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

[Foreign Language]. Welcome to our investor briefing on IT and Managed Services. My name is Stefan Knight, and I'm Spark's CFO. I'm joined today by Grant McBeath, our Customer Director; and Tessa Tierney, our Product Director. So today, we're going to provide a more in-depth view of our IT and Managed Services businesses. And there's 2 primary objectives for the session. So first, we want to help the audience understand the growth potential we see in this market and why we're so excited about it. But secondly, there is also an educational element to it. We really want to provide some key insights on the products, and we'll provide more detail on that as we go through. So the format for the day today for the session is I'm going to provide an overview of the sector, our strategy and where we see the growth potential. Grant's going to share more about why we're well placed to win. And then Tessa is going to share the insights around the key products and the characteristics of each of those. We will share some case studies along the way to bring it to life, and we expect that to take around half an hour, maybe 40 minutes, and then we'll move on to some questions because I'm sure there'll be plenty. So on that note, let's get into it. So first of all, let's start with what is IT and Managed Services, and let's begin with our customer needs. So as our customers go through digital transformation journeys, they tell us they want a number of things. First of all, they want access to high-quality data center facilities. They want access to best-in-class partners, particularly in the cloud space and they want security over the top of it. And ultimately, one of the big messages they tell us though, "I just want it all to work together seamlessly." And so we deliver that through our cloud security and service management business. In order to deliver those services, our customers also need access to hardware and to software. And they need that in all locations around New Zealand, and we deliver that through our procurement and partners business. And underpinning that, they need to always be connected across all of their locations, and we deliver that through our managed data networks and services businesses. And the collaboration business also supports customers who work in the office and remotely. And collaboration is one of those terms that you have now often also hear referred to as video conferencing. So if we then look at the make-up of this part of the business, the IT and Managed Service business has grown strongly with around 10% revenue growth over the last year. In FY '20, our Spark overall revenues were $3.62 billion and 31% of that falls into the IT and Managed Services category. And in FY '20, you can see that revenues were around $1.1 billion and the composition is laid out there. So today, we've also released additional financial information via the stock exchange. The new disclosures provide more detail around that breakout of cloud security and service management. And we've also included both financial and some nonfinancial measures to help you understand it and for the analysts and investors to also to model it in more detail. So that additional disclosure is designed to provide you with more information, but at the same time, while managing what we would see as commercially sensitive parts of the business. It is worth noting there are some risk statements that have gone through the product lines, particularly where we see in some of our cloud security and service management business, some of the revenue has been moved into managed data where we felt it was more accurately reflected. So moving on. Now let's look at our 3-year strategy. So on the 16th of September last year, we outlined our 3-year strategy. And what we described was a capability-centric strategy that reinforces both growth in our established markets but also into our future markets. And as a reminder, our established markets are wireless, broadband and cloud. So on cloud, we aspire to be New Zealand's leading agnostic cloud custodian, and it's bringing the best of private and public cloud together with our service expertise. And that ambition hasn't changed, and we have included it here again for your reference. We deliver that through end-to-end hybrid cloud solutions and business transformation services that are supported by our consultancy business, Leaven. We partner with hyperscalers to deliver a full suite of products because that's what our customers tell us they want. And we offer remote working through digital workplace solutions. And then we have local service to meet our customers' needs. And ultimately, that's all underpinned by always-on connectivity and security. So now let's take a look at the growth opportunity that exists in this market. Prior to COVID, our businesses were already embarking on digital transformation. However, following the impact of COVID-19, one of the macro shifts that we're seeing is that shift from physical products and channels to digital. And that trend is accelerating in New Zealand and across the businesses. So Gartner predict that by 2025, 80% of businesses globally will migrate away from on-premise storage solutions and so now move to colocation or the cloud. In New Zealand, we estimate only 25% to 30% have made that move. So it's going to create huge demand for professional services as well that will go in to support those transformations. The market in New Zealand is large at around $6 billion of revenue. And we expect that IT and managed service market to grow at around 4% to 6% CAGR through to FY '23. Cloud will be a big driver of that growth, and public cloud, a big driver within it. So we expect that there will be ongoing demand for hybrid clouds. But we -- and that's because we know that our customers need both. So they'll need private cloud for those critical applications or for those ones that aren't actually able to make their transition to public cloud, but they also are going to need public cloud to achieve the cost benefits that they seek. And so we know that public cloud will create that price pressure on our existing business, but due to that volume growth, we expect that will really help offset it. And we also know that local service will continue to grow and we see a significant opportunity there. So Spark is well poised to grow within this growing market. So first of all, one of the first reasons we think of is that we see ourselves as the only New Zealand-based operator who can provide an end-to-end IT and managed service business with both connectivity and mobility. Secondly, the ability to differentiate by bringing together our services, which utilize our infrastructure assets, partnering with those best-of-breed cloud providers and then combining it with a local service layer that's not replicated anywhere else in New Zealand. And third, through established relationships that we already have with such a large number of New Zealand's businesses and the market share that we have. But it is worth remembering that the market in this space is actually quite fragmented, and it leaves opportunities for us to grow faster than the market, we believe. And then also, our investments in infrastructure create new opportunities, so things like 5G, Internet of Things, edge compute. These have all got emerging use cases and we're leading them out in New Zealand. So our growth is underpinned by our infrastructure portfolio. We've got a significant portfolio of assets across fiber, mobile, network, mobile networks, data centers and subsea cables. We've also got New Zealand's largest and fastest-growing Internet of Things network. So we've already announced that we'll be reviewing the portfolio for investment and partnership opportunities. Ultimately, they've got to be commercially sensible and they've got to help maintain the competitive advantage that we see that they drive already today. Our aim is to drive greater capital efficiency, increased resilience and better customer experiences. And as we've mentioned earlier or at the half year result, we'll be providing an update on this at the full year result. So to help you understand the revenue growth, we've laid it out in a bit more detail where we see the opportunities. So just working through them, in cloud, including our data center business, our revenue in FY '20 was $225 million and grew at 6%. We expect growth in hybrid to continue at a similar rate. And while we see price pressure from public cloud and IaaS, we expect that to be offset by volume growth with only 25% to 30% having made the move already, as we said. We expect to grow slower than the market, so we think market growth will be more like 10% to 15% but the big driver of that will be public cloud. In security, in FY '20, our revenues were $37 million and grew around 3%. So our performance here is slower than we would like but that reflects the market and customer needs are quite complex. So we expect similar growth here reflecting that complexity. Service management is where we help our customers with their digital transformation journeys. Now our revenue in FY '20 was $158 million and that grew 16%. We expect strong growth here faster than the market. The market, we estimate, is growing around 3%, and that reflects the strength of the capabilities we have. However, a 16% CAGR is pretty difficult to maintain so we expect growth but not at 16%. Procurement and partners revenue in FY '20 was $407 million and grew 12%. We expect that to continue as our customers purchase hardware and software for remote working and for cloud. So this is faster than the growth we're seeing in the market, but it is worth knowing this is subject also to supply chain availability and with COVID, that is making it hard to predict. Collaboration or video conferencing revenue in FY '20 was $65 million and grew 23%. And looking forward, we expect this to grow in line with the market growth, which is somewhere around that 10% to 15% mark. Managed data and networks revenue in FY '20 was $212 million and grew 2%. We expect that to continue with growth in networks, offsetting the declines that we see in managed data. So looking at the IT and managed services portfolio in aggregate, in FY '20, it grew at 10%. And looking forward, we expect ongoing strong growth for the portfolio at around that 5% to 10% mark. So that gave you a bit of an oversight or a bit of insight into where our revenue trends are playing out. We also want to provide some insight into how our margins will evolve over time. So looking first at cloud security and service management. In aggregate, this part of the portfolio delivers a contribution margin of 35% to 40%. However, there's 2 quite different dynamics within the portfolio. So the cloud and data center portfolio is characterized by low labor and high margins, and those high margins then support high capital intensity. And in return, that drives attractive ROICs, which are above our weighted average cost of capital. Looking forward, public cloud will place pressure on price and lower margins. However, public cloud doesn't require CapEx and so that will help offset some of that price pressure. The other part of the portfolio is security and service management. These businesses typically have higher labor costs and lower margins but they also have lower capital intensity. And therefore, they also generate attractive ROIC, which is once again in excess of weighted average cost of capital. So looking forward, we see the opportunity to improve the margins here, and that's through standardization and automation of our service delivery. Our smart networks also create opportunities for new margins and, as I mentioned, those areas like 5G, network slicing, et cetera. The procurement and partner business is primarily a resale business. And as you'd expect, it operates with relatively low margins, but it also has very low capital intensity and we don't actually expect that to change substantially. Our managed data networks and services businesses are high margin, and they leverage the infrastructure assets that have already been invested in. We see opportunity to improve the margins by simplification of our product set and also of the service delivery. So in summary here, we think that the margins will change as public cloud creates price pressure. But there's also opportunities for efficiencies and other parts of the portfolio as we simplify and automate and also opportunities for new margins as we invest in our infrastructure assets. So as I mentioned, we are also aware of the impact of hyperscale entry and the impact that will have on the market. So our plan is not to compete here but is instead to focus on our strengths. We are the only New Zealand-based provider who can afford a full end -- who can offer -- sorry, who can offer a fully end-to-end service and who can provide that service locally where our customers are. We partner with the hyperscalers because we know our customers need hybrid cloud. And we see opportunities to bring and to support New Zealand businesses as we bring those technologies to life and help them gain the productivity gains that they seek. We also see opportunity for new margins as we invest in infrastructure with those use cases emerging. So in summary, we see this is a large and growing market. We're uniquely positioned to grow within it, leveraging the assets that we have and our end-to-end services and that sets us up well for long-term growth in this space. So I'm now going to hand over to Grant, who's going to talk more about why we're well placed to win.

Thanks, Stef, and [Foreign Language] everybody. So why Spark? As a legacy New Zealand business, not only have we read the map around business transformation but we've also traveled the road, having separated out our systems through restructural separation with Chorus; rebranded from Telecom to Spark; modernized our legacy IT infrastructure; invested heavily in cloud and IT managed services businesses; established a big data business; and established a thriving IoT business. Through this journey, we've been proud to maintain and grow our presence in New Zealand's largest private and public companies, providing leading cloud and IT managed services and support. Within the business cluster, our mantra is to earn the right to rewin our clients' business every day through great service and great project delivery, service management and operating managed services for our clients. As Telecom and the time, we knew we wanted to be our client's most trusted partner. And often that relationship comes in IT services versus just pure telco. So we purchased Gen-i back in 2004. We continued to add to the portfolio of businesses and products and solutions aimed at cloud and IT managed services as our clients' needs changed. And as the cloud became the key to digital transformation, acquiring Revera in 2013 gave us strong cloud managed services capability. And the development of our Tier 3 Takanini data center in 2014 reinforced this further. Adding a bespoke and highly customized IT managed services business in CCL in 2015 gave us greater scalability down through enterprise, corporate and into the SME channel. We observed the demand for Revera and CCL services to be much more interoperable, and we made the decision to integrate the 2 businesses in 2019. This created the best of both worlds for our clients with a highly platform-orientated business of Revera coupled with the flexibility and customizable nature of CCL. But cloud was changing. With the development of the hyperscalers, primarily, Azure, AWS and Google, clients needed guidance to help transform into the modern cloud. And it wasn't just about shifting workloads, it was as much about strategy and culture across the board with people, process and technology implications. We've partnered with CTP in the U.S. who has been the leading Fortune 500 cloud technology partner to create our Leaven brand, focused on helping New Zealand clients develop, design and manage their modern cloud strategies and deployment. To continue to capture demand and harness capability, we've also established Mattr, who's focused on building digital trust and solving sovereign self-identity. We've set up our first vertical in Spark Health, focused on transforming the health sector with digital services to deliver improved health outcomes. Our clients have -- our clients often can have thousands of partners that traverse their ICT needs across the connect, enable and transform portfolios. Managing partners has become an industry into its own. We believe there is a smarter way to consolidate your partners into much clearer, scalable and capable ways that complement the end-to-end capability of ICT that a service provider like Spark and the Spark Group can provide. Having telecommunications network resilience and a pedigree and a leveraged or dedicated resource capacity, coupled with IT managed services and security, is the backbone for which our clients businesses run. With the rapid acceleration of digital and cloud transformation, Leaven is New Zealand's unique cloud-agnostic consultancy with industry-leading IP and solutions to perform the transformation for our clients or work alongside their teams as we impart our knowledge and train their teams. CCL then can provide cloud custodianship and managed services either in the cloud or on your traditional infrastructure with an unmatched service management culture. As our clients focus on learning more about their customers or look for continued process improvements or asset tracking and telematics, then Spark's fastest-growing IoT networks and solutions rapidly become a point of differentiation for our clients. Mattr is a digital services provider, creating safe ways for people to connect online is core to what Spark does. In an online world where it's becoming increasingly difficult to build trust, Spark has the opportunity to help lead the way in finding solutions to issues around identity and privacy. We're doing this by providing the investment to Mattr for Mattr to set up as a start-up business. Mattr is a subsidiary of Spark. It operates as an independent business with its own advisory board. We serve all business client segments and scale nationwide. No other ICT provider has the breadth and depth of reach across New Zealand. Our teams are aligned through 1 galvanizing strategy and governance to ensure shared knowledge and clear focus on what our clients need. The Spark direct teams lead businesses from 100 FTE up to the enterprise and government clients and a much more dedicated and focused support model across the full portfolio of cloud and IT managed services. Our business hubs are local like you. They're individually owned and operated. They're members of their local chamber of commerce. They're immersed in their local regions, providing on-the-ground local support, where our competitors are often solely telephone-based from the main centers. One of the issues our clients in the SME space experience is this bespoke nature of not being able to get consistent, standardized IT support throughout their branch network. And so we've established an IT partner network to do just that and they work hand in glove with our business hubs around New Zealand. CCL are also nationwide. They provide tailored and trusted expertise and support for all ICT and managed services needs in a modern cloud ecosystem. Leaven, as we said earlier, has provided some incredible business transformations already and COVID has accelerated its relevance in the market. All of these business units tree up to my customer director leadership team to ensure we take a coordinated and aligned approach to the New Zealand ICT market. Nobody else can provide this level of capability, service and reach across New Zealand. Alongside our culture, our brands and reach are 3 key areas where we believe we have significant differentiation and competitive advantage. First one is investment capability and local advantage. Our continued investment with over $200 million invested in FY '20 alone, with 1/3 in IT and managed services and the remainder in telco networks. Excluding property and buildings, we now have over $600 million of infrastructure assets, which will deliver -- which will continue to deliver significant value for the Spark Group. Our scale and investment is a clear competitive advantage for Spark. Second is capability. As discussed previously, some of our clients have thousands of ICT partners. Having a more scalable, focused and capable end-to-end partner ecosystem provides a greater level of alignment and partnership for our clients. We can be that one-stop shop so many prefer. Nobody else has the breadth of telco, cloud and IT services capability in New Zealand. And we continue to expand this with new technology like the Internet of Things, data and analytics, machine learning, digital trust, 5G edge compute and network slicing. Not only do we transform ourselves internally, but some of New Zealand's largest government and enterprise clients can trust Spark to deliver their most complex IT modernization and transformation programs. And we do this across the breadth and depth of New Zealand businesses, from government departments all the way through to the backbone of New Zealand, our incredible SME businesses across New Zealand. And thirdly, our local advantage is our competitive advantage. Nobody else has physical presence in over 25 cities and towns with hundreds of professional services and engineering people across New Zealand. We've done it to ourselves. We've continued to evolve and transform our business. We separated from Chorus. We've rebranded. We've redesigned our retail network. We've modernized our IT stack. We've moved into the cloud and big data and flipped at scale to agile. We pride ourselves on being client-led. We do what's right for our clients and their strategy and sever relationships with the 3 public cloud providers, Microsoft, AWS and Google. And our local capability and scale allows us to respond at pace, develop, retain and attract the top talent and ICT nationally. And here's an example of our ability coming to life for a client, Fidelity Life. They were 1 year into a 5-year transformation and were using Microsoft's Azure platform as a financial services provider. Security is paramount. However, with such a large transformation, often there were multiple vendors developing business applications for them in Asia with inconsistent security approaches and standards, this invited unnecessary risk. So our Leaven cloud transformation service reviewed their security approach, applying a 3-part approach called DevSecOps to analyze, fix and then harden the insurer's cloud platforms. A huge part of Leaven's services is creating controls, whether it be cost or compliance, and in this case, making sure security is baked into code deployment ongoing. This enabled Fidelity Life to move more quickly to deliver software updates. Security processes are automated and managed, allowing the organization to innovate faster than ever before. It's been awesome to partner with Fidelity Life here. I'd now like to take the opportunity to introduce my colleague, Tessa Tierney, our Product Director, to talk more specifically to our product estate.

[Foreign Language] Keeping New Zealand's businesses running has never been as critical as it is now in the midst of a pandemic that has forced rapid enablement of traditional on-premise teams to be able to work from home confidently and securely. Being able to sprint alongside our customers as they transform their businesses depends on our ability to translate their needs into a portfolio of products that is flexible enough to change with them but also aggregates the best solutions from global and local partners into a single managed service relationship. The IT and Managed Services portfolio is split into 3 major components: our cloud security and service management portfolio; procurement and partners; and then managed networks collaboration, which includes contact centers. For our customers, being able to procure their storage and compute capacity, security services and connectivity networks from a single partner increases their speed of change and incident management as well as being able to road map future capability with a single trusted partner. We then augment these critical infrastructure services with application modernization, monitoring, collaboration and workforce calling applications and desktop management capabilities, right out to hardware and licensing procurement secured at some of the best reseller rates as a significant partner in New Zealand of the top global IT enterprise companies. Cloud has represented a significant growth engine for Spark over the last 5 to 7 years. Moving quickly on the global trend of businesses to shift their on-premise infrastructure into centralized partner managed data centers, we have secured a market-leading position in hybrid cloud services and infrastructure management. Customers want to consume infrastructure-as-a-service or IaaS services on demand, and they expect them to be assured, highly available and enterprise class. We deliver this through multiple New Zealand-based data centers that enable our clients to be agile and resilient, providing a pay-as-you-go IaaS solution designed to scale to meet the needs of New Zealand businesses, particularly those who value their data being kept with the New Zealand shores. Assisting our customers to take advantage of public cloud efficiencies and innovation has also become a core part of this portfolio. For our customers, managing disparate environments at scale is challenging and increasingly complex as they have many applications running on different hardware on-premises and in the cloud. Therefore, our multi-cloud, hybrid cloud products enable our customers to fully realize the benefit of their legacy technologies whilst helping them to unlock the potential that new cloud technologies can offer. In this first client example I'll take you through, our client undertook a large-scale migration of its IT to CCL's infrastructure-as-a-service or IaaS platform. This was part of a broader digital transformation program spearheaded by Spark to help the client redefine its customer experience and achieve a vision we hear all too often these days where they wanted to be digital by default. The client wanted to move away from aging infrastructure, which was unstable and costly to upkeep and to keep ahead of any potential disruption from digital-first players by redefining its customer experience. CCL worked hard with the client on a large-scale migration to an IaaS platform, dramatically simplifying the entire IT environment. The cloud platform modularity ensures the client can build, park and share complex multi-virtual machine environments. They can start small and scale up when the time is right, reduce their development times and integrate new applications and services without disruption to critical operations. In security, having access to the people and the capability to protect your network, applications, endpoints and data has never been more important. Customers are turning to security service providers for various needs. These include improving performance and efficiencies, improving mean time to detection and response, utilizing emerging security tools and technologies and providing visibility across all security controls and, finally, meeting compliance requirements. We provide an unmatched depth and breadth of capability. We've built a world-class cybersecurity capability that provides our customers with the most comprehensive and effective managed security offering in New Zealand. We deliver this through a unique mix of people, technology and customer-focused solutions. We have New Zealand's largest cybersecurity practice and security operations center with over 150 security certifications. We have an investment program in new security technologies and key partnerships with leading cyber technology providers. Our focus is an evergreen commitment to products and services, and we are New Zealand's only commercial member of the first global network, providing unrivaled global threat visibility. Our solutions span managed detection and response, threat intelligence and hunting through endpoint -- through to endpoint application, network and cloud protection. All wrapped with consulting services to assist our customers and understanding their current security posture and building a plan that enables them to transform their businesses and ways of working with absolute confidence. As we have developed out our cloud, network and security offerings, we have scaled our capabilities in service management and service aggregation, effectively offering evergreen business transformations for our customers, removing the unnecessary operational overheads and costs of multiple providers and partners and providing that critical single pane of glass for management across multiple service lines and partners. As Grant said, our local presence is our strength in this portfolio, where we can provide the in-country service desk and partner management for our customers. Our service desks generate annuity revenues across the management of core infrastructure services, database management, network application, network management and application configuration management, providing local support in defining and managing appropriate operational management and government frameworks across both the services contracted by Spark and, in the case of service aggregation, of the customers' third-party providers. In short, we ensure some of New Zealand's largest and most complex businesses remain up and operating 24/7. In procurement, we have one of the largest teams of sourcing professionals in New Zealand who maintain accreditations and relationships with major suppliers to ensure our customers can get market-leading hardware and software advice. As with many things, lockdown exposed gaps for remote working, resulting in spend to enable secure environments and upgrading meeting rooms and other infrastructure to match the new profile of blended working from home. For us, in this portfolio, our scale is our greatest asset as we have a large buying power, which offers us priority for our customers when supply chains are under pressure globally. We are certified across more than 150 brands in hardware and software, including Apple, Dell, HP, Samsung, Microsoft, Cisco and Adobe, among others, allowing us to remain vendor-neutral, focusing on ensuring our customers' investments are the best choice for their business requirements. Our connectivity portfolio. Connectivity solutions are core to Spark's offering, given our telecommunications heritage. And we have invested heavily in the last 3 years to modernize our managed data and networks portfolio. Whilst revenues are under pressure and managed data from falling input and device costs, we are seeing emerging opportunities to integrate wireless technologies into this portfolio to improve margin outcomes. We already have customers who are beginning to roll out wireless primary connectivity into some sites, and we expect this will only grow as 5G becomes more readily available. Foundational to this portfolio is our ability to provide private, secure and end-to-end into office and internal office networks where our customers' data travels over their own dedicated bandwidth. We provide and upgrade all of the necessary equipment and proactively manage the network 24/7 through our network operations center, so our customers can focus on their customers. On top of this, we have now evolved our services to include software-defined Wide Area Network products that allow us to manage both public and private networks for secure, efficient cloud connectivity and application performance. I'd like to introduce you to an example of this and VTNZ who have shifted to our cloud-managed network product and SD-WAN technology. [Presentation]

The last area of this portfolio is our collaboration area, which includes contact centers, and both are strong growth markets for us and are also known as unified comms. The growth is driven predominantly by business transformations as our customers move from on-premise solutions to cloud-based applications, of course, accelerated by COVID-19 and the requirement for teams to work remotely. Globally, the UCaaS market is tipped to grow 850% by 2027. This is according to new research from future market insights. As an example of this growth, in 2019 in November, Microsoft Teams had 20 million users globally. In October 2020, just 1 year later, this number had grown to 115 million, extraordinary growth in just 1 year. In the case of contact centers, our Spark PureCloud product powered by Genesys, gives customers the ability to run powerful and easy-to-use contact center capabilities without the cost and time to deploy on-premise legacy contact center solutions. It is capable of both inbound and outbound call center tasks and multichannel processing from voice, e-mail, chat, SMS, social media. And as the technology evolves, it is future-ready for AI integration, alongside allowing for our agents to work remotely. Continued growth in this portfolio is a focus for us as it also drives pull-through revenue from higher-margin connectivity products that underpin these solutions. The final client case study for today we will talk to as a complete digital workplace. This client had undergone some significant structural changes in their business, which presented a unique opportunity to modernize the existing technology and channels to better support its new objectives. They made a bold decision early on in transformation to go cloud-only, and this remains as one of the foundational principles of the solution. The transformation was built on an agile-based implementation program to deliver combined IT services, desktop-as-a-service, telecommunications-as-a-service and Revera CCL infrastructure-as-a-service products. The opportunity to work on such a large implementation of cloud technology afforded us the experience to build a complete digital workplace from the ground up. When COVID disrupted New Zealand in 2020, this customer was able to seamlessly transition their employees to work from home, including those frontline agents in their call center. I'd now like to hand back to Grant to provide some concluding remarks.

So to summarize, we're hugely proud of our business in cloud and IT managed services. We're enjoying good growth and momentum with our clients who are entrusting the Spark Group more and more with their ICT needs. Earning the right to rewin our clients' business every day is resonating with our clients' own needs and partnering. So as you can see, the Spark Group is a much more diversified business than broadly recognized. The IT managed services sector is showing strong growth with continued macro trends leading to more transformation and digitization. At Spark, we have a clear differentiation and competitive advantage across investment, capability and our local advantage. The sum of these parts and our continued success in this market provides greater earnings resilience and long-term sustainable value for our shareholders. That now concludes the formal presentations. We will now open for questions. Thank you.

Our first question comes from Arie Dekker at Jarden.

And thanks for the presentation and the additional line of sight into this part of the business. First question, just in terms of the revenue growth aspiration over '21 to '23, the 5% to 10% range. Can you just talk a little bit to where, I guess, you sort of see the key risks in that range, that sort of, I guess, make it a 5% spread? Just to get a bit of a sense of where we would make a call in terms of what might drive it to the upper end versus the lower end.

Yes, sure. So I'll pick that one up. So the -- I don't think it'll be any surprise to anyone that the biggest trend within the market will be the growth in public cloud. And that will obviously have an impact on our pricing of our AWS service. So that's where we would see probably the biggest change in trend potential. But as I talked about, one of the things that gives us confidence in this space and could put you higher in the range is the fact that New Zealand businesses are only about 25% to 30% through the migration. And if you think, based on piece of information, we'd expect 80% of businesses to make that transition over time. There's going to be price pressure going one way but there will also be quite substantial volume growth. And I guess that range that -- between that 5% and 10% reflects a level of uncertainty. We don't know exactly how quickly those trends will play out. So I think that's probably your biggest driver. The other thing that will help influence it will be some of the new businesses that may come on. So those use cases are emerging. It's really a question of can we get them into production and how quickly can we scale them? And I would see that being in FY '23. So '22 is probably a development stage. '23 is where the opportunity comes with those. So that will be the ones that I'd be focused on thinking about.

Sure. And then within the cloud security and service management, obviously, there's sort of a weighting in the growth to the service management. You're pretty comfortable that in terms of mix changes and there that you can kind -- that you've got enough opportunities for margin improvement to offset some of the higher costs that may come with mix change.

Yes. Look, I think the opportunity here is where we will provide service management in a lot of our customers that has put some of those larger enterprises and where you see the opportunities around the fact that many of them have common needs. So we will run, in some situations, we'll run leverage helpdesk and some we run very individual customized support models. The opportunity is to transform that -- have more standardized processes, common tooling across our customers, which then creates that ability to drive the efficiency through the backend delivery. So I guess when we look at the -- or the level of change that's going to come through, we'll get the volume growth and then the opportunity for efficiency. We see those as kind of being the 2 big plays that will help drive that growth into the future.

Yes, that's helpful, Stefan. Just on investment and the asset base, would you still expect to invest at FY '20 levels in the IT and Managed Services, I think, sort of circa around $60 million, $70 million annually over the next few years? And do you think it's likely that you'll ever do another data center investment again?

So my -- to answer the first part of your question, Arie, yes, I think we would continue investing at similar levels. The investment in another data center will ultimately depend on some of this infrastructure review that we've already announced. And so the goal here is to look at the efficiency of our capital, the opportunity for increased resilience and also better customer experiences. And so that could be investment, it could be partnership. Ultimately, it's a bit early to say whether we'd be investing in data centers at this stage. What we want to do is run that process. We'll look at the opportunities, make sure they're commercially sensible, make sure they drive our competitive advantage. But ultimately, we've got to do that piece of work and that's where we'll give an update on that in August.

Sure. Yes. I mean I guess the question wasn't so much in the context of that work stream that you're doing, but I guess in terms of -- with the hybrid model and also your ability and your customers' ability to increasingly utilize public cloud. Do you think in terms of where you are going with your cloud offering, that there's a need for you to own -- control data centers or that you'll be able to get by going forward with utilizing public cloud more?

Look, I'll pick up the first part of this and then maybe Grant can add some context around customer need for hybrid. But ultimately, we do see customers having a high propensity or a high likelihood of using both. And so playing that forward will -- I know I keep bringing it back to this infrastructure review, but ultimately, that is where we are, looking at what are the demands that our customers are going to have. And that then, in turn, informs what are your investment choices and what assets do you need to be long-term holders of. And so it's too early to say at this stage. Grant, I don't know if there's anything you want to add.

Yes. And I think certainly from -- Arie, from our own estate, we know that we won't be sending all workloads into the public cloud. We will have a blend of IaaS and public cloud. And when we go out to our customers, when we go to market, it's all about our clients' needs. So helping them develop their strategy, assessing where they are on their cloud journey and then providing that right mix based on their workloads, their strategy, their cost focus, their compliance and risk stature and security, exactly what is the right blend of private and public cloud. So from a go-to-market, being agnostic is super important for us, and we'll continue to go down that pathway.

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

Maybe just those revenue targets again. So just I suppose if you were to hit that 10% range because of the growth in the public cloud, is that going to have any impact on your 31% sort of EBITDA margin targets, just given the public cloud should be lower margin business?

I guess in theory, it could. But ultimately, you've got to take it in context of $3.5 billion worth of revenue. I think the likelihood of it having a material impact on 31% is lower. And probably the way I would think about it is if it did have an impact on that, then there will also be a corresponding impact on your capital intensity. So from a free cash flow perspective, while your input costs or your pricing might be -- your pricing might be lower, your capital intensity would be lower, too.

And I think I'd just add to that as well is similar to procurement, they may have lower margins per se, but the managed services, whether it be migration, installation, running managed services over the top, certainly complements and facilitates a higher-margin blend when you look at that end to end.

Yes, perfect. And then for cloud revenue to $25 million for a 31% share, just interested how much of that is coming from the government market in New Zealand and sort of what your share looks like in that market. And I suppose whether you see any risks around CDC in New Zealand, given their dominance and how much they dominate the government market in Australia.

Do you want me to take the first half and then you can add some comments to that one? So look, our -- we do have very strong relationships back into the government space. There was certainly -- the Revera business was very strong in that area. I think CDC's entry will clearly have an impact, that will impact pricing. But once again, I come back to that fact that we're only 25% to 30% of New Zealand businesses having made that transition. And in goal of going to 80%, I think there is going to be such a level of demand that there will be still plenty of opportunities for that as we push forward. I don't know if there's anything else you'd like.

Yes. The only thing I'd add to that is we are really confident in that government market. It has been an area of sustained growth for us. And we're seeing, particularly through this year, from a macro trend point of view, that kind of flight to trust and safety, particularly for government and an end-to-end support and compliance because the compliance cost and also requirements of us to provide into that marketplace are onerous for many smaller kind of boutique players. So this actually becomes a competitive advantage for us for how we solve the problems of big government agencies, big government agencies that are trying to transform. It's a huge part of health and making sure some of these big sectors go digital over time for the constituents of New Zealand, and that's a big area of strength for us and understanding those needs and then taking our government customers on that journey.

Perfect. And just one last one. Just managed data and networks. Just interested if you could talk about where the incremental revenue growth is coming from for the market overall, whether things like SD-WAN are putting any pricing pressure through that market.

You pick that up?

Yes. So a lot of the growth is coming from the new technologies. SD-WAN is growing off a small base really rapidly. Yes, it introduces some price pressure, but actually the margin profile is holding up relatively well within that portfolio as we move forward, particularly with the introduction of -- it makes us more flexible on wireless access. So wireless failover and resiliency has been a common part of that portfolio, and it's now allowing customers to blend wireless primarily with fixed primary across different sites, depending on the profile of your branch network, the location and the types of workloads you have out at the edge versus at the core. So that's driving that kind of new growth. The other area of growth for us has been in managed networks. So as opposed to the actual data connectivity itself, the networks that are now required to support the applications you're running either in your main business locations or remote workers and what's driving a lot of that growth in there as people upscale their WiFi networks, their internal LAN capacities, all of those things and the integration of those applications is what's driving a lot of the growth through that portfolio.

And so I think when we look forward, you would expect to see that the reduction in what would be our legacy business for managed data, the things that Tessa's talked about there with growth in SD-WAN and growth in managed networks ultimately offset that decline.

Our next question comes from Phil Campbell at UBS.

Just a few questions from me. I suppose the first one is just if you can give us a little bit of more detail around the partnerships with the hyperscalers, whether or not some of those are exclusive or not, and just when you are trying to help customers transition to the cloud. In some cases, do you actually face competition from the hyperscalers? I know that Spark has obviously got some of these unique nationwide capabilities and those types of stuff and on the ground. But I was just curious as whether or not you have situations where you may have lost business to a hyperscaler in terms of one of those digitizations.

Yes, thank you. I can probably take the first part of that conversation. We won't go into details of our specific partner contracts externally. However, we did announce last year a partnership with Microsoft around how we work with them -- with our customers and moving customers' data migrations into public cloud and some of their virtual desktop work. We call out in the deck that our partners are both competitors and partners. The really important thing for us is that we remain agnostic for our customers. So where hyperscalers will have individual conversations directly with New Zealand businesses about their capabilities, we're able to hold a conversation that is actually there should be the right hyperscaler for the right workload for the right customer experience that you're looking for within your business. And so that impartial trust is really important in this conversation because most customers we see will pick hybrid, so they'll ask us to help manage that hybrid estate, which becomes really complex. But it does mean that they can talk to Google if they really want to power up something like their marketing engine. Or they can talk to Azure if they're looking at infrastructure or AWS kind of deep, deep infrastructure. So having that flexibility across those partnerships is really important to us as a business. And in terms of going straight to market, Grant or Steve, you can pick that up, but I haven't seen anything material.

No, there's nothing we've seen materially in that space. So great answer. Thanks, Tessa.

And just a quick couple of follow-ups. Just when we talk about hybrid cloud, and we've talked about it quite a lot in the presentation, are we kind of assuming kind of 50-50 private and public? Or is there -- coming back to maybe the first question around the revenue ranges, is the risk of the mix between on hybrid is 70-30 public versus private? What's your kind of thoughts on what that mix is between the 2?

So Phil, look, the way I think about it is we've got a very large established base in the IaaS part of the market. The opportunity we have is to retain obviously all of those customers by making sure we've got the pricing right. So where I think your question becomes in is what's the future opportunity. And that is -- it is a little bit of a crystal ball-type question. We know that our customers will need both. As I talked a little bit about earlier, while in theory a lot of customers want to put all of their loads on, actually there are some critical components and applications that need either a higher level of care or a different service level. And having them in a private environment actually makes a lot of sense. And so it actually depends customer by customer, so it's very hard to give you a specific answer. What I would say is that if you look at the overall growth in the market, I do think that public cloud will grow faster than private cloud, if you look going forward. So our opportunity is to retain the customers we've got, continue to grow. We still think we can do that but the growth in public will be faster than perhaps what we'd see in private.

And I think also, we wouldn't just look at that as a platform margin. We look again at the applications that need to be developed on the public cloud are relatively nascent. We're very, very mature in the private cloud space. So for us, managed services will continue to evolve and improve that margin that you see as just a base level for public cloud.

Do we know what the kind of the percentage of private cloud versus public cloud is at the moment with the customers in New Zealand?

Look, I don't off the top of my head but it might be something that if you touch base with the IR team afterwards, they may be able to help you work through that in a bit more detail. But it's not something I've got off...

That would be great. And just one last one. I'm just kind of coming back to what you talked about before in terms of the digitization opportunity going from 25% to 30% up to 80% over the next 4 years. I just kind of wanted to talk a little bit about the data center capacity to be able to do that because I just looked at your slide deck, and it talks about your Tier 3 data centers. I'm not sure if there's 2 or 3 of those, and they look as though they've got 75% to 80% pre-commitments. The Microsoft data centers that CDC is building, apparently you've got 80% pre-commitments. Yes, I just wanted to kind of check that kind of data center capacity, whether or not there'll be enough to actually cope with that digitization that we talked about.

Look, I think that over time, you will see increasing capacity coming to the New Zealand market. I guess the question, Phil, is that you've got to think how much of it needs to be onshore versus offshore. And clearly, there's bigger markets offshore. We see a large potential still for onshore. So I think there will be additional capacity coming. As you've noted, we're at 75% to 80% committed to date. So some of the things that we'll need to look at as we come forward is what is the optimal mix for using our own data center facilities versus partnering with others.

Our next question comes from Brian Han at Morningstar.

In the procurement business, can you talk about how margins have been trending in recent years? And do you think that that procurement business is so important to this whole concept of being a single IP partner that Spark needs to keep being in that space even if margins continue to come under pressure?

So why don't I pick up the first part of that around the margin piece, and then you can talk about the value-add that that part of the business provides? If you look through our disclosures, you'll see that that part of the portfolio, the margins are -- they do move around a bit. They will kind of be down anywhere from around 7% or 8% and up as high as 12%. And ultimately, that depends on the mix that's going through in any given time. Hardware makes a difference. We've had, for example, in the most recent half, quite a large portion of software licensing deals that have gone through and so that has kept the margins slightly lower. So I think, ultimately, it depends on the underlying business. But if you look over the longer term, I feel that 8% to 10% space is a sustainable position. And particularly, as we continue to grow the scale in this place -- in this part of the market, that's a reasonable assumption to carry forward.

And as far as procurement being a core part of our offering, absolutely. For me, sales leads to service, service leads to sales. And as we do big procurement deals based off our scalability and the relationships we have with our vendor partners, it does create opportunities to save cost for our clients. But off the back of that, the installation work, the migration work, the managed services off the back of that, the running of those projects often leads to our best pipelines because we are earning the right to rewin our clients' business every day through great project delivery and great service. So yes, we do see that. If we look at the opportunities to further grow as we push further into SME with our IT partners' strategy that we talked about earlier, that creates a great opportunity again for our scale as Spark to provide that same level of cost buying power to SMEs throughout New Zealand and then provide the IT partnering over the top of it for incremental growth.

Great. Just a follow-up question. Is there much cyclicality to IT spending these days? And do you think there may be a little like a hangover in the next year or so, given the bringing forward of IT spend and digital transformation because of the pandemic?

So in terms of the cyclical nature, yes, there is an element of that. So typically, what you see is software is often bought on either a 1-year or a 3-year licensing basis. So we are a large provider to government so that tends to have a cyclical nature. Then you've also got things like hardware refreshes, if you think about laptops and things like that. They tend to be on a more -- a 3-year cycle. If you think about the overall IT portfolio, along the time we see our revenues typically are stronger in the second half because of the way that we recognize margins as we go through. So I think there is an element of cyclical nature within that. But then in relation to COVID, I'll maybe leave Grant to comment on that.

I would suggest COVID has exposed certain companies in certain industries lack of -- or technology debt. We probably sweated our assets for a long time as a country. And now the opportunity with collaboration through the likes of Teams, work from home, modern workplace, moving into the cloud and the benefits that provides you from an innovation from knowing your customers better, from being more data-driven operating model and really completely changing your business is huge. So I don't feel as though it's cyclical. You have certain industries that are absolutely investing ahead. But you've also got some, based on their own infrastructure investment cycles, that are still sweating their assets so they'll come on board a little bit later or certain industries that may well seek out a little bit more stability before they invest in some of those big transformation projects. As those big transformation projects become more referenceable and clearer in the market, that will give confidence to more organizations to follow that pathway as well. So we're certainly very confident in that sort of cloud, IT managed services and continuing to grow that space.

Our next question comes from Aaron Ibbotson at Forsyth Barr.

Thanks for a very comprehensive presentation on this somewhat opaque part of your business. I got sort of 2 big picture questions. First of all, I wondered if you could talk to the synergies between IT and Managed Services and, I guess, the rest of your business, providing broadband and mobile to retail. Is there any real synergies between these 2 things? Or has there been a consideration of maybe even, at some future time, separate this business? And then secondly, it's difficult for us or certainly for me to sort of understand how much of your revenues is coming from new services and products versus how much is coming from established products and services. And sometimes, companies provide some metrics around, for instance, how much of your revenues are around products and services that have been launched over the last 5 years or 3 years or some sort of metric to show the innovation cycle. I wondered if you could say something like that. Is it 20%, 50%, 10%? That was it for me.

I'll pick up the first part of that conversation. So yes, there's absolutely a halo effect that we get from the consumer, mobile, broadband side of our business. I think within New Zealand that we've been a very visible transformation story coming out of structural separation from Chorus, rebranding from Telecom to Spark, modernizing our legacy IT infrastructure, buying Cloud and IT Managed Services businesses, creating big data and flipping to agile amongst them, our own retail footprint and how that's our clear competitive advantage for us. Those elements absolutely have halo effects. And if you look at where we invest the bulk of our advertising in our brand would be in that sort of mass market consumer sort of side of the business. So it has awesome follow-through. And again, talking about end-to-end management with the breadth and depth that we have across our estate, that not only does that provide capability and credibility but it also provides blended opportunities based on how aggressive our competitors may be in certain areas. If we've got a broader stack plus service management that wraps around it all, it just reinforces our capability across the board.

And I'd probably build on that with new products and services coming like 5G, it's clear that some of the early use cases will be B2B ones, where the real commercial use cases are. So without that consumer business, where a lot of that technology is driven from in the mobile business, then you would be an IT services business trying to leverage that from someone else. So that connectedness with mobility is really important as you see the world actually shifting to kind of a more wireless-centric world even in business, much the same as consumer. So to leverage the learnings from both is really important to us in the product portfolio.

And then to pick up the second part of your question around the portion of our business that is recurring versus perhaps one-off, we have, in some of our previous presentations, disclosed an annuity share. So what we would say is that in cloud, security and service management, around 80% of that business is annuity. And the other components would be more project-based, so you have to win that each year. Obviously, the procurement side of things is a lot lower than that. And then -- but our managed data networks business once again will be around that 80% mark. So hopefully, that gives you a bit of a flavor for what it is. At this stage, we've just put out the new disclosures. So I think we'll sit with those for a little bit. We'll click feedback and then we'll maybe reconsider in time, but for now, we won't be adding anything further to them.

I mean I think you talked to our portfolio, how many were older products versus newer products and what that split was. It's probably similar. So our investment in agile capability in the business is meaning that we're probably doing more new product development now than we have done in the kind of previous decade. But similar to our customers' needs, we have to move and step with our customers and where they're ready in those transformations based on their investment cycles with the products that they've bought from us in the past. So again, you probably got 80% of our portfolio is what I call in the mature life cycle stage and a smaller percentage of that within that 80% that's actually in the declining space, which is where we have similar to our 3-year strategy, we called out our simplicity program for our customers. B2B is a big area of simplification for us and moving customers and on-boarding them into modern services as they move with us, particularly, as we've spoken about in the last year, as that's become apparent to a lot of businesses it's time to shift. But we probably have a solid 20% now of our portfolio where we have invested new product development into areas like managed data and networks, into our modern workplace solutions and into mobility and managed mobility services. So we're seeing a more growing demand now for new product development in some of these areas to keep in step with very different customers, customer needs moving forward.

Our next question comes from Wade Gardiner at Craigs Investment.

Just to follow up on Phil's question around data center capacity. Can you just talk to, I guess, the advantages, the disadvantages of sort of offshore versus onshore data centers, whether it's security, price, et cetera? And are there customer preferences in this area? I mean I believe that, particularly within the Australian market, a lot of that government work has -- they've had a preference to shift that onshore.

Yes. Good question. I'll pick it up and then you guys feel free to add anything. So we do know that a number of customers have that real preference for having their data housed onshore. There aren't -- in the past, there was previously government requirements that certain data that was particularly sensitive needed to be housed onshore. That's been relaxed to some extent. But just the natural ability to be able to have access to it, have a support model around it, has meant that a lot of it has stayed onshore. And so ultimately, it will depend on customer need. But I would think that there will be continuing real demand for a local presence with a local service model because that's the thing that we're finding has really been our differentiator. Anything else you want to add?

Yes, absolutely. So I think when we look at the globals or the hypers and versus the local provider, having that customer intimacy, where if something does go bump in the middle of the night, they can contact us and have that escalation capability, local labor laws, understand the culture, that level of immediate on-ground support, whether it be in the regions, in the towns and cities throughout New Zealand and then providing that end-to-end brand and reputational risk that somebody like Spark who is 100% focused on the New Zealand market provides, certainly gives a lot of confidence to a New Zealand partner. But I think to your point earlier on, the stigma and the maturity and understanding around cloud and what that means certainly has changed quite markedly over the last couple of years. But we absolutely see the local service differentiator as key to our IT managed services business moving forward.

Does the scale that the global providers can provide, does that impact price?

It does. But you've got to remember that with most New Zealand-based operators have been able to access global facilities for quite some time now. So that is already a factor within the market in terms of the pricing and the relativity that we've had to set. So I don't see that changing.

I guess another way of putting it, I guess, is do the local -- like if you build local, can you get a price premium? Or are you sort of you're essentially driven by matching global pricing?

I think price premium potential but optimistic. I think ultimately, pricing will be set by public cloud. There might be a small premium we can have for local. But really, the opportunity is for us to drive those local services and grow that revenue stream in line because that's where we see that demand. If you think with such a big portion of the customers having to make that shift, that the support they're going to need to manage their environments across local and private environments is where we see that opportunity. All right. My understanding is that is the end of the questions. So look, thank you, everybody, for joining us for this briefing on the IT and Managed Services portfolio. Thanks to Grant and Tessa for joining today and sharing some insights. As I mentioned at the start, there was 2 things we were trying to achieve. First of all, we wanted to really help the audience understand where we see the growth potential. And secondly was just shooting some great level of insight around those products and services. And I hope you found this a useful session. So thank you for joining us, and goodbye.