Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Aussie Broadband Q4 FY '22 ABB quarterly trading update. [Operator Instructions] I would now like to hand the conference over to Mr. Phil Britt, Managing Director. Please go ahead.

Thanks very much, and thanks, everyone, for joining us on this nice and brisk Monday morning, where at least it is in more where I am today. As you have hopefully seen released to the ASX this morning, we've put out our fourth quarter trading release. And so I'll walk you through some of the highlights to that and a little bit of commentary along the way, and then we'll open up for questions at the end of that. So as we called out in the release, we expect to generate EBITDA at the very top end of our guidance range of $38 million to $39 million. And so we're very pleased with this result, includes 3.5 months contribution from Over the Wire as well. So this, yes, really quite pleased with that and certainly being at the very top end of that range. Total broadband services for the quarter increased by 35,882 or 7%, and this included Over the Wire's contribution during the quarter as well. And total broadband services now sit at 584,793, which is up 46% over the financial year. And to grow yet another 46% during this financial year, and compared into a market that's ultimately a churn market these days, there's no sort of headwinds from NBN migration we feel is a great result. Churn in the residential base continued to be at similar levels to what we experienced in the third quarter and additional work is being undertaken to further understand the underlying drivers. There's a number of factors at play here, including large network migrations that are going on in both quarters. So that's where we're migrating our services off, the legacy networks that we've had and on to Aussie fiber and the 100-gig regional backhaul. During the quarter, we also saw increased NBN outages within the NBN network, and so this is outside of Aussie's control as they've been upgrading their own network, and there have also been a number of large-scale weather events. And these -- both the combination of these outages and these weather events, direct a large volume of calls to our call centers, naturally, customers wanting to know what's going on. We've also seen increased offers from competitors in the market trying to buy share through offers that are basically at cost or very close to cost. If we look into the business segment, we're seeing that broadband services are up 68% over the financial year to 59,488 with net additions during the quarter of 3,587. We've now commenced migrating Over the Wire's data and broadband services onto the Aussie network and the migration of the NBN component of these services that will be complete this quarter. White label has continued to perform well, and we've seen 8,201 net additions during the quarter, and this closed out the year with over 60,000 services from just around 2,000 at the beginning of the financial year. And so at the end of -- or at the very beginning of the quarter, we saw the tailwind of origins migrations occur. And so the majority of that 8,201 number is organic growth. Looking at -- to the acquisition that we did 3.5 months ago, it feels a lot longer ago than that now, but we've been starting to unlock a number of revenue synergies from the Over the Wire acquisition, including through cross-selling services between our wholesale and managed service provider partners. This has been great to see because typically, all of these managed service providers and wholesale partners have been data only, whereas Over the Wire had a skew towards voice-based providers. And so there is some crossover between our 2 respective bases, but there is a lot of opportunity for cross-selling here and we're starting to see that flow through. We've also sold a number of local government and larger business solutions using a combination of cloud, voice, data and security services with a mix of technologies from both businesses. And this has been great to see our sales team basically coming together now and working as one and using the full product suite from both organizations. With the Aussie Fibre Project now 90% complete, and whilst we had planned to finish this project by the end of June, a number of weather events made it challenging. The project does remain on budget though, and we're committed to completing this in this quarter now. 105 employees have been migrated, so that's 105 out of 121 employees have now been migrated onto the new network, and this network is a combination of Aussie fiber as well as 100 gig to regional locations, which we use Telstra for those locations. This means the majority of savings are now being realized. The remaining 16 employees are expected to be migrated this quarter, and we're still incurring legacy backhaul charges for those 16 sites. So in terms of looking at that $13.5 million, you won't see the full amount of that flow through this financial year, but you'll see a decent chunk of it. Further opportunities have been identified to grow the Aussie fiber network and the number of connected buildings. These will allow us to unlock further savings by migrating our existing customers from Aussie and Over the Wire off other carriers and onto our own network. The design work is well advanced to take advantage of this opportunity and construction will start in late this quarter. We expect the project will run for the next few years as we migrate it through, and hopefully, we'll see further opportunities as we progress. Integration of Over the Wire is progressing as planned, and our investment case of $8 million to $12 million in synergies remains unchanged. A total of $5.2 million in annualized synergy savings have already been achieved, including synergies related to the migration of Aussie's voice traffic onto the Over the Wire T1 voice network, which has yielded $2.9 million in annualized savings, higher than our original investment case. Moving forward, where we'll be operating as one team, one budget and one dream, ultimately, it will be the last that you hear us talking about Over the Wire as a separate entity and a lot of our teams are now working as one. This includes our sales team, our network teams, and we're starting to progress our operations teams into one team, and this is starting to really unlock the true benefit of what the combination is. Regarding CVC and NBN pricing, Minister of Communications Michelle Rowland has instructed the NBN to withdraw its SAU proposal and reset the process, including a complete wreak into NBN's pricing approach. Minister Rowland has also opened the door to look at NBN's historical costs, including the ICRA, which is a key component that's holding NBN's prices high. We believe that NBN will lodge the replacement SAU within the next week, possibly fortnight, and we'll continue to be a key player in these discussions with the NBN, the ACCC and the wider industry as we've done today. As part of the Minister's instructions, NBN is to put in place interim pricing arrangements from the 1st of December and a final pricing plan in place by the 1st of July 2023. Currently, our existing agreements with NBN will expire at the end of November, hence the reason for this instruction to carry at least the current pricing arrangements forward, but we're hoping that there'll be some relief potentially in the new pricing arrangements. Overall, we're very pleased with the quarter's results and the results that we've achieved this financial year. And I thank all of the Aussie team for their contribution to these results. So with that, I'll open to questions, and we'll go from there.

[Operator Instructions] Your first question comes from Jonathon Higgins with Shaw and Partners.

Just first one off for me. I mean, fourth quarter, there was sort of a significant number of sort of disruptive things that sort of range from weather, obviously, you called out the federal election and the like, and some of the competition. Can you just talk us through what you're seeing on the competitive front? And I think you've sort of commented that it looks like it's improved through July through to date. I mean, obviously, we've seen more telecom CBA, these type of things that at or below cost is well below cost to me. Has some of these things sort of lessened in the first quarter?

Yes. Look, all those offers are still going on in the market. And certainly, when I scroll through my Facebook or LinkedIn or other things, there's no shortage of ads from all the different players. You've got billboards from other major value type competitors in market. So I think the offer component is definitely running hot and continuing to run high into this first quarter. So we're sort of seeing things sort of steady as she goes rather than necessarily increasing during this quarter. And I think these offers are below cost. What we've experienced in past with these is you tend to get your offers that move around these different deals. And so whilst they might buy the customer in the short term, they will then move on to the next offer. So I think as a bit of an industry, we've got to look at how offers are playing into the mix. And Aussie has certainly been a contributor to that in the past but start to go is that something we want to play in moving forward.

Anecdotally, I mean, it looks to me like your marketing has picked up in July from what we saw, probably post sort of June, July. Is that something you guys targeted in line with that sort of the acquisition that you're seeing through the federal election time?

Yes. Look, we're definitely a little bit lower in the fourth quarter. It wasn't significantly lower. It was really just the TV component that came off during the election, and we have ramped hard into this first quarter as well and looking to obviously continue to grow share, the more share you can grow in the first quarter where it carries forward through the financial year. So we're definitely running our marketing strong as we always have. But it's a little bit stronger, perhaps not significantly stronger.

A couple more for me and then I'll join the queue, guys. Just secondly, just on the white label deal. Obviously, the origin agreement there is a highlight. They've got -- they've said some public ambitions outside of you guys to get to a pretty large number, sort of north of where you guys are sitting actually currently at the current time by FY '24. And they're adding sort of -- so in your white label segment, you're adding sort of 30,000 or north of 30,000 a year for them. Can you just give us an idea around just your ambitions for that white label segment and potentially, obviously, that needs to accelerate materially to sort of reach some of the numbers that your partners have been talking towards?

Yes. Look, I can't talk towards their specific ambitions because that's really for them to do. And then the information we do have is sort of more of a commercial and confidence kind of nature. But what I can talk to is that we are continuing to explore other white label opportunities because we see there's a good pathway to grow. We do see them increasing their presence in market and so on, which we see as a positive. But I agree with you, too, they need to get their scopes on if they're going to hit the 600,000.

Great. Last one for me, Phil, I appreciate the time. Just lastly, just on the cross-sell and the opportunity out of Over the Wire, like you've called out distinctly that like you've got this sort of like a bit of the fiber network running around the country. Obviously, you're migrating sort of wholesale networks as alongside sort of broadband connections and the like. You sort of distinctly called out that over time, there's some synergies and higher margins coming through. Can you give us an idea just around what does that mean for you guys? How do you sort of cross-sell? And just also just maybe just expanding the synergies look like they're running quite well at this stage. Is that sort of offsetting some of the inflation in your business?

Yes. So the synergies are definitely running as planned. And the inflationary question, we're definitely not immune to the wage inflation piece that's definitely playing through every layer of our organization with a frontline worker or with part of the senior management team sort of thing. It's definitely playing through, and we'll call out more towards more information around that in the annual results at the end of the period. But yes, ultimately -- I'm sorry, I've lost track of the question. Maybe Brian, he has a bit. Sorry, Jon.

No. Look, it was just in regards to just the cross-sell opportunity. So you're calling out the revenue and margin opportunities. What does it like -- what product segment does that mean? Yes.

Yes. Sorry, Jon. Yes, ultimately, the cross-sell opportunity is if we look at the Aussie fiber specific case, it's about targeting businesses where we already have fiber into those. And so we've actually put on a couple of business development and it is specifically focused on the fiber and that route and what we call the on net or connected buildings. So that's sort of one key element. And then the other component is ultimately the cross-selling other products. So Aussie's business and enterprise customers to date have been very heavily focused towards data or NBN type services whereas the Over the Wire mix gives us cloud security, managed services that we can put into those spaces. Likewise, the Over the Wire base, it's been -- data has been definitely a key mix of what they do, but it's been heavier probably in the ancillary services. And so what we're finding is we're able to get more expanded data opportunities because the price point Aussie enables them to go in at is probably a bit stronger than what they've had today.

Your next question comes from Eric Choi with Barrenjoey.

I have 3 quick ones as well. Firstly, just wondering if your weekly take of new NBN order volumes stayed at that 10% in the fourth quarter? And then secondly, I think this time last year, you provided a July update. Just wondering if you could do the same and particularly interested if churns starting to reduce yet with your additional call center stuff. And then just thirdly, on the CVC overages, just wondering if that was better than expected in the fourth quarter and if that could be the reason why you guys are sort of guiding to the top end of EBITDA guidance now.

No worries. See with the -- taking the 10% of connections during the period, we've seen that sort of level through the quarter and into July as well. With overage, it was actually probably around about the same as what we've experienced before. So it wasn't higher than expected, but wasn't lower, so that wasn't contributing towards the EBITDA result. And the last question...

July update. So we're not giving a specific update on July now, but churn remains an ongoing challenge as we called out in the release, and we're digging into that quite heavily currently.

High level, what's driving that extra million dollars in only small, I guess?

My guess is -- sorry, Phil, there's a range of issues in there. There's a program being run by NBN that we've got pretty good advantage from COTA, too. The marketing spend was probably slightly lower than we expected and probably some of the benefits from our final rollout have been all there, that they don't flow through fully into FY '23 that probably comes a bit faster than we hoped in Q4.

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

I've got a couple of questions. I might fire them off one by one. Just on the 18,000 net residential broadband additions in the quarter, do you expect that quarterly run rate to pick up heading into FY '23 as you ramp up marketing?