Aussie Broadband Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aussie Broadband Limited Investor and Analyst briefing. [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, and welcome to today's investor and analyst call. Today is a very special day for Aussie Broadband. We're launching a new pillar to our residential strategy, our new brand, Buddy Telco, and we can't wait to tell you more about it. We're also providing the market with an update in relation to our FY '24 trading and FY '24 guidance. As already stated, my name is Phillip Britt. I'm the Co-Founder and Group Managing Director of Aussie Broadband. And today, I'm joined by Jonathan Prosser, our Chief Strategy Officer; and Andy Giles Knopp, our Chief Financial Officer. Before we get into the details around our FY '24 trading and FY '24 guidance and the launch of Buddy Telco, I'd like to acknowledge the Aboriginal and Torres Strait Islanders as the first Australians, and for their role as the original communicators, connectors, scientists and carers for the lands and waters across Australia. We pay our respects to their elders, past and present. We commit to working respectively to honor the ongoing cultural and spiritual connections between the traditional owners of the country and to building an inclusive Australia together. I'd like to begin by taking everyone through -- everyone first through our preliminary results for FY '24, which included our recent acquisition of Symbio from the 4 months to June 30. Aussie's momentum has remained strong throughout the second half of FY '24. The group is happy to announce that based on preliminary unaudited figures, our FY '24 EBITDA is expected to be at the top end of $116 million to $121 million range that we provided at our February results. Our broadband connections have continued to steadily grow throughout the quarter with total connections, excluding Origin broadband and Symbio growing to over 684,000 broadband services. We also maintained strength in net broadband additions with a net growth of just under 85,000 broadband connections during FY '24. We're especially proud of the discontinued growth given the industry has weathered two price rises within 7 months due to the introduction of the latest wholesale agreement with NBN, along with the most recent price rises being announced in early June. That steady growth is a testament to how resilient and beloved the Aussie Broadband brand is, and given the significant headwinds that all RSPs have faced during the time. We also wanted to point out that the figures featured in the trading and guidance of today do not include any services for Origin Broadband. Aussie is continuing to support around 145,000 services until they are migrated off the network throughout the first 4 months of FY '25. Our full year audited results will be released on the 26th of August 2024, and I look forward to discussing with them with you in detail. For now, let's look ahead to our FY '24 guidance. And for that, I'll hand over to Andy.

Thanks, Phil. We're pleased to announce that the group is providing an EBITDA guidance range of $135 million to $145 million, excluding the impacts of Buddy Telco for FY '25. That guidance represents a rise of 12% to 20% from the top of our FY '24 guidance. And when the impact of Buddy Telco is included, our EBITDA guidance range is $125 million to $135 million. The group expects the impact of Buddy Telco to total approximately $10 million in one-off establishment, branding and other marketing OpEx-related costs during FY '25. We expect Buddy to be an EBITDA positive from FY '27 and beyond. And this is a formula and approach that Aussie Broadband has executed strongly in the past. And later, you'll hear from Phil and Jono about the innovation and startup mentality behind Buddy that has laid a strong foundation for its future success. We would also like to provide a CapEx guidance for the group for FY '25. Our CapEx range is $55 million to $60 million, inclusive of capitalized software development costs. This is $8 million lower than the FY '24 comparable due to the excess capacity that has become available with the migration of Origin customers. During FY '25, Aussie Broadband and Buddy Telco will progressively use this excess capacity. Now I'll hand back over to you, Phil, who will talk through the strategy and the positioning of Buddy.

Thanks, Andy. We're really excited for the launch of Buddy Telco, not just because of what it represents to the Aussie Broadband group but also because of the way in which it's come together. As Aussie continued to grow. We've been looking at the challenger brand space that we used to occupy. After extensive review of all the inorganic options available, we eventually decided on developing the brand in-house, leveraging our innovative mentality and a history of scaling broadband businesses that would provide best-in-class success. Bringing a new telco brand to life is no mean feat, and I'm hugely grateful to the team within Aussie that have worked tirelessly to make Buddy Telco happen. Buddy has been brought to life entirely within the Aussie Broadband team. We've been planning a brand like Buddy for some time now, and it felt like it was the right time to bring Buddy to market. It is a remarkable accomplishment that speaks volumes to Aussie's ability to innovate and adapt within the ever-changing telecommunication space. But I also want to highlight just how valuable the Buddy brand will be to Aussie and its future. And to do that, I'm going to hand over to Jonathan Prosser, Aussie Broadband's Chief Strategy Officer, who will talk through more of the Buddy strategy and positioning in market.

Thank you very much, Phil, and I'll do my best to contain my excitement here. So thank you, everyone, for joining the call this morning. I am incredibly excited to take you through Buddy's positioning, segmentation and go-to-market and why we chose to do this. Aussie is not just a well-established brand but one of the most beloved brands in Australia. We have a stellar reputation as it shows most trusted telco and have set record highs for customer satisfaction, both according to Roy Morgan. So while that challenger mindset and willingness to disrupt the telco space lives on in the heart of Aussie, the reality is Aussie Broadband is no longer a challenge to telco. By trading Buddy, it presents Aussie with several key advantages that really leverage our strength in innovation, automation and our ability to scale broadband businesses. The first advantage is that Buddy gives us the opportunity to innovate and experiment, a way that would be much riskier under the Aussie brand. By establishing Buddy, we can target the 4 million households that are showing value-seeking NBN market without sacrificing the premium brand and service that Aussie Broadband provides today. This is thanks to all the years of ingenuity and expertise that Aussie has in automation, machine learning and network management. By leveraging our strengths here, we can provide Buddy Telco services today across the Aussie part of the backbone and the entirety of the NBN's 121 points of interconnect. From day 1, Buddy services will be available to 77% of all the trading households, and we will continue to expand our offering and availability across the country as the brand progresses. As we are researching the market opportunity for Buddy, we're also aligned on a clear ideal that Buddy would target a very different type of end user from Aussie Broadband. Aussie Broadband has been very successful with first adopters and tech-savvy audiences. Buddy's approach will be different. Not only will we be competitive on price with our lower cost to serve and a self-service model, but Buddy is focused on the Australian audience who prioritize reliability and ease of service. These are users who want a digital-only experience with as little interaction as possible. They want simplicity. They don't want to be bombarded with excess information about products and technology types that don't apply to them. These are customers who expect the Internet to work when they need it, and they want to know they're getting a great deal at the same time. Our expertise in automation and robust infrastructure means that we know we can onboard and service these users through the Buddy Telco app, website and live chat quickly and at scale as we do for our white label and wholesale customers today. And because we have such a clear differentiation in the audiences we're targeting with Buddy, we expect there to be minimal customer crossover between the two brands. We expect our target customers will likely be longer-term users of Telstra and Optus who value reliability and simplicity. As a result, we anticipate that we will be competing with the likes of the Belong, Tangerine, Next, TPG, Dodo and Superloop. As mentioned earlier on the call, we expect the impact of Buddy to be approximately $10 million in FY '25, and that spend will not affect marketing activity or investment in the Aussie Broadband brand. We will continue to actively drive growth across both Aussie Broadband and Buddy Telco concurrently, and we look forward to having Buddy service around 100,000 customers within 3 years. From an advertising perspective, we will be mirroring the brand's digital-only offering with a strong digitally-led campaign across multiple channels and broadband comparison sites using video and social media where appropriate. The brand will be serviced out of Aussie's existing Perth office, and we have recruited staff internally to support Buddy's launch. We are hugely excited to bring this brand to life as it further diversifies the Aussie Broadband group by allowing us to strongly compete in both the premium and value-add end of the broadband market. With that, I'll hand back to you, Phil.

Thanks, Jono. As mentioned, this is an exciting day for Aussie and just to further showcase our growth, diversity, innovation and ability to adapt to changing market conditions. So with that, I'll now open the floor for any questions that you may have.

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

Just came to sneak a few things out today, if that's okay. So just the first one for me. Can you just tell us a little bit further just in regards to the challenger brand potential for cannibalization of your core brands? As well as if it allows you to sort of experiment with anything that you may take across into the core premium product that you have, firstly?

Jono, it's Jono. I'll take both of those questions. I'll start off with the cannibalization and then go into the experimentation. So yes, very good question. And obviously, there will be a degree of cannibalization from Aussie to Buddy. The key thing here is how we've factored that into our modeling. So for both the Aussie Broadband brand itself and for Buddy Telco itself, our assumption is that 5% of the sales from Buddy will come from Aussie Broadband. The other very important part to this equation on this discussion is that most of those, we do believe are value-led customers who would likely be leaving the Aussie Broadband brand anyway. And in that case, there's some really important math to kind of point out. When those customers are with Aussie Broadband as a brand, [ try saying that to us ] many times, they deliver $10 net to us from a net profit perspective under Aussie Broadband. When we retain those customers by moving them into Buddy, we retain $8. So effectively losing $2. And so that's a really important part of how we're looking at the cannibalization risk as well as treating those customers moving forward. Do you have any questions on that, Jono?

No, that's -- I mean, that's good clarity. And I mean that obviously starts to help out the net subs in general. I might ask another one, just a couple more, if that's okay, maybe towards -- to Phil and Andy. So can you just explain a little bit just in regards to what goes into guidance? Give us some clarity in terms of some of the businesses that are sort of contributing to that number? I mean, fully, I think you're probably a little bit light on what I had, but the second half rate was pretty good. We've got Symbio coming in, some synergies from there. I know you've previously spoken about the TCV in -- not in Origin, sorry, in E&G. Can you just expand a little bit around that makeup, please.

Yes. So there's a few parts to sort of make up in the guidance range. We'll call out that Symbio is contributing 38 of that number. And then the rest of that is the core Aussie business. And so -- and Symbio will probably make up about 12 of the 4 months into FY '25. So there's a couple of sort of metrics for you to be able to work on. The 38 number includes the synergy benefit that we're receiving from Symbio so far, and that will continue to progress. And we'll talk more about Symbio synergies at the August results, but that gives you a feel of sort of a split between those numbers.

No, I appreciate that context. That's nice color. Last one for me and then I'll join the queue again. I mean, I think today with the guidance that we're seeing. We're seeing probably the final sort of cleans out from what's occurred with the white labeling relationship. Wasn't that too many months long. Wasn't too far ago that, that actually occurred. So my next question would be around just other initiatives like can you talk us through any of the pipeline on other potential white labeling relationships, energy retailers, anything on the acquisition front E&G? And that's my final question.

Yes. So look, we're continuing to progress opportunities in the white label and also reseller space. And hopefully, we'll have something more to talk about that on in the next month or two. E&G has performed very well, leading into the end of fourth quarter. The pipeline grew quite significantly into that. And we'll call out some more specifics around that at the August results, but the -- we've won us a significant number of very large high-profile brands in E&G, which are currently being provisioned, and they'll continue to roll through. So there's a lot of work still going on in the background. I think the other perspective I'd also add is that whilst we've been working hard away on Buddy, there's been no impact to Aussie's retail growth in that period. There's been about 70 people were from Buddy over the last sort of 2 quarters. And so we've been able to do that with no impact on resi, but we've also been able to grow all our other segments as well. So we're sort of walking and showing down all at the same time as we're bringing this together, which I think is a huge testament to the team, so.

Your next question comes from Entcho Raykovski with E&P.

I've got one question on the guidance as well. Just doing some very quick maths based on that [ number fill ] which you gave us a $38 million contribution from Symbio. That seems to assume a decline for the business ex-Symbio. I guess, just wanted to make sure that's correct. And then is the Origin impact in '25 perhaps greater than the $14 million, which you previously mentioned. I guess I'm just trying to get to an underlying -- a clean underlying growth number, perhaps ex-Origin, ex-Symbio.

We've never called out a number for Origin for '25. We've only called out a number for Origin in '24. And so the impact in '25 is always greater than $14 million because obviously, you've got the run rate leading into '25. So that's the first thing I'd clarify there is that we haven't called out a '25 number for Origin. And there is some conservatism in how we're approaching this because the phaseout of Origin as it moves forward is still unclear. And we're still running a full staff base to support Origin into that period. We don't know what that looks like in terms of the timing of the run out. We believe it's going to be the first 4 months of the year, but we don't have the phasing of what that looks like yet. And so there are a number of moving parts to around all of that.

Yes. And Phil, I'd just add that the EBITDA basically for ABB at the core business for '25 is broadly in line with '24, which includes Origin. So that sort of -- there's certainly not a decline in terms of the core business. It's broadly in line.

Okay. Great. And then second question, the $10 million start-up costs for Buddy. Do you expect those will be permanent in nature? So should we assume they stay in the base? I think you used the word one-off? Or do you see that sort of like a one-off? Or is it like a one-off step change? Just wanted to understand whether we should capitalize those going forward?

There's some -- small amount of it is setup costs that can be capitalized, but the majority of it is the marketing investment in Buddy, which would be an ongoing type basis. So just as Aussie was when it was going through its growth phase, we overinvested in marketing in the early stage to build the base and grow the business. We're anticipating that we'll do exactly the same thing with Buddy. The marketing investment will be there to support its growth. We've been open for business for a few hours this morning and already seeing really good sales coming through. So we're off to a good start in that regard. But yes, we'll be continuing to invest in Buddy's marketing line just as we have done with Aussie's over time.

And what I'd just add again to that, Phil, is just the actual marketing dollars per connection or per sale will become more efficient over time. So the investment in totality will obviously change a little bit of shape over the future years just as we learn more particularly.

Okay. And a final one on Buddy. Are you able to give us that likely cost to serve for Buddy once you ramp up and perhaps how it compares to the main brand?

The cost to serve will be lower. I think we've called out in the announcement that it will have a similar EBITDA contribution percentage to what ABB does. And so whilst its gross margin is lower, once you drop through to EBITDA, it comes out similar.

Your next question comes from Eric Choi with Barrenjoey.

Can I just ask a follow-up to Entcho and Jon's questions. Just on FY '25 guidance and the impact of that Origin contract. I was just picking up what you said, feeling, you sort of said you're still assuming full run rate of staff costs into '25. So if that Origin EBITDA contribution was $14 million in FY '24, do we assume like the gross margin contribution was higher than that? And can you give us an estimate for the gross margin contribution?

Look, we're not calling out any specific numbers around Origin in terms of its contribution in '24 or '25. It's a business that will run off over the next 4 months and won't be part of our numbers moving forward. So we provided our guidance for '25, and that's where we're leaving it.

Got you. I thought I would try. Can I just take a step back, Phil, and go like if you just think about your organic business, that's what's happening with Symbio, that's what's happening with Origin, but if you think about the organic business and just [indiscernible] how many subs are you adding next year versus what you did in FY '24 and one of the unit economics per customer in '25 versus FY '24. It doesn't feel like you're forecasting a slowdown in sub growth or a deterioration in those unit economics. So something is slowing down that organic growth into '25 versus '24. And my view is we've just modeled Origin badly, and that's purely the difference. Would that be the right high-level conclusion?

Yes. Look, that's our conclusion to be honest because our growth numbers are very similar to '24, and the unit economics are the same. The way Origin has been modeled moving forward is really where the gap is.

Awesome. And just super last question. It's very helpful you gave us the Symbio estimate for next year. It's very small, but are you assuming you win the Symbio wholesale contract from SLC in that number?

There's a little bit in there. But yes, there is an assumption we'll win that in time but not very much of it in '25.

Your next question comes from Ian Munro with Ord Minnett.