Vocus forced to revise guidance again as profit drops

Vocus has brought in a first-half statutory net profit of AU$37.3 million, found a buyer for its New Zealand assets, made five sales on its ASC, and revised its guidance down for the full financial year.

Vocus has published its financial results for the first half of FY18, again revising its guidance down for the full year after its previous downgrade in financial guidance last year opened it up to a potential class action from its shareholders.

Describing the revision as "modest", Vocus said it now expects underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) to be between AU$365 million and AU$380 million rather than the originally stated AU$370 million and AU$390 million due to a change in its consumer strategy to "focus on higher-quality digital channels" and a lower number of energy subscribers than originally hoped.

Underlying net profit is additionally expected to be AU$125 million to AU$135 million instead of AU$140 million to AU$150 million due to higher depreciation and amortisation expenses than previously forecast; while capex will total between AU$180 million and AU$190 million rather than AU$190 million and AU$210 million.

ASC capex will be US$43 million rather than US$38 million; and net financing costs will be AU$45 million rather than AU$50 million. However, revenue is still expected to be between AU$1.9 billion and AU$2 billion, and net debt between AU$1.03 billion and AU$1.06 billion.

"Whilst facing some short-term earnings headwinds in the Australian Consumer division, the Vocus business has significant growth opportunities available to it and a clear strategy in place to take share in the most attractive market segments; combined with our focus on efficiency and customer experience, the business is well positioned to deliver shareholder returns into the long term," Vocus CEO Geoff Horth said.

Vocus also provided an update on its Australia-Singapore Cable (ASC) project, saying it remains set to go live in the first quarter of FY19 after executing five sales agreements.

"All cable manufacturing is now complete, and ships have been loaded," Vocus said.

"Upgrades to the terrestrial network have commenced to meet expected customer commitments through to Sydney. Sales are continuing to progress well, and we are engaged with all relevant and potential customers for pre-ready-for-service capacity."

Vocus expects to spend US$18 million in capex on the ASC in the second half of FY18, and US$121 million in FY19.

In total, Vocus brought in statutory revenue and income of AU$67.3 million, up 9 percent, for the six-month period, while statutory net profit was AU$37.3 million, down 21 percent. Underlying net profit pre significant items and below-the-line costs of AU$31.3 million was AU$68.6 million, down 25 percent.

Vocus reported statutory EBITDA of AU$188.1 million, up 12 percent; while underlying EBITDA pre-significant items of AU$0.7 million was AU$188.8 million, up 1 percent.

Enterprise and Wholesale Australia brought in AU$392.1 million in revenue: AU$243.8 million from data networks; AU$113.3 million from voice services; AU$18.8 million from datacentre; and AU$3.1 million from mobile.

According to Vocus, its Nextgen Networks acquisition has provided it with a "competitive network footprint" in Australia, with the company able to provide connectivity and redundancy across enterprise, wholesale, and government.

It will now focus on opportunities in the Victorian, NSW, and federal government markets, Vocus said, as well as investing in east coast services; increasing its wholesale market share; partnering with small businesses; deploying a national account management regime; expanding products; and improving automation.

Vocus had announced in January that it would be splitting its wholesale and enterprise arms as part of accelerated transformation program. It will soon have four operating segments: Enterprise and Government; Wholesale and International; Consumer; and New Zealand.

Through its Consumer Australia segment, Vocus made AU$409.9 million in revenue: AU$198.8 million from broadband; AU$39 million from voice; AU$28.8 million from mobile; and AU$122.9 million from energy.

In total, Vocus now has 543,000 consumer broadband services in operation (SIOs): 284,000 copper broadband and bundles at an average revenue per user (ARPU) of AU$59.99 per month, and 259,000 National Broadband Network (NBN) customers at an ARPU of AU$62 per month.

Vocus held an 8.8 percent NBN market share as of December, though its broadband subscriber growth was impacted by NBN's decision to cease sales on the HFC network.

It additionally has 159,000 mobile SIOs through Dodo and iPrimus, and 151,000 consumer energy SIOs, split between 104,000 electricity and 47,000 gas customers.

Vocus said it would seek to grow its consumer business in Australia by improving digital marketing; refining its brands and products; reducing call centre costs and Dodo kiosk costs by enabling online sign-up and self-service; upselling broadband packages; cross-selling energy bundles; and focusing on an "exit from non-core brands to simplify operations".

Vocus' New Zealand business drew in AU$165.3 million in revenue: AU$90.8 million from enterprise and wholesale, and AU$91.8 million from consumer. It retains 196,000 broadband consumer SIOs -- 62,000 Ultra-Fast Broadband (UFB) customers and 134,000 copper customers; 22,000 SMB SIOs; 12,000 energy SIOs; and 24,000 mobile SIOs. Broadband ARPU is NZ$71.10 per month.

Vocus cited revenue growth across New Zealand enterprise and government, ongoing growth in its Switch energy business, and an increase in its 2talk customers for its Kiwi result.

The company had announced in October that it would be selling off its New Zealand business, and on Tuesday confirmed that a formal sale process has begun and is expected to be concluded by June 30.

Until then, Vocus said it would focus on driving UFB market share; automating "everything"; improving resiliency; bundling more services; and improving business processes.

Vocus identified its business-wide key opportunities as being the shift from copper to fibre; the migration from on-premises to cloud computing; the growth in demand for upgraded network security systems; the scale to be attained through its acquisitions; and "technological advancement", including the switch to 5G which will require fibre to mobile towers.

"Significant advancements in software and the customers' desire to self-serve and problem shoot should drive material improvements in the ability of the company to lower the cost of customer acquisition and service across all segments of the market," Vocus said.

"The evolution of wireless technology over the next five years, in particular towards 5G technology, is expected to also drive increased need for fibre to connect base stations. This could open up additional opportunities to increase capacity utilisation on Vocus' fibre network."

Risks were outlined as being increased competition, including the NBN rollout strategy and its connectivity virtual circuit (CVC) pricing model, and fixed-wireless and 5G technologies providing opportunities for new entrants; regulatory and environmental risks, including the risk of its subsea cables being damaged; network and operational disruption, such as cyber attacks, natural disasters, and "employee negligence or unauthorised physical or electrical access"; and financial and commodity markets in Australia and New Zealand.

Last month, Vocus additionally announced entering an agreement with Australia's Department of Foreign Affairs and Trade (DFAT) to scope out the design, construction, and procurement of a subsea cable between Australia, Papua New Guinea, and Solomon Islands, with the agreement worth AU$2,841,301.10 to Vocus.

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