Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

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

Thanks very much, and good morning, everyone, and welcome to Aussie Broadband Full Year Results for FY '22. It's been a successful year for the team and for the company, delivering on our growth strategy and reinforcing the strength of the business. Significant milestones have been achieved, and we're very happy with how the company has performed, both operationally and financially over FY '22. Turning to Slide 2 in the pack. Business is undergoing a transformation after the acquisition of Over the Wire. For the past 20 years, Aussie Broadband has been focused on providing broadband, Voice over IP and mobile services to residential customers. And we've been providing the best-in-class technology and world-class customer service. When we acquired Over the Wire, they have been doing a similar thing for the last 15 years and have built strong technology in the business space and have deep capability in data, voice, cloud and managed services with a strong business, enterprise and government focus. Together, we're becoming Aussie 2.0, integrated full-service provider, leading diversified communications and technology company. Moving on to Slide 3, we're a business that has changed, but fundamentally we haven't. We're big, we're bold, and we aim to continue to work to the ethos as we transform to Aussie 2.0. The values that have gotten us to where we are today will continue to lead us forward. By 2025, we want to be Australia's fourth largest provider of communications and technology services. As you can see, we've delivered on our growth strategy in FY '22. Turning to Slide 5. Revenue is up 56% to $546.9 million. EBITDA is up 107% to $39.4 million. Broadband services are up 46% to over 584,000 and 92% (sic) [ 90% ] of the Aussie Fibre Network is now complete. Importantly, our share of NBN services has continued to grow, and our market share in the NBN space is 6.46%, showing that we're taking market share and continue to do so. As you can see from Slide 6, we've continued to deliver strong profitable growth with our EBITDA margin lifting substantially during FY '22. We're evolving into a communications and technology business with scale and national reach as outlined on Slide 7. Each of our divisions are showing great potential for growth and have contributed meaningfully to both EBITDA and revenue over the past year. Our business in wholesale segments are showing the greatest further potential for growth and with Over the Wire now being completed, they've added a large number of wholesale and enterprise, wholesale business and enterprise customers and added a material margin uplift as a result. I'll now hand over to Brian, who will take you through the financial results for the year.

Thanks, Phil. So just now on Slide 9, we will present a summary of the financial performance for the year. You can see there, the strong growth in revenue and earnings generated by the company in FY '22. Residential revenues increased by 36% and the business, 54% Wholesale revenue increased by $24.7 million and Over the Wire has contributed $38.5 million. Importantly, our gross margins have grown as we're a premium player in the market with some limited pricing power and some of the synergies Over the Wire is providing a plant there as well. Employee expenses increased in a rate faster than revenue, partially due to the acquisition Over the Wire and partly due to investments in competencies to support future growth and a challenging labor market. Marketing expenses increased at a lower rate than revenue but still represented an increase year-on-year as we look to meet the developing competitive landscape. We've also experienced some modest operating leverage in administration costs. On the next slide, we present the balance sheet and highlights to call out will be balance sheet position as well increasing plant, equipments and with the acquisition of OTW. Also we've got $30 million of fiber build spend during the year. Significant increase in intangibles, principally arising from the acquisition of Over the Wire. Just a tap on the purchase -- there's deferred tax liability on assets, which is basically driven by the intangibles acquired through Over the Wire. And also a net debt asset loss due to tax losses since we were able to claim full depreciation on those assets -- fiber assets that have been completed and ready to use by 30th June, 2022. Also, importantly, in the financial statements, the client liabilities includes $40 million of debt that we have subsequently extended the tenure since year-end. So that is now maturing in March 2025 rather than December this year. Then on Page 11, just a strong operating cash flow, which is up 49% to $37.8 million, with strong EBITDA to cash conversion. So that's just laid out the financial plans for the year. And now I'll hand back to Phil, to discuss the operational performance.

No worries. Thanks very much, Brian. In line with our Aussie 2.0 strategy, FY '22 saw a rapid growth in business, enterprise and government and wholesale customer segments. So I'll now walk you through each of those. Turning to Slide 13. Our rapidly growing business and enterprise and governance segment now has over 24,000 business and enterprise, government net core band additions in FY '22, resulting in a 68% growth in customers. We now have over 1 million numbers and 120 million units per month on the NetSIP voice platform. And this is very encouraging as the voice component and particularly the Tier 1 voice network we acquired as part of Over the Wire, which is very high-margin business. New and resigned cloud infrastructure agreements and several large local and state government organizations in Queensland have also been signed on to our cloud platform. Our ongoing strategic partnership with NextDC to deliver network hardware and managed services and NextDC is a strategic data center partner hosting a lot of our infrastructure around Australia. Continued growth and focus on industries, including government, education, health and medical and professional services and entry into new industries, including a 3-year deal with Mitsubishi Motors to provide Enterprise Ethernet and Aussie Fibre services around Australia. Moving to Slide 14. You can see rapid growth in our wholesale segment as the business quickly scales. During the year, we developed a new capability to provide white label services and voice services in under 6 months. We now have over 400 managed service providers on our Carbon platform and 250 voice customers on our NetSIP voice platform, both proprietary software that we've developed internally. Moving to Slide 15, you can see the substantial growth we've achieved in the residential business in a highly competitive market. We've managed to continue year-on-year growth in the share of connections and increased our share of gross orders going to NBN from 8% to 9% during the year. In FY '22, our share of orders was steady at 9% despite aggressive pricing behavior in the market, and there's been a number of competitive options out there. And that 9% share equates to around 18,000 orders per month going into the residential segment. Compared to the rest of market, Aussie's share skews more towards the high-speed plans which positions us to a higher profitable product as a result of those and 27% share of super and ultrafast orders with a 20% margin gain compared to the lower speed tier mix, and a 14% share of Home Fast orders, a 6% margin gain compared to 50 and below tiers. Net growth of 28% year-on-year, adding 101,000 (sic) [ 101,524 ] connections in FY '22. Moving on to Slide 16, the mobile segment. We've added over 12,000 mobile additions during the year, up 48% year-on-year. There continues to be an opportunity for sales growing in July -- in June and July, significantly showing an opportunity to upsell within the existing base, but also, more importantly, attracting new customers for a mobile only environment that we can potentially sell broadband services in to. As we move into FY '23, we'll be starting to launch multiproduct bundles, which will further help grow the mobile space. On the Slide 17, the market share chart shows that we're steadily growing towards the 10% market share in NBN services. Stronger brand awareness has led to 8% market share in Victoria and shows what is achievable nationally with further focus on marketing and brand awareness. WA and Australian Capital Territory have also continued to outpace the other states. And these are states where we've never had a presence prior to entering NBN game. Growth opportunities continue into the Northern Territory, New South Wales and South Australia through increased marketing and further word-of-mouth promotions. In terms of our marketing, Aussie is focused on the value proposition and differentiation rather than playing a price game with our marketing efforts, some of the visuals we presented show successful campaigns we've launched capturing the assets while highlighting key points of differentiation. On Slide 19, you'll see the growth in marketing spend. We've increased use of promotions to drive broadband growth and mobile retention. Our customer acquisition cost increased in efficiency by 27% over half 1 in a year-on-year brand -- let's say, year-on-year unprompted brand awareness has grown from 5% to 7%. And prompted brand awareness is growing from 43% to 48% during the year. Turning to Slide 21, we believe it's a simple equation to drive market share growth. Our customer service has to be the best, reflected in our service excellence awards for Customer Service Organization of the Year, 2 years running. Our staff must be highly engaged. 82% of our staff say Aussie is a Great Place to Work. And then this leads to higher customer engagement with Aussie Broadband achieving a very high 8.1 out of 10 customer satisfaction score. Looking at Slide 22, there's a -- you don't have to believe what we say, there's a much higher customer engagement. When you look at what's out there, Roy Morgan has rated Aussie Broadband is Australia's most trusted telco. And this was awarded in the last couple of months, and we're very proud of that. We've also retained very high levels of customer service ratings across a range of different externally reviewed platforms. We're also very proud of the many awards Aussie Broadband has achieved both through this financial year and calling out both our staff, our diversity inclusion and the quality of the products that we bring to market. When we look at churn, our high customer service levels engage customers leads to a lower churn. Churn is, we actually remain steady through the period running at 1.1% and peaks in January and April due to bulk expiry of promotion offices -- promotional offers, relocations and unplanned network outages. Long-term churn rate remains steady, and this is focusing on the residential and business customers again and it excludes wholesale. Ultimately, our innovative products and services are what is leading to growth and our proprietary software, highly engaged team members. As we move forward into 2025 and look at our aspirations, we have a number of pillars for growth. We are aiming to have over 1 million broadband services by 2025, and over 250,000 mobile services and 3 million numbers on the voice network. And as I called out earlier, Net (sic) [NetSIP] voice network is particularly important for margin growth. As we look at the integration of Over the Wire, the key plank for our growth is the acquisition of Over the Wire and the more rapidly -- more rapid entry into the business and enterprise sectors. We've added a range of business services and customers to the network. We've significantly expanded the product offering in business, enterprise and government and wholesale segments. Our revenue synergies are already being recognized with total -- our cost synergies have already been recognized with total annual synergies of $5.2 million. We've commenced the design of fiber builds as well to move customers onto the Aussie Fibre Network and further synergies that can be realized by migrating those services across. We reaffirm our expectation of $8 million to $12 million in annualized cost synergies. If we look at our proprietary software, a lot of investors think that Aussie Broadband is a residential provider and there's so much more than that. We have proprietary software, which is supporting our customer growth retention and profitability, importantly, into the business and enterprise and government segments. Our Carbon product, we have over 400 partners now signed up, including a major corporate customer with over 850 services, not single customer. Carbon will be expanded to include additional products now available in Aussie 2.0 from our portfolio. NetSIP is the backbone of ABB's growth platform, a full carrier interconnect product with Tier 1 connection to other voice carriers in Australia. And this is important because it means those other carriers need to pay us to land services when their customers are calling on to our network. Over 250 partners are using NetSIP with over 120 million minutes routed through the platform each month and growing from there. NetSIP be further integrated with over-the-top software solutions such as Microsoft Teams and Cisco Webex to increase market share. As we continue the fiber build, we have found additional opportunities to unlock further fiber savings in FY '23 and FY '24 as a result of the successful fiber build. Over the 92% of the original fiber build is now complete. $13.5 million year-on savings have been unlocked and the remaining POIs are being migrated to the Aussie network and expected to be completed this quarter. As we look at -- as we continue to look at the further opportunities to expand the fiber network and number of connected buildings, we've identified over 1,000 Over the Wire services and 400 ABB services planned to be migrated to this network. If you turn to Slide 30 and how we think about ESG. Aussie Broadband is on track to be certified B Corp as part of the goal to benchmark ourselves and improve ESG. We've made our first submission for assessment, exceeding the initial threshold to progress further, and we expect the assessment to be completed in the third quarter of FY '23. We're aiming to be in the top 10 B Corps in Australia and that is describing some of the initiatives and results that we've outlined on the slide. When we think about the NBN long-term pricing play in the NBN SAU, we've outlined here what we believe the impacts will be on Aussie Broadband, which is likely to be positive. We continue to work with NBN, the ACCC, the industry to progress this pricing through. Ultimately, CVC is currently plans to be phased out over a 3-year period with expected implementation of the new pricing plans to start in July 2023. As we move to Slide 32 and Aussie Broadband's FY '23 outlook, we've continued to grow over the first 8 weeks of FY '23. Our total net adds, so that's gross sales less churn of 15,332 across the enterprise, business, residential and wholesale segments. And of this 1,572 were higher-margin business and enterprise net adds. While there are several competitive low and low margin offers in the residential market at present, we will not chase growth at any cost and are focused on striking the right balance between margin and customer growth. The customer continues to successfully migrate to higher-value residential customers who prioritize value and customer experience over price whilst also focusing on converting higher-margin business and enterprise customers and growing customers within the company's growing pipeline of new opportunities. The strategy of underpinning the growth over -- in margin over FY '23, will continue to drive the margin growth we expect in FY '23. In terms of FY '23 guidance, based on current marketing conditions, the operating plan and year-to-date trading, Aussie Broadband expects to generate revenue in the range of $800 million to $840 million in FY '23. So planned growth in higher-margin business and enterprise customers with full year benefit Over the Wire is expected to deliver an EBITDA margin, excluding integration costs of circa 10% to 10.5% up from the 7.2% in FY '22. This margin is after additional investment in people, product and the support for longer-term growth. We're focused on growing this business further, and we can see end of the range with different opportunities, and we're continuing to invest in the business, which is partly the reason why our range is reduced for EBITDA margin. With the company currently in the early stages of FY '23, there remains uncertainty around market conditions. And there are a number of additional potential upside opportunities and downside as we've outlined here. There is a lot of opportunity for margin expansion, and we're continuing to invest in the opportunities to grow. We've also provided investors with some detail on what we see as the base drivers for increasing EBITDA and additional upside opportunities for FY '23. In closing, the FY '22 delivered continued growth across all key segments exceeding EBITDA guidance. We're successfully evolving into Aussie 2.0. Our intention is to be Australia's fourth largest provider of communications and technology services. We're rapidly growing the business, enterprise and government and wholesale statements. Our growth is underpinned by an unwavering focus on products, technology and innovation in customer service. We've provided FY '23 guidance for revenue of $800 million to $840 million and continue our growth of EBITDA margin to 10% to 10.5%, up from 7.2% in FY '22. The other thing I'll call out is we're planning to hold an Investor Day on the 5th of October and more details will come out in due course about that. So with that, that completes our presentation today. I'll now hand over to the operator for questions.

[Operator Instructions] Your first question comes from Eric Choi with Barrenjoey.

I might go through my questions one by one, if that's okay. Firstly, so TPG and Telstra have been lifting their NBN prices, but I noticed price increases haven't been caught out as an upside opportunity on Slide 32. So can we assume you've already acted some price increases into your FY '23 base case?

No, there are no price increases factored into our FY '23 base case. We're still considering what our position is on price rises and the effect that they may have in the market. So there's no price rises baked into FY '23 base case.

Awesome. Very helpful. And then secondly, just on gross margins. Excluding OTW, that 27.5 in FY '22. I'm just wondering if this can lift next year again with the fiber backhaul deal. Or do you think CVC is going to be too much of an offset?

Look, certainly, the backhaul deal helps. CVC has got a number of moving parts to it, and we're looking at how we can manage that through with, it's quite well known. We have a technology piece we call CVC bot, which manages our bandwidth purchasing, but we're also working with a couple of other technology vendors to hopefully mitigate too much CVC offset. So at the moment, it's probably too early to call. The technology piece is still going into the network at the moment. But we think that there's still some potential margin improvement there that we can't quantify what it is at this point.

When you say margin improvement, so you're talking gross margin, or you talking improvement on CVC overages?

I'm talking improvement on CVC average here.

Got you. And then the last question, just on net adds, I guess they're on track simplistically for around 23,000 this quarter. Just wondering if you can -- if you think this can accelerate or do we think September is a bit of a seasonally high quarter and maybe you guys don't want to chase unprofitable growth.

Yes. Look, I think doing the numbers straight, I'd probably come up with a number slightly higher than that. For September, if nothing else changed from where it is sort of being, September is not seasonally high. But what we do see is things can move both positively and negatively on a week-by-week basis with the way the market is moving at the moment. So we're certainly trying to grow things further in the quarter. But we're not going into the specifics of what we're doing around that because we know that a bunch of competitors who like to use those same tools as well. But we think there's opportunities there, but it's very much a week by week, month-by-month proposition in how we tackle this growth phase.

I think when you look back at last year, maybe what prompts you think it's seasonal in September because we had a very strong quarter, just last year. And it also correlates with where we had higher cost of acquisition. So we were using a lot of promotions this time last year, which drove that volume up, but then we what we found over the years that, that created some spikes in churn later on when those promotions disappeared. So that's pretty why you see that spike last year. And what we actually think is with some of the offers going around at the moment that those offers expire and competitors potentially provides opportunities for us down the track.

Your next question comes from John Campbell, Jefferies.

Guys, I might do the same as Eric. I've just got a couple of questions. So I'll just ask the first one. Your 1 million broadband subs target for FY '25, is that all organic? And if so, what sort of ramp-up in marketing spend do you think will be required to deliver those sort of pretty impressive numbers?

Look, at the end of the day, we haven't got a hard and fast case on how we would grow that number. We -- the intention is it would be majority organic, but there are a number of smaller ISPs out there and that sort of thing as well that can help us drive to that. So we're not specifically saying it's all organic or specifically saying it's going to be all acquisition. There's a number of levers we can pull over that 3-year horizon to get to where it is. In terms of the marketing spend side of things, we're probably planning to increase marketing spend again into FY '23, not substantially, but it's still an increase over what it was in FY '22.

Okay. And just on those, referencing those smaller ISPs that are out there. And pricing has obviously been pretty expensive, I think, generally speaking in the transactions that have been done by others seem to be expensive on a per sub basis. How are you seeing the sort of M&A opportunity set and whether pricing has become more realistic as markets around the world have sold out pretty heavily?

We're not engaged in any activity in M&A at the moment. So I don't have any sense of where the pricing expectations sit at the moment. But we've always been very conscious of our cost to acquire, whether that be through marketing or whether that be through acquiring businesses. So it would be fair to say that we'll be very prudent in how we acquire customer bases.

Yes. Excellent. Just one last one for me. The additional fiber build-out opportunities that you've called out for FY '23 and '24, can you give us a rough quantification of the dollars we're talking about and whether there's any firm timing around when it's going to be commenced that sort of second wave of fiber rollout?

Yes. Look, the way that we're running this is very much on a -- what we're calling a cost-by-cost basis. What we're doing is effectively designing out customers that are new buyer or each other. When I say new buy within sort of 1 to 2 kilometers and designing out anywhere from sort of 5 to 10 customers at a time and then making a commercial decision on a cluster-by-cluster basis, whether we proceed with that or not. So all of the CapEx is, call it discretionary. It allows us to manage it based on our cash flows and so on and basically do it as it makes sense within the market. So we haven't got a specific figure that we're calling out today around the CapEx element. But it is very much a discretionary case-by-case, project-based spend that we're approaching with as opposed to what we did in the first part where we essentially did the big space to build backlog.

Yes. Got it. Okay. That makes sense. It's going to be sort of more incremental opportunistic where it makes sense.