Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aussie Broadband Limited Fiscal Year '23 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Phillip Britt, Managing Director. Please go ahead.

Thanks very much, and good morning, everyone. Thank you for joining us for the Aussie Broadband FY '23 Results Call. As mentioned, my name is Phillip Britt and I'm the Managing Director of Aussie Broadband. I'm looking forward to sharing with you our great progress we've made over the past year. To begin, I'd like to acknowledge the Aboriginal and Torres Strait Islanders as the First Australians, and for their role as the original communicators, connectors and carers of the lands and waters across Australia. We pay our respects to elders past and present. We commit to working respectfully on our ongoing cultural and spiritual connections between the traditional owners of this country and building an inclusive Australia together. I'm joined today by acting CFO, Gurjit Mann, who will take you through the financial performance for FY '23 as our CFO, Brian Maher, is overseas. I've just returned from 3 months long service leave and Gurjit has been acting CFO during his time as Brian stepped up to be acting CEO whilst I was away. I use this time off to travel and to reflect on the past 20 years since we founded the companies that became Aussie Broadband to recharge my batteries and to follow some of my other passions. This included attending the World Scout Jamboree in Korea as a unit -- volunteer unit leader. I've been asked what's next for me, and I'm committed as ever to see our company succeed, and I'm looking forward to leading us into FY '24 and beyond. The results we're presenting are outstanding and a huge credit to all the team at Aussie. Moving to Page 5 of the deck. In FY '23, we committed to build scale, strengthen our position as a provider of reliable and resilient network infrastructure. We did this by delivering on our commitment to provide quality communication services and exceptional customer experiences to Residential and all other segments. We've grown across all segments, and I'm encouraged by our progress in Business, Enterprise and Government and Wholesale. We leveraged our strategic investment in fiber infrastructure and cutting-edge technology to deliver higher margins and significant cost savings. Looking at Slide 6 with our FY '23 highlights. We delivered strong growth across all the key metrics. Our revenue increased to $788 million, marking as a percentage of growth of 23% on a pro forma basis. Our gross margin increased by 2.1 percentage points reaching 35%. This highlights our focus on efficient and sustainable growth, and we achieved an EBITDA of $89.6 million, increasing by 52% and coming into the top end of the guidance range that we provided. Importantly, our operational cash flow grew by $116.7 million, reflecting a 147% increase from the prior year. The figures underscore our financial strength and show the effectiveness of our operational strategies in a dynamic market. As we continue to grow our nbn market share has risen to 7.6%, up from 6.5% last year. This upward trajectory highlights our consistent efforts to capture opportunities in the competitive landscape. During FY '23, the number of Broadband Connections increased by more than 18% to 690,000 as at 30 June. This reflects the trust our customers place in us and the value our broadband products bring to the market. That growth rate has continued and our connection account as at today is over 715,000. I'll now pass over to our acting CFO, Gurjit Mann, to talk about our financial performance and segment highlights for the year.

Thanks, Phil, and good morning, everyone. I'm pleased to present Aussie Broadband's full year 2023 results. This is a really good set of results, which show outstanding performance across all segments of our business. We have continued to build scale and leverage our network to improve margins and manage our operating expenses to support revenue growth while also investing in systems to support scale going forward. I'll walk you through an overview of our results, followed by a deeper dive into key drivers of growth and segment performance. On Slide 8, we compare Aussie Broadband's profit and loss for FY '23 and FY '22. Important to note here that the FY '22 numbers presented are on a pro forma basis, which is an aggregated view of Aussie Broadband and Over the Wire results. Starting with revenue, we received an impressive 23% growth to $788 million in FY '23. Gross margin increased to over 35%, outpacing revenue growth largely due to network synergies and mix of products sold. EBITDA grew at a faster rate than gross margin, increasing substantially by 52% to $89.6 million, on the back of operating costs, which remained broadly flat as a percentage of revenue at 24%. Net profit after tax and before amortization of acquisition-related intangibles and associated tax savings increased to $37 million from $11 million in the prior period. Looking at the cost drivers. Employee expenses as a percentage of revenue remained broadly flat at just over 15%, albeit growing by 23% to $124 million. This included new roles to support growth and inflationary increase of approximately 5% on price prior year. Marketing cost as a percentage of revenue reduced to 4% from 5% in the prior period. This is driven largely by our focus on targeted campaigns, increased channel efficiency and enhancing conversion rates through our new branding value propositions. Administration costs as a percentage of revenue were just over 4% increasing [ 33.4% ] in the prior period. The increase reflected investment to support growth and investment in systems with an OpEx impact. Moving on to nonrecurring items. This includes one-off integration costs associated with Over the Wire and gain on disposal of Zintel New Zealand and Fonebox, during the year. Lastly, the higher interest rate expense relates to the debt facility used for the acquisition of Over the Wire and reflect the full year impact. On Slide 9, we set out revenue growth drivers on a pro forma basis by segment. Important to note here, in the second half of FY '23, we finalized our segmentation process. Where we redefined our mid-market business customers to E&G to reflect the way we service customers. Going forward, no further changes are anticipated. In the appendix, we set out on a same basis the revenue and connection profile of these segments. We delivered strong growth across all 4 segments with outstanding performance in Residential and Wholesale contributing a combined $135 million growth. We also grew in Business and E&G, accelerating our growth trajectory, albeit from a smaller base. Revenue grew by approximately $6 million in each of these segments. In line with our strategy, these 2 segments generate high margins and play a significant part in Aussie's ambition to deliver diversified revenue. Moving on to Slide 10, we present EBITDA drivers that have contributed to the FY '23 results. As noted, EBITDA increased by $31 million to a record $89.6 million, an outstanding increase of 52%. The key drivers of EBITDA growth was a return generated by our network investments. We understand the value of owning and operating our own infrastructure assets, and investment in previous periods delivered an EBITDA uplift of $20 million. Strong growth across all segments increased EBITDA by a further $14 million, while synergies delivered approximately $5 million improvement. Offsetting this was the impact of inflation on our employee cost base, which reduced EBITDA by $5 million or just over 5% increase in these costs. On Slide 11, we set out the high level cash flow and leverage metrics with the detailed balance sheet and cash flow set out in the appendix. Our cash conversion ratio in FY '23 was an impressive 130%, an increase of 50 percentage points on prior periods. The higher cash conversion was due to improved working capital, driven largely by the change in nbn billing cycle during FY '23 and timing of nbn payments. Pleasingly, our net leverage ratio based on banking covenants was just over 1x and plenty of headroom and interest cover ratio at 9x. Moving on to Slide 12. Our CapEx for FY '23 was $49 million, lower than indicated at the half year due to timing of some of the customer fiber builds. Growth CapEx was approximately $14 million, reflecting an investment in both short-term and long-term growth. Replacement CapEx remains moderate at $10 million per annum, which we anticipate to continue going forward. Fibre Backbone is now complete and added $9 million in FY '23. In FY '24, fibre investment will be driven by customer demand and customer migration of other carriers. We anticipate our FY '24 total CapEx spend to be similar to FY '23. We remain disciplined in our CapEx investment based on returns generated and strategic intent. Turning to segment performance. On Slide 14, we've set out our Residential segment, which continues to deliver sustained growth in a very competitive market. Residential revenue showed strong growth at 23% to $512 million, driven by increased connections and a shift in mix, including fiber connect upgrades. Residential gross margin increased 4 percentage points to 31.2%, reflecting returns on our network investment, effective management of CVC and a focus on more profitable services. We continue to invest in our market-leading customer service and experience. And as a result, customer churn remained stable at an average 1%. Moving to the Business segment on Slide 15. We remain focused on growing this high-margin segment by leveraging our unique customer experience and reputation. Revenue increased 7.3% to just over $89 million, driven by strong momentum in this segment. Gross margin was slightly up at 47%, and customer churn remained stable at an average of 0.6%. We are making good progress in the business segment, and we'll continue to focus on delivering profitable growth as we take advantage of our product portfolio and fiber investments. Turning to Slide 16. In our Enterprise & Government segment, we are increasing market awareness about our E&G capabilities and continue to see upward trajectory in our pipeline for future growth. Total E&G revenue increased 8.5% to just over $86 million. with recurring revenue increasing 9% to $75 million. Gross margin was marginally down to just over 51%. In the E&G space, we continue to invest for future growth. With strong sales momentum in FY '23 with over 800 deals signed. You can see the new names we signed during the year on the page. We continue to see growth in FY '23 on a quarter-on-quarter basis of deals signed and this momentum continues into FY '24. As Phil mentioned at the half year, lead times for E&G pipeline conversion and revenue recognition are typically longer than other segments. This is due to the size of deals and complexities involved with their solutions. Noting this, at 30th of June, E&G had $10 million in annualized reoccurring and $7 million in non-reoccurring revenue side which is yet to be built, positioning E&G well for FY '24. Important to note that the phasing of this revenue recognition will vary into FY '24 as services are commissioned and therefore, the annualized reoccurring run rate will not be entirely recognized in FY '24. Moving on to Slide 17. Our Wholesale segment is made up of white label, managed service providers and voice. Our Wholesale segment has seen strong performance with white label and high-margin voice growth. Revenue grew an impressive 62% to reach over $100 million in FY '23, reflecting strong white label performance, voice and growth in managed service provider customer base. We now have 819 partners onboarded into this channel, setting us up for future growth. Gross margin was slightly up to 32.2%, driven by high-margin voice revenue, which continued to show strong growth in average monthly minutes in FY '23. In summary, this has been an outstanding year. Aussie Broadband delivered strong performance and cash flows in FY '23 and is well positioned to deliver the FY '24 outlook. Our approach to CapEx investment remains disciplined and is based on returns generated. I'll now pass back to Phil who will talk to the operational highlights, outlook and our FY '24 guidance.

Thanks very much, Gurjit, and well done to you and all the team for the preparations that are going into these end of year results. Looking at Slide 19, we've made significant progress on the operational front this year, too. First of all, an update on our acquisition of Over the Wire. The integration of the 2 companies has achieved an exit run rate synergy of $6 million in FY '23. These synergies have been driven by rapid network and voice wins, with streamlining of operations to remove duplication and finding other efficiency gains. The team integration between Aussie Broadband and Over the Wire has now been completed and solid progress has been made on the operational integration too. The development of a systems integration road map is ongoing and consolidation of the 2 networks is due to be completed in FY '24, which will provide further benefits. The remaining work is related to ongoing investment and the migration of customers onto the Aussie fiber network which remains a key focus. Moving to Slide 20. An achievement in FY '23 that we're really proud of is our B Corp certification, which we welcome after 18 months of hard work and data gathering. It's always been in our DNA to be good to people and the community. And this achievement takes all of that foundational work and helps us demonstrate that all profit companies can be good for the planet whilst delivering to shareholders. Part of securing this certification was the inclusion of a purpose statement into our constitution, which states the purpose of the company is to deliver returns to shareholders while having an overall positive impact on society and the environment. This change, together with the stakeholder cause was supported by our shareholders in the 2022 AGM and a vote in favor of almost 96%. We are the largest telco in Australia to be accredited as B Corp and 1 of only 19 telcos in the world, with an overall score of 96.3. We are one of the best-performing B Corp businesses with more than 250 employees in Australia, putting us in the top 6. Underpinning our B Corp certification are our community impact activities. We seek to build and foster strong sustainable communities across Australia. Initiatives through our 1% pledge, ensure that Aussie grows, as Aussie grows, so does our reach and the support that we provide. We have directly and positively impacted 110,000 people through our helping communities connect program, direct charity sponsorships and the small change, big change program. At Aussie, we recognize that we play a vital role in the shaping of the sustainable and equitable future. We've made strong progress towards reaching our -- reducing our carbon footprint during the year. We remain carbon neutral for Scope 1 and 2 emissions and decreased carbon emissions per full-time employee by 26% year-on-year. We've implemented initiatives to reduce our overall footprint including purchasing carbon offset credits, transitioning to green power and working in our supply chain to drive down carbon reduction. Our work towards an equitable future has seen us drive a focused approach on inclusion and diversity, fostering a workplace culture that champions the quality and lives up to our values. Further, our approach to governance has continued to develop. We recognize the importance of protecting confidential and personal information and to that end throughout FY '23, Aussie has continued to strengthen our cybersecurity posture and resiliency. On to Slide 22 and expanding our reach. Our Aussie fiber initiatives has been pivotable to our growth strategy. By the end of FY '23, we've installed over 1,400 kilometers of fiber and had invested a further $19.1 million during the financial year. We've now connected 354 buildings to the Aussie fiber network, a further 1,700 buildings are considered near net and easily able to connect to the Aussie fiber network, supporting sustainable future growth. These investments have greatly expanded our capacity, network resiliency and interconnectivity, providing a solid foundation for future growth opportunities. Our Tier 1 voice network is another cornerstone of our capabilities with an average of 144 million voice minutes per month. There has been a strong 28% increase over the last 12 months. We are now 1 of 6 Tier 1 voice providers through our NetSIP brand, and we are the third largest host of 13 numbers in Australia. Owning and operating this infrastructure allows us to have greater control over the reliability, quality and scalability of our voice services. Looking next to cloud services. We've taken a big step to improve our presence in the cloud domain. The major government clients has been successfully onboarded onto our modernized cloud architecture, and we've engineered a private cloud tailored towards our enterprise and government customers. We've added cloud infrastructure in the data centers in Melbourne and Sydney to enhance our data protection services, which were Brisbane-centric and we've budgeted an additional investment in FY '24 to further expand our cloud capabilities and onboard more customers into the platform. On to Slide 23, and we've maintained our position as the Roy Morgan most trusted Telco and secured 16 awards acknowledging the team's excellence in customer service, technology and innovation. These accolades are underscored by our team's unwavering commitment to our customers, propelling us to consistently exceed customer expectations and drive innovation across our product offerings. None of this would be possible without a highly engaged team. 4 out of every 5 team members say Aussie is a great place to work. Just before we jump into the FY '24 outlook and guidance, I want to share with you some changes to the executive leadership team, which adds further technology and innovation depth together with systems and project management expertise. In May, Anna Clive commenced as Chief Information Officer. Anna brings significant experience to the role having previously been a senior executive at 2 companies, including Thryv. Previously, Anna spent nearly 10 years at Deloitte as a leader in its strategy and operations management consulting practice. In July, Brad Parker joined Aussie Broadband as the new Chief Infrastructure Engineering Officer. Brad joins Aussie Broadband with a wealth of experience and expertise following 20 years as an infrastructure executive in Silicon Valley. He previously held positions at Google, Cisco Systems, Salesforce and Yahoo! As CIEO, Brad will lead the team that delivers our critical technology infrastructure supporting Aussie's exceptional customer experience, technology excellence and ongoing commitment to delivering outstanding solutions for our rapidly growing user base. Co-Founder and Chief Technology Officer, John Reisinger, who has led the infrastructure team to-date, will be transitioning to a new role focused on innovation. John and I have worked together for over 20 years, and we're looking forward to him continuing to lead the technology innovation within the business. After 7 years in various roles at Aussie broadband, Matthew Kusi-Appauh or more efficiently known to us internally as Kusi will step down as Chief Operating Officer at the end of 2023. Planing for over 18 months, this will allow him to pursue his desire to travel extensively. Anna has assumed many of Kusi's key responsibilities as has Jonathan Prosser, who's been with the company for over 12 months now and his remaining duties are being transitioned. While Kusi still has another 4 months to go, I'd like to take this opportunity to thank him for his outstanding commitment and contributions to the company over the past 7 years. As we continue our journey into FY '24, we're excited to build out our momentum to further drive our growth in the nonresidential segments. We're committed to deepening our presence in the business, enterprise and government segments. This will be achieved through a focus on solution selling and providing tailored offerings that meet the unique needs of these segments. By leveraging the trust our customers have in the Aussie Broadband brand, we're also poised to secure wins in the enterprise segment as we are going to increase the marketing spend in this area as well. In the Wholesale segment, voice will continue to be a core pillar as we capture further market share. In line with our commitment to operational excellence, we'll continue to make targeted investments in fiber infrastructure and technology to deliver efficiencies and improve profitability. While we concentrate on expanding our presence in key segments, we're equally dedicated to nurturing our growth in the residential segment. We'll achieve this by investing in our network, ensuring that our services continue to attract new customers. As we look forward into the FY '23 year, there are some upside and downside risks, which we've called out on Page 26 of the presentation. On the upside, we continue momentum across all market segments, manage costs through efficiency initiatives, further improve operating leverage and increase deal volumes in the Enterprise and Government space. We'll be wary of possible continued delays in the nbn SAU implementation, the impacts of the new nbn wholesale pricing regime, continued inflationary pressure on costs and staffing and cost of living pressures for customers. All of these things could impact churn and product mix, although I must hope we've not experienced this to date. Our FY '23 growth trajectory has continued into FY '24. As already mentioned, we are now at 715,000 connections, up from 691,000 at the end of June. We're also adding new customers through deals we're signing in the Enterprise and Government space, and this pipeline continues to grow steadily. Therefore, based on the current market assessment, operating plan, pipeline and trading data, we anticipate an EBITDA result in the range of $100 million to $110 million for FY '24. This is an improvement of 12% to 23% on FY '23 EBITDA result. This projection reflects our confidence in our strategies, marketing position and overall efficiency. In addition to EBITDA guidance, we've also provided CapEx guidance of $47 million to $52 million, and this range is primarily dependent on customer demand for Aussie fiber. We have focused on the organic expansion and are dedicated to leveraging our core competencies and our infrastructure to deliver superior services and capturing opportunities in the market. Should the opportunities arise, we'll consider acquisitions that are aligned with our strategic objectives, that will be thoroughly investigated to ensure they're aligned with our values, goals and long-term vision. Our financial outlook for FY '24 underscores our unwavering dedication to growth and operational excellence. Whilst challenges and uncertainties persist, we're confident in our ability to navigate the evolving landscape and continue our journey towards success. Thank you for your attention and patience as we work through the presentation. We're now happy to address any questions that you may have regarding the results.

[Operator Instructions] Your first question comes from Jonathon Higgins with Unified Capital Partners.

I appreciate the time today and great set of results. Very pleasing to see it coming through particularly the leverage. Just firstly, just a couple of questions just on -- just the E&G segment, and -- this would seem to understand just sort of the nature of the work in that segment, firstly, just from a qualitative point of view. And then you called out the sales momentum increasing. Can you define that $10 million? Is that $10 million of revenue, not TCV? And give us an idea of when that would come on, please?

Yes, that's $10 million of -- thanks, Jonathon, for your questions and great to be on the call again. Yes, the $10 million is annualized revenue, not total contract value. As Gurjit called out, it will come on progressively through FY '24 and naturally, we'll continue to sign more deals as we progress through FY '24 as well. So we don't see it as being the end game for what's going to get at it. It's just really calling out that the time to provision cycles in enterprise are much longer than, obviously, resi and the time to win. So it's all about pipeline and making sure that pipeline is well stacked. But we have a great signed book already basically ready to go as we head into FY '24.

Awesome. And we'll get Unified Capital Partners up there in that presentation next time, Phil, appreciate the service from an IT point of view. Just another one for me. Just on just the CapEx and the cash flows. I mean, the cash flows are a standout, this one's probably more for you Gurjit, just walking towards -- if you could talk towards just the benefit from the nbn? And then secondly, on the CapEx side of things, I think CapEx is coming lower than what we were originally expecting from the half year results. Has that just sort of moved from 1 half to the other based on customer demand, please?

Sorry. Sorry, Jonathon, I think I got dropped out there for a second. On the cash flow side of this, actually, due to the nbn billing cycle change there's approximately a $30 million upside that has come through, and that's what you see through the cash conversion side of things. Our typical cash conversion cycle is around 90% and -- so 90% to 95% side of things. On the CapEx point, there's really just been a disciplined approach to that. And part of that is led by customer demand. So therefore, some of that CapEx is moving into FY '24. And that's really the key driver of the lower CapEx spend in FY '23.

I understand. I appreciate that context. Last one for me and then I'll join the queue. Just on the SAU still, I mean, it's been sort of ongoing for a long period of time. We obviously all like it. I think the last thing I read from the nbn said that they'd be submitting their plan by mid to late August, which we're sort of in that zone at the moment. Usually, it's something that should be coming. Can you just sort of give sort of Aussie's view on the SAU and just potentially how you think it all plays out. We've obviously been through a few iterations, particularly on the 50 meg and sort of various pricing.

Yes. So the nbn has submitted its latest version of it prior to submitting it, they put out many consultations providers where they provided a number of options. Of these option, our preferred option was option 2, which is the option that has actually gone up to the ACCC. There's been some commentary from the ACCC in the last sort of 48 hours that they're quite warm to the proposal and feel that it's addressed a lot of the issues that were there. And so we're growing in confidence now that hopefully this will be approved and implemented by the 1st of December.

Our next question comes from John Campbell with Jefferies.

Just further on the SAU field. So your expectation is implemented by 1 December. And so is there sort of a level of conservatism as to what the financial impact will be on your FY '24 or built into your FY '24 guidance around the new SAU.

Look, our modeling is based on it coming in on the 1st of December, and it's based on where we believe Aussie's reaction will be to that. Obviously, we need to also consider the rest of the market's reaction and how things move with that as well. So there's 2 elements to play into the guidance. One is timing. Does it happen on 1st of December. We think confidence is getting higher with that. The second part is we've estimated what we believe the market's reaction will be for that and build that into our guidance as well. The market might react differently to that in which case we'll look at that at the time with sort of not providing any forward-looking stuff on what our plans and that might be like because we don't want to signal competitors what our reaction will be. But in terms of the timeline part, we're growing in confidence with that.

Okay. And just in terms of the business segment, 7% revenue growth for the full year is obviously the weaker part of the overall segmental results. And sort of SMEs, I guess, we would -- our view would be that that's an area that you should have increasing success in. Now that you've got effectively a full suite of capabilities and approaching the market with 1 voice. So can you just talk a little bit about that sort of relatively low revenue growth so far? And how you -- what's your sort of expectations for -- particularly for SME into '24?

Yes. Look, business is an interesting mix. So business, we've definitely put into the smaller end of the range. Part of that reclassification we did during the year was move out what we call the market sort of part, which was like the top end of business, if you like, actually flipped that over the fence and E&G because we felt that would better manage there. Where we've been getting -- what we sort of find is some businesses, they sign up actually on resi top services and get classified that way and other sign up as Business. So part of what we're doing, if we run business primarily through call centers, we run E&G through business development managers and so on. We're obviously trying to grow all of the segments through over the next 12 months. But I would say the bulk of our energy is going into that E&G space because there's greater margin opportunities there, and we're also seeing greater interest in the multisite business space. So businesses that have 10, 20, 100-plus sites sort of things. And so we rely on business tends to get more of our generalized marketing and focus like what resi does. Where as E&G has a completely different approach to how we tackle it. So it's definitely a focus. Yes, it's one of the lower growth things, but 7% growth is still pretty good by a lot of businesses stance.

And just on E&G, are you getting invited to tender on any say, large opportunities for ASX100 type enterprise levels. Is that where you're -- I mean, I think most of the names that you've listed in terms of wins are obviously good sized corporations, but any particularly large ones?