at Christchurch International Airport. Low latency is really critical in such applications.. Smart streets (lighting and traffic management), linking with security and integrating 'cars talking to traffic lights' is all part of the wider convergence of such technology within the transport ecosystem.

Spark used Team New Zealand and the America's Cup as a 5G usefulness test case. Our Americas Cup team had 200 sensors on their boat. This information was downloaded to a hard drive drive, and the data was studied overnight. With 5G, the information can be immediately relayed to shore, in partnership with video footage. The designers can then do real time adjustments and understand the cause and effect of those adjustments while the boat is still 'out on the water'. For the sailing spectator, 5G can deliver video streaming to a whole crowd of people in one place.

South Korea is in pole position with 5G. Samsung is determined to be the leader in 5G technology.

The arrival of 5G will not see the end of 'LoRa' and '4g based IoT' technology. These older technologies will be complimentary and not superseded by 5G IoT applications.

SNOOPY

[Snoopy]

Trying to put a cash value on Spark's growth streams is not an easy exercise.

Summing up, I get the revenue contribution from the areas of new growth to be: Digital Health $30m + Internet of Things $30m + Qurious $30m + Sport $30m = $120m. That leaves $10m unallocated for 'other' "Other Revenue".

Returning to my favourite Spark 'growth' reference:

https://investors.sparknz.co.nz/Form...gy%20FINAL.pdf

Slide 69 suggests that revenue from 'Other Revenue' (that is the revenue category that includes the three hot growth prospects) will grow by $80-$90m (from $130m) by EOFY2023. That represents a compounding annual growth rate 'g' of:

$130m(1+g)^3=($210m to $220m) => g= 17% to 19%

"Growth in IoT driven by explosion of connected devices to grow to~1m." That sounds like a big lift in monitoring fees piggy backing on cellphone towers that are largely already equipped with the gear they need. Such growth sounds quite profitable.

"Growth in Digital Heath driven by new revenue opportunities supported by the introduction of the Digital Health Platform." This part of the growth agenda, I find the most opaque. Spark runs the nationwide 111 service, for example. Would this move to the new 'Digital Health Platform'? If it does that isn't really growth because the same service was already operating under another business unit envelope.

Health Board ICT infrastructure is highly fragmented, and includes many unsupported legacy systems.

https://www.reseller.co.nz/article/6...d-procurement/

That means there is definitely room for some serious IT spend, even though most of that seems directed towards customized software systems as designed by the likes of Oracle. But Spark may be stuck with the 'operational crumbs' in this space, unless this is where Qrious fits into the Spark business plan.

"Growth in Sport driven by increasing subscriber base." That sounds like a recipe for cashflow going straight to the bottom line - good stuff. Although it may be that Spark Sport is not yet profitable, this early in the business development cycle.

P61 of AR2020 is where the true calculation of profitability starts

	Operating Revenues	less Product Costs	less Labour Costs	less Other Operating Expenses	equals EBITDA
'Other Operating Revenues'	$130m	$82m	$19m	$15m	$14m

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= 130/3588 = 3.623%; Labour Cost = 0.03623 x $511m = $19m, 'Other Operating Expenses' = 0.03623 x $402m = $15m

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

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') = 0.03623 x $479m = $17m

EBIT= EBITDA - DA = $14m - $17m = -$3m

The interest charge against 'Other Revenue' = 0.03623 x [ $36m - $94m ] = -$2m. With a loss there is no tax due. So underlying Net Profit After Tax is:

NPAT = EBIT - I = -$3m-$2m= -$5m

These growth initiatives at Spark sound good and no doubt have future promise. But at this stage in the business cycle, the future growth initiatives are loss making.

SNOOPY

[Snoopy]

Spark has transformed itself into an "end to end digital services company". The aim is to be the number 1 retailer in mobility, data, effortless service and cost. To do this, Spark needs to maintain the lowest cost per Gigabit future proof data network in the country. Spark seek out to understand their customers: feelings, frustrations, aspirations and what drives them to succeed. It is by being a customer-centric business that Spark will know what customers, including small business owners, truly value.

From their telecommunications company ancestry, Spark are good at:

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in business.

Spark are not product designers. So using their networks in partnership with 'internet connectable third party hardware' and/or content is the way Spark see their own business developing. Spark have realigned their 'business units' into 'product classes'.

1/ Mobile: Currently first in 'pay monthly mobile', with 'Spark' and 'Skinny' brands. Data demand is driving growth. Main competitors 'Vodafone' and 'Two Degrees'.
2/ Voice: The legacy voice business. (Market position No.1)
3/ Broadband: Currently largest provider in both fixed fibre and mobile broadband. 80+ competitors in the market, with low barrier to entry.
4/ Cloud Security & Service Management: In the cloud data storage and complimentary security business. Market leader for onshore services.
5/ Procurement & Partners: Buying in third party equipment (e.g. mobile handsets) for resale and third party software services for resale.
6/ Managed data, networks & services: Trading under Spark as well as sub brands:
6a/ 'Leaven' (accelerates cloud and digital adoption, e.g. supporting the technology behind the Covid-19 Tracer App and helping the implementation and operation of the vaccine rollout),
6b/ 'Computer Concepts Limited (CCL)' (e.g. multi-cloud and ICT (Information and Communications Technology) solutions, provided to the NZ Election 2020) and
6c/ 'Digital Island' (e.g. remote contact centre solutions).
7/ Other operating revenues: This includes the future growth categories of
7a/ IoT (Internet of Things),
7b/Digital Health and
7c/ Spark Sport.
These are largely innovative growth areas where it is difficult to measure the current size of the market. I expect 'Spark Sport' is number 2 in that market, behind 'Sky'.

From a revenue perspective Mobile and Broadband, the two largest product categories, make up 55% of all the company's revenue. But Spark are 'at the top' or 'near the top' in in all the markets in which they choose to operate.

Conclusion: Pass Test

[Snoopy]

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)

FY2017: ($396m - 0.72($20m) )/ 1833m = 20.8cps
FY2018: ($365m - 0.72($10m) )/ 1835m = 19.5cps
FY2019: ($409m - 0.72($15m) )/ 1836m = 21.7cps
FY2020: ($427m - 0.72($35m-$2m) - $10m -$7m)/ 1837m = 21.0cps
FY2021: ($384m - 0.72($28m - $16m) ) / 1867m = 20.1cps

Notes

1/ Figures for FY2017 and FY2018 are derived from the re-reported profit figures as as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2017 and FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2017 and FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2017, I have removed the $20m of profit that resulted from the one off sale of surplus land on Mayoral Drive.

3/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

4/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

5/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

6/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

Original Concluding Remarks: Some of the changes in profit from year to year could almost be seen as rounding errors. I don't want to make a judgement just on that. I need to sleep on this result before I decide what to do.

Conclusion: Average normalised earnings over the past five years was 20.6cps. The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. My BT4 test (post 1810 below) has discussed the reduced likelihood of cost cutting in the future being able to maintain profits. My growth initiative research (post 1812) does not give any hint of a significant boost in top line revenue going forwards. Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. There is no clear historical pattern of increasing earnings per share here. Furthermore it looks like increasing 'eps' into the future is going to get harder. For these reasons, I cannot see any reason to overturn the actual 'eps' numbers calculated because of unusual market conditions (e.g. the Covid-19 environment). The numbers do tell the story. The result of this test for Spark is a 'fail'.

SNOOPY

[Biscuit]

.........

Conclusion: Some of the changes in profit from year to year could almost be seen as rounding errors. I don't want to make a judgement just on that. I need to sleep on this result before I decide what to do.

SNOOPY

It looks pretty clear to me Snoopy. They work hard just to stay where they are, they will never go bust but there is no growth there. I hold for diversification and they have been a better investment than Telstra which I also hold.

[Snoopy]

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2017: $382m / $1,601m = 23.9%
FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%

Conclusion: Pass Test

[Snoopy]

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

SNOOPY