Earnings Transcript for SPK.AX - Q4 Fiscal Year 2021

Jolie Hodson: Good morning, and thanks, everyone, for joining us here today for Spark's full year results. Naturally, not the day we expected it to be following last night's alert level 4 lockdown announcement for New Zealand. But like most businesses, we've got used to adapting pretty rapidly. And with me today on the call is Spark's Finance Director, Stefan Knight, and as always, we're going to leave some time at the end for questions at the end of the presentation. So if I shift now through the environment we've been in. During the year, New Zealand experienced a stronger-than-expected economic recovery with low unemployment and GDP back in growth. This moderated the anticipated impact of COVID-19 on Spark in some areas. However, with the border is still largely closed, we continue to be impacted by the loss of roaming, lower overall growth in the broadband and prepaid markets and increasing talent scarcity. This, along with some one-off costs, the top line revenues were down 0.8% year-on-year to roughly $3.6 billion. That decline mask a strong underlying revenue performance in our established markets of mobile and cloud security and service management, which I'm going to touch on shortly. With that momentum is combined with our disciplined cost management, we were able to deliver FY '21 EBITDAI growth of 1% to $1.124 billion and that was at the top end of our guidance range. NPAT declined 8.6% to $384 million, driven by higher depreciation and amortization costs as we invested a greater share of digital products, shorter asset lives and an increase in tax expense as we cycle the one-off reductions experienced in FY '20. Resilience in our customer demand for our core services and disciplined cost and capital management mitigated the impact of loss of roaming on free cash flow, which decreased 1.1% to $433 million during the year. This enabled us to declare a total FY '21 dividend of $0.25 per share. It's 100% imputed for our shareholders. In our half year results, we announced a review of our infrastructure assets. And today, we're going to share the outcomes of the first phase of that review, including 2 significant investments planned for FY '22. Our accelerated 5G rollout and an expansion of our data center capacity. We have also identified further opportunities to drive value from the passive components of our mobile network and fiber, and we'll speak to that in more detail shortly. So if I just focus now in the established markets as we outlined on Slide 7, particularly proud that we're able to grow mobile service revenue 0.5% to $852 million, even when you take out the significant loss of roaming revenues. Stripping back that impact, mobile service revenue grew a healthy 4.3%. We also grew our mobile market share -- revenue share by 1.1 percentage points to 41.5%. Our focus on generating deep customer insights through data and analytics supported this growth and an 89% increase in Endless mobile plan adoption. The broadband market did remain challenging with lower overall market growth continued competition and pricing pressure, leading to a 1.5% revenue declined to $670 million. And as a result, our wireless broadband growth was below our target for the year. However, we did see momentum pick up in the final quarter, finishing the year with an increase of 19,000 connections. We remain committed to our long-term target of 30% to 40% of our broadband base on wireless and acceleration of our 5G rollout will support that goal. However, we are targeting the bottom end of that range by the end of FY '23, given the slower rate of growth. Cloud security and service management revenues grew 5.5% to $443 million as businesses continue to digitize and transition to cloud-based solutions. We saw particularly strong performances in service management and collaboration and our data center expansion, I will speak to shortly, will continue to support our growth in this market. We've made strong progress in getting the core capabilities to identify in our 3-year strategy is critical to our competitive advantage, and we're already seeing this translate into improved customer experiences and growth in the market. We're a simpler business than we were a year ago. So we've invested in improved digital customer experiences, supporting a 32% increase in digital sale and change customer journeys, and we retired 210 legacy mobile and broadband plans that did add complexity into our business. And overall, that's about a 30% reduction in those plans. A key enabler of better customer experiences is having a deep understanding of what our customers need and when they need it. And we finished FY '21 with a robust data capability that is providing us with the insight that helped to increase our marketing efficiency by 16%. Our long-term investment in culture of paying dividends, with 86% of our squads now scoring 3.5 out of 5 or above for their agile maturity. Our employee engagement continue to grow up 10 points and strong progress against our inclusivity goals, with 42% of senior leadership roles and that's beyond the Leadership Squad and Board now held by women. We continue to invest in the smart automated network that underpins our success in the market. So with 5G launching in 9 locations, rural connectivity expanding and improved automation and resilience of the optical transport network, Spark's fiber backbone. So I'm going to turn to the infrastructure review. So in February, we announced the review of our infrastructure assets, and that was the aim of giving greater capital efficiency, increased resilience and better customer experiences. We've now grouped our assets into 3 classes

Stefan Knight: Thanks, Jolie, and good morning, everybody. It's my pleasure to speak through the full year results for FY '21. So starting with a summary of the key financials as set out on Page 20 of the results presentation. Spark generated revenue of $3.593 billion, which was down $30 million or 0.8% on the prior year. And we're really pleased to announce EBITDAI of $1.124 billion, which was up $11 million or 1%. NPAT of $384 million was down $36 million or 8.6%. The depreciation and amortization and tax expense grew, and free cash flow of $433 million was down $5 million or 1.1%. And we've confirmed in the H2 FY '21 dividend of $0.125 per share, fully imputed and in line with guidance. So now let's get through some of the key elements in a bit more detail, so I can provide you with some more color. So let's start with an overview of the key movements in revenue as outlined in the FY '21 operational performance section of our presentation. So while top line revenues declined due to the ongoing loss of roaming, underlying revenue growth continues to be driven by our 2 key established markets, fixed line and mobile. And cloud security and service management, we saw revenue growth of $23 million or 5.5%, as we supported businesses on their digital transformation journeys. The growth in service management was primarily due to increased demand for managed-as-a-service propositions and especially our desktop management offerings. We experienced slower growth of $4 million in cloud as we see the price implications of a change in mix with growth in public cloud, partially offset by lower private cloud revenues. In mobile, revenues grew $23 million or 1.8%, of which $19 million was due to increased handset and accessories revenues. Service revenues grew $4 million or 0.5%. However, this included the loss of roaming revenues, and when you exclude that impact, underlying service revenues grew by 4.3%. We are very pleased with our sustained and strong performance in mobile which was driven by growth in our pay monthly customer base of 56,000 connections and ARPU growth of $0.81 or 2.9%. The growth in ARPU reflects customer demand for more data and the benefits of our precision marketing efforts. Our voice revenues were down $78 million or 20.2%, and that reflects the nonrecurring refund of $16 million for historic wire maintenance changes, connection declined and lower usage as voice becomes a smaller part of our business. Our broadband revenues declined $10 million or 1.5%, reflecting lower overall market growth and the very competitive nature of the broadband market. Other gains of $28 million were down $7 million from FY '20, and were mainly generated from the sale of mobile network equipment and gains on lease modifications, as we renegotiated some of our property leases. When we look forward to FY '22, our ambition is to return to revenue growth by maintaining the momentum we have in our established markets and continue to grow our customer base and share of wallet in our future markets of health, IoT and sports. And we expect mobile service revenue growth of around 2% to 4% and cloud security and service management revenue growth of around 5% to 8%. So shifting focus to now look at our costs. So entering the year with the uncertainty that COVID-19 created, we knew that cost management would be key. And as such, we implemented an accelerated cost reduction program to mitigate the COVID impacts. As a result of the cost reduction program and the ongoing shift to digital customer interactions, we saw operating expenses fall by 1.6% to $2.469 billion. The cost reduction program drove lower costs across product, marketing and on general OpEx. Our product costs fell by $4 million and that was driven by declines in voice and in broadband as our wireless broadband base grew. Also, our other product costs fell versus the prior year, which included cost for Lightbox which has been divested. However, those declines were mostly offset by increased costs in mobile and cloud, security and service management that supported our revenue growth. Labor costs fell by $20 million or 3.9% as services transition to digital and customers access an expanded range of self-service options. We also saw a lower bad debt expense as the impacts of COVID-19 on our collections were less than expected and provisions we raised in FY '20 were able to be released, and also as we start to see the benefits from investments we've made in biometrics and automation. Looking forward, we continue to see opportunity to drive efficiency in our cost base as we transition to a digital services provider and maintain our long-term focus on sustainable cost reduction. As a result of the cost reduction program, the decline in operating expenses was more than the decline in revenues and EBITDAI grew by $11 million or 1% to $1.124 billion. Within the result, we estimate COVID-19 impact of around $40 million. As previously mentioned, the most significant impact on roaming. At the half year result, we had indicated that the impact of COVID was expected to be around $50 million, however, with lower bad debts expense than anticipated as result of $10 million lower impact. As we look forward to FY '22, we expect to see a modest improvement in roaming revenues, noting limited travel bubble openings with Australia, which is currently paused. While EBITDAI grew by $11 million, the increase in depreciation and tax expense meant that NPAT fell by $36 million or 8.6%. So depreciation and amortization was $13 million higher for property, plant and equipment and intangibles, reflecting the shorter asset lives and $22 million higher for right-of-use assets and leased customer equipment assets due to increased customer and commercial lease activity. Our tax expense was up $21 million due to one-off decreases and tax expense recorded in the prior year for depreciation allowances being reintroduced for commercial buildings. FY '22, we expect total depreciation and amortization expense to be broadly flat. We also expect tax payments to normalize and, therefore, expect to see NPAT improve as EBITDAI grows. Moving now to CapEx and free cash flow. FY '21 CapEx was $354 million excluding spectrum and $405 million including spectrum. Our CapEx spend from the year was heavily focused on improving capacity and resilience across our key infrastructure assets. We've now rolled out 5G to 9 locations and our investment in the optical transport network, which is the fiber backbone of our network, has provided us with an increase in capacity of 5x that of the existing OTN and with greater capacity and resilience. We continue to invest in our converged communications network, which shifts all of our services to IP and provides the foundation for our exit of the legacy PSTN. In FY '22, we expect to spend around $400 million in CapEx again, but with no spectrum requirements in FY '22. We'll focus on investing in infrastructure that supports New Zealand's connectivity and resilience. As a result, we've committed an additional $35 million to accelerate our rollout of 5G which will see $125 million of our envelope committed to mobile connectivity. We also increased our spend on data center capacity, with a modest level of investment required in FY '22 to support development at Mayoral Drive, and we are planning for further investment in FY '23 and FY '24 related to a new development in Takanini. We expect to be able to maintain this within our 10% to 11% CapEx to sales ratio, albeit at the top end of that range. Free cash flow for FY '21 was $433 million, which was down $5 million on the prior year. This includes the impact of an increase in our tax payments of $48 million, reflecting the timing of higher provisional tax payments under the uplift method. The increase in cash tax payments was able to be offset due to the continued focus on managing our working capital and strong cash conversion. So free cash flow when combined with the DRP is sufficient to fund the total FY '21 dividend of $0.25 per share and the renewal of our 1,800 megahertz and 2,100 megahertz spectrum. For FY '22, we continue to focus on funding the dividend from free cash flow and aspire to achieve $420 million to $460 million, and that will be supported by our targeted return to revenue growth. The impact of the steady free cash flow and the strong DRP participation at net debt reduced by $46 million, and our reported net debt-to-EBITDA ratio was 1.16x, within Spark's internal threshold of 1.4x and consistent with S&P's A- credit rating. So moving on to our FY '22 indicators of success. To help the investors mark our progress, we've laid out the critical factors that will influence business performance and free cash flow, and we report on progress of these at the half and full year. The indicators of success are aligned against our strategic pillars, so you can understand the progress we're making towards the delivery of our 3-year strategy. The majority of them are self-explanatory and consistent with the success factors we've laid out in the past. I will have to draw your attention to the wireless broadband target of 15,000 to 20,000 growth. In FY '22, I know this is a high interest. So the target represents growth at a similar level to FY '21, and as Jolie has stated, while we remain committed to the ambition of 30% to 40% of our base on wireless broadband, we now believe we'll be at the lower end of that range by the end of FY '23. We do still see plenty of opportunity to grow our wireless broadband base as our 5G rollout progresses. We will not only make 5G wireless broadband available in more areas, but will also create additional capacity on the 4G network for wireless broadband. So now moving on to guidance for FY '22. We have set guidance, subject to no material change in operating outlook as EBITDAI of $1.13 billion to $1.16 billion. CapEx of around $400 million and a total FY '22 dividend of $0.25 per share fully imputed. Our long-term intent continues to be to deliver a sustainable dividend that is fully funded by free cash flow. And finally, we've retained the dividend reinvestment plan for H2 FY '21 as is a useful capital management tool and will operate at 0 discount. Shares issued under the DRP will be issued at the prevailing market price as determined around the time of issue. So that now concludes our financial summaries. Operator, we'll hand back to you and open the line for questions.

Operator: [Operator Instructions] Our first question comes from the line of Kane Hannan from Goldman Sachs.

Kane Hannan: Just 3 questions from me. But maybe just starting on the tower assets and obviously, I appreciate the current tenancy comments and the infrastructure review progressing. If I just see some of the earning metrics from your international peers in the tenancy road show, I get to an EBITDAI -- EBITDAI portfolio in the low 30s. Just wondering if that's the right way to be thinking about it or if there's any comments you can make around what the telco earnings will be?

Stefan Knight: Look, Kane, I understand your desire for a lot more detail in space. At this stage, we are just considering all of our options, the discussions that we're having remain confidential. So look, it's really just too early to be able to give that kind of that level of detail. We're still going to work through the options in that space.

Kane Hannan: Yes. And then just in terms of free cash flow, just given that capital spending comments on sort of the 11% aspirations in '23. Are you guys still aspiring to that $500 million free cash flow target that you set out at the Strategy Day? And if you are, could you just step us through the moving parts from FY '22 guidance to the $500 million range in FY '23?

Stefan Knight: So Kane, yes we are -- we remain committed to that $500 million free cash flow aspiration. What we laid out at the Investor Strategy Day still remains absolutely valid, which is that we see the opportunities coming through ongoing EBITDAI growth that has been something we previously indicated. We still see the opportunities there, tight management of our working capital, a consistent level of CapEx spend, and we'll get further guidance on that in FY '23.

Kane Hannan: Perfect. And then just finally, just Digital Health, you're talking about 8% to 10% revenue growth next year. It's a pretty meaningful revenue base. Just talk about where you're seeing that growth coming through, I suppose, where that business can get to longer term?

Stefan Knight: Yes. So if I can talk a bit. So at the moment, the -- we've got a good strong revenue base there and the growth is primarily coming in the IT and managed services space. When we look ahead, we see it coming in a number of areas. Firstly, there's some opportunities around the Digital Health reform. That gives us a chance to operate in a national manner. So at the moment, the industry is largely regionalized as a national operator that puts us in a very good position. The second area where we are focusing some of those growth opportunities is around our Digital Health Platform. So this is a platform that we are currently developing. We expect to go live in the coming year and build off the current connectivity that we have across the DHPs and the various other parts of the health industry, and we see the opportunity to standard up more to applications off the back of it and grow revenues off that.

Jolie Hodson: Because if you look at the health sector, a significant amount of still manual paper-based activity and the opportunities we work through our workforce management or other elements of that, Digital Health Platform would provide a strong base whether that's in data, whether that's in similar deprecations being provided through that. So that's where the broad opportunity sits as well.

Operator: Our next online question is from Arie Dekker from Jarden.

Arie Dekker: Just starting with broadband. I've got a few questions there. I mean it looks like when you strip out wholesale, you were down 16,000 connections on the retail brands. You talked about sort of looking to hold connections. Growth in the market is starting to slow its penetration sort of hits a point. Can you sort of talk about what your strategy is going to be there? You're obviously pursuing fixed wireless still but under indexing market share on fiber and you do retain premium and sort of ARPUs above some of your peers. So can you just sort of give some guidance on what you're looking to do on broadband and what your revenue target is for broadband in FY '22?

Jolie Hodson: Well, we don't have a specific revenue target, Arie. In terms of the market, the points that you've highlighted are absolutely right. It's a competitive market. We're seeing many different players intact. We have seen lower growth in the overall market. It's about 3% growth this year versus 5% in the prior year. Some of that is due to border closure, but in general, the market has slowed. Pricing continues to be something that we review, but also the offerings that we have. So while it's broadband we have had a lower gigabyte offering, which has proved quite successful as well for different needs. So what we're looking at is the different elements of our product portfolio, but we will always continue to see sale prices competitive in the market or not and what do we need to do to make sure that we are, so that will be a continuing focus for us in FY '22. Obviously, the entertainment things that go alongside that is an important part, too, of our offerings. So whether that [indiscernible] or sport as well. So we look at all those components when we look at the offers for our customers.

Arie Dekker: Sure. And then I mean just a question on your fixed wireless adds, do you -- I think like your landline fixed wireless product now includes 40 gigabits of broadband as standard. So are those customers now included in your fixed wireless as opposed to [indiscernible]...

Jolie Hodson: They are only included the activated broadband. That won't be included as nonactivated account. So...

Arie Dekker: It does look like because you're turning off PSTN and your voice over wireless is very static. So would it be right to assume that there are a decent amount of those being activate? Obviously, they can do WiFi on the phone and that sort of thing, and they are part of your decent chunk of your fixed wireless adds.

Stefan Knight: No, it's not a material driver of the movement.

Arie Dekker: Okay. And then just lastly on the broadband one. Obviously, the ComCom has come out with a greater focus on just marketing of alternate technologies, and it's obviously focused on couple withdrawal on that. But just sort of thinking about your reduced target now to 30%. And I guess what you outlined at the Strategy Day about being able to direct customers to fixed wireless instead of fiber with the investment you're making in 5G. Do you think that it's getting incrementally harder to actually to kind of direct your customers to fix wireless over 5G? Or is there something else sort of behind the reduction to the lower end of the range?

Jolie Hodson: I think when you look at the overall market, and with broadband market for [indiscernible] wireless or fiber or any components, their growth is flat. So that's what has impacted our view around by the end of FY '23 being at the lower end. As we further roll out 5G and as you can see, we've got a target of roughly 90% population coverage getting towards the EMEA -- it becomes more opportunity for us to grow both from a 5G perspective, but also what's happening is you're moving traffic off 4G to 5G, which then opens us up to push equipment at coverage further out from urban more into rural and that provides some different opportunities as well. So I think from a point of view of overall market competitors, yes, there are no easy wins in this space. So we have to work pretty hard to get what we are getting, but we still see opportunity within wireless broadband, just probably given the slower growth in market overall and what we're seeing a slower build to that, the lower end of the target.

Arie Dekker: Yes. Just quickly on Spark Sport. I mean I see that it's come out of the FY '22 sort of objectives and you've talked about, I guess, investment being consistent with existing levels. And clearly, with the Rugby League going to Sky and that point you made at Investor Day about there not being a lot of content available sort of thing. Like are you sort of -- where are you at in terms of, I guess, your outlook? I mean I think your objective was to kind of own entertainment on the home. There's obviously lots of means to doing that with a plethora of value-add services you could add that you don't actually provide as principal. Can you sort of just give an update on where you sort of see the relevance of sport being in your future markets?

Stefan Knight: Yes. Arie, I'll take that one up. So look, from our perspective, sport is a really important part of our vast portfolio, which provides really meaningful differentiation to our portfolio of broadband and mobile offerings. So we still see that as being a really -- sports being an important part of that. But as we've said before, we obviously want it to be substantially bigger than where we are. We've got a long-term ambition, we obviously want it to be commercially viable. And as we work through that really, the key to it is clearly subscriber growth. And so when we look forward, the biggest opportunities we see to get subscriber growth are really around additional content, and we see the best way to do that through partnerships. So it actually remains a core part of our strategy, but partnerships will be the key to driving content subscriber growth and improved returns over time.

Arie Dekker: Yes. Okay. So we are essentially you sort of caught the ticket for a partner and they use your platform?

Jolie Hodson: It could be -- it could be a combination of things, Arie, because obviously, we have certain content as well. So it could be a combination of sharing different content or it could be as you say, a combination of clicking. I mean a number of things we've done even in our cricket association [indiscernible]. So we've looked to different parts of work. So we're excited. We will continue to explore that across content, and that will be the way we'll be looking at adding to that.

Arie Dekker: Yes. And then just, Stefan, your comment about differentiating for your customers with sport, are you sort of signaling that you're in terms of the next generation of that you might look to more heavily discount your sport offering to your existing customers, so it is more differentiated from those on other -- some people that are accessing it on other networks?

Stefan Knight: No, that's not the sphere I'm trying to create. It's more effective when you look at our offering. We currently have discounts on things like Netflix on -- we have the ability for customers to get Netflix at better rates. And at the moment, you can get Spark Sport, you can put it on your belt at a better rate. So that's the kind of way in which we're thinking about it, but ultimately, it provides the differentiation against other offerings.

Arie Dekker: Sure. And then last one, just a follow-up on infrastructure. I guess when I look to the balance sheet and your investment sort of across your right-of-use assets and PP&A just a bit of a steer of like where the relative value sits between those 3 classes of assets. And I guess, specifically, in Class 3 what sort of level of book value investment that you have in each of the passive mobile and the fiber?

Jolie Hodson: I think if you -- Arie, if you think about the impeditive mobile tower that [indiscernible] that's roughly about $100 million. In terms of [indiscernible], we've got a combination of value across all, both [indiscernible]. We haven't broken that out specifically. As we progress, clearly, we'll do more of that. That sort of just a tease on the towers piece.

Arie Dekker: About $100 million?

Jolie Hodson: Yes, just over $100 million...

Arie Dekker: Sorry...

Stefan Knight: Sorry, we missed the [indiscernible]...

Jolie Hodson: [indiscernible]...

Arie Dekker: I was just saying, that's all thanks and work well done on producing a very solid result in COVID environment.

Jolie Hodson: Thanks, Arie.

Stefan Knight: Thanks, Arie.

Operator: [Operator Instructions] Our next telephone question is from Lucy Huang from Bank of America.

Lucy Huang: I have 3 questions. So firstly, if we can touch on mobile, I think you're flagging potentially mobile growth of 2 to -- mobile revenue growth of 2% to 4% going into FY '22. I'm just wondering whether you think that majority of this growth is likely to come from continued subscriber additions or whether you think the majority of it will come from ARPU growth? And if you can comment on kind of the competitive dynamics at the moment in mobile, that would be great. And then just my second question. So just...

Jolie Hodson: Can we just [indiscernible]...

Lucy Huang: I'm sorry.

Jolie Hodson: No, that's fine. In terms of the mobile revenue growth. I think what we're seeing in our marketplace and probably globally is the shift of up of data consumption, which is leading to people moving up the data curve and so forth into higher plans and also as they buy different devices that's leading to more activity. So there will be a combination like we have seen in this year of subscriber growth tick in that pay monthly postpaid area, but a lot of it to do with the higher -- paying a higher rate effectively for more data usage. We don't see that sort of changing. And obviously, we've largely cycled roaming through this last 12 months. So the implications there have been experienced eventually.

Lucy Huang: Wonderful. That makes sense. And then just my second question, I think you guys flagged some cost savings in '21 due to COVID restrictions. So just wondering, coming into '22, obviously, the new lockdown for COVID has more uncertainty. But just overall, what are your thoughts on whether these costs may -- will they do creep back into '22? And then just alongside that, are you seeing kind of medium-term EBITDAI margins for the business could land? Or what are your targets for the next kind of 3 years?

Jolie Hodson: So maybe I'll take that as 2 sets. So in terms of the costs, over many years, we've operated at a just low cost program. So while we saw costs come out in '21, we did in '20, and we will then continue to see it in '22 and a combination as we move to greater digital technology. We've virtualized more of our own networks. And we look at our overall cost base each year and retire legacy elements of that as well. So we don't see any shift out in that approach or program that will always be part of our operating model. And then I think your second question or third question was around the EBITDAI margin. So we target around 31%, which of EBITDAI margin, which is pretty well leading when we look across, and so we don't see a huge shift. We don't expect a huge shift at the moment.

Operator: [Operator Instructions] Our next telephone question comes from the line of Entcho from Crédit Suisse.

Entcho Raykovski: Entcho Raykovski here. So my first question is on cloud and in particular, the cloud-competitive environment. Just interested whether you're seeing competition accelerating in that space, particularly with CDC announcing that they were pursuing hyperscale development in Auckland. And I guess, what does that mean for the longer-term projections within the cloud segment?

Jolie Hodson: Then if you stand back from the cloud segment in New Zealand, you've fully got around about a 30% penetration and a forecast of growing over the next 5 years to about 60% penetration. You've got a combination of both public cloud, private cloud, on premise, and we see customers having a range of those different elements. Generally, we're seeing a shift towards both public cloud, but if you're an organization which has a lot of legacy applications and has been around for a period of time, it's quite difficult to shift your sight just straight into public cloud. So within next year and depending on what data and workload that is, people are choosing different environments before that. So we offer services that wrap around all of those things. We also work with all of the hub scalers effectively. In no doubt there's a shift in terms of the margin profile in public cloud and private cloud and, therefore, you can see that in the mix of our work when you outline or you look at the volume potential of growth with the combination of growth driving that perhaps at lower rates at [indiscernible]...

Entcho Raykovski: Okay. Got you. But so is it fair to say that's a dynamic that we've seen over a period of time, nothing that's really changed...

Jolie Hodson: Yes. Yes. All considering a lot of the significant data center investments have a few years out to opening as well. So it is a combination of things happening, including our own business.

Entcho Raykovski: Got it. And in mobile, the transition of prepaid to pay monthly has continued into the second half. I mean I know you spoke just then about greater take-up of hard other plans, et cetera. But just interested specifically in that transition, how much more of it do you see? And is it perhaps something that's been accelerated during that COVID-impacted period?

Jolie Hodson: I think there's no doubt, as more and more applications, more and more working on the move, different locations is leading to people using data in a different way than pets they have. COVID has probably contributed to that as well, but it has been a consistent theme for a number of years for us. Against our market overall with predominantly more prepaid than postpaid, which was unusual compared to most of the rest of the world. So we're seeing a little bit of a catch-up. The other thing we are doing within our prepaid market is our inlets offered there also have lager data. So we're seeing growth in our prepaid ARPU as well at the same time. [indiscernible] starting to impact the number of travelers that were on prepaid protections as well. So they fell away generally for short periods of time for less ARPU, you see both of those things in seating. So if you say what's the longer-term trend, we're still seeing that shift upwards across that, and we would expect that to continue to happen between pre and post.

Entcho Raykovski: Got it. And just finally, I know you mentioned it's modest, but can you quantify what sort of riding benefit you've got factored into the FY '22 guidance. I mean maybe asking in a different way, how much of the $40 million of COVID impact in '21 do you expect to reverse?

Stefan Knight: So I'll answer your question in a slightly different way. I'll talk a bit more from a revenue perspective in a standard year, our roaming revenues, as we've previously said, sit a little over $30 million. We've had a reduction in FY '20, a further reduction in FY '21. So to give you a general sense, in FY '21, our roaming revenues were about 10% of the normal year. So it gives you a pretty good sense of how significantly they were impacted. We expect a small increase. Like I'm not going to give you a specific number because at the moment, 24 hours ago, we were not in locked down. So the landscape evolves too quickly. What I can say is that the amount we've announced is expected to be pretty small and not material in the scheme of the overall revenue and guidance.

Operator: Our next telephone question is from Phil Campbell from UBS.

Phil Campbell: Just a few questions from me. Stefan, just the first one was on the new accounting standard in terms of accounting for IT spend. I was just wondering if the FY '22 guidance had any expense for the ERP upgrade that I think is dropping in FY '22? So that was just my first question.

Stefan Knight: And so just for the benefit of others on the call, will just kind of give a quick overview. So basically, there's a new interpretation of an accounting standard, which requires organizations to look at the amount of cost they have incurred in relation to standing up new cloud-based software tools. In the past, most organizations, including ourselves, have capitalized that cost as part of the creation of a new asset. The new interpretation is any part of that cost, which is actually was related to configuration and should be expensed going forward. So we've seen in our accounts. We've got about a $50 million spend over 3 years. A portion of that will relate to configuration, we will go back and have a look at that, there's a bit of work to be done to understand what the impact is when we look forward to FY '22, and we're not expecting that to have a material impact on our accounts or guidance.

Phil Campbell: Okay. Great. That's very clear. The second one was just on mobile. I noticed that you did recently lose quite a large customer. It seems as though the competition in the kind of B2B space is intensifying a little bit. Would you be just to make a bit more comment around that? And I'm assuming there is customers won and lost all time, but just wondering kind of there was quite a large customer. So just kind of what is the kind of response to that?

Jolie Hodson: So overall and ever since enterprise customers, we grew connections. So as you say, there is always customers won and lost across that. So we saw greater growth than we saw a lot effectively. The business, the enterprise market has always been competitive. Nothing much is really changing around that, particularly in the beginning of town in regards to that. So I don't see any significant concern or issue in relation to that.

Phil Campbell: Great. Awesome. And then just a last one for me. With -- I think we've seen a new consultation document from RSM, just in terms of the spectrum, which would -- when you first read it would tend to indicate that there's a chance that the MNOs may be able to get more than 100 megahertz of capacity in 5G? Just is that your interpretation of that potential consultation?

Jolie Hodson: I'm not or -- the specific thing that you're referring to. There is a continuing review of how the sections might work and the components of what might fit in there, but we can pick that up with you off-line, if you like, in terms of -- will follow that up...

Phil Campbell: That would be great. I think they're just reserving the 3.3 to 3.4 for the WISPs and for enterprise. And so it just means that, that 400 megahertz from 3.4 to 3.8 could be available for 3 MNOs and potentially marry. But the only -- sorry, last question.

Jolie Hodson: [indiscernible]

PhilCampbell: Yes. Sorry, the very last one was just with the couple with the drill coming up soon, how do you view that? Some people are talking about it as a bit of a churn event. I'm assuming that a lot of those kind of remaining copper customers are Spark customers. So do you think of it as a churn event? Or do you think it's going to be less of an issue and you would just be able to migrate your existing copper customers onto fiber or wireless?

Jolie Hodson: I mean we've obviously got quite experienced migration through our PSTN as we started to remove that specific. It's done a lot of work around how we work with customers to offer them the right options as they migrate off. So we've done a lot of work with that. And so from our perspective, still not complacent about, it is an opportunity for customers to reconsider, but we certainly are focused on making sure any kind of migration offers a positive one for them and one that's easily managed. So we don't see this significant tune event per se.

Operator: Our next telephone question is from Brian Han from Morningstar.

Brian Han: Jolie, the accelerated investment in 5G in F '22, I'm still a little bit confused about how that marries with your thinking that your fixed wireless will be towards the low end of the 30% to 40% target in F '23. I mean are you not counting the potential benefit of 5G in lifting your wireless bypass of fiber about and beyond fixed wireless? Or are you simply seeing...

Jolie Hodson: Yes. We are. But obviously, as you roll out, you go into different markets at different times. So it just takes time we talk out of the space of 2 years. So that's why we are aiming or suggesting it's probably towards the lower end of that. We're not saying that 5G won't have a role to play, absolutely it will. But just as we look ahead, recognize that it takes sort of by the end of calendar '23, we've got 85% of the country. So if you think about that, the opportunity probably sits just beyond the end of FY '23.

Brian Han: Right. Okay. And are you assuming the slower broadband market will persist for some time?

Jolie Hodson: Well, at the moment, when you look at it, with borders shut and that's not the only reason for why the market is slow, but that has definitely had an impact within a halving roughly of the growth in the market in the last 12 months. And if you look ahead this year, given the situation we're currently in as of today, but also globally, it's not clear when we would see them materially open anyway. So that sort of factor for the next 12 months feels like it's potentially in play. And then secondly, when you look at that, it is a well-penetrated marketplace. So unless population is substantially growing, which has historically been about the immigration coming in being -- it's difficult to see that there will be a significant shift up in the market size in a pretty mature market.

Brian Han: Okay. If you don't mind, just one more question. How would you describe the competitive landscape in the consumer mobile space right now? I mean are you concerned in any way about Vodafone perhaps moving beyond cost cuts and maybe going a bit harder on the market share front?

Jolie Hodson: Look, at the end of the day, mobile has always been a competitive market. If you think about what's driving growth in our marketplace, it's a shift up of people in their data usage, and that is available for all of the market participants. So I don't see it necessarily accelerating in terms of where we're at because that opportunity because everyone, [indiscernible] but that's not to say that there won't be. I mean I can't call what they will choose to do or not do. But similarly, there's a lot of focus on just trying to mechanize as we grow data and for our customers.

Operator: Our next telephone question is from Ian Martin from New Street Research.

Ian Martin: I just have 2 related questions around infrastructure investment. So in your class structure, you're obviously investing for growth in Class 1 and optimizing investment in Class 2. What's the ongoing investment focus in Class 3 while you're going through these exploration opportunities, both in terms of how material and what the focus is. And I'm thinking here particularly small cell.

Jolie Hodson: So if you stand back, there'll be some operational investment we would always make. So if you think about fiber, for example, the optical transport network in the process, automating a lot more of that, and we've been going through the country doing that, that would continue. Within our investing capital envelope, as you can see it. And then in mobile, our 5G investment is really in and around our existing assets and towers that were in place. So what we're doing is upgrading all the active components of our network. So therefore, not a significant rollout to stand-alone or anything like that in the interim period.

Ian Martin: All right. Just a related question on the right-of-use assets, I mean that's quite a material part of the balance sheet. And the additions, $129 million in the last year. That's not part in CapEx, I'm assuming. And some of that's also in network infrastructure, particularly mobile sites. So I just wonder how material part of the asset base is mobile sites in right-of-use assets.

Stefan Knight: The right-of-use assets change that you're talking about, a lot of that will be driven by lease activity, in the way that that's reflected. So -- and I think what we've talked to earlier was, if you look at that path of, those path of infrastructure assets, the book value that we carry on those is a bit in excess of the $100 million mark.

Ian Martin: Including what's in right-of-use assets. So in effect, that's kind of for funding already to expand your mobile footprint? Is it...

Jolie Hodson: Maybe it will be better, Stef, you take it offline and come back to...

Stefan Knight: Yes.

Operator: And our final question today is from Aaron Ibbotson from Forsyth Barr.

Aaron Ibbotson: Just two quick one from me. So first, just a clarification on your commentary on cloud security and service margins or mix shift. So if I look at gross margin drop-through, it was around 40% this year. So if I think maybe not just FY '22, but over the next few years, how should we think about sort of incremental gross margins, if I put it that way, is that too simplistic to think about it. It's my first question.

Stefan Knight: So I can pick that one up. I mean I think you will see continuation of current trends to some extent because there was a shift in mix there. So public cloud, we're reselling it obviously comes with a lower margin. And we are seeing some pricing pressure on our private cloud business, which has in turn being offset by volume growth. So I think that impact of private cloud will have some price impact and, therefore, will put a little bit of pressure on the margin there.

Aaron Ibbotson: Okay. Very clear. And then I'm not sure what you have given, to be honest. But if I look at your fixed wireless customers, could you give some sort of color on where they are in the sense, I know you're targeting low users, et cetera. But what proportion of these are in sort of USB Zone 1 and 2? And what are outside sort of on rural at the moment? Anything you can share with us there?

Jolie Hodson: I mean -- as an overview, we have customers sitting on by urban and rural areas. Clearly, there are opportunities where there is not necessary access to fiber or copper lines because when you think about the types of users that initially came on to that were people who were more on [indiscernible] or couldn't access the high speed, but there are people also in urban areas that are using it as well. We don't present that information out in more detail like a map of the country or anything like that, that shows that all the combination of that. But if you think about it being used in both locations. And really, what we're looking at is who is the customer? What are their needs? What is the best available form of technology? Because at the end of the day, we sell all forms of those technologies and making sure that that's met.

Aaron Ibbotson: Okay. And if I ask just on 5G versus 4G, what proportion is -- are you already today having fixed wireless customers on 5G. And if you look at new sales you're doing today, is the majority going to 5G, if you look at incremental fixed wireless customers? Or is this the level of 4G is being sold today?

Jolie Hodson: So we're selling wireless broadband on both 4G and 5G. We have around 9 new locations of 5G in this last financial year. So you can see as we add locations, the opportunity comes for people to come on, on board. So if you think about our predominant wireless broadband base at the moment, would still be predominantly 4G because of the size and scale of it. We've got 175,000 customers or 25% of our broadband base and on wireless. But it would be shifting -- and the opportunity is obviously arising as we move through with more 5G. And so we've got 10 to 15 additional locations, including expansion of coverage in some areas we've already gone over the next financial year. So we'll see the opportunity left. And then beyond that, obviously, FY '23 as well.

Aaron Ibbotson: Well, I'm basically just trying to get you to answer my previous question without wanting to. So I was just wondering the 9,000 you signed up this last 6 months. Is it fair to assume that the majority of that was in 5G or that the vast majority is still on 4G, if you take the last six months?

Jolie Hodson: No, it's a -- it would be a combination of both, so -- And we don't provide that.

Operator: There are no more further questions at this time. I would like to hand the call back to today's presenters. Please continue.

Jolie Hodson: Thank you. Thank you, everyone, for joining us today and for the conversation. Cheers.

Operator: Thank you all for joining. You may all disconnect. Have a great day. Goodbye.