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Spark New Zealand share price on watch after lifting profit

The Spark New Zealand Ltd (ASX: SPK) share price will be on watch this morning following the release of the telco’s first-half earnings for FY20. All figures in this article are in NZD unless otherwise stated.

Financial highlights

Spark announced its revenues were up 4.0% on the prior corresponding period (pcp) to $1,824 million for the half-year to 31 December 2019. The primary driver of this increase was a particularly strong performance in mobile, with high-margin mobile service revenue up 5.5%.

Spark managed to increase its market share of the telco market by 1.2% to 40.1%. This market share is actually its highest level achieved since 2012.

Revenues were also driven higher by growth in cloud, security and service management services, up 12.3% on the pcp, as well as the introduction of Spark Sport. A further driver was a slow-down in the rate of legacy voice declines to be down 11.6% for the period as fixed-line voice becomes a smaller proportion of Spark’s overall business and revenue base.

Spark’s earnings before interest, tax, depreciation and amortisation (EBITDA) was up by 2.2% to $500 million, buoyed by strong momentum in revenue growth.

Meanwhile, net profit after tax (NPAT) grew 9.2% to $167 million, primarily driven by growth in EBITDA and lower depreciation and amortisation expense.

Increase in operating expenses to fund future growth

Operating expenses were noted to have increased because the benefit of cost-out activities was reinvested to partially fund current and future revenue growth.

Some of these activities included the launch of Spark’s new cloud and business transformation consultancy, Leaven. Expenses were also higher to support the growth of Spark Sport, the acquisition of Now Consulting as part of data analytics business Qrious, and the launch of emerging technology business, Mattr.

Final part of a 3-year company-wide transformation strategy

Spark commented that the company’s shift to Agile ways-of-working and its long-term investment in IT and network infrastructure was delivering results.

This is part of a 3-year strategy, and Spark is in the last six months of this period. During this time, the company has made significant investments in its network infrastructure. This, in turn, has improved Spark’s competitive advantage and diversified its business beyond traditional telecommunications into growth segments like digital services and sports streaming.

Dividend and market outlook

At an investor day on 2 April 2020, Spark will release details of its next three-year strategy, encompassing the period out to, and including, FY23.

Spark announced an H1 FY20 total dividend per share of 12.5 cents, 75% imputed. According to the company’s ASX release, Aussie shareholders will receive around 14.15 cents in AUD.

Spark commented that guidance remains unchanged, subject to no adverse change in operating outlook full-year FY20 EBITDA, capital expenditure and dividend.

FY20 dividend per share guidance was noted to be 25.0 cents, at least 75% imputed.

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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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