Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aussie Broadband Limited half year results. [Operator Instructions] I would now like to hand the conference over to Mr. Phillip Britt, Co-founder and Managing Director. Please go ahead.

Thanks very much. And good morning, everyone, and welcome to Aussie Broadband's FY '23 half year results. My name is Phillip Britt. And with me today is our CFO, Brian Maher. I'd like to begin by acknowledging the traditional owners of the land on which we meet today; and pay my respects to the elders past, present and emerging. I'd also like to acknowledge any Aboriginal or Torres Strait Islander's people whose here today and acknowledge their connection to land, the sea and sky. This morning, I'll take you through the progress of our Aussie 2.0 strategy and the key highlights, including upgrading EBITDA guidance for FY '23. As you'll see, it was another half of strong growth for Aussie, and we've continued to deliver our plan and are very pleased with the company's overall results. Brian will run through the financial detail for the half. And then I'll provide detail on each of the segments before opening up to Q&A. During the half, the team remained focused on delivering our Aussie 2.0 strategy. And that will position the company to be Australia's fourth largest provider of communications and technology services by 2025. We spent a large part of the half setting up the right foundation to unlock the business, enterprise and government opportunity; and we believe we're now in a position to accelerate growth in these 3 segments. Some of our foundational pillars are outlined on Slide 4, and these build the base for our 2025 ambition. We're prioritizing resources in 3 key areas. We've continued to leverage our technology platforms, including infrastructure, systems and fiber network, to lay the foundation for future growth. Specifically, we've been expanding our fiber network, upgrading our voice platforms with additional capability and expanding our cloud capability and infrastructure to take advantage of the move towards a hybrid cloud environment. We've been expanding our team with talented people to help drive our exceptional customer experience and further go to -- expand our go-to-market strategy. And we're continuing to deliver sustainable and profitable growth, leveraging our infrastructure and automation to drive down costs, increase margins across the 4 segments. In Slide 5, we touch on our business model; and how we're now segregating the results and businesses across all key segments, being residential, business, enterprise and government and wholesale. For each segment, Aussie has a dedicated strategy, products and proposition underpinned by our exceptional customer experience, industry-leading technology, owned infrastructure and software platforms. Turning to Slide 6. We continue to scale our business while expanding our product offerings and diversifying earnings. Firstly, we're creating scale through the delivery of a high-speed network, communication services and exceptional customer experience. Secondly, we're leveraging our acquired capability in voice, cloud and security to grow greater market share in the nonresidential segments. And finally, we're continuing to selectively invest in fiber infrastructure and technology that generates high returns while enabling scalability and additional cost efficiencies. I'll now hand over to Brian to talk through our financial and operational highlights.

Thanks, Phil. On Slide 8, you can see that we've continued to grow across all key metrics, noting that the prior year comparisons we used here were calculated by aggregating the first half results of FY '22 of ABB and Over the Wire. And as such, the comparisons on a like-for-like basis removes the inorganic growth benefits arising from the acquisition. And on that basis, revenue is up 27% to $379 million. EBITDA grew impressively by 86% to $41 million. It's also worth noting on a statutory reporting basis the EBITDA for the half exceeding the full year results for FY '22. Gross margin increased by 2.5 percentage points to 34.9%. And operating cash flow was up 35% to almost $31 million. Moving to Slide 9. Our operational highlights show that the number of broadband connections increased by 27% to over 635,000. Importantly, our share of nbn services has grown to just above 7%, showing we continue to win market share with our offerings despite a slowing nbn connection market. Our integration of Over the Wire is progressing well, delivering $6 million in annualized synergies. And we're on track to achieve $8 million to $12 million of synergies annually by FY '25. We expect the synergy benefits experienced in the FY '23 full year to be $5.3 million. With our 1,100 team members, our one team approach of delivering exceptional customer experience across all segments continues to delight our customers. Turning now to Slide 10, you can see how we are evolving into a communications and technology business and making a positive shift from primarily residential nbn to higher-margin segments. This is demonstrated here by the darker green segments of the pie charts. The nonresidential segments contribute only 36% of the group revenue or 45% of the gross margin, and we look forward to increasing that further. Having said that, our residential business remains the [indiscernible]. And we continue to proactively manage its growth strategy, focused principally on broadband and mobile, while diversifying products, revenues and earnings across the other 3 segments. In Slide 11, we outline the key revenue drivers in the first half. On a pro forma basis, FY '22's first half revenue was almost $300 million. Residential had just under $50 million in revenue, against the corresponding period. And the other segments contributed an incremental $31 million, against the same period, predominately through wholesale. In total, an additional 27% of revenue is generated over the prior corresponding period. In Slide 12, we show the key EBITDA drivers for the half as we continued to scale and shift our mix across the segments. On a pro forma basis, FY '22's first half EBITDA was $22 million. Our investment in infrastructure delivered the bulk of $9 million in network savings in the half. Additional $18 million of revenue delivered another $10 million of EBITDA. Acquisition synergies of $2.2 million were experienced in the half, while some of these gains made were in part offset by wage inflation, as we called out at the full year. On Slide 13, looking at CapEx. We provided an indicative CapEx profile at the Investor Day, and Slide 13 provides an update on actual spend for the half being $31.2 million. And indicatively, we expect a full year spend of $55 million. In FY '22, CapEx was dominated by fiber backbone, whereas in FY '23 CapEx has been focused on growth. Recurring CapEx remains modest, largely relating to replacement and upgrades and software, while growth CapEx of $17.5 million related to customer fiber builds, short-term growth related to connection numbers and longer-term investments to provide the base for our future growth. We have a disciplined approach to investing in infrastructure for longer-term growth and are continuing this approach to maximize the benefits to our customers and shareholder returns. Moving on to Slide 14. Operating cash flow continued to grow, with $30.8 million generated in the first half, which represents an EBITDA conversion rate of approximately 75%, a little lower than prior period's principally due to timing of payments and receipts around Christmas. In the half, investing activities were mostly related to growth and fiber CapEx. I'd also like to note the tax payments of $1.4 million are largely recoverable, being payable under the ATO's installment regime. Our installment rate was recently reduced to 0% of revenue. As we head into the second half, disciplined cash management will remain a key focus. I'll now hand over to Phil to take you through our 4 operating segments in more detail.

Thanks, Brian. And turning to Slide 16. In residential, we continue to grow broadband connections and take market share in a slowing nbn connection market. Revenue increased 26% to $243 million, driven by growing connections and a larger share of high-speed plans. We achieved net additions of just over 30,000 services in the first half, which was an excellent result. At the same time, gross margin continued to grow, up 5 percentage points, as the mix of higher-margin customers continued to grow; and as we achieved the scale benefits of the Aussie fiber network, which now underpins our broadband platform. Our customers continued to positively rate us through public feedback and via our voice-of-customer surveys. This remains a key focus as we continue to invest and transform our customer experience. As a result, customer churns remained low at circa 1.2%. Turning to Slide 17 and the business segment. We continue to grow connections and revenues through a broader product offering even in an environment where customers on legacy contracts are renewing and moving to lower-cost nbn solutions, which impacts gross margin. Revenue grew 7% to $50 million, driven by connection growth, both organic and through the Over the Wire acquisition and through additional product offerings. Looking forward, we have -- now have a revised marketing approach focused on a complete portfolio of solutions to grow the small and medium business segment. Turning to Slide 18. The enterprise and government segment provides high-margin value-added solutions with longer-term contracts. Recurring revenue was up 5% to $31.5 million. Nonrecurring revenue was down $1.7 million. As you can see, the revenue base in this segment is modest, but we believe there is a significant upside here as we begin to scale. Broadband and data is the entry product for the segment, which allows us to add higher-margin products like cloud, voice, security and managed services once trust is built with the customer. Broadband accounts for only 35% of the revenue in this segment, with the majority of revenue and margin coming from higher-value services like cloud and voice. If we look at Slide 19 and the wholesale segment. This segment is made up of white label and wholesale voice, resellers and the building block solutions used by our managed service provider partners through our Carbon platform. These services include things like nbn Enterprise Ethernet, Aussie fiber and our NetSIP voice platform. The segment grew, with broadband connections increasing by 147% to over 85,000 services. Revenue grew 129% to $49.4 million, and gross margin more than doubled in the half compared to first half of FY '22. Gross margin percentage moved, reflected a change in product mix. We continued to invest to improve our partnering customer experience in the segment. And the segment is diversified now across a range of customers. Aussie fiber and looking at Slide 20. The growth of our Aussie fiber network has accelerated in the first half. And I'm now pleased to announce that 100% of the core network is now completed, with over 288 buildings connected. A further 73 buildings are currently being [ provisioned ]. And we now have access to over 1,400 nearby buildings that are now within one kilometer of the Aussie network. This is an increase of over 320% on the prior corresponding period. The next phase of the Aussie fiber journey is to migrate over 1,000 enterprise services currently on Aussie -- on other carriers on to the Aussie fiber network. The migration test project is nearly complete, and we plan to commence migrating services at scale in mid-FY '23. Turning to Slide 21. As Brian mentioned earlier, integration of Over the Wire is progressing well and is expected to deliver $5.3 million of synergies in FY '23. This equates to $6 million annualized. We remain on track to deliver our guidance of $8 million to $12 million in synergies by FY '25, gained from efficiencies in our infrastructure and technology. The next phase of synergy realization requires the consolidation of the Over the Wire network into the Aussie network, and this work is planned for FY '24. We don't expect any further synergy realization in FY '23. In addition, we've divested 2 noncore businesses, generating $6.5 million in gross proceeds. In summing up, look. Aussie has had an awesome first half. And we're very, very proud of the performance of the company today. We've delivered strong financial performance with growth across all the key metrics. The Over the Wire acquisition is now embedded into the broader Aussie group and, as we've talked about, delivering $6 million of synergies on a run rate basis and on track to deliver our previous synergy guidance into FY '23. Our investment for future growth continues to be disciplined across infrastructure and customer growth. This has always been the focus of Aussie. And we're continuing to grow in every way we can through a range of different products and services. We now have a diverse product portfolio, with a shift in revenue and earnings mix toward higher-margin products and services that fully support a sustainable growth. And most importantly, our financial performance is on track. Whilst we've revised revenue guidance to be $780 million to $800 million, we're pleased to advise we're upgrading EBITDA guidance to be $85 million to $90 million based on effective CVC management, disciplined staff growth and strong gross margin performance driven by operating leverage now flowing from the scale of our owned infrastructure. That finishes today's formal proceedings. Brian and I will be more than happy to take any questions you might have.

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

Congratulations, Phil and Brian. Good set of results. Just a couple for me. Just firstly, just on the nbn, a big part of your business. They flagged on Friday that -- or sorry. The ACCC flagged via the nbn on Friday that there's potentially a new sort of pricing proposal on the table and that they'd look to -- I think their words would be, "to legislate it ASAP." Can you talk us through what's happening and how that may benefit or affect you guys?

Yes. Look. The currently -- thanks for your questions. So no -- I mean the currently proposed nbn SAU, in its current form, is very positive for Aussie because it skews towards the high-speed tiers. What a lot of the discussion has been to date is more around the 50/20 plans specifically and some of the lower-speed tiers. And there's been a lot of pushback from the larger telcos around improving the price metrics in those lower-speed tiers, and the ACCC seems to be supportive of that. So what -- the ACCC can't do a conditional approval. They can only either accept or reject. And so what they've effectively come out and done is said to nbn, "Hey. If you come back to us with a new proposal that addresses these issues, we promise to turn it around quickly and then try and keep things on track for the 1 July implementation." Effectively, nbn said, "If this is all approved and signed off by the end of March, then I'll commit to having it come in on 1 July," so -- and I see these as a real positive for Aussie. It's not going to get any worse than the current proposal. Anything that comes on the table now is better. And it's really put the message out there that everyone from at least the regulatory sense is on track to get this implemented from the start of July, which means that we'll start to see the benefits flow through in FY '24 for Aussie and other ISPs.

Excellent. Just secondly, just on the guidance, I don't know who's best to sort of knock this one off, but margins have been good in the first half. You're up sort of plus 50 basis points in the half. You've got a few things coming through some -- from some extra savings on the fiber. You've also got the Over the Wire synergies plus sort of broad business growth, so can you just talk us through just what is happening on the margins and just bridge it out a little bit in the second half?

Yes. Look. You're just interested in a guide, Jon. [indiscernible], [ is it ]?

Yes. Look. We are getting really good leverage on basically the benefit of our Aussie fiber network now rolling through. That skew towards the high-speed tiers also helps us in that space. And CVC has remained within sort of our tolerances or probably a little bit better than that, which has helped us as well on the margin front. So there's not a -- not one particular thing you can point to, but ultimately our margin, EBITDA margin, for the first half was around that 10.8 percentage. And if you look at where we're guiding to, you can see that "growing a little bit further" sort of thing. So we obviously get the full effects of the Aussie fiber network flow through into the second half, which helps as well, so it's a combination of those factors which give us confidence in upgrading that EBITDA.

Last one for me, guys, and I'll just join the queue again, but just can you give us an idea on how sort of connections in the broadband market is going through this current half?

Yes. Look. Connections for this half are still chugging along really well. We're seeing consistent sales numbers. Also January was a great month. February has been running on track as well, so connections are running really good. We're seeing good connections coming through from -- in the partner space, through white label and our MSP partners. So we're not seeing any slowdown in connections or anything like that in this -- as we head into the second half.

The next question comes from John Campbell with Jefferies.

Just -- so just a couple of questions. Just can you explain -- you talked a bit about margin, obviously, for H2, but can you just explain -- and apologies if I missed it, but can you just explain the downgrading of revenue for FY '23?

Look. The revenue change in -- for the full year is we haven't quite hit the growth in mobiles that we perhaps would have liked, and that was a main part of that. And effectively the -- yes, that's really the main part. [ Origin is ] the other part. They were a bit slow at the start. And so that's sort of now coming through in the second half, but obviously we don't get the benefit of that coming forward. So the -- they're really the 2 reasons around the revenue side of things. And the normal people's mindsets would be, "Well, that's obviously going to affect your EBITDA," but because we're getting an improvement in margin on the way through, that's why EBITDA is up and revenue is slightly down.

And just further, just on the connections again, connections for the second half. Obviously you've consummated the merger with OTW relatively recently, but you're now approaching the market as one team, one brand. And the new operating model and expanded team are well in place, so I guess the general feeling is there's a huge opportunity for you guys in business. And I mean you obviously say enterprise as well but particularly SME and mid markets. Today, we -- or for reasons I just said, we haven't seen the growth yet, but can we really start to expect that the business [ segment's ] growth will start to accelerate? You'll start to see evidence of that picking up in H2 and then more in FY '24.

I'd probably counteract that we have seen growth in the business segment, albeit not as strong as there is, say, in the residential segment. And where we're putting all of our focus at the moment is predominantly into that E&G segment and the sort of the top end of what we call the business segment market. And ultimately we've rebuilt the entire business sales team within that -- those 2 areas. We've rebuilt the marketing function as well that goes into that. So a lot of what we acquired with Over the Wire was very much sort of an -- a business that grew through inorganic growth, although it was the complete opposite of that of being a business that grows organically typically. And so we've put all of our learnings into that and rebuilding the team. The actual business development team now that underpins the enterprise and government space is significantly larger than what it was before. And ultimately those deal flows come through our pipeline in the E&G space as well. It is growing significantly. And ultimately that pipeline takes a little bit of time to convert. And then once a deal closes, it also takes a bit longer to provision because those deals tend to be not normal nbn sort of sales like they used to. They're the more complex products and so they take a little time to bring the revenue on, but essentially for business and E&G, the last 6 months was all about foundation building and shoring things up around that team. Now that that's done, they're well and surely up and running. And the pipeline and the names that we're talking to now, very large airlines, other bank-type groups, things like that, very encouraging as to what we're seeing in that area.

Okay. And you've -- I mean in that pipeline is you talk about banks, et cetera. Are there any sized customers that you're sort of at this stage precluded from really talking to with credibility? Or do you feel that the entire E&G space is potentially open to you?

Look. Clearly we have access. The levels of customers we are dealing with are in some of the leads we gather in, call it, the ASX top 20 sort of thing, so I don't think there's anyone that we're precluded from dealing with at the moment.

Okay. Just quickly, last question from me. Just in terms of the sort of competitor activity that we've seen over the last 6 months to a year maybe in terms of new entrants in resi broadband and arguably more aggressive discounting and plans, are you seeing any signs of abatement or stabilization in terms of competitor activity?

The first quarter was busy, as we've talked about on previous calls, in terms of competitor activity, but the second quarter was quite subdued. And we've seen that flow into this financial year as well. I think there's a lot of pressure going on at that low-price-point end of the market, but in the area that Aussie typically plays in, we're not seeing that pressure as much, so we're quite comfortable that we're continuing to add the same sort of net adds that we've done for the last sort of 6, 7 quarters in those spaces. And so we're pretty comfortable with that.

The next question comes from Ian Munro with Ord Minnett.

Just looking at the enterprise segment and your comments around you build for scale, just in terms of customers won during the first half, can you give us a sense of whether there's much contribution from incremental new customers in the numbers? And then secondly, how does the CapEx profile -- you've highlighted some extensive spending into growth and fiber. How does that tie in with the E&G strategy? And what's a reasonable time frame to expect to see some runs on the board there?