Spark New Zealand Limited (SPK) Earnings Call Transcript & Summary

[indiscernible], and good morning, and welcome to Spark's results announcement for the year ended 30 June 2020. I'm really pleased to share we delivered our financial results, CapEx and H2 FY '20 dividend within our guidance range despite the challenging environment New Zealand continues to face with COVID-19. We adapted at pace to the implications of the pandemic, keeping our people safe and ensuring New Zealanders could continue to work, learn and connect during this time, while also providing assistance for those customers experiencing financial hardship. FY '20 also marked the successful delivery of our 3-year plan. And during this time, we've undergone a significant transformation from a traditional telco to an end-to-end digital services company. We've also undergone a significant transformation in our own ways of working with our flip to Agile, improving our speed to market and customer focus, which has, in turn, significantly improved customer engagement and our people engagement. Our sustained network investment has underpinned our growth and ensured New Zealanders could stay connected. While I will briefly touch on our new 3-year plan to FY '23, the focus for today will be the FY '20 results. We will share more on the 3-year strategy at the upcoming Investor Day in September. I'm joined today by our CFO, Stefan Knight, who will take you through the financials in more detail, and we'll then take Q&A. So today, we announced revenue growth of 2.5% to $3.623 billion for the year ending June 30. With really strong momentum coming out of the first half, we [ sustained our ] performances in mobile. Our Endless mobile plans had strong take-up as customers seek larger data allowances and price [indiscernible]. We continued our rollout of 5G, securing 60 megahertz of critical C-band spectrum during lockdown. Our mobile service revenue grew 3.9%, outperforming the market and our share [ improved ] 1 percentage points to 40.2%. In cloud, we continue to see growth in our annuity revenues. We signed a strategic partnership with Microsoft to drive adoption of the Azure cloud technologies and completed the integration of the Revera and CCL businesses into one under the CCL brand. This contributed to double-digit growth in cloud, security and service management revenue, which increased by 10.8%. While the broadband market remains challenging, we grew our connection by 14,000 to 709,000 connections. And now 22% of our base is on our wireless broadband. This delivered $74 million of annualized gross cost reduction in access costs. Our focus on Agile ways of working is delivering better experiences for our customers and our people. The combination of initiatives, including better digital self-service service options in monthly care volumes reduced 28% while delivering a 10-point customer experience improvement in our consumer and small business iNPS. I'm incredibly proud of how our people responded to COVID-19. It was a testament to their adaptability and "can do" attitude, and we're able to support our customers while delivering what we said we would. And during the year, we saw our employee NPS to grow 25 points to plus 66. Our operating expenses increases the benefit of cost-out programs, we reinvested to partially fund growth in key markets like cloud. This also included the launch of the cloud and business transformation consultancy Leaven. The acquisition of Now Consulting as part of data analytics business, Qrious and the launch of the emerging technology business [ matter ]. The growth in revenue combined with the continued focus on cost management enabled us to grow EBITDA by 2.1% to $1.13 billion, whilst maintaining our EBITDA margin of approximately 31%. I'll turn to the scorecard of FY '20 indicators of success captured on Slide 7. We successfully delivered against the majority of our key indicators. As I said, with improved customer experience, we've built on our wireless feature with the launch of 5G, we're growing in the key markets with mobile, cloud and IoT and we're maturing our Agile leadership, at the same time as delivering this cost. While our wireless broadband connections grew by 16,000, our aspirations were higher at 20,000. The continued strong performance of our network during lockdown has given us the confidence to accelerate this growth further in FY '21, and we've targeted new wireless broadband connections of 40,000. As I touched on at the half year, the target is successfully delivering the Rugby World Cup tournament with the platform availability of 99.9% was not achieved due to the [ World Cup size ] issue, [indiscernible] game of All Blacks v/s South Africa. [indiscernible], when we stand back and look at the tournament as a whole, with subscribers and performance against our plan, we're pleased with the overall performance. We continue to enhance this sports platform with the robust delivery of English Premier League as a recent example, and exploration of different partnerships to expand our reach and capability. And we're really looking forward to bringing New Zealand summer cricket to screens later this year. We also made strong progress on our sustainability goals at a time when having an internet connection of more essential than ever before, we've leaned in and accelerated the rollout of our not-for-profit broadband product Skinny Jump, connecting more than 4,500 additional homes since COVID-19 hit. This contributed to us meeting our own new target of 10,000 students participating in one of the Spark Foundation's program. If I look at the current 3-year plan, as I mentioned, this year also marks the successful delivery of our 3-year plan. And on Slide 8, we've summarized our performance over this time. This was a bold strategy to transform our business. We have changed our culture and ways of working with significantly improved customer experiences. We've grown mobile and cloud market share. We continue to deliver these cost whilst diversifying our business from a traditional telco to operate as an end-to-end digital services company. During that time, we've delivered industry-leading returns for our shareholders, a TSR of 13% per annum and a ROI of 16% per annum over the 3-year period, which we believe puts us in the top 10% of global telcos. In FY '20, we were able to cover 95% of the [ $0.25 ] dividend through free [indiscernible] cash flow. We're just short of our aspiration of 100%. I've touched earlier on the strong progress we've made in both Agile and employee engagement alongside our improvements in the customer experience. We also made great progress in serving our cost-conscious customers using our multi-brand strategy. With Skinny successfully growing the space by 17% over 3 years. We also invested in our network and our technology, reengineering our IT stacks and investing for capacity over a sustained period, which has built a point of competitive advantage. While we didn't achieve our goal on broadband with holding connection share, we did, however, retain market leadership and through our focus on higher value customers, our revenue share has held up better. During the year, we rolled out 5G wireless broadband services in Heartland, New Zealand and in July from international rollout of mobile services, enabled by the allocation of 5G spectrum during lockdown. This will enable a step change in our fixed wireless broadband offering and will allow us to grow the number of customers on this product even further, delivering a better customer experience and improved margins for Spark. 5G will be a big part of how we will continue to create a wireless feature for New Zealand. So having successfully delivered on our 3-year plan, we have created a strong foundation to build on for the next 3 years. We I look to Slide 9, we share our new sustainability framework, which will focus our efforts as we move in next 3 years. As New Zealand responds to and recovers from COVID-19, sustainability will remain a core focus for our business. Rebuilding and transforming our economy to become a more productive and sustainable will take concerted and coordinated effort. The country will be looking for leadership from businesses like us with a scale to make a difference. As such, we reviewed and refined our approach to sustainability, and updated our framework to reflect this new context and new opportunities that sits within it. A key focus is on our own sustainability so that we can then support New Zealand's recovery and economic transformation. Digital equity is at the heart of our approach, and we remain committed to working in partnership to make a positive contribution to digital equity. The sustainability will be integrated into our new strategy as a key pillar under the title of our positive digital future for all New Zealand and it sits alongside the work of our foundation and the work in our [indiscernible] strategy. So I'd now like to touch on the in-year impacts of COVID-19 and potential implications for FY '21, which we overview on Slides 10 and 11 of our presentation pack. In a year that was enormously challenging for all New Zealanders, Spark moved quickly to mitigate COVID-19 impacts as much as possible, while maintaining essential services to keep the country connected. Even though COVID appeared in the last quarter of our financial year, the total negative EBITDA impact was moderated to approximately $25 million. We've captured the key impacts here on this slide, including the loss of high-margin roaming revenues as the Board has closed, retail revenue reductions through store closures, high billing collection risks as our customers experienced more financial hardship, but at the same time, we did see some increases in demand for collaboration products as more Kiwi shifted from work to home and digital transformation as customers look to model workplace tools to help them work through this time. As we look ahead to FY '21, we expect the impact to materialize further with greater economic uncertainty and the resurgence of COVID-19. The expected impacts on international tourism, growing unemployment as the wage subsidies to roll off later in the year and the impacts on small-medium businesses, many of whom are our customers, has been well-documented. While we're operating in a volatile environment, we are preparing for greater billing collection risk as customers experience financial hardship and the subsidies roll off. Mobile market growth that's likely to be slower, particularly due to the lesser roaming and lower mobile handset sales, mitigated in part by infrastructure and software as service, which are likely to benefit, but we will also potentially see some offsets in IT outsourcing programs. We have even more confidence to increase data caps and drive wireless broadband uptake following a very strong network performance during the lockdown. And we will be accelerating and scaling our FY '21 cost reduction program to help offset the negative revenue earnings impacts noted above. Now Stefan is going to cover more of the estimated impacts in more detail in the financial section. So we believe our 5G rollout and sustainability focused on closing the digital divide are even more important now in helping to support New Zealand's recovery. So looking ahead now to the next 3 years, we were due to launch a new 3-year strategy to the market in April. However, given the COVID-19 situation, we needed to pause and review. We'll now share our new direction on the 16th of September in a few weeks' time. While we're operating in a more uncertain times and preparing for a more challenging year ahead of us, we believe we are well positioned for the new normal we find ourselves and other nation over the longer term. We have a strong balance sheet, a leading network and technology set, a diversified business and an Agile team. Trends that have shaped our thinking for some time now are accelerating due to the disruption of COVID-19, including acceleration of consumer services from physical to digital, the increasing pace of business transformation and digitization, the exponential customer demands for data, the explosion of connected devices and an even greater emphasis being faced on connectivity as a basic social need. Our new strategy will be an evolution of our current direction, building on the momentum of the prior 3 years and the evolving trends shaping our market. We'll be focused on a set of core capabilities that will underpin our continued strong performance in our key markets while also driving our growth in new markets where we see opportunities such as digital health and [indiscernible] services. Investing for a long-term in smart infrastructure, international cable capacity in spectrum to support improved productivity, break the digital adoption and innovation while connecting New Zealand to the world. Finally, we see a strategic focus on unconstrained capacity continuing to underpin our growth in wireless over the next 3 years. As we outlined on Slide 17, we'll achieve this through a number of levers: simplification and moving off legacy technology to pave the way for technology evolution; new revenue streams; improved cost base; and improved environmental performance; a 5G rollout, which will cater the customers with high data needs will underpin innovation and free up 4G spectrums to increase capacity in regional and rural areas. We've grown wireless broadband take up as 5G delivers greater capacity and speed. Finally, big data and AI, driving enhanced customer experiences, lower cost of acquisition and improving data insight on more channel marketing investments. So I believe we've got the team, the fortitude, and the ambition to successfully deliver on this plan over the next 3 years. I'm now going to hand over to Stefan, who will run you through the key financials, capital management and guidance.

Thanks, Jol, and good morning, everybody. As it's my position to step through the full year results for FY '20. So starting with a summary of the key financials, as we set out on Page 19 of the result presentation. So Spark generated revenue of $3.623 billion, which was up 2.5% on the prior year. EBITDAI was $1.113 billion or -- and up $23 million or 2.1%. EBITDAI growth, combined with lower tax, partly offset by higher financing costs and no Southern Cross dividends, resulted in net earnings for the period that were up $18 million or 4.4% to $427 million. The increase in EBITDAI is primarily driven by the strength of the revenue momentum from the first 9 months of the year prior to the COVID-19 lockdown. And I'll now skip you through the key elements of the results in more detail. So looking firstly at revenues. Continued the momentum that we built during H1, which were positive revenue momentum across all key product lines for the first half of H2. As Jolie had mentioned, COVID-19 began to impact the business from the last quarter, and as a result, revenue growth dropped from 4% in H1 to broadly flat in H2. The key impacts on the business were the loss of high margin roaming revenue, lower handset sales due to retail store closures, the removal of broadband data caps and providing Spark Sport at no charge while live sport was unavailable globally. However, we also had some positive offsets with greater demand for collaboration products as customers embraced remote working. And noting that a good portion of this volume will flow through into FY '21. Despite the impacts of COVID-19, mobile service revenue showed good resilience, and we finished up -- we finished the year at 3.9%, generating an additional $32 million of high-margin revenues. The growth was the result of a 2.5% lift in average revenue per user, which is a really pleasing result, given the last quarter saw roaming revenues fall significantly particularly in pay monthly. The growth in ARPU was primarily in prepaid as we see higher demand for data and reflects the progress we've made in using data-driven insights to more accurately match our product offerings to customer needs. Total mobile connections grew by 8,000, but most pleasing was the growth in the pay monthly base of $79,000, and this is a key contributor to that 1 percentage point growth in mobile service revenue market share over the prior year. Cloud security and service management revenues increased 10.8% or $43 million. And this was driven in part by large customer outsource contracts that were previously in transition moving into ServiceNow, also along with a number of smaller ones. Impact of COVID-19 have seen a shift in the mix of business with increasing request to support business continuity planning and remote working, albeit offset by some other legacy projects being put on hold as customers reprioritize their IT investments. Voice revenue declines for the year totaled $50 million compared to $77 million in FY '19 as wholesale rates have declined moderate to more normal levels. And this also reflected the impact of higher calling volumes, particularly 0-800 over the COVID-19 lockdown period. The other revenue line increased by $16 million for the year. The largest driver of this result was the launch of Spark Sport, however, it is with learning that we stopped charging for Spark Sport from March to July due to the cancellation of live sports and tournaments globally. This category also includes revenues from our Internet of Things business and our data and analytics business, Qrious, which acquired Now Consulting during the period. As we look forward to FY '21, we expect that a contracting economy will result in revenues being broadly flat, particularly with the ongoing uncertainty of COVID-19 and the expectation that New Zealand will continue to move through alert levels. We have assumed that there'll be no material roaming revenues in FY '21 and economic conditions will reduce discretionary income, resulting in an ongoing focus on price from customers. However, we've also seen that COVID-19 will let new opportunities to support remote working and digital transformations, and we're really well placed to support our customers through these journeys. The high level of recurring revenues associated with our business also helps provide resilience. From a Spark -- from a sport perspective, we also continue to seek partnerships and to seek partnership opportunities to improve the desirability, reach, capability and commercial returns of sport, building a sports media business that will complement our existing paid base offerings like Spotify for our customers. So moving now to costs. As revenues have grown, we've also seen cost lift in support of us, with cost of sales grow $33 million to support revenue growth, with the main increases seen in support of cloud and procurement. Labor also grew $36 million, and the trends in the first half have continued, and this can be thought of in 3 parts. So firstly, we added labor to support our growth businesses. Examples include the acquisition of Now Consulting to support Qrious; growth in digital services; and new hires in our new businesses such as Mattr, Leaven and Spark Sport. Secondly, the mix of work change with least efforts spent in building new assets as our investment in large IT programs has peaked and more efforts been on simplification and improvement of existing products, resulting in more labor being expensed. And this is in line with our full year -- with our lower full year Capex. This was offset as we continued to actively rebalance our workforce against shrinking legacy businesses and lower customer interactions due to improvements in digital self service. So tight management of costs was a strong focus and delivered $99 million of benefit during the year, and this will continue to be a focus for FY '21. During the COVID-19 lockdown, we also saw a reduction in discretionary expenditure in areas such as travel and marketing. Our cost reduction programs include initiatives that focus on ensuring maximum efficiency of our marketing programs, minimizing customer inquiries and credits by improving their billing processes and renegotiating with vendors. We continue to see further opportunities to improve our cost base in FY '21 and have an active program underway, again, to ensure that we can offset the impacts from COVID-19. For FY '21, we are targeting reductions in the excess of what we achieved in FY '20. The key areas of focus include driving greater uptake of wireless broadband, continuing to drive efficiency in our marketing spend and optimizing our spend with vendors. I'd now like to give a quick update on Southern Cross and our investment in Southern Cross Next cable build. So Spark contributed $22 million of equity during FY '20 and mainly to contribute additional equity depending on the level of Southern Cross Next presales that are secured. However, no further equity contributions are expected to be made in FY '21. No dividends were received from Southern Cross during FY '20 compared with $15 million in FY '19. Southern Cross dividends have been suspended for the duration of the Southern Cross Next build phase and are not expected to resume until FY '23 rather than from FY '22, as we previously communicated. So moving now on to net earnings. Higher EBITDAI helped offset increase in financing costs and no Southern Cross dividends. Also impacting net earnings in FY '20 is a lower tax expense which reflects the new rules around depreciation on commercial buildings. These factors resulted in net earnings for the period of $427 million, which were up $18 million or 4.4% and allow us to confirm in H2 FY '20 ordinary dividend of $0.125 per share. I also note that we are returning to a full implication for this dividend payment and for FY '21 guidance based on expected underlying taxable earnings. So moving on now I wanted to touch on free cash flow, which was $438 million, up $146 million on FY '19. Previously, we've communicated an aspiration to deliver $460 million of free cash flow. So while we were a bit short of the aspiration, $438 million is a significant improvement and has funded the majority of FY '20 dividend. In order to deliver free cash flow growth, we focused on 3 key areas. Firstly, delivering the FY '20 EBITDAI in line with guidance. Second, ensuring that CapEx outcomes we delivered within the $370 million envelope and third, that working capital grew by no more than $50 million. So looking at FY '20, we delivered our EBITDA growth aspirations and note that the result of $1.113 billion included the negative impact of approximately $25 million due to COVID-19. Our reported CapEx was $374 million, but our cash CapEx was higher as we consciously decide to secure 5G mobile network equipment in advance of requirements. We've also delivered the first stage of our next-generation optical transport network, which has self [indiscernible] capabilities to automatically restore services by rerouting traffic in an event of failure relating to fiber cuts or network disasters. And lastly, the [ net cash flow up ] on working capital reduced by $17 million in FY '20 versus growth of $137 million in FY '19. And this improvement reflects new working capital policies put in place to ensure we manage cash conversion. Looking to FY '21, our aspiration remains to generate free cash flow to fund shareholder dividends and will focus on the same 3 areas. Firstly, EBITDAI stability during these uncertain times. While the impacts of COVID-19 were mostly felt in the last quarter of FY '20, we estimate the negative impact will be more material at approximately $75 million in FY '21. Given the uncertain economic environment, we'll continue to monitor this closely. We are planning for broadly flat revenues and have upweighted our focus on cost reduction to offset this. However, we will also be pursuing new opportunities for growth in 5G, wireless broadband and remote working, and we'll be investing to support these. Secondly, we have priorized capital expenditure of around $350 million. So we've reduced the envelope from $370 million to $350 million for the FY '21 year as we manage through a period of moderating revenue growth, and we'll look to lift that again as revenue trends return to more normal levels. We'll focus this year's capital investment on supporting New Zealand's economic recovery, including through the rollout of 5G and investment in rural connectivity and are confident will be sufficient to support our customer priorities. It is worth noting that when combined with the upcoming spectrum renewals, our overall investment will be greater than FY '20. And this reflects a conscious decision to reallocate available funds and prioritize investment and infrastructure that supports New Zealand growth. Third, we continue to target ongoing improvement in working capital as we focus on improving cash conversion. So now moving on to net debt, which increased by $33 million for the full year, but was down from the increases seen at the half year as free cash flow improved. Our reported net debt-to-EBITDAI ratio was 1.2x -- 1.21x, and within our internal capital management policy, where lower our net debt to EBITDAI did not exceed 1.4x. During the period, we refinanced existing maturities and established 2 new committed revolving bank facilities totaling $150 million. The new facilities will put in place to provide access to additional funding and liquidity during this period of market uncertainty. And we remain committed to an S&P A- credit rating and continue to have sufficient access to fund that. So looking now to FY '21. To help investors monitor progress, we've laid out the critical indicators of success that will influence business performance and free cash flow, and we'll report on progress at the half and full year. We've also laid out the key assumptions that underpin our guidance. We have assumed that the economy remains subdued with New Zealand's intimately different alert levels. This will result in no material roaming revenue, slower growth in the mobile market and lower handset volumes. IaaS and other cloud revenues are likely to benefit, but may also be offset in other areas of IT outsourcing and therefore, growth will be slower. As I mentioned earlier, we have estimated FY '21 negative EBITDAI impacts of $75 million, and for the sake of clarity, these impacts are reflective within the guidance range provided. To reiterate that our intention to offset these impacts through our cost-out program, which is targeting reductions in excess of those achieved in FY '20. So lastly, now moving on to guidance. We have set out our FY '21 guidance with wider ranges to normal practice to reflect the high degree of uncertainty that COVID-19 has created within the economy. For FY '21, we have set guidance, subject to no material change in operating outlook, as EBITDAI of $1.090 billion to $1.130 billion, CapEx of around $350 million, spectrum investment of $50 million, and a dividend of $0.23 to $0.25 per share fully included. We've introduced a dividend range for FY '21 to reflect the increased uncertainty as a result of COVID-19 also the expected spectrum renewal payments during the year and to align with our ability to generate sufficient free cash flow to fund dividends. Our long-term aspiration continues to be to deliver sustainable dividend that is fully funded by free cash flow. Finally, we've also reinstated the dividend reinvestment plan as this is a useful capital management tool, and it will operate from the H2 FY '20 dividend. Shared issued under the dividend reinvestment plan will be issued at a 2% discount to the prevailing market price as determined around the time of an issue. So that now concludes the financial summaries. We'll open the line for any questions. And back to you, operator.

[Operator Instructions] Our first question comes from Kane Hannan from Goldman Sachs.

Just 3 questions from me, please. But firstly, just on that dividend outlook, and ask you a question on a few moving parts into next year. So just to confirm, so I suppose FY '21, is that dividend going to be purely based on where you land in that free cash flow range and so the midpoint, you will be implying a $0.24 dividend. And then the comments in the previous slide, just around the long-term sustainable dividend. Is that still in reference to a 25% -- 25% aspiration. Or is there a bit of a change in messaging there? Secondly, just around the mobile roaming revenues, I think you previously disclosed that to be around 5% of your base. Just interested if you talk about the trends in that number prior to the pandemic. I suppose how much of that 5% you think is likely to return once it's international travel resumes? And then finally, just the wireless broadband. So that 40,000 target...

Probably. I think we should -- can we just take the first 3 questions. I mean [indiscernible].

And so -- just -- can you repeat the first question, Kane Hannan, because it was...

Just the [ divi ] if -- so we're saying that $420 million to $460 million is free cash flow. Is that going to be the pure driver of the dividend in that 23% to 25%? And then the messaging around how you're doing...

Just on multiple [indiscernible]. So the $420 million to $460 million of free cash flow gives you a good indication of what we're targeting to support the dividend. However, we'll wait throughout the course of the year to see how the year [indiscernible] and see what the impacts of the COVID [indiscernible] on our part of business. And that will be one of the many factors that we're looking as we decide we need to set that range. We'll set within that range [indiscernible].

So it could be a situation with $420 million free cash flow and the $0.25 dividend if the earnings are on track to ahead of that guidance range?

I think what Stefan is saying is that there is a -- we've given you some directional markers around the things that we consider. We're making a final decision around the dividend. And I think any of them have benefit in their own in isolation, look at a number of factors making that decision. And obviously, the [indiscernible] nature of the business [indiscernible].

Okay. Perfect. And then on the mobile rolling revenue in that 5% number? Just the trends there and also how much of that return?

Yes. Look, so obviously 5% growth in [indiscernible] is a very pleasing outcome. And you'll have quarter in -- sort of roaming revenues drop quite off. We've previously given that [indiscernible] to the market, the roaming revenues with around $40 million worth of margin that will -- with a plan for that to effectively drop one-off in FY '21 given that the border closures or extended border closures are likely, but we would also expect that, that would come back when borders reopen, it's just impossible for us to know when that might be. So we've allowed for one of it within the period. When we think about ARPUs though in general, there are also some underlying trends that are really positive. So one of the things that has driven ARPU growth is actually the upsell from prepay into pay monthly. And then within pay monthly was up -- up the actual tiers of the plans, and we continue to see opportunities to do that as customers use more data as we use our marketing and data-driven capabilities to more accurately target those customers and put more relevant offers in front of them, we still see really good opportunities to drive that upsell program.

Perfect. And then lastly, just the wireless broadband. So basically getting -- your 40,000, you're getting to 27%, 28% penetration of your base, which is a bit about 25 sort of older targets. Just interested if there's anything you can share there or whether that will be directed at the Investor Day?

So if we look at wireless program in FY '21, obviously, we have 5G network rolling out. And that's one of the biggest global use cases for 5G is the enhanced wireless broadband. So we see the opportunity to continue to grow that. We've also seen through our lockdown period how well the network has performed. We removed tests on wireless broadband during that time. And that means that there's probably broader addresses that are available for us to target in terms of that both from a 4G and 5G perspective. So that's how we're thinking about it for FY '21, and this will be increased target.

Our next question comes from Arie Dekker from Jarden.

Just on the guidance for dividend, just maybe looking at it slightly different way. I'm just trying to understand, is something fundamental changed and you're deciding to guide to the potential for dividend to drop because if I look at it in terms of the bottom end of the range for $40 million, and you're assuming no roaming revenue, that's a $40 million impact. Wouldn't you just look through a temporary impact like that, which as you point out, is going to come back over the next year or 2? I'm just trying to understand what circumstance would you see yourself not paying $0.25, given you're not assuming any roaming revenues, but that's a temporary loss of revenue that will come back?

Arie, I think if we think about the economic environment with the New Zealand still largely uncertain. So what we've done is provided our best estimate of what we think the FY '21 and tax might be at $75 million, but it could be different to that. And the -- therefore, the way that we've provided some guidance throughout the dividend range is really to reflect there is more uncertainty in this year. Obviously, if we're in a position to pay debt, we will look to pay debt. So I think it's really more around providing clarity to reflect this greater uncertainty.

It also reflects the fact that we've got an additional $50 million spectrum payment to be made within the year. We know that amount is fixed, but that's a one-off payment that come through. So it picks up that as well.

Yes. Well, just on that. I mean I just have sort of assumed that on the DRP. I mean how long do you see that being in place for? Or I guess I sort of saw that as raising equity to fund some of these lumpier spectrum payments that you have coming up, but -- and it will be a temporary thing, is that fair?

We're not going to give a long-range view out past FY '21 for guidance on that. What we can say is that it will be back in place for the H2 dividend. I mean with goal that will be in place for FY '21. It's a really useful capital management tool. We have put the discount on it to help drive some uptake and help us manage through the cash flow implication during these more uncertain times. And then the Board will make a call on the continuation of that or not in future years and we'll update accordingly.

And then, Jolie, just going back to that point you made around the range, perhaps just reflecting more that the general economic uncertainty, I guess, fair enough. Does that mean that if you end up adding $420 million for the year and there's been a $40 million roaming impact, which you see sort of coming back to FY '22 that in that circumstance, there's been no reason why you wouldn't pay $0.25?

Look, I think our long-term aspiration, as we've talked about is to have a sustainable dividend linked to the free cash flow that we generate. So if you take consideration and some of those impacts moderate through the end of '21 and then on 2020, then I think that's a reasonable. Obviously, I'm not going to guide the dividend beyond FY '21, but I think in terms of not thinking, we haven't moved away from that free cash as being a pretty important guide to how we think about that.

And one of the things we're planning to do with the Investor Day in September is give a bit more clarity around where we see some of those sorts of opportunity for free cash flow growth out over -- not just FY '21, but out over a 3-year horizon.

Great. That's helpful. Just on the broadband. You've obviously, over the last 6 months or so, been trialing the 5G in a number of markets, and you're in the very early stages of sort of rolling it out. What have you sort of seen in terms of performance with the 5G fixed wireless? And I guess in particular its ability through improved download speeds and latency to compete with entry-level fiber products?

So obviously, it's early days in terms of the rollout that we haven't seen -- we have obviously seen good speed delivered through the 5G wireless broadband that we have, and we've rolled in July for our [indiscernible]. So again, we're seeing it. So that helps us to from my point of view of speeds that people can experience for the different solutions, but also the capacity. So in terms around [indiscernible] and then you're actually creating a much more fiber-like experience, therefore. Obviously, the network will roll out over a period of time. We're looking at least 5 locations during FY '21. So we'll continue to add capacity and look to move traffic of 4 and 5, which will also help in some of the other areas, regional and rural areas as well.

Yes. I mean just that gradual rollout of that kind of makes sense in terms of where you're guiding, it's not too ambitious versus what you achieved in the last half. Just on licenses, that's one of the areas that has sort of showing up. It's not being as strong in the 4G fixed wireless. What have you seen in the testing, in the field on latency in terms of creating that fiber-like experience?

Yes, I will remind you that [indiscernible] afterwards in terms of the breaking into the guidance for speed in the future?

Yes, I'm not talking about speed and talking about latency performance, but yes, as you wish. That's all right.

Yes.

Just moving to Slide 4. What sort of allowance have you made in terms of EBITDA drag in FY '21 for that?

Look, we're not going to give a specific number for EBITDAI for Spark Sport. What I can say is that we've got a really clear plan around the growth that we are looking for. In that part of the market, we've just got a really strong lineup coming with cricket coming on to the platform. And we continue to seek opportunities around partnerships to a combination of those factors.

Sure. And then just Spark Sport because obviously, we are in a different environment. What sort of flexibility have you -- will turn to the cost base there around the potential for COVID to be a disruptor, particularly around your first season of cricket? I mean does your contract allow you to scale back the content costs if the calendars go back, operations budget, that sort of thing?

Look, so we're working well with our partners. We have really good relationships with them. We obviously cater into the commercial details of what cost base might change, but I think what you're really trying to understand is what the impact on the business. A good way to think about it is that the impact of sport would be no different than what we previously invested in other media type offerings that we've had in market.

Okay. No, that's great. And then just quickly the last one. Just on broadband, potential for a new entrant coming into that market, sort of look at the strategy over the last few years. Obviously, you've grown gross margin through the fixed wireless strategy. Is there any tilting in your approach to put broadband from a customer sort of critical mass perspective? I mean you haven't added a lot in the way of customers seeing, sort of, competitors like 2degrees and [indiscernible] build up reasonable basis. What is the strategy with regards to competing in broadband for the next 3 years?

Well, we wouldn't go to the next 3 years right now. We'll talk about that in terms of [ guide ]. But effectively, from our broadband perspective, as you pointed, it's a highly competitive market. There's over 80 RSPs. So new entrants probably don't make a huge difference, to be quite honest, to the marketplace that it is. We just gained 14,000 connections over this year. And yes, aspiration, as you pointed, is very much in the wireless broadband space growth, [indiscernible] plans would be on unlimited and/or a fix of fiber as well. So from that point of view, our strategy around broadband is to continue to hold that customer base or to desire to hold that customer base. And as I pointed out, over the last 3 years, we haven't held it as much as we'd like to. So that will be a focus for us and to continue to hold at the same time as moving off some of the older technologies and generally on to wallet for that.

Our next question comes from Sameer Chopra from Bank of America.

Congratulations on a really good delivery, given the tough environment out there. Just 2 questions, please. One is just on 5G. So if you think about the 3 kind of use cases for 5G, one's around network substitution or cost-out [ loans ] capacity. And then the last bucket would be revenue. I get the sense from the conversations so far that there's a strong emphasis on what 5G can do in terms of broadband, replacing fixed broadband? What it can do in terms of capacity, have you baked in much in terms of revenue? Do you see a strong sort of revenue case around 5G. That's kind of one question. And then the second question was just on Capex. Really nice to see that CapEx guidance, circa $350 million down again. Could you maybe walk us through which of the buckets do you think comes down in FY '21 versus FY '20? Like do you think the efficiencies are on the network side or the IT side?

Okay. So Sameer, just to pick up the first question around 5G and the opportunities. As you pointed out, we are very focused on the wireless broadband growth as the first piece presets the earliest and bit highest returning from both the customer experience perspective, but also from a [indiscernible] organizational perspective, we see that. Clearly, it helps with new expenses we talked about, too. Then on the revenue side, I think we start to look at new cases around whether that's putting our IT business as it is start to move into more smart automation with cities, transport. That is where we see 5G playing a role as well and helping to support [indiscernible] mix where we see revenue opportunities coming from. They will evolve over time, obviously, as you roll that network out. And you -- and like all the other network [indiscernible] with the 3 or 4, that happened over a period of years. But from our return on investments, and when you look at the biggest opportunity in front of us right now, it is enhanced wireless broadband.

And then Sameer, I can pick up your second question around CapEx and the $350 million. So it is, as I mentioned earlier on, it is really important that while the kind of core Capex, I guess, a $350 million a year include spectrum and the number is actually $400 million. So it is still a substantial amount of spend. Our level of investment in mobile will continue to be the largest chunk of that, and I would have -- we expected it to be at similar levels to put in context, in FY '20, we had a very large level of investment as we prepare for Rugby World Cup. So we continue to invest heavily and that will support our rollout of 5G and also ongoing capacity requirements as we move to unconstrained capacity, particularly around wireless broadband. Where it comes down is in some of our IT programs. We've kind of pass-through the peak of some of those large IT program spends, and so we're able to pull back in some of those areas and redirect the money into other parts of the portfolio.

Stefan, if I can just squeeze one more in -- you spoke about working capital efficiency as well. How are you doing it? Like telcos are renowned for not being great on working capital. How have you managed to sort of get the efficiency levels up on working capital? What are you guys doing? And how can you repeat it?

So there's a couple of things that we've been focused on. One is more a high level of focus on the level of prepayments that exist within the business. At times, it makes really good sense to prepay some of our expenses because it gives us access to good commercial deals. We continue to look for those opportunities, but we've got a higher bar on that now. So pulling back on our prepayments has been one of the key things. We've also run an education program throughout the business to help our people understand the importance of cash throughout the organization, and so it becomes the things mostly around removing exceptions. So having paying on standard terms and removing exceptions where we win and also receiving our cash on standard terms. And once again, removing those exceptions. So it's a combination of those things, which have had the biggest impact. It is also worth noting, a part of the improvement in FY '19 was, we had some quite large deals that went through at the end of the year, which meant that last year's position was probably get a headline number that was worse than what it might have otherwise been. That is back to more a normal position. We got [indiscernible].

Our next question comes from Brian Han from Morningstar.

The COVID impact that you estimated for F '21 in broad terms, are you just annualizing the $25 million impact in the most quarter for F '21 and then projecting cost control to offset it to bring it down to 75%? Or are you assuming COVID impact of just 9 months in F '21?

No. So when we look at FY '21 -- FY '20, there's a number of factors that sit with a net, there is roaming revenues, there was also the impact of low handset sales and stores are closed. And there's also some offsets in various areas around higher levels of calling where we saw a pickup in 0-800. When we look forward -- and also be fair to say minimal impact from customers because we've still got the wage subsidy in place. If you look forward to FY '21, we have assumed a continuation of roaming revenues being not available, but we've also actually looked through line-by-line and work out what we think is the likely impact over the course of the year. So the $75 million there is the impact that we expect, and then we've got a cost-out program to offset that $75 million.

Okay. And my second question is, I know you set a solid target for fixed wireless this year. With more people depending on fixed line broadband during the current pandemic, are you worried that longer term -- and I'm talking longer term here, this may reduce the potential size of the fixed wireless markets that you guys can go after?

No, I don't think that's the case. I think what we saw around on our wireless broadband network has it performed very well. The speeds were good for our customers. We were able to remove cash overhead. There were no constraints for them working at home. And as we look at 5G and other [indiscernible], that's the benefit of 5G, the fixed capacity that it adds the experience list even further. So we're not concerned about that as a broader trend.

Our next question comes from Phil Campbell from UBS.

Just a couple of questions from me. Stefan, just the first one on the 1,800, 2,100 spectrum renewal of $50 million. I just wanted to stick with you, if you had any discussions with the government regarding the deferred payment option. And I think there was a deferred payment option of 5 years, but I was just wondering if you actually could go to the government and look for a 20-year deferred payment option, which is in line with the license, just given we are in a COVID tough environment, that was kind of my first question. Then the second one was just on fixed wireless. The 40,000 net adds forecast for this year. Is there some 5G fixed wireless net adds included within that number? I'm just conscious of the fact that the modem prices are not quite high. So if that is the case, I'm just assuming that you expect the modem prices to come down next year.

Phil, yes, I can pick that up. So in terms of the deferral option, so we'll look at all of those as choices, ultimately, will depend on what is the commercial construct that goes around it, and that's not something we've seen yet. So as that payment comes through, that's certainly something we will look at, but as I say, will depend on the commercial construct at the time. In relation to your question around wireless broadband and the uptake of the 40,000. Yes, that does include an assumption that we'll pick up some 5G within that, and we are absolutely seeing modem prices come down. They're still more expensive than other ones, but that will come down, especially as it goes globally and that is our expectation. Yes.

And then in the mobile revenue growth of like 0% to 3% for this year. Obviously, it's got a 5G iPhone launch [ containment ] there, I'm assuming. So is that -- what's your kind of expectations for the later in the year under kind of the COVID environment?

Good question. Probably a little early to tell at this stage. We are -- we're really focused on the things that have been successful for us to date, which is using our data and insights to accurately identify those customers, get really good offerings in front of them around -- commit the need for additional data and helping drive that upsell program that we still see the biggest opportunity that will be where we focus.

And sorry, just one very quick final one, Stefan. When you're doing a line-by-line kind of analysis for FY '21 and you go into the bad debt line, do you go back and look at the GFC for COVID guidance on what you think is going to happen with bad debts? Or have you gone kind of approached that?

No, that's one of many factors we look at. We're also in contact with peers in other jurisdictions around the globe. But as I think you can see, Phil, it's pretty hard to predict. Even if you look at economists' views on the impacts on the economy, there's a huge range. So we've taken what we believe is a cautious approach, but time will tell.

We're obviously actively managing through the financial hardship policy that we have in place for our customers. The desire to keep them connected for as long as possible. So we've got a range of different options here from different plan options to short-term extensions to longer term. And so we have both customers under strong management. So that gives us a sense of where we are now. But as we pointed out earlier, once the wage subsidies roll off, that will give us a better indication, too, from both a small, medium-sized business as well as consumers, the impact that we're seeing more longer term.

Yes. Are you noticing anything in the mobile market in respect to some of those SMEs in terms of cancellation of plans or trading down at the moment?

Nothing significant. I mean, as I'll say, that's probably a little early to tell given the wage subsidy is still in place. We see device volumes down, acquisition rates a little slower, but also generates a little slower. So it's really a bit early to say.

And I guess, it's an environment where connectivity is really important whether that's fixed or wireless. You go to have a reasonable degree of stickiness within businesses because they need it to be able to engage with their customers [ fixed and mobile ].

Our final question comes from Ian Martin from New Street Research.

I just got a couple of questions around mobile usage and then mobile capacity. So can you comment on how average monthly usage varied through the year? And in particular, in the June quarter, whether it went up or down with those COVID lockdown impacts. And you talk about 5G being able to address higher data needs, where do you see that monthly usage going in the year ahead and as 5G gets established? And then in relation to capital spending on [indiscernible] .

Well, Ian, could you just repeat the start of the first question. You break up a bit. Could you repeat the start of the first question, please?

Yes, sure. Just interested in how average monthly usage on mobile varied through the year. And in particular, whether it went up or down in the June quarter?

So the -- let me read from it. The -- our usage profile over the year in terms of data usage was relatively consistent. We did see small levels of decline in the last quarter because people were at home more and therefore using more of the broadband allowances. So we tend to use other technology. And clearly, the big drop off we see is in roaming, but not substantial. And as we come out of lockdown, we're seeing that return back to normal.

And obviously, wireless broadband, cameras are broadband, not mobile [indiscernible]. Yes.

Yes.

Okay. So when you're talking about 5G Capex, the implication was the focus of that is on wireless broadband and increasing that capacity. I just wonder whether that comes at the expense of building out 5G population coverage or whether you're able to do both?

We're doing both, combination of both, Ian. So -- yes.

And given the situation with the 3.5 gigahertz spectrum, just how far can you pursue that when you're not -- if it's not clear how that spectrum allocation is going to work out in the long term?

So we're taking a managed approach to the rollout with the spectrum that we have. You're right, that's the 2 year right at the point until the further negotiations between the government and the [indiscernible] interested parties. We continue to work with the government to understand the time frame for that auction. So it is a balance in terms of making sure that we get non-regretful network rollout at the same time is making sure that we're matching our customer demand. So there's a balance that we operate in.

And just lastly, just in terms of the radio access network hit, is there a switchover issue you've got to manage given the situation around the vendors and particularly, do you need to switch over some of the 4G ran given that vendor issue?

We are doing a combination of some of our [indiscernible] in terms of -- on our 4G -- where it makes sense. And then, obviously, with 5G, we've rolled out with Nokia so far, and we'll continue, we got a multi-vendor approach here. So that's the end of questions. So thank you, everyone.

Thank you so much. Ladies and gentlemen, that does conclude the call today. Thank you for attending. You may now disconnect.