Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Aussie Broadband HY '22 Half Year Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Phillip Britt, Managing Director. Please go ahead.

Thank you. And thanks, everyone for joining us today for our first half results for FY '22. We've got a number of highlights that we want to sort of walk through today. But the first one I'll share with you is a new office and call center in Perth. This location just outside the CBD of Perth has allowed us to bring on, we've got nearly 90 team members there now. And this is allowing us to basically start doing a bit more follow of the sun style support and so on with the time difference, they're really helping. So it's proven primarily our customer service team. And now we've got operations based on east coast of Australia and west coast of Australia as well as a warehousing operation there, which is a way on us to work through some of the COVID challenges by when our team have been affected by COVID. In Victoria, we've been able to do dispatch and so on in our Perth, so little image there of the office in effect, but it's one we thought we'd start out on. If we look over the last 6 months, it's been a great another 6 months for Aussie. We've seen a big jump in revenues, so $229.3 million revenue for the first half, up 46% on the prior corresponding period. $9.1 million EBITDA result before transaction costs, so up 7% on the prior period. Just shy of 0.5 million broadband subscribers, so 494,803, and that's up 45% from December last year as well. And that gives us a market share of 5.66% of the NBN market. And that's up from 4.23% last year. So we're well on the way to our aspirational target of around 10% market share in the NBN space. Mobiles [ clicked ] quite a lot in last 12 months, up 70% to 32,000 odd services. And businesses also performed very well during the period with 45,000 odd services, up 67% over the previous period. Some of the other successes for the half. We're awarded the customer service organization of the year again. So this is our second year running with this. This is a major customer service awards that covers a whole range of industries, not just the telco industry. And so we're very proud of that one. We had a successful capital raise which many of you participated in, so raised $134 million less costs. We got our white label migrations going for Origin. So this was a big part of onboarding Origin during the period. So we managed to migrate 8,725 services during the half. Our customer surveys remained steady at 8.2% -- sorry, 8.2 out of a 100 (sic) [ 10 ]. And our fiber network of moving as well with now 63 POIs connected to data centers. And that continues to go up quite a bit week on week. And we'll have a large part of it finished by the end of March. And we saw a 29% increase in our team during the period. So we now have 733 team members scattered all over Australia, both working from our offices and also working from home as well. We drill into a bit of this. We had a broadband segment that has continued to run strong. As I said, we added 50 -- market share is now 5.66%. And we added around 58,000 residential additions for the half, 10,000 business additions and 25,000 odd wholesale and white label services. So the majority of that sell Origin and white label agreement, and that's continuing to climb quite dramatically. So if we look at the charts that we've presented in the pack there, quite a jump in that business, wholesale space. Customer churn through the period also remained fairly steady. Couple of spikes there mainly related to when different promotions finished and so on. And then we did some transitioning of our promotions from typically at what we call X off for 6 months. So let's say the $10 off or $20 off for 6 months. So more moving to first month free, which has the promo hits in that first month, but we find that the customer tends to be a bit stickier rather than at the end of that 6 month period. They're finding their prices going up. So we've used that a bit more during the period, focus on fast, which was an NBN promotion also played a little bit through that churn period as well. If we dive into the mobile services side of things, steady growth there in that. And in a period where we were migrating our existing base from the Telstra mobile network to the Optus mobile network. So we picked up around about 20,000 customers and migrated those which involves sending new SIM cards to every customer, getting them to transition. And part of the way that we did that was we provided a 2 month free offer to all customers that were transitioning. And this allowed them to try the service, obviously, with the 2 months free, and the vast majority of those services have stuck through the period. We also started a range of new promotions for existing and new customers and offered them the 2 months free as well through that period. And so that's helped to continue to drive mobile, perhaps not as strong as we would have liked, but we're hoping to drive that further as we head into the next half. We look at Voice & Fetch. Voice has been quite steady and continues to grow. A lot of the growth is in the business segment here. And this is in space of hosted phone systems or what we call hosted PABX. And existing customers like as in -- sorry, residential customers still migrate their services as well during that, although we're finding now they're starting to go more to mobile only type services rather than necessarily voice. So voice is a steady as she goes type product, but a very high margin product and about to become higher margin as we complete the Over the Wire acquisition. And I'll talk a bit more about that later. Fetch, we're finding has been pretty slow growth, particularly in the second quarter through the period. And so we're looking at other ways to sort of attack this streaming type space. If we look at our marketing and promotion expenses during the period, our marketing expense was actually down slightly on the previous half. So not the prior corresponding period, but half to FY '21. But the promotional cost side of things were up quite a lot, which we called out in our quarterly update. So our promotional costs were $8 million for the half. And they were up from the prior period, the second half period by around $4.5 million. Now some of those promotions were related to the mobile retention plans that we did during the period. Some of it also related to drawing broadband higher. We've provided the chart there sort of indicating where we feel that the total acquisition costs will be over the next 6 months, where we're planning to tail back to promotions and use them on specific product lines and mainly focused on higher speed broadband cheese. We've already done that in January and February. And we're finding that we're able to keep similar customer number growth, but with lower promotional spend. So we expect that will drop in the next 6 months. If we look at our customer & team side of things, our reviews are remaining solid. And our customer services is doing its work. And the team have won a number of awards during the period. So as I mentioned earlier, the Australian Service Excellence Awards, Great Places To Work certified this year, first time actually being certified. Reader's Digest has called us out. And so internet, their internet service provider winner, winner of the Diversity Inclusion Awards, the ACOMMS this year and ProductReview again this year. We started to do a lot more in the ESG space. And we've taken the steps, the first steps to become a certified B Corporation. It allows us to benchmark ourselves and improve our ESG practices. So we've launched our first report, if you like with B-Corp, and we're waiting for their formal assessment to be completed on those. And we expect that will be finished in the next sort of 6 to 9 months. So we're hoping that by the time we get to our annual report stage, we'll be able to report back on this and where we're at. And this ties in with everything that we're doing in the community and the way that we run the organization. So with that, I'll hand over to Brian Maher, who is our Chief Financial Officer, and he'll run through the financial results.

Thanks, Phil, and thanks for joining us today. Just to touch on some of the key elements of our financial performance for the first half of the year. So revenue -- reported revenues grown by 46% versus the same period last year. And that's driven largely by organic volume growth and enhanced by our new white label contract. And that -- but that's after netting off a [ truly ] increasing [ merchant ] discounts that Phil touched on previously. Gross margins held up reasonably well in year-on-year, despite the impacts of lockdowns in the first quarter. And as Phil himself touched on, our marketing investments continued at the similar rate to the second half of last year, but significantly higher than the corresponding period in FY '21. Including that number is as we make a contribution to the startup of the white label arrangement to help that kind of great start in the market, which has been successful. And that's, so that was a commitment we made for the first 6 months on that contract. Employee and admin costs broadly aligning with revenue. This is probably a slightly higher percentage of employer costs, as we've invested particularly in middle management to support our businesses through significant growth. Depreciation & amortization, obviously increasing rapidly with the increased investment in our fiber network and other network asset. In terms of the balance sheet position, so obviously, it's very strong cash position boosted by the share placement and share purchase plan. And then obviously we used in part towards the Over the Wire acquisition. Trade debtors have increased by less than revenues increase. So we had some COVID challenges last year with credit control, and they've now been resolved. And we are managing our debtor balances very well currently. And then property, plant and equipments has increased as the fiber network has rolled out, as we touched on before. And we've got increased lease liabilities with a large network equipment that we lease and some right of use assets, and 2 new office locations that add to that liability. In terms of cash flow. So customer receipts and supplier payments are broadly in line with revenue growth. And because strong correlation between the EBITDA and cash flow. PPE spend is significant with the final build. And then we've got the equity proceeds and of costs flowing in as well. And so when we look over the recent trends, you'd see that the growth in revenue continues, that residential revenue excluding hardware increased by 44%. Business revenue 68%. Also revenue is a new segment we've introduced. Now that we've got the white label contract, it has become material. And so we disclosed that for the first time. And then and hardware revenue, which is a relatively small portion of the overall revenue. That's fallen by 7% year-on-year, due to the lower proportion of new business being first time NBN connects, and therefore not fewer customers requiring new routers when they join us. On the EBITDA side. EBITDA is 7% higher than prior period, our corresponding period but 15% lower than the second half of last year. And that's principally due to 2 factors: one, the impact of lockdowns through July and October driving higher CVC and other network costs. And then also, as we've touched on increased use of promotions and free month offers for broadband and mobile. And that impacts short term EBITDA, but has fueled better than anticipated volume growth. So now I'll just pass back to Phillip.

No worries. Thanks, Brian. So as we sort of look ahead and what's coming up for the next 6 months. You've heard me say it many times before, but I'll repeat it again. We're completing the fiber build. We're now on the homestretch. And as at the time of this report, there's now 75 sites that are complete, up from 63 that were complete at the end of December, and we expect to complete another 21 sites between now and the end of March. So things are well and truly on the home straight. Once the fiber is into the actual POIs, we then have to transfer our network on to using it. And so we've transferred 31 POIs now over to the network. And that means that we'll be able to start realizing savings from the 1st of March. So under our agreement with Telstra, who currently provides the backhaul to these sites, we're able to start canceling those services from the 1st of March which we have now placed a number of cancellation orders. So we'll start to see those benefits flow through and we'll get the -- get them all cut over by the end of the financial year is the plan. To recap, there'll be over 1,200 kilometers of Aussie owned fiber that's in the ground. It's a very large fiber network. It's unique in a lot of ways in that it's been built, specifically to cover the POIs. And it's been built specifically with redundancy for the POIs. From day 1, there's not another network I can think of that's actually quite designed like this because of the way that we've built it. The other advantage of this is that we're able to directly connect businesses on the fiber out. And we're doing that, and we'll continue to do that so there's specifically when the Over the Wire transaction completes, we'll then start a process to transfer their customers and the Aussie Broadband business customers that we have on to our fiber network. So this is going to be a key asset moving forward for the organization, and really allow us to change our margins as we move forward over the next 12, 18 months. So Over the Wire. As I said, Over the Wire will -- if the transaction completes and on the later this week, on the 24th of February, the Over the Wire shareholders will buy them in transaction. And if it completes, we had significant product and skill capability, accelerate our growth into the business and wholesale segments. I just want to recap some of the Over the Wire elements, and what it brings to the group should it complete. Over the Wire's business, it's growing primarily through acquisition over the years, and has a number of unique sort of elements to it. The business is sort of built around 3 core pillars being cloud, connect and collaborate. And cloud and collaborate are probably 2 of the key components that have attracted us to the business as well as the security piece. So we intend to carry forward and grow and further develop the cloud piece. So their cloud offering is primarily pitched and targeted towards large government entities today and large businesses. We believe that there's elements in there that we can bring down to small business, but also further expanding to the larger government segments that Aussie already operates in, but doesn't provide cloud solutions in. The collaborate side of things covers all the voice side of things. One of the key synergy elements and one of the quick wins Aussie will get is transferring its voice business on to the Over the Wire voice network. There's a couple of million dollars a year just purely in that component. And that voice business, particularly in the wholesale space has been growing quite rapidly, which is really positive. And then the security piece. We've got the connects element well and truly covered in Aussie. But adding that security piece to it is another key element. So ultimately, they are the things that attracted us to Over the Wire. If we sort of compare the 2 companies, we've provided some sort of side by side comparisons in the side packs and so on. But I'll just call out some of the key highlights. Obviously, Aussie has the large NBN network to all 121 POIs. Today Over the Wire purchases their NBN through Aussie and a couple of other NBN resellers. So they will obviously all come onto the Aussie network. We've got the fiber network and a good strong data center presence. Over the Wire is very strong in the voice space. And they're obviously strong in the cloud and security space, which we really don't have offerings in today. The breadth of the 2 organizations will have large customer base now both in resi, business and wholesale, that we'll be able to target moving forward in a team of roughly over 1000 people. And ultimately going to market, we'll have 4 key, I guess, sales teams that are focused. So residential as Aussie does today appeals to the premium end of the market, so roughly half the NBN market out there. And that's a comprehensive offering. The business space, which is -- this is primarily small and medium, single side businesses, of which there's about 2.3 million of them nationally. And so that will be a product set that's focused on broadband hosted phone, mobile managed WiFi and security with a premium support that will be operating 24/7. In the enterprise space, this is focused on large multi-site businesses, government customers and so on that have complex and tailored needs. And this is something that Over the Wire has really excelled in and Aussie has started to make some traction into in particularly the data space. Adding the full products, it will really help fill this segment out and grow and we feel that we've got the sales generation machine that can really drive both of these business segments forward. And then the other space is the wholesale, MSP and white label. So Over the Wire has got a strong reseller channel as well as a wholesale channel invoice. Aussie has got a strong MSP channel through Carbon and the services that our MSP partners provide and will harmonize the product sets and move those into common platforms, so that our respective wholesale and MSP customers can access all the product sets. And then the white label offering to 1 customer today with Origin, but we're actively working on other customers that can fill in that white label space. So if we look forward to the second half outlook, January was a record month for broadband sales and February has continued to be strong. And on a sales per day basis has been stronger than January. So we expect the total numbers will be about the same as January, but given February is a much shorter month, that's been a great outcome. The white label migrations recommenced in mid-January and are now largely complete. As at the end of this week, there will be about 1,500 left to go, and we'll pop those up over the next few weeks. As I mentioned earlier, the Over the Wire shareholders vote on the 24th of February. Assuming that they approve the deal, it will go back to the federal court on the 3rd of March. And then we'll be pretty much all systems go shortly after that, hopefully. In terms of our EBITDA guidance, which we provided in our quarterly results, a range of $27 million to $30 million, excluding any transaction costs or contributions from Over the Wire. And that will be driven largely by bringing down the promotion costs that we talked about. And basically, our other costs being a lower percentage of revenue. And we also provided a connections guidance range there of 85,000 to 95,000 for the half and getting us to a total in the range of 580,000 to 590,000 services. And we'll provide another update. Our next quarterly will be due sort of late -- sorry, late March, and we'll provide an update on how we're tracking into that connections guidance from there. So with that, we'll hand over to questions. We'll start with the voice questions first over the phone. And then after that, we'll move to the web questions. So thanks, operator.

[Operator Instructions] Your first question comes from Lachlan Brown from Credit Suisse.

Phil, Brian, I've just got 3 questions. Firstly, on the wholesale business. I can see gross profit margin was delivered above that of the residential segment in the period. Can you just talk about what that's driven by? For example, is that the variable CVC expense in the period? Or is that driven by MVNO services and hardware that's in residential? I guess I'm just trying to understand if we should see structurally higher gross margins going forward. And on that, if you can provide any color, it would be great. But can we expect the wholesale segment to be EBITDA positive in the second half or into FY '23? Secondly, just on the dark fiber rollout, I believe it was expected to be a $67 million project. I just want to confirm that they still holds. And then lastly, on the review of the special access undertaking variation with NBN submission expected by the end of the month. I appreciate there might not be a whole lot of color you can provide. But as your expectations on the outcome changed at all since the second quarter trading update, I guess what I'm referring to is their recent press reports with [indiscernible] has mentioned it might not be in the best commercially viable option to recover the full amount of the ICRA. Do you think there's a scenario where you could see material lower wholesale access costs?

Do you want to take the last one first, Phil?

Yes, sounds good. So with the SAU side of things, correct, they're due to launch that in the next week or 2. We don't have any visibility other than we're not expecting it to be materially different to what's already been reported in the media, which is at the CVC side of things, the relief, as in no CVC will quite a 100 meg and above tiers, but CVC will still apply to 50 and below tiers. I'm truly on the record of saying that we don't feel that that's the appropriate response. And I was pleased to see [indiscernible] comments around that NBN. That shouldn't recover the fully credits there. So this has been, I guess, the [indiscernible] contention between RSPs and NBN. And it's good to see that the agencies voicing that same opinion, I guess. But other than that, we don't have any insights as to where it will go next. But hopefully, in a positive way for RSPs based on that commentary. Do you want to handle the margin ones, Brian?

Yes, sure. So I'm not sure of the wholesale [indiscernible] is particularly different from the others, but it does have -- the [indiscernible] does have a slightly lower usage profile, so it is not quite the same CVC impact. The other point I was making, so looking at the segments is that we only run one network. We don't run a wholesale network, a business network and a residential network. So there's an allocation methodology of costing to those into that segments that does make some of these analysis a little bit challenging, but I'll leave that one there. In terms of second half wholesale EBITDA, we're not providing any guidance on individual segment EBITDAs for the second half. So what we will have is the agreement to support the marketing effort on wholesale is -- it's passing in January. So that marketing expense line will not continue unless we see a benefit in doing so in concert with our partner. And then your other question about the CapEx on the fiber network. So the $67 million was in 2 tranches. Both -- 52, which for the -- what we call the backbone or the core network and the balance was for demand-driven customer lengths. So we build the core fiber network around the CBDs and acting to the suburbs. And then if we find customers who went to [indiscernible] CapEx seem to take links off the backbone to the customer. So when we look at the core bill, the $52 million, that's going to -- that build will come in on time and on budget.

Your next question comes from Ian Munro from Ord.

And just a couple of questions, please. Just the first one with respect to residential gross profit. Bringing back the promotional adjustments, GP looks like it was sort of steady second half -- on some of first half this year making allowances for the CVC cost. Can you perhaps give us a sense for the trend of GPs in residential? And I guess what I'm really trying to ask is what's been the churn profile of the customers that you've offered the 1- or 2-month promotions to post that promotional period running off?

Yes. So the trend -- I mean, it can't be -- the GP can bounce around a little, but and you'll have it in CVC around different times of the year and things like that. So broadly, we see as the underlying margin seems to be fairly steady, but we do have going into FY '23, the benefits of the fiber network to factor in. Albeit that CVC continues to grow over time due to the 20% to 25% increase in utilization year-on-year we experienced offset by that we've been increasing inclusions on May 1, but that's the end of the sort of documented mitigations to CVC going forward. So obviously, we continue to put pressure on one, to provide litigation and by life inclusion increases, but more fundamentally, that the CVC's construct is radically changed, is not eliminated. In terms of the churn profile, I think we do get -- as we said before, we do get some spikes in the churn profile. Largely, we have got a slight tick up in December, January, which we think was a function of the end of the focus on fast campaign that NBN introduced, which sort of ended in around July. So we're just seeing the tail end that was 6 month offers. There they would see the tail end of that. In terms of the free months versus the X offs some, whether that's a different churn profile, we don't -- we can -- it's still fairly early in that journey. What -- I mean, it's a thesis, and it's what I'd say is that when you've got X off for 6 months, you get that sort of surprise at the end of the 6 months in your bill going up and that going to create some agitation in the customer base whereas where you offered free month. You get free month upfront, and then you don't get that future build change that may come as a bit of a surprise. So as I said, that's just a thesis. We don't think it's too early to know whether those customers are any more sticky or less sticky than anybody else at this stage.

And just as a follow-up, perhaps on this margin discussion. Obviously, the business margins are really strong and overall EBITDA performance well up on PCP. Can you perhaps comment on the role of enterprise -- all these enterprise customers within that business mix and what that played in EBITDA?

What do you -- Phil, that one?

Yes. Look, it's enterprise Ethernet has run strong through the period. And that does run a higher margin in that product. But I think we've also started to see a lot more voice come into the mix as well, which again is a high-margin product. So I think it really is a combination of factors. We don't really split the business and enterprise separately at the moment. But this business in general has been performing well, and then combination through call center and medians. So I think as we start, what we're surmising, I guess, with the Over the Wire acquisition is and having access to a much range of products, a much larger product set that will help to further grow margins in that space and obviously, revenue as well.

And just with respect to the cash balance might be one back to Brian, but net cash, obviously, very healthy at the end of December. Can you perhaps comment on sort of whether that level has been maintained post balance there? Just starting to thinking about the cash component of the OTW acquisition.

Yes. There's been a small depletion of the cash balance due to the fiber build, but it's still -- yes, comfortably where we -- comfortable within the range we expected it to be at this point prior to the elections of the Over the Wire shareholders, and ultimately where we end up in terms of the cash requirements from the business for that transaction.