2degrees sees operating earnings, revenue jump ahead of possible IPO

IPO candidate 2degrees has achieved big jumps in revenue and operating earnings for its latest quarter – albeit helped by comparisons against the lockdown-hit period last year, and favourable exchange movements for its Seattle-based parent.

The telco’s revenue for the three months to June, 2021, increased 25 per cent to US$127.4m against the pandemic-hit June 2020 quarter.

Revenue was “impacted favorably by a 16% increase in foreign currency exchange,” 2degrees owner Trilogy International Partners said in a Toronto Stock Exchange filing.

Adjusted operating earnings increased 22 percent from the year-ago quarter’s US$26.1m to US$31.7m.

But overall, Trilogy saw a net loss widened the year-ago quarter’s US$19.2m to US$26.4m as its second major telco asset, Bolivia’s Viva continued to wallow in red ink.

Trilogy’s long-term debt was US$623.8m at the end of the quarter from the year-ago US$630.8m.

The US owner said 2degrees’ business improved in the second half of 2020 and was continuing to improve in the first half of 2021 “compared to the initial months of the pandemic.”

But it qualified that Covid continued to make the economic outlook uncertain, “suppression” of lucrative roaming revenue continued with border restrictions, and the telco continued to face increased risk of bad debt. However, it added: “To date we have not yet observed a significant increase in bad debt expense in New Zealand.”

In Bolivia, where the impact of the pandemic has been more severe, bad debt was a concern, and Viva made a loss on revenue that shrank 10 per cent as bad debt increased amid an unexpected resurgence in cases over April and Ma. “It is unclear when customer behavior in Bolivia will return to historic norms,” Trilogy said.

2degrees has historically lagged rivals Spark and Vodafone in the business market. In a May 2021 presentation to an industry conference, Trilogy – quoting figures from market tracker IDC – said 2degrees had just 4 per cent of NZ’s $1.2 billion of telco revenue generated from business customers.

The gap has been pitched as a growth opportunity, and this morning Trilogy chairman Brad Horowitz said 2degrees had “accelerating momentum in the B2B [business-to-business space … Our B2B mobile activations in the quarter grew 85 per cent year-over-year and B2B service revenue growth of 25% outpaced the growth of our B2B mobile customer base.”

Figures around mobile customers on contract (or postpaid accounts) were on the up, indicating 2degrees had made gains in the higher-margin business market.

Horowitz highlighted improvements in arpu (average revenue per user per month) across the board, including an 8 per cent lift for postpaid mobile of 8 per cent from the year-ago US$27.88 to US$31.45.

2degrees’ total number of post-paid accounts was also up 8 per cent to 527,000.

The number of prepaid customers fell 3 per cent to 940,000. Prepaid has been 2degrees’ traditional strenth, but the June quarter underlined that it’s also the lowest-spending segment, even if arpu increased by nearly a third against the Covid-hit June 2020 quarter to US$9.14.

Overall, total mobile connections increased 1 per cent to 1.47m (Spark and Vodafone are neck-and-neck on around 2.5m).

In fixed-line broadband, 2degrees’ total number of customers increased 16 per cent to 139,000. Fixed-line broadband has been a major focus of 2degrees’ recent marketing, and it has made big gains – even if it is still some distance behind third-placed Vocus (with around 220,000 fixed-line customers), second-placed Vodafone (around 420,000) and market leader Spark (around 800,000).

Possible float

Trilogy is looking to float 2degrees by the end of this year. It has yet to narrow down if it will be an ASX, NZX or dual listing.

The process depends in part on how the US company goes offloading its second asset, under-performing Bolivian telco Viva, which it has put on the block for a trade sale.

Meanwhile, documents leaked from a recently wrapped up non-deal roadshow for 2degrees’ possible IPO indicate fund managers were told the Kiwi telco would be valued at around A$1.5b ($1.6b).

The roadshow – which took the virtual form of 32 Zoom calls – was part of an effort by Jarden, Macquarie and Craigs.

If the IPO does go ahead, long-time Port of Tauranga CEO turned professional director Mark Cairns will take over as chairman (from Trilogy’s Brad Horowitz).

Trilogy shares were recently trading on the Toronto Stock Exchange at C$1.80 for a market cap of C$107m ($120m).

The US company hopes to unlock value by selling its Bolivian operation -regarded as a long-term drag on its stock – and listing 2degrees.

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