Time to Spark up the Rugby
In conjunction with state-owned Television New Zealand, Spark New Zealand (ASX:SPK) yesterday announced that the pair had obtained the rights to broadcast the Rugby World Cup 2019 (RWC2019) to New Zealanders. The deal struck also encompassed other rugby tournaments.
It was a win for Spark and will further strengthen Spark’s competitive position and brand in the video streaming space, which is already strong locally with the Lightbox-branded offering.
Spark’s Netflix-like offering, Lightbox, had reached 300,000 subscribers at the time of Spark’s interim report. Given Kiwi’s passion for rugby, the coup with regards to the rights is likely to see that number increase significantly, even if New Zealand viewers from other providers will be able to pay to watch matches.
While the cost of the successful bid was not disclosed and Spark would have had to stump up a significant amount to dislodge the incumbent provider of the Rugby World Cup, the Sky Network, Spark Managing Director Simon Moutter indicated the investment met the necessary internal hurdles.
Mr Moutter stated, “we’re disciplined when it comes to investments of this nature. Although sport is a powerful content genre, it is typically very expensive – something we’re mindful of. For this reason, we’re focused on making sure the business case for securing rights of this nature can stand on its own two feet – and these tournaments certainly do that.”
Mr Moutter also said, “The increasing diversity of New Zealand and rapid changes in technology mean many of us are watching sport in a very different way to in the past. By combining our technical expertise and capability with that of TVNZ, we believe we will not only deliver these tournaments in a way that long-time, loyal rugby fans will love, but we will also reach out and inspire new audiences to get behind our men and women in black – bringing the Rugby World Cup to a much wider audience.”
Alongside the RWC2019, the deal encompassed the rights to the Women’s Rugby World Cup 2021, the Rugby World Cup Sevens 2018, and World Rugby U20 Championships 2018 and 2019.
Kiwis will be able to view all RWC2019 matches and related content live or on-demand over home broadband or mobile connections on a range of devices – including TVs, mobiles laptops and tablets. Both free and paid content from the event will be available to all Kiwis, not just Spark customers.
New Zealanders will be hoping for more scenes like this in 2019…
Source: World Rugby website
To watch related content, New Zealanders will just need to download an app compatible with a wide range of devices, and then they will be able to stream live or choose from an already screened backlog of content.
Spark’s agreement with TVNZ will result in some games from the range of tournaments screened free-to-air on TVNZ and for those matches advertisements won’t be screened in live game time by the national broadcaster. TVNZ will screen seven RWC2019 matches live, including the opening game and the final. That is the same number offered free-to-air in 2015. A yet to be confirmed number of delayed matches will be screened free-to-air as well.
Of course, most of the RWC2019 will be pay-for-view, and packages will include a “tournament pass” and passes to watch individual matches.
Pricing details will be disclosed next year, but Mr Moutter said rather than an “all or nothing” bundle that has been the status quo for prior Rugby World Cups, Spark intends to offer a menu of well-priced options to suit consumer’s differing preferences and budgets.
The TV landscape has changed dramatically in recent years, spearheaded by Netflix and Spark is hoping to strengthen Lightbox’s position in the New Zealand market.
Besides the attractive addition of this new sports offering, Spark (ASX:SPK) is expanding its Lightbox service with other new entertainment content, including dipping its toes into original content. Spark is also seeking to further monetise it through new options such as premium options to unlock simultaneous streaming to more devices and downloadable content to watch offline. It is also offering a “Kids Zone”, with appropriately curated content.
Source: Spark (ASX:SPK)
Spark views Lightbox as a valuable avenue for customer acquisition and retention.
And video-on-demand does not tend to be a zero-sum game, with consumers tending to add services to broaden their possible content viewing options. As avid fans of shows like Game of Thrones or Stranger Things know, it may very well add a service just to ensure being up to date with these shows. Accordingly, we believe Lightbox has good prospects to grow in the New Zealand market.
1H18 recap
Spark’s interim net profit showed a slight 3.4% decline from a year earlier to $172 million, although the dividend was maintained. And with the transformation plan having further to run, along with solid traction in mobile, digitisation and cloud offerings, we remain positive on the investment case. The attractive dividend offers further support to the investment case.
To recap, total operating revenues ticked upwards, rising $29 million, or 1.6% year-on-year to $1.822 billion. The key drivers of growth were in Mobile and Cloud, security & service management services and growth associated with the acquisitions of Ubiquity and Digital Island, partially offset by declines in the legacy Voice business and Managed data & networks revenue. This was an extension of expected trends, as management has been migrating wholesale customers away from traditional products towards higher margin products. Positively, total mobile ARPU returned to growth for the first time in two years, up 1.8% from the prior year.
Source: Spark (ASX:SPK)
Operating expenses increased 2.9% year-on-year to $1.358 billion, with cost increases to support top line growth and the implementation of the Quantum programme ($13m) with associated non-recurring costs. Excluding the Quantum programme costs, operating expenses increased 1.9% from 1H17.
Reported EBITDA slipped 1.7% year-on-year to $463 million as the EBITDA margin contracted 0.9 percentage points to 25.4%. Excluding the $13 million associated with the Quantum programme, EBITDA would have increased $5 million year-on-year to $476 million.
Source: Spark (ASX:SPK)
Spark (ASX:SPK) maintained its guidance for EBITDA to be flat to 2% higher year-on-year in FY18 excluding the net gain from the sale of Mayoral Drive carpark. The full year dividend guidance was also reaffirmed, at 25.0 cents.
Summary
We view the securing of the rights for the 2019 Rugby World Cup and other rugby tournaments as a coup for Spark, and this should serve to strengthen its brand and positioning in the New Zealand video streaming market materially.
And although investors were earlier in the year somewhat underwhelmed with Spark’s interim results there were plenty of bright spots and the company is delivering on its strategic initiatives. The company’s transformation plans have further to run in our view, with the benefits to earnings expected towards the back-end of the project. Spark’s differentiated offerings in the Mobile and Broadband spaces support market share growth, as will its cloud offerings.
From a valuation perspective Spark trades on a FY18 earnings multiple of 16 times and offers an appealing forecast dividend yield of 7.1%.
We retain our Buy rating on Spark New Zealand (ASX:SPK) for Members with no exposure, and with a medium to long-term investment horizon.
Disclosure: Spark New Zealand (ASX:SPK) is held in the Fat Prophets Global Opportunities, Australian Share Income, Concentrated Australian Share and Small/Mid-Cap Models.
