Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Aussie Broadband Limited First Half Fiscal Year 2024 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Phillip Britt, Managing Director. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to Aussie Broadband's first half FY '24 results call. My name is Phillip Britt, and I'm the Managing Director of Aussie Broadband. And with me today we have our CFO, Brian Maher. As you can see, Aussie delivered a cracking result for the first half and the company continues to demonstrate why we're one of Australia's leading communications and technology services providers. Before we start the results and move to Q&A, I'd like to begin by acknowledging the Aboriginal and Torres Strait Islanders as the first Australians, and their role as original communicators, connectors, and carers of the lands and waters across Australia. We pay our respects to their elders, past and present. We commit to working respectively to honor their ongoing cultural and spiritual connections between the traditional owners of this country and building an inclusive Australia together. When setting our strategy, we use a cascade model which allows the leadership team to set a compelling vision for the future. We call this our game worth playing. We then imagine ourselves standing in that future and looking back at the actions and targets we've taken to get there. We use the word game deliberately when we're referring to our strategy and our breakthrough targets. This fits with 20 years of Aussie being a gamechanger and our 'have fun' value. But it also sets a broader context that we play hard, and we don't think of performance as a 'right or wrong' situation. This is not about short-term objectives, or copying our competitors. It's about building the base for our 2025 ambition to have 1 million broadband services. Moving to slide 5 of the deck. As the Aussie team focused on delivering the FY '24 strategy in the first half, we continued to build scale, growing our NBN share to 8.3%. Underpinning this growth is our exceptional team and their ability to think big, their dedication to customer experience, and our resilient network infrastructure. With the NBN SAU changes coming into effect on December 1, 2023, we implemented a range of promotional activities, which we believe will allow Aussie to capitalize on the introduced changes into the second half of FY '24. As a result, we expect to see margins in the Residential and Business segments improve as this financial year progresses and into the future. We are also confident with the sales momentum we are seeing in the E&G segment and that of the business segment. And despite a modest dip in recurring revenue when compared to the second half of last year, the sales pipeline that we discussed in June 2023 remains on track. Aussie investors once again demonstrated their faith and confidence in our strategy and future potential by strongly supporting our successful AUD 140 million capital raising that strengthened our balance sheet and provided capital for future potential M&A opportunities. Our decision to acquire Symbio in the first half demonstrates our commitment to diversifying the business across its key segments. We are very excited with how well Symbio complements our existing offering. Turning to Slide 6 and the numbers that matter from the first half. We are very happy to report double-digit revenue and EBITDA growth when compared to the prior corresponding period. During the first half, we repriced all our customers following the introduction of the NBN SAU. We've now been through the impact of that, including elevated churn. Despite this, we delivered net connection growth higher than our previous 2 halves. We now have the benefit of all our customers being on the new plans. The first half saw revenue grow by just under 18% to AUD 446 million and EBITDA grew by 13% to just over AUD 46 million. Importantly, operational cash flow jumped 58% to AUD 41 million, reflecting the strong underlying performance of the business. Overall, gross margins increased to AUD 154 million, up 17% on the prior corresponding period. Across the Residential and Business segments, margins were impacted by unfavorable mobile data charges. Residential margins were also influenced by a period of intense promotional activity around the SAU changes. Gross margins in the E&G and Wholesale segments increased, and Brian will provide more detail later. Meanwhile, our NBN market share rose by 1.3 percentage points to 8.3%. This successfully continues the growth trajectory and reflects our consistent efforts to successfully capture market share in a competitive environment. Pleasingly, the number of broadband connections continued to increase during the first half. While they increased 11% from the second half of FY '23, they jumped approximately 21% compared to the first half of FY '23. This was achieved through increased marketing and promotion activities and a campaign specifically designed to offset any increased churn and take advantage of increased buying activity in market following the NBN SAU price changes. Since the move to the new pricing, 69% of new customers are signing up on higher-speed tiers, meaning 100 megabits and above. The outcome is something we are very proud of as we head towards our 2025 goal of 1 million broadband services. Our increasing marketing activity has continued into the second half of this year. I'll now hand over to our Brian Maher, our Chief Financial Officer, to present our financial performance and segment highlights for the first half.

Thanks, Phil, and good morning, everyone. I am pleased to present Aussie Broadband's financial results for the 6 months ended 31 December 2023. I'll take you through an overview of our results, followed by a deeper dive into key drivers of growth and segment performance. The business is clearly building momentum and the results for the first half largely reflect this as we continued to build scale and deliver growth in revenue, earnings, and cash flows. Turning to Slide 8, we provide a breakdown by business segments of the revenue growth between the first half of FY '23 and the first half of FY '24. The chart illustrates the strong growth we achieved across the majority of segments. While Residential and Wholesale revenue growth were standouts, the Enterprise & Government segment was impacted by reduced one-off revenue. We were particularly pleased with the growth in the Residential segment, which exceeded our expectations. Looking at Slide 9. We present EBITDA drivers that have contributed to our first half FY '24 EBITDA results. Overall, EBITDA increased by AUD 5 million on the prior corresponding period to just over AUD 46 million. The key driver of EBITDA growth is the uplift in revenue of AUD 67 million which delivered an estimated incremental EBITDA of AUD 10 million. This gain was in part offset by higher marketing expenses. This increased investment was reflective of a number of strategies: firstly, a proactive investment in retail marketing in anticipation of the changing competitive environment relating to the SAU changes which were introduced in December 2023; secondly, we expanded our Business and Enterprise and Government marketing activities, continuing to establish the ABB brand in those sectors; and finally, a dedicated mobile marketing strategy was developed and implemented. The effects of wage inflation on our employees' salaries impacted EBITDA by AUD 2.5 million, an increase of almost 5%. And there's been modest leverage achieved in administration costs in the first half of the year. Moving to Slide 10. Reflecting the strong underlying performance of the business, operational cashflow increased AUD 15 million, or 58%, to just under AUD 41 million. This helped consolidate our strong cash position which increased AUD 42 million to AUD 117 million in the first half. There is a 20 percentage point increase in our cash conversion ratio, which at the end of the half was close to 95%, but this was attributable to timing issues called out in last year's equivalent result. At 31 December, we had net cash of AUD 73 million after using some of the funds raised in the placement and share purchase plan to reduce debt in the short term. This was undertaken on the basis that no M&A outflows were expected in the early part of 2024, and we therefore, took the opportunity to mitigate our interest cost exposure in advance of the new syndicated debt facility for the Symbio acquisition. Our interest cover ratio at the end of the period was a comfortable 9.9x. Slide 11 details the reduction in CapEx in the first half of FY '24 to AUD 16 million. We take a very disciplined approach to CapEx, and following a rigorous assessment of the program of work, it was determined that new phasing could be implemented, which resulted in a reduced CapEx spend against previous guidance. Due to the lower CapEx in the half, we have reduced Aussie Broadband's CapEx guidance for FY '24 from a range of AUD 47 million to AUD 52 million to the new range between AUD 40 million and AUD 45 million. Turning back to segment performance on Slide 13. Our Residential segment continues to demonstrate strong momentum in what is a very competitive market. Revenue in this segment increased by just over 15% to almost AUD 284 million. Connections growth was particularly pleasing with over 38,000 new NBN connections made in the first half. This number exceeded the connections in both halves of FY '23. Residential gross margins were modestly lower in the first half, declining 0.4 percentage points to 30.2%. And as discussed previously, margins were impacted by unfavorable mobile data charges. With the SAU changes coming into effect from 1 December 2023, we expect margins to return to growth in the second half of the financial year as they benefit from a full half impact. In the first half, we strategically realigned all our segments, including residential, for the SAU changes and repriced our NBN plans. As a result, we went through the pain of changing prices and saw elevated churn, although this was less than anticipated. We expect churn to go back to historical levels in the second half, and we are already seeing evidence of this through January and February. Now that we've been through the pain, all our customers are on the new pricing plans, which, along with our continued growth in net additions, gives us confidence in our revenue and EBITDA targets. From a competitive position, it is our view that some challenger brands in the market may not have yet repriced their existing customer bases and could potentially see higher churn if they do reprice. This could create a churn point and upside opportunity for Aussie Broadband. Moving to the Business segment on Slide 14, which reflected consistent growth in both revenue and connections over the first half. Revenue increased 11% to AUD 48 million driven by strong sales momentum. Our Business segment had a consistently low churn rate, which contributes to a very stable customer base. We will continue to focus on delivering profitable growth in this Segment as we take advantage of our investment in fiber over the past couple of years. Slide 5 (sic) [ Slide 15 ] looks at our Enterprise & Government segment. Revenue declined modestly in the first half to AUD 42 million, due largely to a reduction in one-off nonrecurring revenue. However, this result masks the growth in recurring revenue, which from the first half of FY '23 increased just over 7% to AUD 38 million. Recurring revenues were slightly lower from the second half of FY '23 as some customers moved from older legacy priced plans to new NBN and Aussie Fibre plans, which are more sharply priced. This transition is expected to continue through the second half of FY '24. Pleasingly, gross margin as a percentage of revenue rose up 1.7 percentage points to 52.7%, principally due to changes to the revenue mix. Meanwhile, Aussie experienced increased momentum in recurring revenue with new customers in the first half of FY '24. The strong pipeline of new accounts that we announced in June last year remains on track for delivery. And finally moving on to Slide 16. Our Wholesale segment, which is made up of white label, managed service providers, and voice, this continued to deliver strong growth over the half. Revenue grew approximately by 53% to AUD 72 million in the first half of FY '24, reflecting increasing momentum in the number of both NBN and voice customers. The net growth of 31,000 connections made in the half was an improvement over the previous 2 halves. Strong Wholesale Voice margins continued to drive overall margins higher. Gross margins increased 64% to AUD 25 million, while the gross margin percentage lifted 2.6 percentage points to 34%. Pleasingly, this segment once again experienced an increase in services with a 28% increase in NBN services and a 17% increase in NetSIP minutes in the half. We expect that the combined NetSIP and Symbio business will lead to a large uplift in monthly minutes growth through the next 12 months. I'll now pass back to Phil, who will talk to the Symbio transaction, some operational updates, and our FY '24 guidance.

Thanks, Brian. Turning to Slide 18. In addition to Aussie's continued growth in financial performance, we've also continued to make significant progress operationally. We are very excited by the acquisition of Symbio Holdings. The process, which started in September last year, has now been approved by Symbio shareholders and implementation of the scheme is expected to occur next week on the 28th of February. Today we were very pleased to announce that Michael Omeros has agreed to lead the Symbio business as CEO. As you all know, Michael was Co-Founder and CEO of Over the Wire and has extensive Wholesale Voice experience. Current CEO and Co-Founder, Rene Sugo, will remain with the business as it transitions to Aussie Broadband, and he will take on the role as an advisor to Michael. In the short-to-medium term, we intend to run the business standalone, and we have provided the upgraded guidance for the combined group on Slide 23. I would just like to take a moment to acknowledge Rene's significant contribution to Symbio and our industry over the past 20 years. Rene was the pioneer of voice-over-IP technology in Australia and has been a significant disrupter of traditional voice markets in Australia and overseas. Rene has a deep passion for the talented team that he's built, and this passion has been evident through all discussions I've had with him. We look forward to working with him in his new role and continuing his amazing work at Symbio. Onto Slide 19, you will be able to see across a range of metrics how the acquisition of Symbio will benefit the broader group. On a pro forma basis based on FY '23 actuals, annual revenue of the combined businesses would be almost AUD 1 billion with an EBITDA of AUD 117 million. The Wholesale segment of the business would receive the greatest uplift of revenue while E&G revenue also benefits from the acquisition. We are expecting to realize in excess of AUD 5 million worth of synergies from the acquisition. Moving onto Slide 20. We have estimated the impact of the transaction by segment across revenue and gross margin, and you can see how, on a pro forma basis, the Symbio business adds to the Group overall. The Wholesale business becomes a much larger part of the pie on both counts, demonstrating the benefits of diversification for the overall group. Turning then to Slide 1. I just wanted to update you on some organization changes we are announcing today. In terms of the management team, we believe the changes we have announced today will underpin the company's next phase of growth following the acquisition of Symbio. Current Chief Financial Officer, Brian Maher, has been appointed CEO of the Aussie Broadband business. Current Executive Director, Michael Omeros, appointed CEO of the Symbio business. On 11th March, Andy Giles Knopp will have joined Aussie Broadband as Interim CFO, while an executive is undertaken for Brian's replacement. I'll become Group Managing Director of the Aussie Broadband Group, and both Brian and Michael will report to me. This will enable me to work on the things that I really enjoy, like M&A strategy and a continued deep focus on the technology elements of our business. Earlier in the half we were delighted to announce that Sue Klose had accepted a position as our newest Non-Executive Director on the Board. Sue comes to Aussie with an excellent reputation and resume, being an experienced senior executive and Board director with a diverse background focusing on digital strategy, corporate development, partnerships, and business growth. Before we turn to Q&A, I would like to take a few minutes to touch on our upgraded FY '24 guidance, both with and without the Symbio acquisition. So, turning to Slide 24, we've now upgraded the FY '24 EBITDA guidance to the top-end of the previous range, before non-recurring items, between AUD 105 million and AUD 110 million. This was previously AUD 100 million to AUD 110 million, and this includes the impact of ongoing investment in marketing and excludes any contribution from Symbio. We've adjusted our CapEx guidance for FY '24 down to a range of AUD 40 million to AUD 45 million, previously AUD 47 million to AUD 52 million, based on the reduced CapEx spend for the first half of FY '24. Although only limited [ information on Symbio ] has been provided to Aussie at this time, we anticipate that Symbio will contribute around AUD 11 million of additional EBITDA for the 4 months owned by the group, taking the updated EBITDA guidance for the combined group for FY '24 to a range of AUD 116 million to AUD 121 million. It is important to remind our investors that the group remains focused on organic growth but remains open to acquisition opportunities should they arise and which align with our strategic objectives. With that, Brian and I will now be happy to take any questions that you may have.

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

Congratulations on the result. And also, Brian, to you, congratulations on the appointment of CEO and also MO to the role of CEO of Symbio. Well deserved, guys. So first question just for me, just in regards to just the [ broader adds ] environment [indiscernible], can you just explore a little bit to me just with regards to what happened in the first half. You guys obviously put some price changes through which resulted in some rises through in the lower-speed segments. Just talk to us a little bit how that worked out with churn, price, and also what you're seeing in the second half now that that's been passed through.

Jono. Yes, look, we went into the second half knowing or believing that the SAU would come into effect when it did. And it gave us an opportunity to basically rebalance all the pricing, some plans lower, some plans higher, and we rolled that through to the base. Now we did a really detailed study on how we were going to roll this through. We executed a particular marketing plan. It was very deliberate, the approach that we got. And our churn during that period was certainly elevated based on historical levels, but much lower than what we expected. And so the combination of that strategy generated a much higher net connection growth than we were expecting through the period and that allowed us to really do very well out of it. And so ultimately, it's allowed us to move our book around. We will pick up the gross margin benefit from that in the second half, and we had our best connections net growth in residential for a long time over 2 years. So it was a very carefully planned strategy that played out very, very well for us.

Appreciate the context. Just 2 more from me. Just on just the Wholesale segment in terms of Voice and Symbio. Obviously, you're completing the Symbio transaction very soon. We saw their results come out which showed some good earnings coming through, some good cash flows and the like. But your Wholesale business also is going quite well. Can you just talk us through just what you're seeing in the market on wholesale and the combined opportunities that you have when you put those 2 businesses together?

Yes, look, I think there's a lot of benefits from being together. We obviously operate 2 voice networks today. Symbio is significantly larger in terms of the voice network than the Aussie voice network, but they both appeal to different elements of the market. There's also a lot of product sets within the Symbio business that work really well in the E&G segment, so they have some product sets around things called Operator Connect and that Aussie doesn't have today. And so that'll allow us to hit other parts. Our enterprise sales machine is working really well, and so we believe putting some of that tech that's in Symbio into our E&G team will really help to drive that as well. And I think there's quite a lot of opportunity to talk to the broader voice market as well, coming up with a number of conferences. And so going in with the united front into those environments will hopefully show a really strong offering of what we can do. And the broader ABB business being so much bigger and the network that it brings as well, there's potentially other opportunities. Some of these customers might be interested in more than just voice. There could be data opportunities and potentially opportunities for international carriers to bring data products into Australia as well that Aussie can help them with.

And just last 1 for me, then I'll rejoin the queue. Just for you, Brian, just to get one last one in just in terms of the CFO role, just on the cash flow side of things. At the FY '23 results, we saw really strong cash flow performance, and you commented at the time that there was some benefit there from the NBN changing payment terms. You've had good subs growth. So I know that helps you on the negative working capital side of things. But can you just sort of tell us about any of the unwind that may have occurred from FY '23 into first half of '24 in that operating cash flow number?

Yes, no problem, Jono. It was a once-off permanent change. So the NBN billing cycle changed from the 21st of the month to the 1st of the month, which made the peak of our cash flow essentially the last day of the month, whereas it used to be mid-month. So it was just a phasing of the peak of our cash balance, really. And we got the benefit of that at the 30th June. That's now normalized, and now obviously, the cycle runs month to month as normal. So this is what I would say is now a more normalized conversion performance in this half. So there is no unwind. It was a one-off change. And so it's a pretty normal cash flow performance and obviously it's a strong one, so we're happy with that.

Your next question comes from Ian Munro with Ord Minnett.

Phil, Brian, congrats on the result. Just looking at the Symbio forecast contribution in the second half combined with what they've already reported for the first, looks like they're on track to that guidance range. Are you able to just give us a sense perhaps of how you're seeing that business at the moment relative to expectation? Also, any intentions regarding change in CapEx direction and any update on potential synergy targets would be great.

Obviously, through the Scheme of Arrangement period, we have to observe fairly strict competition protocols. So our access to information is limited. We do have some, but we can't dig too deeply into it because of those competition protocols which we're just coming out of now. So we've seen their numbers and we've seen a forecast. We're comfortable that it's consistent with what we expected. The trajectory looks good to us and all the expectations we have as how that was going to perform this year are being met. So we're pretty happy with that. In terms of the CapEx elements, we don't really have much to comment on that at this time. There's no changes from our perspective at this point. Was there another element to your question I just missed there? I think there was.

Yes. Just in terms of potential synergy targets.

Synergies, yes. I think we called out that we see AUD 5 million as a minimum. There's potentially more, but we don't want to commit to those right now. But there's at least AUD 5 million synergies in there.

Just as a follow up. Looking at the resi sub. So just confirming that 19,000 is a net number for the first 7 weeks of the second half. And just, I guess in terms of the second half skew this year, similar to last year, is there any reason why that would normalize to be more of a even half-on-half performance looking forward? Or is it a case of intensive marketing first half, build the sub base to capitalize on the second half again next year?

Yes. The 19,000 is net, yes. In terms of the first half, second half skew, so this year, we think is probably more skewed, certainly more skewed than the year before, in our view. The principal reason for that is the SAU changes which came through on the 1st of December, so that they are net positive to us in combination with our pricing changes, so that we've only had the benefit of 1 month of that in the first half and we'll have 6 month benefit in the second half. In terms of future years, generally we would expect there to be a skew towards the second half, so higher in the second half, largely because pay increases, et cetera, go through in July, they impact the first half of the year more, particularly when [indiscernible] is still growing. Our revenue is greater in the second half, covering some of those fixed cost elements of those increases. And similarly some of your admin costs tend to be like, for example, your insurance cost, which is a fairly hefty cost, you pay it once a year, and as your revenue is growing, it takes up a smaller and smaller percentage of your overall revenue. So yes, continued to be skewed second half, would be my assumption. This is without having done a budget yet, but probably less so than this year.

To cover the connections part of that, Ian, we're seeing that connections growth continue into the second half. So whether it will be a more pronounced skew in terms of connection growth in the second half, I don't think it will be so much that. I think it's probably going to be consistent potentially between the 2 halves. We are certainly working harder to drive that net addition harder. And if the churn does continue to normalize as we expect, then that will help that, so.

Your next question comes from Eric Choi with Barrenjoey.

I had a few. I'll just fire them all at once. First one, I think Brian mentioned 1 month of benefit in the first half, 6 months of benefits in the second half. So just wondering if you can give us a sense of how much that gross margin percentage stepped up in December versus the first 5 months after the new prices in SAU. Secondly, just on that minimum AUD 5 million Symbio synergies, do you think you will be fully run rating that by FY '25? And just confirming, that AUD 5 million probably excludes any large wholesale contracts or anything like that. And then just confirming. I think you just confirmed this, Phil, but no second half skew to subs, which means if you divide that 19,000 by 54 days and straight line it, you're probably guiding to a net addition number similar to the first half, ex Unity, so 64,000. Is that right?

I'll pick up the first couple. We're not putting any specific numbers on the improvement in margin in the second half, but I think our guidance gives you the second half EBITDA. So it gives you some indication of how that may improve. In terms of the synergies, we won't get the full AUD 5 million in FY '25. I wouldn't expect the next few months, MO, is going to go in and listen, observe, and just understand the business. We'll find some low-hanging fruits. So some of the listed costs, obviously, will be savings and things like that, but some of the others may take a little while to implement. And in terms of the network savings, there'll be some network savings on the voice side that we can find reasonably quickly. But the contracts they have in regard to their NBN customers, they will continue to run during the year, I think, through the rest of this calendar year. And then beyond that, we can start to take some advantage of that. I can't recall the second half skew question, Phil. Maybe you can remember that one.

Yes. So, look, I think the connection numbers, like your maths and so on, if it divides out like that, then sounds reasonably sound. It'll just be a case of we're always changing things. And so we're definitely trying to hedge a bit more out of it in that second half from a connections perspective. But it is a very dynamic market, and we're still seeing a lot of the benefits of price changes of others flowing through, particularly from Telstra. We're seeing about 50% to 60% of our new additions into the ABB main brand coming out of Telstra. So if they start to pivot, then that may affect that as well. But we're pretty happy with where that growth is and how it's continued into January and February.

Your next question comes from [ Encho Rayovsky with ENP ].

My first question is around the lower CapEx guidance. I'm just curious, are there any projects that you're now not pursuing in FY '24? So will this mean there's a need for a step up in FY '25? Or is it just more a matter of you being more prudent with your spending?

Look, it's really a case of being a bit more prudent with the spending. We are rejigging some projects. We had a new Chief Infrastructure Engineering Officer join us towards the end of last year, and he's taken a good look at what we're doing in some areas and has really good contacts in a number of different businesses. So a combination of being able to get better pricing from suppliers. Some of our suppliers are hungry for deals at the moment, and so we've been able to get sharper discounts and just rejigging some of the projects that we're working on. So we have a number of new strategies going on in the network in our OSS/BSS systems. And so it's been a combination of those things which has led to lower CapEx in the first half, and we'll continue with that revised program in the second half. I don't think it will need to step up materially in next financial year. We'll provide more color on that once we get closer to that financial year and once we get through the budgeting process that we're just starting at the moment.

Okay, great. And then in E&G, obviously, you've previously spoken about the AUD 10 million of recurring revenues in that division, which were likely to drop at some point. And you've said today the pipeline is on track. Just interested, for the avoidance of doubt, have you booked any of that revenue yet or is it still to come? And if it's still to come, what's the expected phasing?

Some of it is booked. I think we said at the time that they take varying degrees of time to provision. And that AUD 10 million was obviously an annualized number. So as they come on month by month, you're obviously only seeing incrementally part of that. So we estimate there's about -- we've recognized about AUD 1.4 million of revenue in the half, which essentially only represents 3 months. So that's about AUD 5.6 million in total when it run rates. So that's about half of that revenue has started to flow, but only just started to flow incrementally through the period. And then obviously we've topped that funnel up with additional new sales into the second half. So it's a slow burn. We did call out that the growth in E&G would be a multi half strategy. So that's the large driver there.