I like the strong, yet succinct update on the speculation surrounding the motives for their stake in SLC. Big tick for management (not that they needed it!)

https://hotcopper.com.au/documentembed?id=uOMxKKzFkiWRTLKhOROKAxjvSTYM4Aa7yxWZofV7ke92GA%3D%3D

Aussie Broadband have released a further announcement regarding their stake in Superloop.

1. They've now submitted an application to the Singaporean authority, IMDA, for the Superloop shares they've already acquired.
2. They have applied to the Federal Court of Australia to restrain Superloop from forcing them to dispose of the shares

One possible outcome here was that with the initial acquisition being rebuffed, and the recent increase in Superloop share price, Aussie Broadband could dispose of their Superloop stake for a tidy profit. That now seems unlikely, at least in the near term.

Aussie Broadband have announced they are being directed to dispose of some of their interest in Superloop.

From the announcement:

Under the constitution of Superloop (Superloop Constitution), there are certain provisions regarding the acquisition of Superloop shares which derive from regulatory requirements relating to the Singapore Facilities-Based Operations (FBO) telecommunications licence held by Superloop’s Singapore-based subsidiary (Superloop Singapore). Specifically, the Superloop Constitution provides that a person must not, alone or together with their associates control, 12% or more but less than 30% or, 30% or more, of the voting power in Superloop without the prior written approval of the Info-communications Media Development Authority of Singapore (IMDA).

Superloop claim Aussie Broadband knew full well about this requirement, since their prior acquisition of Symbio would have involved dealing with the Singaporean IMDA. Aussie Broadband claim their failure to comply was 'inadvertent'.

Inadvertent is an interesting word to use. They can't claim `unaware` since they clearly should have been aware.

Either they overlooked this requirement, which suggests poor strategy, or they were aware and figured it was better to beg forgiveness than ask permission. I'm inclined to believe it was the latter.

I'm uncertain how to proceed here. The prior acquisitions have been successful but I didn't buy ABB expecting a series of acquisitions. I'm not sure how to evaluate this (seemingly) aggressive approach to acquisitions. That's not a value judgement: it's probably a fine strategy for the appropriate company, just not my cup of tea.

In particular, I'm wondering:

1. How important is this acquisition to ABB?
2. If it was important, have they bungled it? Or was this a strategic manoeuvre beyond my view (ie. they must have known about the IMDA requirement) ?
3. The price is continuing to drop, yet their holding in Superloop has appreciated. If the price looks good can I get comfortable with where management is headed?

Still thinking on this one.

$ABB just received surprise termination of their white label wholesale contract with Origin.

ASX Announcement

As a further twist, $SLC have announced a 6-year exclusive deal with Origin.

$ABB have a NBIO to acquire $SLC and own 20% of $SLC.

As pure luck would have it, I recently divested my $ABB holding, in anticipation of turmoil in the $ABB and $SLC contest. However, I didn't see this coming.

No doubt the market will react negatively, as this points to the intense competition that will no douby play out in the enterprise, business and wholesale segment. (Perhaps I was right to follow my instinctive dislike of this segment.)

For now, I will watch with interest from the sidelines, but remain alert to any over-reaction presenting an opportunity.

Disc: I do not hold $ABB or $SLC,.... and I'd never ever hold $ORG

FWIW new broker report out from Morgan Stanley (now Overweight PT $5.50)

The report runs 31 pages but here's the front page summary

Can ABB execute on a multi-year earnings expansion strategy? … Yes, we think so

The shares are +15% since 23 February after a strong 1H result. Consensus is that they are now fully priced. We disagree. We see much more to come. Move to OW with PT A$5.50/shr. Here we outline what's driving ABB's high earnings growth vs. peers. We say build positions for multi-year growth

Key Takeaways

• 1HFY24 results were strong, well ahead of consensus
• 2H customer additions + revenue + EBITDA momentum are accelerating
• Strong FCF. Net cash position. We see modest upside to EBITDA margins
• ABB trades at parity with peers TLS and TPG on ~7x one-year forward EBITDA, but we forecast ABB three-year EBITDA CAGR at 15-20% vs. TLS and TPG at ~5%
• Either our ABB earnings estimates ultimately prove wrong...or ABB shares will significantly outperform over the next three years, to close that differential

Australia's telco industry is mature and relatively low growth. We forecast total telco spending to increase at only 1-3% p.a. over the next decade. Experience has taught us: an operator able to gain market share over a sustained period, in a profitable and FCF-positive way, can create meaningful shareholder value. We think ABB ticks the boxes

Three key changes: We initiated on ABB 18 months ago with a bearish view because we saw it as a single-product telco (residential broadband) and purely a "re-seller" of the NBN's services. As such, we saw ABB's future earnings and profit margins as vulnerable to regulatory change and shifts in wholesale prices as dictated by others (e.g., the network owner and regulator). But today we think that bearish thesis no longer holds. Those risks haven't evaporated – but they have diminished

1. Residential broadband business now underpinned by own fibre network: We view this as a game-changer - it puts ABB more in control of its own economics

2. Wholesale broadband business: White-label product is exceeding expectations

3. Enterprise – building a unique disruptor telco business. No legacy revenues to defend. ABB is selling new software/tech (e.g., SD-WAN) to its enterprise customers. We also include recently acquired Symbio in ABB estimates and valuation

DISC: Held in SM & RL

Today, I have exited $ABB, taking advantage of further exuberance this morning.

It was a finely balanced decision, but overall I have decided to maintain the discipline of adhering to my investment thesis.

In September and October 2022, having assessed that the market had completely over-reacted to the slowing resi growth, following the combination of $ABB and $OTW, I built a RL position in $ABB over 4 weeks at an average cost of $2.28/sh.

The thesis was simple: as an attacker with a strong customer focus, execution and reputation, having built its own fibre backbone to access high value markets, focused on the high margin segment, $ABB was stealing market share from incumbents at very attractive margins. Given the location of its network, and inevitable slowing Resi sales (as NBN buildout completed), it turned its focus to the higher margin Business, E&G and Wholesale markets. I epxected it to win here too.

My valuation was predicated on this focused attacker model, with strong growth in the business segments and continuing above-market growth in Resi, driven by its network and reputation. Valuation $4.50 ($3.67-$5.04)

With the announcement of $SYM, I eventually got comfortable that I could hold to the valuation, arguing that the $SYM customer base and product set MIGHT strengthen market positioning in the B, E&B and W/S segements. International was an open question for me, but I wasn't unduly concerned given it relative immateriality. I was also encouraged by what appeared from the outside to be the successful integration of $OTW, with the CEO retained as part of the management team, and good growth in all segments at the FY23 and 1HFY24.

I was concerned about the integration risk, but was prepared to give management the benefit of the doubt. While I didn't update my valuation, in my mind, the risk part of the equation was increased.

Now the low-ball offer for $SLC and the 20% stake, unsurprisingly dismissed out of hand. To me it seems inevitable that $ABB will come back with a significantly improved offer. They've taken the 20% stake, and as a minimum they want to get into a dataroom and do due diligence. And $SLC knows it, so they won't make it easy.

As discussed here yesterday, $SLC is a very different business with a large network of regional and international capacity. Is this complementary to $ABB or dilutive. I don't know. I don't understand the business logic of the combination.

Secondly, it is a bigger and even larger deal than $SYM. Management are going to have to focus on two successive integrations.

Again, while I haven't done a valuation, it is clear that NewCo will carry higher debt at c. $250m, the eventual price for $SLC will dilute $ABB (I've done a quick proforma which indicates NewCo ROE could be around 7.5% in FY24 before synergies, whereas $ABB is around 9%, even though it is possible it will be EPS accretive).

But what about the famous Aussie customer focus? There will potentially be a protracted period of change. $ABB has alrady said that it will run $SYM as standalone initially, So presumably that will apply to $SLC.

And what about Phil Britt? When Phil returned from long service leave a while ago, he said something quite telling, which I've never forgotten. They were words to the effect that he was considering his own future. Of course, after his leave he put everyone at ease but putting the question down, but it made me realise that while I have a lot of confidence in Phil, I don't really know that much about the rest of the bench, nor what the succession plan might look like.

These and other questions mean that I no longer have confidence in my valuation (above). The market gave me the opportunity this morning to cash in at $4.70, and given the risk-reward and the many question-marks in my mind, I decided to take the money.

So, I could be wrong, And I may well be. The NewCo combination might indeed benefit from the improved scale, talent, product suite and weight to attack B, E&G and W/S more vigorously, and accelerate the demise of the lumbering incumbents. But it will be a competitive fight, and what does that mean for margins in future?

So my thesis today is to maintain $ABB on my Watchlist. Who knows, after the combination is delivered (if it is delivered), we may see another SP stumble, like we did in OTW. At that point I will be able to value the NewCo on a solid set of numbers, and see if opportunity knocks once more, I'll be waiting.

-----------------------------------

As I wrote in my Straw when I first reported acquiring a stake in $ABB, I don't really like telco-land. But I am pleased it delivered over a 100% return in less than 18 months.

Farewell $ABB, Good luck. But, hey, I'm still a customer, so don't mess up!

Disc: No held in RL and SM

ASX Announcement

$ABB has come out this morning with an all-scrip non-binding indicative bid for Superloop, clearly deciding to leverage its recovered SP.

The deal implies a value of $0.95 per $SLC share, against Friday close of $0.875.

I note that across 5 analysts that cover $SLC, the range of broker vals. are $1.00 to $1.17, which is quite a tight range and indicates that there may (will?) be a need for $ABB to raise their bid significantly before getting a Board recommendation.

So, its an opening deal to allow $ABB to get the due diligence process underway.

$SLC delivered strong results last week, with Revenue up 32.7% to PCP, underlying EBITDA of $23m up 83% to pcp and OpCF of $24m.

$SLC would significantly enhance $ABB's infrastructure network, although I don't yet understand what the implications of overlapping coverage in metro areas is.

Clearly, coming right of the back of the finalised $SYM deal, $ABB has decided that its strategy is to concentrate the market of the leading attackers, to strengthen it ability to continue to take share from the major incumbents.

This is a significantly larger deal than either $OTW or $SYM.

The deal looks a bit low-ball, so my bet is that $SLC board will decline.

ASX Announcement

$ABB announced their 1H FY24 result this morning. The results have so far been well-received by the market with the SP at time of writing up 16%.

There’s some detail to understanding the results, however, at a total connections basis, $ABB’s share of NBN connections has increased to 8.3% from 7.0% in the PCP (and 7.6% at FY23). What this means is that new connections accelerated in the H-o-H comparison. This, as well as some minor upgrades to FY24 guidance appear to have driven an initial positive response. (Of course, what the market is really reacting to is that in December I finally became an Aussie customer!)

Their Highlights (comparisons to PCP)

• Revenue grew 17.7% to $445.9 million
• EBITDA before non-recurring items grew 12.7% to $46.3 million
• Operating cash flow grew 57.8% to $40.7 million
• Total broadband connections grew 20.6% to 765,800 with strong growth across all segments\
• Increased NBN broadband market share (excluding satellite) 1.3 ppt to 8.3%
• On track to complete the acquisition of Symbio Holdings (due 28 February 2024, post balance date) providing cloud-based voice and messaging capabilities. Strategically complementary to Aussie’s business
• Successfully raised $140 million through a strongly supported institutional placement and retail share purchase plan, strengthening the balance sheet and providing funding for the Symbio acquisition and other potential M&A
• Aussie Broadband awarded Service Champion for Customer Service Organisation of the Year, and Service Champion for Project of the Year Customer Impact at the Customer Service Institute of Australia ASEA awards
• Aussie Broadband again recognised by The Roy Morgan “Risk Monitor” rankings as Australia’s most trusted telco.

My Analysis

A strong result best examined segment by segment. But before diving in, it was good to see a strong cash flow performance with operating CF of $40.7m up 57.8% and my measure of FCF at $15.2m up from -14.1m, an improvements of $29.3m, driven by both OpCF improvements and falling capex.

The changing capex profile is well-signalled, as $ABB moves from a focus of building their network to now connecting customers, maintaining, replacing and upgrading.

Overall, revenue grew 17.7% to $445.9m, with EBITDA up 12.7%. NPAT was 14.2% stronger $9.8m.

To understand the result, we need to dive into the segments.

Residential

Resi saw an uptick in new connections, with 38k (+3.3%) net adds – the highest result since 2HFY22. %Gm compressed slightly from 30.6% to 30.2% due to (what sounds like) paying for excess data charges under agreement with mobile services provider Optus. This is expected to be a one-off.

Importantly, off the back of SAU changes in December, all customers have been moved to new Resi plans. This resulted in some churn, although less than expected, and $ABB expect to see the benefits of increased margins flow through the full 2H FY24, a major driver of the EBITDA upgrade.

In addition, $ABB believe that several competitors are yet to implement the price increases impacting lower speed plans, and they stand ready to benefit from competitor customer churn in H2, as the price increases are passed on.

Business Segment

Good progress in Business, with 19.7% increased connections over pcp and 8.7% h-o-h, adding another 4.2k accounts in the half. The %GM decline is attributed to the fact that the Zintel NZ business, disposed in 1HFY23, has driven the result. Importantly, churn in this high margin segment is low at 0.8%. SAU and price changes are expected to drive margin improvement in H2.

Enterprise & Government (E&G)

Although E&G connections grew strongly at +21.7% to pcp, total revenue declined -1.2%. This was attributed to a) a sharp decline in non-recurring revenue and b) recontracting of legacy customers to new NBN and Aussie Fibre plans. So the good news is that the 7.3% increase in recurring revenue is on a higher %Gross Margin, and these benefits will flow through into the second half.

CEO Phil spoke about a strong pipeline of customers, an average of $111k new MRR being signed each month, and larger enterprise customers taking up to 7 months to onboard, due to both customer constraints, $ABB constraints and hardware constraints.

Wholesale Segment

This was the standout, with 24% connection growth to pcp and 52.5% revenue growth, with %GM margin expansion driving a 64.2% Gross Margin growth over PCP. The main driver called out here was strong wholesale voice margins.

Symbio Update

With all hurdles cleared for the Symbio acquisition, this is expect to close next week. As a result, Symbio will contribute 4 months to the FY24 result.

$ABB has committed to $5m cost synergies as a result of the combination. And the discussion indicated that this is the minimum expected, with the potential for further savings and revenue benefits on top.

Aussie and Symbio will initially be run as separate businesses and therefore we will continue to be able to track both separately at the operating level. Over time, however, I expect to see consolidation at the segmental level, with a question mark remaining as to what happens with the international business, on which $ABB has not signalled any strategic intent.

As an approach this makes sense. They can understand what they have. Consolidate and capture synergies at the overhead level, figure out to consolidate systems, before then undertaking a more complete integration.

The high level metrics of the Pro Forma combination is shown in the following slides.

In summary, it is a more diversified business, with greater weight in the Business, E&G and Wholesale segments – the next frontier for $ABB’s attacker strategy.

Management Changes

Phil announced that CFO Brian Maher will take over as CEO of Aussie, with former OTW founder Michael Omeros, taking over as CEO of Symbio. Both report to Phil who will be MD of the Group.

As an aside: It is great to see Michael Omeros, the former CEO of OTW clearly established as a leader in $ABB. Things rarely work out that way.

Guidance Update 

Guidance is modestly updated by narrowing the range for EBITDA from $100-110m to $105-110m.

Capex guidance reduced from $47-52m to $40-45m, attributable to the new guys in charge of investment taking a hard look at the programme and make some scope reductions.

Based on 4 months contribution of $SYM, the guidance for FY of the combined group was given as $116-121m.

My Key Takeaways

Across the board, these are good results with no real weakness. $ABB continues to take market share and the areas of margin weakness demonstrated today in some segements appear temporary and likely to be reversed in the second half.

No wonder the market likes the result. I agree.

Valuation

Although I don’t have half year granularity in my valuation, $ABBs result appears broadly on track with my model, and so today I am leaving my valuation unchanged at $4.50 ($3.67-$5.04).

I haven’t given any value uplift for the $SYM acquisition. That needs to be proven.

I’ll update the valuation at the FY.

Disc: Held in RL and SM

The ABB result was better than I expected. All segments of the business did well.

The key takeout for me was the success of their price rises on the residential broadband market. They had lower churn from this than they expected and added more new connections with a net increase of 38K, higher than either of the last two halfs. Now have 8.3% market share of the NBN market. Did have some short term margin compression, due to the higher marketing costs, which they said were part of the strategy around implementing their price change. I can attest to this as I have received several flyers promoting their high speed plans and bundles over the last few months. They expect margins to return to prior levels over the next half.

Enterprise and government section going well. Recurring revenue increased by 7% to 38.4m but one-off revenue declined slightly to leave the period flat at the headline level but with a slight increase in margin. Happy with the progress and commentary around this segment.

Provided this slide on the Symbio aquisiition, which I think is informative of how they see it adding to their buisness and wholesale operations. Symbio will be maintained as a seperate entity, with the CEO (Michael Omeros) from their Over the Wire acquisition running this side of the business. Phil Brett will become managing director of the overall group.

Gave a tightening of guidance to the upside with EBITDA to be between 105-110m (prev 100-110) from ABB and EBITDA of $116-121m with the 4 months addition of Symbio.

Broadband connection momentum continuing with 19000 new connections added so far in Q3. Very solid result and more than happy to keep holding.

ASX Announcement

Yesterday $SYM shareholders have voted overwhelming for the acquisition offer from $ABB.

The Court Hearing is now set for 16th Feb, with the current plan for new $ABB shares to start trading on 20th Feb.

So, the next report from $ABB will be clean, and then will no doubt include prior period reports on a PRO FORMA basis for a few periods.

It will be interesting to see what the $SYM combination does in the non-residential segments, but I suspect it will be well into 2025 before we can tell for sure.

++++++++++++++++

As an aside, I finally became an Aussie customer in December. My move had complications as a result of NBN and property access/configuration, however, the $ABB customer service was very good.

However, what was next level, was the onboarding process and the excellent automated communications as my account seamlessly switched over. I've never had an experience so good in utilities/TMT.

Best of all was the overnight speed test they performed and the report they emailed me confirming that I was getting in excess of the plan label. Their numbers actally matched my own tests.

Life is indeed better in our household. I rarely got the $TLS label claim, and whenever I tried to follow up there were lots of excuses about position of hub, my equipment, limitations with my device WiFi connections,..blah blah blha.The performance with the $ABB service has proven what I suspected all along ....it was pure BS. And I'm paying about the same as my $TLS plan, but with double the speed, and 3x-5x upload speed.

Happy Customer. Happy Shareholder. (Looks like there's been a bit of price action now that deal looks to be going ahead.)

Phil Britt (Managing Director) was interviewed recently on Ausbiz. Link here for those interested -- ABB interview starts around 19:30.

Key highlights:

• Britt had some time off, three months off long service leave. Britt admitted prior to going on this leave he was 'probably nearly done at that point' but he has come back with a renewed vigour. Britt can still see plenty of opportunities for Aussie to grow and innovate and he wants to be a part of this. Thinks he will be around for the next few years (minimum). If they keep doing 'cool things' he will be there for a lot longer.
• ***on a side note, this is great to hear. My thesis is busted without Britt at the helm.
• Some discussion around the recent Symbio acquisition -- focus on business and enterprise, and particularly wholesale. Symbio is 'all about voice' according to Britt. @mikebrisy he also touches on Asia which we previously queried (22:20) - they think there is some opportunity there but will take a wait and see approach. Doesn't sound like they will be rushing into things which is good.
• Symbio will run as a separate business. The OTW co-founder, who is still at Aussie (I didn't know this, this is impressive if you ask me) will head over and run the Symbio side of the house.
• Further M&A opportunities. Voice now taken care of with Symbio. Further opportunities across bolt on customer bases, bolt on residential/revenue opportunities, or complementary businesses for the E&G space (particularly in the consulting realm). They won't rush into acquisitions, not an issue due to ongoing organic growth.
• Capex spend -- FY23 around 47-52m, this will be similar to FY24. On a % of revenue basis, this will obviously reduce over time as revenue continues to improve.
• The risk of cyber breaches, ABB do a lot to safeguard against cyber attacks. Britt admits he is a tech nerd and he has a good understanding of where their gaps are and where they need to improve. The beauty of your MD coming from a tech background.
• First priority for the new year -- starting a tech transformation journey for a lot of their systems -- perfect time to do this with new acquisitions coming on board.

04-Dec-2023: Share-Purchase-Plan-Result.PDF

It was more than 2 x oversubscribed and applications above $1K will be scaled back.

Excerpt from today's announcement (link to full announcement above):

The SPP received strong support from eligible shareholders, with valid applications totalling ~$43 million from 3,140 eligible shareholders.

As the total value of applications received under the SPP exceeded the SPP target size of $15-20 million, Aussie Broadband has undertaken a scale back, having regard to the pro rata shareholdings of eligible shareholders as at the record date (Wednesday, 1 November 2023).

The outcome is as follows:

• Eligible shareholders who applied for $1,000 of shares will not be subject to any scale back and will receive the amount they applied for, rounded down to reflect a whole number of shares. Accordingly, those shareholders will receive 281 new shares (for a total issue price $997.55), with their remaining application monies to be refunded
• Eligible shareholders who applied for more than $1,000 of shares have been subject to the scale back methodology having regard to their shareholding as at the record date for the SPP. The scale back methodology ensures that, subject to the $30,000 maximum application amount under the SPP, participating shareholders will receive an amount of new shares that:

1. at least maintains their percentage shareholding in Aussie Broadband held prior to the announcement of the Placement and SPP (Pro Rata Amount), subject to a minimum allocation of 281 new shares; or
2. is equivalent to their application if that is lower than their Pro Rata Amount.

Approximately 98% of valid SPP applicants will receive at least their Pro Rata Amount, with most SPP applicants receiving an allocation well in excess of their Pro Rata Amount.

Following the close of the SPP, ABB Co-founder & Managing Director Phillip Britt said ”We are extremely appreciative of the support of our shareholders and encouraged by the level of demand shown. We are particularly pleased to have been able to ensure that in the main our retail shareholders who participated in the SPP have been able to maintain or enhance their interest in the company. We now look forward to utilising the proceeds of the Placement and the SPP to generate good returns for all shareholders”.

In line with the SPP timetable, the shares issued under the SPP will be allotted on Wednesday, 6 December 2023 and are expected to commence trading on ASX on Thursday, 7 December 2023. Holding statements are expected to be dispatched on Friday, 8 December 2023.

A number of Aussie Broadband directors applied for and received their full entitlement under the SPP. 

--- end of excerpt ---

I applied for the max $30K in the largest real money portfolio that I manage, so will be scaled back, but I won't know by how much until Wednesday.

ABB was one of the companies highlighted in todays AFR Fast 100 Special Report

Going big to win most trusted telco

Telco Aussie Broadband is now Australia’s fourth-biggest internet provider, writes Christopher Niesche.

In 2015, Aussie Broadband managing director Phillip Britt had to make a decision – get big or get out. The company, which he had founded in 2003, had carved out a profitable niche providing wireless broadband to regional areas, predominantly in Victoria.

Aussie Broadband was serving homes and businesses that were more than about three or four kilometres from their nearest telephone exchange and so couldn’t get ADSL broadband. It was helped along the way by various government incentives to focus on areas that were underserved for fast internet.

But by 2015, the National Broadband Network (NBN) was being rolled out across the country, including to the regional areas served by Aussie Broadband, leaving the company’s wireless offering uncompetitive.

‘‘We had a decision to make. It was either time to get big or get out,’’ recalls Britt.

The company acquired Brisbane-based telco Over the Wire for $344 million last year and recently announced the purchase of software group Symbio for $262 million.

The latest acquisition comes as Aussie Broadband, which floated three years ago, overtakes the Vocus Group to become Australia’s fourth-biggest internet provider.

Aussie Broadband has by far the highest revenue of any company in the AFR Fast 100 in 2023.

It earned revenue of $350 million in the 2021 financial year and by 2023 revenue had increased to $788 million – a compound annual growth rate of 50 per cent.

Aussie Broadband’s white-label services are designed for big companies such as Origin Energy, which sell telecommunications services under their own brands.

The entrance of the NBN into the market saw Aussie Broadband shift from being a wireless infrastructure owner and builder to ‘‘just another’’ retail service provider over the NBN. It had to find a way to differentiate itself from its large and small rivals.

‘‘We felt there was a huge gap with the way that the big telcos were treating their customers and, I guess coming from the country, we had more of a customer-first kind of approach,’’ Britt says.

‘‘And so we built technologies and systems which allowed us to serve our customers really, really well and do it at a lower cost because I wanted to keep everything onshore, whereas a lot of other telcos were offshoring those roles.’’

The company automated a lot of customer service functions, which allowed it to keep costs down and keep its customer service based in Australia.

‘‘Where that really started to take off was when COVID hit and most of the other big four telcos had offshore operations,’’ he says.

‘‘They were shut down or impacted due to the various lockdowns that happened around the world. But we were able to keep operating because we were predominantly onshore.’’

Days when people were unable to contact their telcos became high sales days for Aussie Broadband.

The decision to get big required a lot more capital, Britt says.

‘‘I’ve nearly gone broke five times over the last 20 years, including as recently as four years ago. It’s been one of those cases that we’ve literally threw everything we had into the business to make it succeed and to grow,’’ he says.

The company debuted on the ASX in October 2020, following a $40 million initial public offering at $1 per share. As of late November this year, its shares were sitting a little under $4 each and the company had a market capitalisation of over $1 billion.

Listing has made capital a lot easier to raise.

Aussie Broadband is Australia’s most trusted telco brand, according to the most recent Roy Morgan Trusted Brand Awards, and Britt says much of its customer growth has been thanks to word of mouth.

‘‘We pull a lot off the big four carriers, particularly Telstra, because people love these services, they love the experience and they trust us,’’ he says.

Speaking in the wake of the Optus network outage in November, Britt said several large corporates have switched their mobile phones to Aussie Broadband, even though it runs on the Optus network because they trust the brand.

It also has spent $50 million on building its own fibre network in about three-quarters of NBN’s geographic areas, which helps it to defray costs. It means the company doesn’t have to pay a third party to carry data from data centres to NBN’s Points of Interconnect, which connects the NBN network to homes and businesses.

Aussie Broadband is the second internet service provider Britt has started. He founded Net Tech in 1996 and then sold it to a listed company called Datafast, which became part of the M2 Group and then Vocus.

Britt hasn’t been to university and says he barely passed high school, but has always had a passion for business. Working at Datafast, he learnt ‘‘how not to run businesses’’ and about small listed telcos.

‘‘I call that my uni degree period of learning how I didn’t want my businesses to look,’’ he says.

Along with accessing capital, another challenge in growing the company has been making a lot of changes very quickly and communicating them to the 1300 staff. Britt says the company sometimes is accused of being ‘‘fast and loose’’ with the way it manages time. ‘‘But that also allows us to move very quickly and adapt to changing market conditions quickly,’’ he adds.

The company will have close to 1700 staff once it completes the Symbio acquisition.

Finding the right talent is a challenge. Britt says it’s difficult finding people who ‘‘can think big enough’’ for what the firm is trying to achieve. ‘‘A lot of people have trouble not seeing what the future looks like when it’s unclear or a bit murky,’’ he says.

Aussie Broadband is now a national internet provider, but Britt says it still has a ‘‘strong regional heart’’, with call centres in Gippsland and Dandenong and one in Perth.

In the 2023 financial year, it earned revenue of $788 million – up by close to a quarter – and operating earnings of $89.6 million. It also increased its NBN market share to 7.6 per cent.

When the Symbio acquisition is complete in February – subject to regulator approval – the company’s revenue will be made up of about 50 per cent residential, 30 per cent wholesale and the remainder split between business, enterprise customers and government.

Britt expects Aussie Broadband will make more acquisitions in future.

In the next 18 months, the company will be installing new technology systems. ‘‘Our technology has been what’s allowed us to lead and differentiate and we feel that we can do more in that space to let us to continue to disrupt and lead in that space,’’ he says.

Britt, who admits to having recently contemplated his future with the company, took three months of long service leave in the middle of this year. ‘‘I’ve come back from that quite reinvigorated and ready to continue to roll the dice a bit longer.’’

DISC: Held in SM & RL

I've caught up this morning with yesterday's capital raising presentation.

Capital Raise Presentation

This morning $ABB announced a successful $120m institutional placement at $3.55 per share, a 9.4% discount to the last close before the Trading Halt. As might be expected the market moved down this morning in that direction, with SP at $3.60 at time of writing.

An SPP will open to raised a further $15-20m, taking total for the raise to $135 to $140m, which compares with the acquired value of $SYM which I put at around $260m, of which 75% was in cash, or c. $195m.

So, an important part of the drive for the CR is to maintain balance sheet strength. Prior to the acquistion, $ABB was at Net debt-to-EBDITA of 1.0x. Now twith the acquisition and the CR, leverage moves to 1.5x. Reasonably conservative.

Assuming all shares are issued at $3.55 then $140m will be around 40 million shares, compared with current SOI of 239m, so a dilution of 17%.

Of course its not really a dilution as it adds GM of $99m to ABB's GM of $279m, or 35% to give a combined GM of $378m.

So the question to mull over is whether to take this opportunity to increase my position via the SPP.

The presentation is informative, because if provides some insights into how $ABB sees $SYM complementing its business. The chart below shows just how important $SYM is in adding weight to the B+W+E&G segments. And the other slides articulate just how $ABB sees the $SYM product set in complementing its existing capabilities, as well as adding key customers and important partnerships.

In earlier exhanges with $StrawPeople, I think there is a consensus that $ABB continues to win in Resi, and the next battle will be in the other segments. These higher margin segments will be defended strongly by the incumbents and so $ABB adding heft to its capabilities and product set makes good sense.

With my central view on valuation of $ABB being around $4.50, if I believe the $SYM acquisition will be executed successfully and deliver an enhance ability to compete in B+E&G+W, then it makes sense to take the opportunity of the SPP.

So, I will mull this over, but at this stage I am favourably disposed. The acquisition makes sense to me. $ABB have demonstrated their ability to integrated acquisitions successfully as shown by $OTW and they have also shown that they are already competing well in these segments.

I'm still no so sure about the regional / international play, and I hope this doesn't blur the laser focus on the Aussie customer experience. I look forward to deep-diving into this at the next Investor Day.

Disc: Held in RL and SM with strong conviction

$SYM Acquisition Recommended by Board

$ABB announce the $SYM Board has accepted their offer and signed the deal, which is now subject to the usual approvals.

$ABB now in a trading halt, pending announcement of a capital raise, presumably to maintain balance sheet strength post deal.

$SYM will strengthen the $ABB product offering in voice and video servic products. Just not sure where the international bit fits, although I am sure Phil will make this clear in due course.

So far, flawless execution.

Disc: Held in RL and SM

Update on Acquisition

$ABB has concluded due diligence and now gone unconditional on the $SYM offer. Value of the deal has changed to reflect the fall over recent weeks in $ABB SP, which is down to macro conditions.

$SYM have until midnight tomorrow to accept the offer.

$ABB describe constructive and ongoing engagement with $SYM, so the tone of the update is positive.

The $ABB offer is superior to $SLCs both in its face value and the fact that there is now a deal on the table capable of being closed. So the $SYM Board would have to be faced with a significantly better offer to justify turning down in favour of another ("bird in the hand..." argument). So, if $SLC are going to respond, today or tomorrow would be a real good time. (I've not assessed the deal from $SLC's perspective, so I don't have any comment to make on that front.)

Disc: I hold $ABB in RL and SM

$ABB provided some key updates in the AGM address being presented later today:

1. NBN Market share has now passed 8%
2. Update on connections at Q1 FY24
3. Update on SAU (Special Access Undertaking) - overall favourable to $ABB
4. Rationale for $SYM takeover bid
5. FY24 Guidance Reaffirmed

I'll comment further on the last 4 items, the first item being self explanatory

2. NBN Connection Updates

In the table below I compare the YoY connection growth rates with the quarterly growth rates, and quarterly growth rates (Gq) annualised (Ga). (Note: Ga = ((1+Gq)^4 -1) and not 4xGq!)

Figure 1: Connection Growth (Connections)

Although this kind of analysis is too fine-grained to pay much attention too (e.g., because it doesn't show seasonal variations), it shows that residential growth in 1Q FY24 has accelerated significantly over the prior 3Qs. The other 3 segments are still also growing strongly in 1Q, alebit at a slightly moderated pace compared with the FY23 overall growth rate.

However, the 1Q numbers include 8,700 customers acquired from Uniti. (Hey, I thought it was 15,000, but they are reporting the number as 8,700 having migrated across in 1Q FY24, so let's take that at face value.)

So, the two tables at the bottom of Figure 1 look at the growth rates taking 8,700 out of the Total Connections and Residential Connections, to get a better handle on the organic growth (Excl. Uniti), which for ease of reading I place alongside the reported numbers (Incl. Uniti).

So, even if the Uniti Connections are excluded, the growth rate in Total Connections picked up pace to 19.8% Q-o-Q Annualised, compared with 17.6%, 18..3%, and 18.5% rates in the prior 3 quarters. And the same metric in Residential picked up to 13.9% compared with 12.3%, 12.5% and 10.4% QoQ annualised in the prior three quarters.

So, no matter how you slice and dice the numbers, Aussie is continuing to maintain strong momentum in growing market share.

3. Update on SAU (Special Access Undertaking)

The market has been waiting some time to hear how the determination for the SAU has played out. At the FY23 Results $ABB said they expected it to be net favourable for ABB. Today they published how the determination impacts their different plans. See Slide 15 below.

While the CVC volume-based charging remains on the lower speed plans, Aussie makes its money in the higher speed plans.

The net effect is that the premum plans will be cheaper and therefore more attractive to customers, which should drive incremental adoption and margin growth for $ABB.

In a word - good news. (Looking forward to signing up for Power House Plan!)

Slide 15 from Presentation

4. Rationale for the $SYM Acquisition

While the due diligence period has been extended by a week, Phil set out the following rationale for the takeover in his MD's address as follows:

"We believe that Symbio’s range of services and platform would complement Aussie’s NetSIP operations. Symbio offers three product sets: Communications Platform as a Service, Telecommunications as a Service, and Unified Communications as a Service. The business hosts 7.3 million phone numbers, carries 9 billion voice minutes, and manages over 180,000 mobile, nbn and voice services for other MSPs. In FY23, Symbio reported revenue of $211m and underlying EBITDA before one-off items of $27.7m. We are continuing our due diligence, and we will provide a market update at the appropriate time."

While the rationale is just as we have discussed here in other straws, it is silent on the international aspect of the business. For now, we just have to see what happens i.e., whether the deal progresses.

5. FY24 Guidance Reaffirmed

Good on 'ya Phil. Enough said. (Of course given the run up in SP some might be disappointed not to see an upgrade, however, it is early in the FY.)

My Key Takeaways

$ABB tracking nicely in line with the thesis.

It will be good to see how the $SYM deal plays out.

Disc: Held in RL and SM

18-Sep-2023: The following straw is one year old, but it's aged well I think. I've added an update at the bottom.

06-Sep-2022:

Aussie Broadband Ltd (ASX: ABB)                      

Website:  https://www.aussiebroadband.com.au/

Sector: Telecommunications and Data, ICT (Information and Communication Technology), specifically ABB are an Internet Service Provider (ISP) and a provider of other Telecommunications services.

Value Drivers:

• Sentiment around the Telco sector in Australia, particularly the smaller end.
• Profitability and growth, increasing profitability, continuing growth, meeting and exceeding expectations.
• Maintaining a high NPS and increasing market share.
• Positive M&A.

Business Description and Competitive Advantages:

Company Overview (from: https://www.aussiebroadband.com.au/investor-centre/)

Aussie Broadband is a challenger internet service provider, with a reputation for providing high-quality internet and transparent customer service.

We have grown to become Australia’s fifth largest provider of nbn™ (NBN) services, connecting more than 300,000 residential and business customers across the country.

We offer a range of services across the residential, small business and enterprise segments, including broadband, VOIP (Voice over Internet Protocol), mobile plans and entertainment bundles through a partnership with Fetch TV.

https://www.aussiebroadband.com.au/blog/aussie-broadband-beats-the-big-four-at-customer-service/

Aussie Broadband | ProductReview.com.au

Aussie Broadband Review: Value-packed NBN Plans | Reviews.org AU

Aussie Broadband named “The most trusted telco brand in Australia” by Roy Morgan in their annual “Most trusted and distrusted brands” research (2022). Source: ABB FY22 Results Announcement (29-Aug-2022)

https://netpromoterscore.guru/aussiebroadband-com-au.amp

NPS Explained:  https://customer.guru/net-promoter-score

ABB have very high customer satisfaction and promote themselves as being customer-focused with their call centre here in Australia. They go out of their way to ensure their customers are happy with the service they receive, and they take complaints seriously and investigate them thoroughly. Feedback from their technicians is also really good. From a quality of service point of view and also from a customer service POV, they are leaders in their industry.

Aussie Broadband are not the cheapest provider, but they are the best ISP in all other respects.

Which Australian ISP has the most satisfied customers? | CHOICE [27-May-2021]

Excerpts:  

We gathered feedback from more than 1800 people for our ISP satisfaction survey so you don't have to settle for the devil you know. Or you might find out you're already with one of the best providers out there, meaning you can stay put with confidence.

Most common problems

Just under half (45%) of respondents had problems with their current ISP in the six months prior to the survey.

Aussie Broadband stood out with 76% of its customers reporting no problems with their internet, compared to Telstra (55%), Optus (50%), TPG (56%), iiNet (51%), and Vodafone (52%).

Aussie Broadband also scored significantly higher than the other providers for Connection Speed, Value for money, and Reliable Connection, i.e. ALL of the categories that Choice covered.

In the graphic above Choice was providing the results for all connection types and in the graphic below they are only covering NBN connections, however, once again, Aussie Broadband also scored significantly higher than the other providers for Connection Speed, Value for Money, and Reliable Connection, in addition to Overall Satisfaction, i.e. ABB were the clear winners in ALL of the categories that Choice covered.

There’s their main competitive advantage!

Market Cap and Share Price:

M/cap = $608m (at $2.56/share on 05-Sep-2022).

Share Price = $2.56 (05-Sep-2022). 12 month low/high = $2.45/$6.03.

Valuations:

From fnarena.com:

Of the 7 brokers that FNArena covers (being UBS, Credit Suisse, Morgan Stanley, Ord Minnett, Macquarie, Citi and Morgans), only two of them (Ord Minnett and Credit Suisse) cover ABB:

Credit Suisse - on 30/08/2022, Outperform, Target: $3.70, Gain to target $1.03

FY22 operating earnings were slightly ahead of expectations while guidance was below. Aussie Broadband has guided to revenue in the range of $800-840m with an EBITDA margin of 10-10.5%.

Additional investment in people and product development is planned, while the broker suspects inflationary pressures in a tight labour market are impacting the cost base.

Guidance also assumes a heightened competitive environment will be maintained over FY23 so any withdrawal of discounts from competitors could provide upside risk.

Outperform maintained. Target is reduced to $3.70 from $4.80.

Target price : $3.70, Price : $2.67 (30/08/2022), Gain to target $1.03 (+38.58%)

(excluding dividends, fees and charges).

Ord Minnett - on 30/08/2022, Buy, Target: $4.03 Gain to target $1.36

FY22 operating earnings were ahead of expectations with growth across all three of Aussie Broadband's segments. The main surprise for Ord Minnett was FY23 guidance of $800-840m in revenue and implying EBITDA of $80-88m, below the prior forecasts.

The broker accepts the business is investing in operating costs and overheads to support its customer service yet notes it is facing a more competitive market to win subscribers.

The broker forecasts more than 50% of the FY23 group EBITDA will be generated in the business segment. Buy rating retained. Target is lowered to $4.03 from $4.69.

Target price : $4.03,  Price : $2.67 (30/08/2022), Gain to target $1.36 (+50.94%)

(excluding dividends, fees and charges).

In summary, the current recommendations (most recent, both as at 30-Aug-2022) from CS & OM are:

The entire 30-Aug-2022 update from OM is available here:  https://www2.asx.com.au/content/dam/asx/broker-reports/2022/abb-update-ordminnett-2922.pdf

Note that Ord Minnett acted as a Co-Manager of the ABB share placement announced 7th September 2021 and received fees for providing that service, so they have likely placed clients into ABB and their views should not be assumed to be entirely independent and without any bias. This is usually the case with most broker reports however, and they can still contain some useful information and facts even if they are likely to paint the company in a favourable light.

See also the Commsec summary of broker recommendations towards the end of the next (Ratios/Metrics) section.

Ratios/Metrics:

From FNArena (https://www.fnarena.com/index.php/analysis-data/consensus-forecasts/stock-analysis/?code=ABB)

From Commsec:

They are a fairly young company, having only IPO’d in October 2020, so they’ve been listed less than 2 years at this point, hence not much data being available.

ABB was not profitable in FY21, but were profitable in FY22, however their share price has come down a lot lately meaning that they have become a lot cheaper. Their PE is fairly meaningless because their earnings are still low because they have just become profitable, however they are growing at a good clip and their metrics are moving in the right direction.

Debt / Balance Sheet Strength:

Net debt (including finance leases, excluding operating leases) was $138.3m at 30-June-2022.

Net Gearing on 30-June-2022 was 62.9% according to Commsec. 

They were in a net cash position at 30-June-2021. The debt has come principally from their acquisition of OTW (Over The Wire) in the December-January period of FY22, which ABB believe has been a major acquisition that has propelled them to what they are calling Aussie Broadband 2.0 in the following slide from their FY22 Results Presentation (on 29-Aug-2022):

While their current debt is significant, it is understandable and, while worth keeping a close eye on, it should be eminently manageable and should be paid down relatively rapidly I expect over the next few years.

Another reason for the debt is that they have been building out their own fibre networks in some of Australia’s major cities. That infrastructure that they own is also providing them with a significant competitive advantage and assets that will provide benefits for decades to come.

Dividends:

No dividends yet. Only IPO’d in 2020. Have just become profitable in FY22.

Guidance:

29-Aug-2022: Trading update

Aussie Broadband has continued to grow over the first eight weeks of FY23. Total net adds (gross sales, less churn) were 15,332 across the enterprise & business, residential and wholesale customer segments. Of this, 1,572 were higher margin business, enterprise net adds. While there are several competitor low/no-margin offers in the residential broadband market at present, Aussie Broadband will not chase growth at any cost and is focused on striking the right balance between growth and margin.

The Company continues to successfully market to higher value residential customers who prioritise solution value and customer experience over price, while also focusing on converting higher margin enterprise & business and government customers within the Company’s growing pipeline of new customer opportunities. This strategy underpinned the growth in margin over FY22, and will continue to drive margin growth expected in FY23.

FY23 guidance

Based on current market conditions, operating plan and year to date trading, Aussie Broadband expects to generate revenue in the range of $800 million to $840 million in FY23.

Planned growth in higher margin business, enterprise and government customers, and with the full year benefit of Over the Wire, is expected to deliver an EBITDA margin (excluding integration costs) of circa 10.0% to 10.5%, up from 7.2% in FY22. This margin is after additional investment in people and product development to support longer term growth in Aussie 2.0. 

With the Company currently in the early stages of FY23, there remains uncertainty around market conditions, in addition to a number of potential upside opportunities and downside risks as outlined in the investor presentation released today.

Commenting on the Company's positive outlook and continued growth in FY23, Mr Britt [ABB’s MD, Phillip Britt] said: “Having delivered continued growth across all key operational metrics and record financial results in FY22, Aussie Broadband is well positioned to deliver another record year in FY23. We have now well and truly started implementing our Aussie 2.0 strategy, with multiple attractive growth opportunities in the business, enterprise and government sectors that will underpin our ability to become Australia’s fourth largest communications and technology services company.

“The ingredients for our continued growth are evident. We are rapidly growing in the business, enterprise & government, and wholesale segments. Our unwavering focus on product and technology innovation, as well as customer service, has reinforced our “value” proposition for 5 customers and differentiated us from other providers. Our balance sheet also supports ongoing attractive organic growth initiatives.

“As the benefits from the execution of our growth strategy come to fruition in FY23, we expect to deliver a step change in EBITDA over the next 12 months. A full year of earnings from Over the Wire, revenue and cost synergies from that acquisition, cost benefits from our fibre network, offset by some cost inflation and further investment into growth initiatives, is expected to substantially lift earnings and cashflows for the business.”

Source: ABB FY22 Results Announcement. [29-Aug-2022]

See also: ABB FY22 Results Presentation. [29-Aug-2022]

It is a major positive in my view that Aussie Broadband are rolling out their own fibre, as telcos that own infrastructure are always more valuable, especially as takeover targets for somebody down the track. Owning some of their own infrastructure also gives them some advantages over other providers and some pricing power at least with regard to their own stuff. The NBN has to some extent levelled the playing field, but those Telcos/ISPs that own some infrastructure themselves have the ability to package that and differentiate themselves. Fibre is also still the fastest internet available, and ABB do use superior speed as a major selling point in their advertising.

Management

The ABB Board:

See: https://www.aussiebroadband.com.au/investor-centre/

Video Link: https://www.youtube.com/watch?v=ygzNWuZfojE

People and Culture:

Having had some feedback from some of the contractors who have worked for ABB, the general feeling is that they are good, they do care about their customers and their customer service, they do take complaints seriously and try to rectify issues very quickly when they do occur. It also appears that ABB management actually value their employees and want to be viewed as an employer of choice as well as scoring well with ESG credentials, as the following slide explains:

The overall gist of the feedback that I've read is that most employees regard the company as a good one to work for, that cares and is trying to do the right thing by their workers, and it looks like by the community and the environment as well, so the feedback seems to match the investor relations material (such as these slides), which is positive.

Upside (reasons to buy):

• Fast Growing Telco/ISP who are leading the industry in customer service and customer satisfaction.
• Despite listing less than 2 years ago, they are already profitable.
• They are putting runs on the board: 
• However those runs on the board are not reflected in the share price which has come down significantly from $6/share to around $2.50/share, levels we haven’t seen since January 2021, shortly after they listed on the ASX.
• ABB is rolling out their own fibre networks in major cities which is valued infrastructure that will provide benefits for decades.
• Well incentivised Board and Management: All of the 6 Board members are ABB shareholders with one NED, Patrick Greene holding over 10 million shares (4.36% of the company, via Greene’s private company, Panama Trial Pty Ltd) and ABB’s MD, Phillip Britt, holding over 16m shares (6.84% of ABB, through a company he controls called Digital Interworks Pty Ltd). A recently retired executive director, John Reisinger, through a company he controls (Intertubes Pty Ltd) also controls 6.84% of ABB (holds over 16 million shares) and John bought half a million dollars worth of ABB shares in early March and another half million worth at the end of August (one week ago), as did Managing Director, Phillip Britt. Those were all on-market trades using their own money. Michael Omeros (a NED, i.e. a non-executive director)) also bought 104,558 ABB shares on-market for $2.69/share (so for a total of $281,261.02) in early May this year. All of the directors appear to be also taking rights or options as part-payment for their directors’ fees, creating even further alignment of interests with ordinary shareholders.
• The Telco/ISP sector is rife with M&A activity, and ABB are going to factor into that at some point. Speaking of which, Origin Energy have a white label contract with ABB where Origin bundle energy supply with telco/ISP services which are provided by ABB and there has been talk in the AFR recently (in the “Street Talk” section) about Origin running their eye over Vocus Group’s retail telco business – see here: https://www.afr.com/street-talk/origin-energy-dials-into-vocus-retail-arm-secret-auction-underway-20220831-p5be9x That part of Vocus when combined with ABB (which Origin is already involved with) would likely create a broad full-service Telco if that is what Origin is after, but it does seem to be a bit of a departure from their core energy business. Point is that ABB will factor into M&A in respect of being a target – at some point in the future. It remains to be seen when, and if they are indeed taken over, and by whom. This does not form a basis or pillar on which my investment thesis is based, it's just some potential extra icing on top.

Downside (reasons not to buy, or to be wary)/risks:

• Execution risk – including acquisition risks. So far, the acquisitions that ABB have made – have made sense and have added to the capabilities of the company and expanded their service offering, however you have to keep an eye on acquisitions. You don’t want them to overpay, or make poor acquisitions, particularly ones that don’t make strategic sense or that are biting off more than they can chew.
• Competition Risk – there are other players in this space who could certainly take market share away from ABB or make their continued growth difficult to achieve, including some massive players, however some of this risk is mitigated by ABB having some clear competitive advantages, the main one being their superior customer service and customer satisfaction ratings. And their superior speed to many other competitors. There is still always a risk that competitors chip away at those competitive advantages and manage to overcome them.
• This is a young company who have only just become profitable, so there is no long track record to look back at yet.
• There is either some shorting going on or possibly a larger shareholder offloading their shares, which is putting significant pressure on the ABB share price, so that’s something to keep an eye on, although the flip side is that it does present a good entry point if it is just a temporary phenomenon. 

Potential Positive Catalysts:

• Continued growth and beating market expectations.
• Decrease in churn, which has been a concern lately.
• Positive market updates (upgraded earnings forecasts), and announcements.
• Positive M&A, both as a potential target or an acquirer of strategic assets.
• More broker and analyst coverage.
• Increasing profits and improved margins.
• Eventually, declaring and paying dividends.

Summary:

Aussie Broadband is a market leader in terms of customer service and customer satisfaction and the sharp pullback in their share price presents a great opportunity in my view to enter this company at this still relatively early point in their journey. This is a company that I’ve wanted to own shares in for the last 18 months however they just looked too expensive. They don’t look expensive now. It’s a sector I've had success in previously (UWL and MAQ more recently, previously Amcom, M2 Telecommunications, Vocus and others), and ABB is a well-positioned company within the sector.

Today (Tuesday 6th September 2022) I bought an initial tranche of ABB shares (IRL) at $2.51/share for one of my main portfolios, and I also added them to my Strawman.com portfolio (at the closing price of $2.49/share).

Further Reading:

Aussie Broadband Stung With $213,000 Fine for Breaching Public Safety Rules (msn.com) [2022]

Aussie Broadband net profit rebounds to $5.3M - ARN (arnnet.com.au) [2022]

Aussie Broadband beats the big four at customer service | Aussie Broadband [2019]

Reviews Aussie Broadband employee ratings and reviews | SEEK [current]

Aussie Broadband Reviews | Glassdoor [current]

ABB FY22 Results Announcement and Presentation

The following is from: https://www.intelligentinvestor.com.au/recommendations/aussie-broadband-result-2022/151665?qa=

Growth in the short term may stumble in the face of intense competition. Yet the business has seen off cycles of irrational competition in the past and we expect this time to be no different.

Aussie boasts twice as many customers on top-tier plans as the market. It doesn’t compete on price and churn rates have normalised after spiking for a period. We won't join the panic over short-term discounting.

Expand the core

In the past, we’ve alluded to the similarities between Aussie and another II favourite, Macquarie Telecom. Management has added more credence to that comparison by confirming a pivot from operating as an NBN reseller to focussing on business, enterprise and wholesale products.

This is a similar trajectory to the one taken by Macquarie about a decade ago and should drive higher retention and higher margins. So far, those new segments are working.

The enterprise business, which offers services to business customers, increased revenue by more than 50% and contributed $10m to EBITDA. The wholesale business, which provides white label services to third parties, now boasts 60,000 connections in its first year and is already profitable.

Over the Wire’s voice platform and data service will be crucial in building new products and services. Importantly, a lot of Aussie’s new products will focus on its own infrastructure. There is clearly concern about NBN pricing, from Aussie and more broadly, especially in the short term. 

Lower the volume charge

When the NBN was established, it was required to achieve specific return-on-asset targets. To reach those, it introduced a notoriously unpopular volume charge that lifts prices for everyone as data consumption rises.

That makes high-tier plans more expensive and lower margin than they would otherwise be. With consumption volumes soaring since the pandemic, NBN wholesale prices keep penalising high volume providers. That will continue for another year but, beyond that, it looks like NBN pricing will change.

As we’ve previously explained, the new federal government is looking to change the NBN mandate and lower or abolish the volume charge.

That will be most beneficial to higher-tier providers like Aussie and will help lower prices or lift margins. Negotiations are still underway, but early signs are positive that something might change in 2024.

We also note that Aussie’s long fibre rollout is 90% complete and will conclude this year. That will provide savings on backhaul leases and a base for further fibre expansion.

Aussie has already confirmed it will extend its fibre network to some data centres and to dozens of large buildings. It can then offer higher-margin products that bypass the NBN.

We suspect next year might be a tough one for Aussie. The consumer broadband sector is looking harder, labour costs are rising – Aussie had to spend $7m in additional labour costs – and discounts are rife.

Yet we think those difficulties will be offset by growth in new segments of the business and, over time, improved wholesale pricing will help lift broadband margins.

Fallen expectations

Management expects revenue for next year to be between $800m and $840m, while EBITDA margins are expected to rise to over 10%. We should expect over $80m in EBITDA for the year.

Aussie currently carries $138m in net debt, a figure we would prefer to see lowered quickly. After adding that debt to a market capitalisation of $640m, we come to an enterprise value of $780m and a forward EV/EBITDA multiple of less than ten.

We acknowledge that risks from competition and discounting have risen, that growing new business segments is harder than growing existing ones and that the balance sheet now carries debt. It appears the market has now discounted the valuation it is willing to ascribe to Aussie in light of those risks.

Yet Aussie isn’t some fad or fashion. The business started from scratch in 2008 and, with no obvious advantage, fought off almost 100 competitors to become a force in broadband.

The skill, hustle and determination that build an impossible business is again being mobilised and we are happy to back management to do it again. To account for the risks, we’re lowering our Buy price from $3.50 to $3 and our Sell price from $7 to $6, but Aussie remains a BUY.

Note: The Intelligent Investor Australian Ethical Shares Fund owns shares in Aussie Broadband.

Disclosure: The author owns shares in Aussie Broadband.

By Gaurav Sodhi

[30-August-2022]

IMPORTANT: Intelligent Investor is published by InvestSMART Financial Services Pty Limited AFSL 226435 (Licensee). Information is general financial product advice. You should consider your own personal objectives, financial situation and needs before making any investment decision and review the Product Disclosure Statement. InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.

--- ends ---

For a free 15-day trial to Intelligent Investor (to gain access to more of Gaurav's fine work) - go here: https://www.intelligentinvestor.com.au

Information, images, charts, diagrams, etc. used in this straw were from the sources listed above as well as the following websites: https://www.aussiebroadband.com.au/investor-centre/, https://www.intelligentinvestor.com.au, https://www.afr.com/, https://www2.commsec.com.au/, https://www.choice.com.au/electronics-and-technology/internet/connecting-to-the-internet/articles/internet-service-provider-satisfaction-survey and https://www.fnarena.com/.

18-Sep-2023: Update:

OK, I was confident that ABB had upside one year ago when I wrote the stuff above, and their report in August for the FY23 full financial year was really good.

You can view their announcement here: ABB-FY23-Annual-Results-Announcement.PDF

And their FY23 Results Presentation can be viewed here: ABB-FY23-Results---Investor-Presentation.PDF

The key highlights from their results announcement were:

They provided the following tables to demonstrate their revenue and subscriber (connections) growth:

They also provided the following FY24 upate and guidance:

All very positive - and then, from their results presentation:

And here's something that I don't see too often - not often enough anyway - an explanation of the key risks to the business and it's growth and profitability trajectory (i.e. downside risks) alongside the upside:

However, the overall FY24 outlook remains positive, as detailed below:

Guidance for continued growth, so good numbers which should continue to be good.

The following was sourced from FNArena.com this afternoon:

The following is the FNArena.com summary of the latest update on ABB from OM (on Aug 28th). They believe that MS and Shaw & Partners have both discontinued coverage of ABB, however I've included the most recent calls on ABB by both of those brokers including the dates they made those calls. According to FNArena, ABB is now only covered by just one broker (Ord Minnett) of the 8 major broking houses that FNArena monitor. I view that as a positive actually. The less major broker coverage a company has, the more likely there is some market misspricing (in my experience).

This last slide (from ABB's FY23 Results Presentation) is a major reason why I hold ABB shares. I believe that outstanding customer service and high customer satisfaction (along with positive customer recommendations) are going to continue to result in ABB gaining further market share from Telstra - and to a lesser extent also from TPG and Optus who I believe may have dropped the ball somewhat recently (in the past 18 months or so) in relation to customer service and customer satisfaction.

And it appears that this is one of those rare cases where the market is finally coming around to MY way of thinking. It doesn't always happen, but it's certainly nice to see when it does.

Disclosure: I hold ABB shares.

Aussie have started to advertise through a number of podcasts of late, including Equity Mates. Many would naturally expect this to involve them spruiking their residential NBN segment, but interestingly enough it was purely around marketing the enterprise and SME sectors. The advertisement included the below:

"They have brought a suite of technology solutions to the table, think networking, voice, connectivity, and cloud solutions. They have already helped over 1000 large Australian businesses and they are ready to do the same to your business"

A few of our members, myself included, believe the enterprise/business segment is the next key opportunity ahead for Aussie. This business increasingly appears to be positioning itself to tackle enterprise and government in a similar way Macquarie did many years before.

Hopefully we see some traction in these segments in H1.

@mikebrisy and @Rocket6 , I'm interested in how you are valuing the Business / Enterprise & Govt revenue potential for ABB.

Do you see this coming from reselling core connectivity eg. NBN Enterprise Ethernet product or Value Added Services on top of the line (eg. IP PBX, Managed Routers etc.)?

My long term hypothesis is that ABB is one of the primary recipients of a tax payer subsidised destruction of the Telecommunications Monopoloy/Duopoloy in Australia. AKA NBN. I also believe that TPG will be a major beneficiary as well and will occupy the "value space" vs "premium service space" taken by ABB. With Telstra being a loser as their monopoly is broken down (structural separation etc. but subiidised with an $11B cheque from NBNCo). I also suspect Optus will be a loser in this transition by being stuck in the middle (not having a clear differentiated proposition like ABB or TPG) as well as being hampered by things such as their Data Breach and foreign ownership.

Your models seem to be based mainly upon residential NBN. I worry that much of the easy growth from consumer NBN is probably done (rollout complete, pressures of bigger Telcos selling 4G/5G Fixed Wireless Broadband to undercut NBN's lower speed tiers, limited growth in SIOs (basically new dwellings approvals at about13,000 builds a month at the moment so 1-2% organic NBN growth and an increase in some of the NBN Access charges for Telcos pressuring margins). While I think ABB can probably still take market share in this space as they have built a good reputation as a company providing great service in a generally mediocre industry, there is still quite a bit of inertia to force change now that NBN rollout isn't forcing people to conduct a once in a lifetime review of their relationship with Telstra.

So from here on in, I'm hoping that further growth is going to come from the Business and Enterprise and Government segments:

• These are coming off a very low base
• However, they seem to offer higher Gross Margin (45-50%) vs 30% for the Residential and Wholesale segments.
• They don't seem to be growing this revenue at a meaningful rate yet (7-9%) vs 23% for Residential (albeit this rate is declining every half) but I'm wondering if this is because the service offering is still so new or whether ABB does not have a sales force sufficiently skilled to address these more complex customers.

There is some sense that with the products from NBNCo for Business and Government (such as Enterprise Ethernet) launching to market much later and potentially some longer term contracts also protecting incumbents its still very early to make a prediction.

• I note that ABB seems to be taking a larger share of Enterprise Ethernet SIOs than their share of Residential Customers:https://www.crn.com.au/news/aussie-broadband-nabs-15-percent-of-nbn-enterprise-orders-575388. (I'm not sure if this is still the case as this information doesn't seem to be published)
• I note that Enterprise revenue for NBNCo is increasing quite rapidly. According to TPG in their ACCC submission https://www.accc.gov.au/system/files/TPG%20-%20Submission%20to%20ACCC%20consultation%20paper%20-%20Public%20version.pdf "For instance, NBN Co reported on 9 August 2022 ‘business segment’ revenue of $1B, which is up 20% year on year. On 15 February 2023, it reported revenue from ‘business customers’ increased to $549 million in HY23, up 11 per cent from $493 in HY22. It has predicted take-up of enterprise ethernet services will grow “rapidly”. TPG and other incumbents with large fibre footprint hate that NBN has gone beyond its initial mandate or residential access.
• NBN themselves think that there is potential for lots of Enterprise Ethernet (and this is really only just beginning) with potential for 318K services in non-metro alone. "The Company’s enhanced Enterprise Ethernet service is enabling eligible business customers to order broadband based on wholesale speed tiers of close to 10 Gbps1,2, which is up to 10 times faster than previously available on the nbn® network. We now have over 20,000 active Enterprise Ethernet services, with 6,000 additional services activated during the half. nbn® Enterprise Ethernet is available through RSPs to NBN Co's existing Enterprise Ethernet footprint, including around 900,000 premises located in nbn® Business Fibre Zones across Australia. Of the 321 Business Fibre Zones, 142 are located in regional Australia, enabling approximately 318,000 businesses to access Enterprise Ethernet in non-metropolitan areas". https://www.nbnco.com.au/content/dam/nbn/documents/about-nbn/reports/financial-reports/NBN-Co-Half-Year-Report-FY23.pdf.coredownload.pdf

I'm not sure whether modelling ABB's growth in Enterprise Ethernet as the core of the Enterprise and Government Revenue is the way to go or whether we should be assuming a greater mix of value added services on top of the core connectivity

• Telstra seems to be starting to see a decline in their Enterprise and Government fixed line revenue but they seem to be trying to offset that by going further up the stack with NAS (Networks and Services). According to Telstra data the liones share of their revenue is coming from the NAS. https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-h/TLS23_17%20Results%20for%20FY23.pdf

I'd appreciate your thoughts. My gut wants to buy some more ABB but my head and DCF which is based upon residential broadband to date is telling me that the stock is currently priced about right unless they can crack Enterprise and government. I'm a bit scared by the rate of decay of net adds per half compared with the install base in the green chart above (2HFY22 10.2%, 1HFY23 6.4%, 2HFY23 5.5%, ...)

DISC: Hold TPG IRL and ABB IRL and Strawman

Wholesale NBN services as of 31 March 2023

More good news for Aussie, with net additions increasing by almost 25,000.

That said, it wasn’t just ABB that continued to increase net additions – Superloop increased theirs by an impressive 56k, while Vocus recorded an increase of 32k. The three telco leaders continue to haemorrhage customers – particularly TPG, losing more than 40,000 services over the reporting period. Collectively, the heavyweights dropped 58,000 services.

Despite Superloop performing well, I still have real questions around their sustainability as a company. This is where Aussie’s moat is starting to shine. Trancer touched on this earlier – poor old Superloop have had to drop costs to keep customers. This looks good in terms of net additions but they chew through capital like there is no tomorrow. Aussie have refused to offer cheap deals to keep customers, preferring that these services churn elsewhere – it is not where the attractive margins are after all.

Superloop burnt 21m in H1, while ABB made an 8.5m profit. Let’s hope we see more of the same in H2 (for Aussie that is; I have nothing against Superloop).

Perhaps not surprisingly with inflation, the 25mbps tier increased since the last report (by around 125,000 services, around 16% of the total wholesale market). Most of these services appear to have downgraded from 50mbps (which lost 99,000 services), although some have upgraded from 12mbps.

That said, 250, 500, ultrafast and 1000mbps tiers all recorded increases in services. This is great news for Aussie, they dominate this end of the market as demonstrated below:

• 250mbps: Aussie has 3^rd most services
• 500mbps: most services
• ultrafast: most services, with almost double the services of the next closest ISP
• 1000mbps: most services, more than double the services of the next closest ISP

So while slower NBN plans have grown in popularity over the last three months, so to have the high speed tiers – and this is only good news for Aussie noting their dominance at this end of the market.

“Aussie Broadband has tapped Melbourne agency Thinkerbell to co-develop its new ‘The Actual Aussie Way’ brand platform.

The campaign will also see the branding replace the “Bloody Good Broadband” tagline across the telco’s communications, customer messaging, branding and external promotions.”

https://mumbrella.com.au/thinkerbell-launches-aussie-broadbands-new-the-actual-aussie-way-campaign-789674

https://youtu.be/TqKV6PGPV8M

Makes sense to change the marketing message away from the residential to encompass the expanded business.

I'm not sure about the tagline "The Actual Aussie Way." It doesn't seem as catchy as "Bloody Good Broadband."

Perhaps, given it already has good brand recognition and recall with the retail consumer, it is deliberate. It’s clearly not so “ocker” and the promo depicts a diverse customer.

Aussie Broadband has acquired the NBN customer base of Uniti Group and will start to migrate users from mid next month. The official Uniti release is here. iT News also wrote about it here.

Key details

• Relates to the acquisition of more than 15,000 subscribers
• Concerns Uniti’s entire NBN customer base, including FuzeNet and Harbour ISP. The latter have more than 6000 satellite services as of the last report, so I am not sure what happens to those customers (noting Aussie doesn’t service satellite)
• Migration scheduled to take place between June and July 2023, so should provide some strength to both H2 and FY24 H1’s residential numbers.
• Aussie will honour all existing plans, like the champions they are.
• No mention of how much Aussie paid to acquire Uniti’s customer base. 

Disc - held.

@mbry9625

i don’t follow motley fool and there recommendations but if the price was to get whacked based on some sell recommendation that’s a great opportunity for you to top up if you feel confident in your position. I would find this an opportunity rather than a negative.

disc - held

The NBN Wholesale Market Indicators Report (December 22 quarter) has been released, and the results are good for Aussie.

Aussie total services

• Sep 22 report – 580,985
• Dec 22 report – 604,951

Key points

• Total NBN services came in at 8.7m, a decrease of 0.1%. With NBN growth stalling, this emphasises that ABB need to capture market share from existing services and justifies their ongoing push towards business and enterprise.
• More of the same – Telstra, Optus and TPG continue to lose market share to smaller players. Who is surprised?! ABB had another strong quarter, but not as strong as Vocus, who picked up 25k services to Aussie’s 24k. Superloop grew their services by a modest 13k. The below chart articulates this better.
• While the 50-speed tier remains the most popular, there was a large increase in the second-most popular 100mbps tier, with almost 190,000 new services. This tier now accounts for over 13 per cent of all services. Customers continue to move towards higher-speed plans -- this is good news for Aussie.  
• Aussie experienced moderate growth across all NBN tiers: 25, 50, wireless, 100, 250, 500, home ultrafast and 1000mbps. The higher tiers are what I am primarily looking for, but the growth across the board is a good sign. On that note, growth in services occurred Australia wide, with increases in all states/territories. This reflects well on their competitive advantage/brand.

In short, Aussie continues to impress. I am going to take a stab in the dark and say they will overtake Vocus and become one of the 'big 4’ NBN providers by March 2023 quarter. 

A few StrawPeople (including me) recognised in the second half of last year that former market darling $ABB was oversold. Today we got the first look at a clean half year of results following the $OTW acquisition.

As reported by @jayjayjayjay , the overall results are decent.

However, some shareholders were clearly spooked with the 4% downgrade in revenue guidance for the FY from $800m-$840m to $780m-$800m, which was headlined by the positive news of an upgrade in EBITDA guidance from $85m - $90m, from earlier guidance of a margin of 10% to 10.5%.

For clarity, the old EBITDA guidance, at the midpoint of the previous revenue ($820m) and EBITDA margin (10.25%) guidance ranges was $84.0m.  So the EBITDA upgrade is +4%. (Honestly, I often wish firms didn't give guidance at all.) 

Shares are down 1% on the day; however, they hit -10% earlier in the session, before the results call.

I'll consider the results through the lens of my investment thesis. First, I am not a fan of the telco sector. However, I am attracted by “attackers” or late entrants to a market with incumbents ripe for disruption ($TLS, $TPG). In the case of $ABB, the thesis is that an agile, customer-focused player, free of legacy infrastructure and systems, can focus on higher margin customer segments by investing in targeted infrastructure and technology to establish a profitable, growing share, defended through excellent customer service.

The Numbers

$ABB were good enough to report the PCP comparison using the proforma combination of $ABB and $OTW, to remove the inorganic consideration in the comparison. (Thanks, guys! This makes up for the muddled guidance.) All my comparisons are therefore on that basis.

Drilling down below the headlines reported by @jayjayjayjay , the EBITDA growth of +86% to $41.1m had two main drivers: 1) network savings (+$9.1m) and growth (+$10.3m). The network savings arise from where NBN backhaul charges are avoided by using $OTW/$ABB's own network backbone, which they are continuing to build out.

Capex: $31.2m was spent in the half with the mix shifting from replacement, upgrading and backbone investments to an increased emphasis on $17.5m growth capex (which means laying network to new customers areas plus actual new customer connections). FY capex was guided to $55.0m, so 2H FY23 number of $23.8m, with clear signalling that peak capex is behind us.

Importantly, the $ABB networks has been expanded to 1,400+ buildings available for connection, which is +320% on PCP.

To meaningfully understand the results it is necessary to consider each of the four business segments in turn: Residential, Business, Enterprise and Government and Wholesale.

Residential: New additions of 30,077 were down on the last half’s 43,000. This is still a healthy +7% on the PCP total, recognising that the overall NBN market is now mature. (Total connections in the market grew from just 8.4 million connections in Jan 2022 to only 8.5 million in December 2022, Source: NBN Co.) Customer churn remained low at c. 1.2%. With revenue rising at 26% and COGS at 18%, Gross Margin increased 49% to $72.0m, with GM% rising from 25% in the PCP to 30%. In summary, while volume growth is moderating, $ABB is still gaining market share concentrated on the high speed premium plans. Operating leverage is driving margin expansion. Residential appears to be in rude health.

Business: New connections here also slowed, adding 4,161 compared with 4,980 in the prior half. This was 11% growth on PCP total connections, and additions were 24% higher than the PCP. Revenue grew on 7% in this segment with COGS up 25%, so Gross Margin was flat at $23.0m and GM% declined from 49% to 46%. I didn’t understand the rationale here which was put down to “Gross margin stable with change in product mix.” The analysts on the call didn’t dig into it, and I wasn’t fast enough on the case to ask a question myself.  So, Business is one to watch going forward.

Enterprise and Government (E&G): Total revenue was flat due to “timing of non-recurring revenue”. However, recurring revenue grew at 5%. COGS actually reduced 7%, so Gross Margin increased 7% to $19.2m, and GM% increased from 49% to 52%.

Wholesale: grew strongly, with revenue up 129% to $49.4m, but with COGS up 141%, Gross Margin increased only 111% to $18.0m. (GM% margin declining from 40% to 37%).

 Cashflow: Net cash from operations increased 34% from $19.2m to $25.8m. Therefore, given the $32.5m investing cash, net cash flow was -$14.1m. Looking ahead, with declining capex, I expect 2H FY23 to be cash flow positive, and for $ABB to turn into a solid cash generator in FY24, as is the consensus view.

Insights from the Q&A Discussion

CEO and co-founder Phil Britt summarised $ABB’s position by stating that “Residential and Wholesale are running strong. Business, Enterprise and Government is now positioned for strong growth.”

Asked to explain the reason for the revenue downgrade, Phil said that they hadn’t quite hit the expected mobile customer additions and that the Origin white label deal was “a bit slow” getting started.

On his bullishness for Business and E&G in H2, Phil said that there was now an integrated $OTW+$ABB team in place and the pipeline is bigger than before. He also pointed out that there is a time lag between signing customers and revenue flowing. He pointed to the first enterprise pilot in Brisbane CBD where they are halfway through standing up 20 new enterprise customers, enable through a focused buildout of the $ABB network. “I’m really bullish about the E&G opportunity.”

On costs, Phil said that headcount will now be steady, with the current team able to drive the next period of growth. Of course, customer support has to scale with revenues, so he was referring to business development and customer onboarding.

On competitive positioning and pricing, Phil said there has been a lot of competitor activity in the lower-tier market, but that they are seeing consistent new additions in their target premium segment. This has continued with a strong January and February also going well. So Phil reported that they are not seeing customer demand falling off. On pricing, competitors have raised prices, but $ABB will hold off until the new NBN determination is in place, hopefully for the start of FY24. He believes this will be favourable for the higher speed plans. Any changes, currently being indicated by ACCC review are likely to be favourable to FY24.

On margins, with the midpoint of new guidance at 10.8%, Phil noted that there would be further benefits from Aussie increasingly using their network as well as well as CVC charges "remaining with tolerances". He indicated that there is some further opportunity for margin expansion. Of course, overall margins will expand if Business and E&G grow faster than Residential.

My Overall Take Aways

Following today’s call, I am happy with the progress and my investment thesis stands, notwithstanding the 27% increase in the value of my holding (RL). Having taken an initial position (RL 2.5% now 3.2%), I was looking today for evidence of progress that would justify increasing this position.

Trading on an EBITDA multiple of 10, $ABB is valued at a 30-35% premium to the sector ($TLS, $TPG).

As it transitions to generating free cash in H2, provided it continues to take market share at strong margins, then this valuation is justified. With declining capex, free cash flow should grow. Operating margins should expand ahead of further improvements in gross margin. Gross Margin expansion should be assisted by a maturing residential sector and the delivery of the CEO’s bullish view on the higher margin business and E&G sectors.

I don't fully understand what is going on the Business and E&G, but with clean numbers for the last half, I will be in a better position to judge at the FY. Given that we are already one-third of the way through H2, there must be a solid basis for Phill's bullishness today!

In summary, the proof point at the FY will be the progress made in Business and E&G, continued progress in Wholesale, even if growth in Residential continues to mature.

For now, I am a happy HOLD.

Disc: Held

The NBN market indicators report has been released, relating to the September quarter.

Key takeaways: 

• The total number of residential services increased by 0.2 percent -- almost 17,000 services.
• The trend continues: Australia's largest telcos continue to lose market share. The 'big 4' (Telstra, TPG, Optus and Vocus) lost 123,000 residential services between them in the quarter. Telstra experienced the largest fall in market share. Note: it will be worth keeping a close eye on the December report; I expect Optus will lose significant market share following the September cyber attack which needs no introduction. 
• Smaller providers meanwhile gained more than 140,000 services in the quarter, increasing their combined market share to 14.2 per cent, up from 12.6 per cent in the previous quarter.  
• You guessed it: ABB and Superloop were the main beneficiaries. Their market share increased by 0.3 percentage points -- reflecting the largest increase of the providers. The thing is though 'other' NBN providers actually lost significant market share (almost 100k services). The difference is ABB and Superloop both bucked the trend. The chart below speaks volumes re: this change. 
• More specifically to ABB, residential services increased from 557k to 581k, an increase of 4.3%. Actual connection increases for ABB were more than Superloop's, but only marginally -- 24k vs 23k increases. 
• ABB increased market share in all areas -- metro, outer metro and regional. Further, customers across all states and territories increased -- that is remarkable. This is important as it demonstrates they aren't largely dominant in one market, but are starting to appeal to the masses countrywide. @mikebrisy discussed it on this very forum last week -- the more ABB customers continue to speak glowingly about their internet provider (ABB) the more we will see the business grow across the country without having to advertise and over-spend on marketing. This is ultimately a competitive advantage.
• 50Mbps speed tier remained the preferred tier option, accounting for just over 50% of all services. Services using NBN's smallest tier (12mpbs) decreased by more than 40,000. About half of these appear to have filtered through to the 25mbps tier, while the rest have elected for higher speeds. In what is good news for ABB, Homefast connections increased from 1.2m to more than 1.3m. ABB do well in this market, so customers increasingly moving to these tiers will only benefit ABB. 

The TLDR of the above is 1) the big 4 telcos continue to suffer, while ABB and Superloop continue to shine, and 2) NBN customers are shifting to higher speeds plans. 

I think the following statement from the ACCC Commissioner is most telling:

“The rate at which smaller broadband providers are gaining market share from the big four accelerated markedly in the September quarter. The smaller providers increased their combined market share by 1.6 percentage points, which is about double the rate of the previous three quarters”

This supports my investment thesis. My view? Australians are sick and tired of being taken for a ride by the major telco providers -- we want better customer service, more reliable connection and stable speeds. This report suggests we are continuing to see this play out. We are witnessing disruption to the NBN industry and in a big way.

Edit: removed date on graph.

ABB up 4% today on back of investor day info. Reaffirmed its guidance for FY23

There has been a steady increase in shorts over the past 3 months.

My initial thoughts are:

·     competition is strong in the business space

·     a "doubt" they can reach the target of 1 million retail customers.

I think they can achieve the retail customer goal as customer service and the Optus debacle should carry them through. Although there is some interesting bundling going on now with CommBank, offering internet discounts with CC payments and mortgages. There are also bundles with utility companies available. Perhaps price will become more important consideration for customers?  More and Tangerine also seem to be nimble, customer focused operators, that could nip at ABB’s customer base.

The business side is not so easy to quantify. To me, their image is of a retail brand that will need to be expanded on to win enterprise business. There is competition on all fronts, big and small, TLC, SLC, etc. I haven’t yet decided if the OTW acquisition adds real value or was just adding/buying customers.

I’m also wondering if the value of their fibre is not being fully appreciated.

Looking forward to the investor presentation tomorrow for some clarity on the above.

Held, potentially looking to add at some point.

Aussie Broadband (ABB) is holding an Investor Day on Wednesday  9 November 2022 at 10am for a 10.30am start, to 2:30pm AEDT; including lunch with Aussie Broadband’s executive leadership team.

Location: Museum of Sydney, cnr Bridge and Phillip Streets, Sydney 

RSVP: By Monday 31 October 2022 to investors@team.aussiebroadband.com.au. Please indicate any dietary requirements for catering purposes.

For those unable to attend in person, the formal presentations and Q&A session of the Investor Day will be livestreamed from 10:30am to 1:00pm AEDT, and participants can register for the livestream via: https://us02web.zoom.us/webinar/register/WN_0RBj17P6SRSIRaeDiffnFw.

Here's their announcement about it today (Wednesday 12th October 2022):

ABB-Investor-Day-Details.PDF

Investors will have the opportunity of meeting with the Company’s executive leadership team, and better understand Aussie Broadband’s ambition to be Australia’s 4th largest provider of communications & technology services. 

Presenting from the Company will be: 

• Phillip Britt, Managing Director and Co-founder 
• John Reisinger, Chief Technology Officer and Co-founder 
• Matthew Kusi-Appauh, Chief Operating Officer 
• Jonathan Prosser, Chief Strategy Officer 
• Aaron O’Keeffe, Chief Growth Officer 

In addition to the executives presenting, the following executives will join the Q&A panel: 

• Brian Maher, Chief Financial Officer 
• Kevin Salerno, Chief Customer Officer 
• Jane Betts, Chief People & Reputation Officer. 

The Investor Day will focus on Aussie Broadband’s strategy and operations, and will cover the following topics: 

• Refresh on Aussie Broadband’s value proposition, business model and industry position 
• Aussie Broadband 2.0 strategy underpinning a diversified communications and technology business 
• Key market segments and growth opportunities – business, enterprise & government; wholesale; residential 
• Delivering the operational benefits of scale via proprietary software technology and infrastructure.

---

Disc: I hold ABB shares. This can't hurt!

Table 5 in the latest ACCC reports show ABB has clear market leadership in the higher speed categories. Close to 50% market share in the 500Mbps, Home Ultrafast, 1000Mbps. These are the kind of customers that should stay loyal and not the sort of low value 12/1 (DSL speed grannies) or 25/5 entry level customers. I expect the lower speed customers are the ones likely to be churned by TPG and Telstra into 4G/5G Wireless customers.

What you can see is in spite of a "low quarter" in adds, ABB is still outperforming other NBN Access Seekers. Other things I will be looking into are where are Telstra's 50Mbps customers going and where are TPG's 100Mbps customers going? My suspicion is they are the ones being targeted with the 5G wireless offers (TPG is undercutting their NBN services at these speeds to the tune of $15/mth). That is the main bear case item for me with ABB.

#Disclosure - I own shares in TPG and ABB

Aussie's CEO Phillip Britt purchased 500k worth of shares on market on 30 August 2022, at a share price of $2.70.

Good to see I am not the only one who thinks shares are currently trading at a discount!

Disc: held

FY22 at a glance  

• Revenue increased 56% throughout the year to 547m 
• EBITDA before non-recurring items increased to 39.4m, up 107%  
• Cash flow positive – 37.8m of cash intake – up 49% on FY21 figures  
• Gross margin increased to 29.5% (previously 28.1%) 
• Evidence of scaling vs FY21 – revenue increased by nearly 200m, while network/hardware expenses increased by 130m. We did however see a sizable jump to staff expense (another 30m), while marketing also increased (5m). 
• NPAT (before amortisation of acquired intangibles) came in at 10m, an increase of 223% 
• Net profit 5.3m, after making a -4.5m loss in FY21  
• Net debt 138m 
• Cash on hand 47.7m 
• FY23 update: 15k total net adds across all markets. Uncertainty around market conditions remain, in addition to a number of potential upside opportunities and downside risks.  
• FY23 guidance: quite aggressive, expecting revenue of 800-840m and an EBITDA margin of 10-10.5% (vs 7% in FY22).  

I am mainly pleased; most things are ticking along as anticipated. But there has been a serious increase to investing cash outflows (308m vs 17.1m), largely due to the OTW acquisition and fibre rollout. Who would have thought investment in oneself would be expensive? :-) 

In total, there was a 9.3m net decrease in cash and equivalents, but with almost 50m cash on hand I don’t have any real concerns here.  

Similar to my assessment of Codan no longer being just a metal detector business, ABB is no longer just a retail NBN provider. This is a more balanced, diversified business than it was 12 months ago – thanks to the OTW acquisition and a shift in strategy. 

Looking ahead, the proposed NBN pricing is currently being discussed by relevant parties. This is definitely something to watch. ABB suggest the last update (August 2022) is a positive step forward, with CVC to be phased out over a 3-year period. Where things get really interesting is where the biggest improvement appears to be to the cost structure – high speed tiers – which is where ABB likes to fish.  

It also emphasises the continued shift in strategy we are seeing. The business is increasingly pivoting from being your standard NBN reseller, to targeting higher margin services at the top end of town (which is also where costs will largely decrease in the proposed cost structure). With residential growth slowing, there is a shift towards upsell opportunities (NBN and mobile packages etc). Management stressed they will not chase retail growth at any cost, particularly at the low/no margin residential part of the market. I put this to the test a few days ago and asked if ABB would price match the lower-quality Superloop deal. They could not have been less interested.  

On the other end of the scale, business/enterprise/govt customers continue to be where growth opportunities exist. It is also stickier and with it comes higher margins. As an example, they recently secured a three-year deal with Mitsubishi Motors with all of their locations nationally.  

Key risks to the business include uncertainly over CVC costs, staff recruitment to support further growth, wage pressures, increased market competition (NBN/5G). 

So what does the result mean?

Sometimes it's important to step back to gain some perspective. Since last year, ABB's share price has halved. What's changed?  

Well, here is a snapshot (FY21 to FY22) 

• Revenue: 350m to 546m 
• NPAT: -4.4m to 5.2m 
• EPS: -2.63 to 2.39 
• Cash from operating activities: 25.2m to 37.7m 
• Gross margin: 28.1% to 29.5% 
• Free cash flow: 5m to -32.5 

We have also seen the business make the acquisition of OTW, which expands ABB's offerings and margins, and better places it to target enterprise/government. The fibre rollout, which is 90% complete, again increases ABB margins -- but more importantly will benefit them significantly into the future.

That is a pretty remarkable 12 months. This is not a lower quality business now – in fact it is the opposite – with the business going from strength to strength over that time.  

Then again, the investment into the business has resulted in significant increases to both Capex and liabilities (the former largely being based on investments and the acquisition, with the latter primarily being borrowings, contract and trade payables). In particular, PPE more than tripled. But the business' balance sheet is healthy and I don’t have any real concerns here. What it does mean though is FCF will be impacted for the next 12-24 months while the business makes these investments. But I am far more concerned about the five-year snapshot than the short term one – hence why I can appreciate the significant investment they are making in themselves, even if it does murky the financial waters temporarily.  

The business is currently trading on a p/e of 80 and a p/s of 1.5x. With the business still growing and only just achieving profitability in FY22 I don't think using a p/e multiple is reasonable here. So despite what appears like a lofty p/e multiple, I think the current share price is an attractive one.

NBN is upgrading to fibre to the premises in our area so I went to Telstra website to upgrade. It was going to take a while so I took a look at Aussie broadband’s website. Brilliantly set up. They were in to me within 24 hours and sold me a hugely upgraded service for 5% more than Telstra were charging me.

Guy from NBN out literally the next day.

no wonder they have customer love.

full disclosure hold irl

Nicely put @jayjayjayjay. Despite new connections slowing up, my thesis remains intact. The business continues to command respect from the industry, and they are generally liked by the majority of customers – their point of difference in an otherwise unpopular market.

Net additions weren’t quite as impressive in Q4 (see below). Excluding the OTW acquisition, total broadband services came in slightly below previous guidance provided, due to reduced marking through the federal election (presumably it was more expensive to advertise during this period?). This is something to watch – they can’t be expected to continue the growth they have achieved in the retail segment, but slow organic growth will supplement the opportunities that lie the business space. Post Q4, ABB’s NBN market share is expected to be around 6.5%, up slightly from the 6.2% reported in March.

Addressing call wait times (absolutely essential) and receiving another industry award are further positives from the quarter.

The report includes an update on the OTW acquisition and integration. Management note OTW has strengthened ABB’s business offering and added 16,000 business, enterprise, government, and wholesale customers – where I think ABB should be looking to expand and where I think the majority of opportunity lies. The integration is progressing as planned and they are already generating revenue synergies from the acquisition, including two large regional health alliance and shire council deals recently signed. The integration is expected to be fully completed in Q1 FY23, which will result in margin improvements and improve fault restoration times. Synergies relating to the migration of Aussie voice traffic onto the OTW network has yielded 2.9m in annualised savings, more than initially expected. When you include a further 2.3m in other synergies achieved, this brings total cost synergies to 5.2m annualised. So they are strengthening their business offering and synergies are enabling savings – that is pretty impressive if you ask me.

More savings (13.5m) will be generated from Aussie’s fibre rollout, which is 90% complete. This is expected to be fully complete in Q1 FY23. The business note they are starting to identify further opportunities to expand their network, with a number of buildings identified. This will enhance their ability to generate new sales. Moreover, new connected buildings have excellent scale benefits – when one customer is added, the next customer (added) in the same building typically has 80% lower capex costs, compared to the first.

There is also an update on CVC and NBN pricing – essentially ministerial intervention is calling for a reset in NBN’s pricing approach. This should be good for ABB and the industry in general, but this probably warrants a separate straw.

Growth is priced in – and expected by the market – so its important ABB continue to grow slowly while it shifts into new verticals. That is the main risk I see at the moment. That said, management, led by founder Phil Britt, continue to run this business exceptionally. I am comforted by their continued focus on the long term, and the steps they are putting in place that should see the business benefit in 3-5 years time.

Disc: held

The ACCC recently released their NBN data for the March 2022 quarter. Between Dec 21 and March 22, ABB continued to take the majority of NBN connections. As a whole, the data suggests consumers are walking away from the dominant players; instead they are electing to take out connections with smaller providers. The graph below shows ABB's dominance with respect to the recent quarter.

Sheeeesh, the market goes whack! I read the report prior to looking at the share price; my thoughts were largely indifferent. The biggest concern for me was those pesky CVC costs -- the last report noted an expected increase in Q3 but I wasn't expecting costs to double. As predicted, wholesale and business segments will largely be key for future growth and this results reflects that. It's good to see they are taking around 20% market share of new enterprise customers. The business segment will only go from strength to strength with the OTW acquisition so this is the one to watch.

I have no concerns with them coming in at the low end of guidance. It's obviously not the ideal outcome, but a -30% hit to the share price? Really Mr Market? I do not envy a business that sets guidance in this environment. You are damned if you do and damned if you don't.

I do agree that their valuation is more realistic following today's beating. The ABB share price has been creeping towards the $6 mark the last few weeks -- I don't think anyone will argue that they were expensive at those levels. @Strawman, I agree -- I think a forward PE of around 35 isn't too demanding, but also doesn't make the business a cracking bargain. That said, I am sure it comes as no surprise to anyone when I say I'm a big fan of ABB. I don't think management have put a foot wrong since listing -- including this result! I will be looking to top up my holding at around $3.50 (if we see the share price drop to that).

I mainly attribute the share price hammering to a combination of the small guidance lowering and increased CVC costs. It was a nervous day on the market so this no doubt played its role too -- generally it wasn't a good day to release a quarterly. The acknowledgment that they are struggling to find staff isn't ideal, but not unexpected when you consider their HQ is based in a remote area of Victoria. The real concern here is the comment around longer wait times. I don't think ABB margins will be squeezed due to the nature of the beast -- customers are happy paying extra for high quality service and connection -- those that want cheaper internet shop elsewhere. But the business must ensure it maintains its fantastic customer service otherwise it's competitive advantage will be impacted. I do think it's good that the business acknowledged the relationship between longer wait times resulting in increased churn -- that suggests to me their finger is on the pulse. Keeping call wait times to a minimum needs to be priority number one.

To conclude, has the result revealed any serious structural impacts? My answer would be absolutely not -- it's business as usual for ABB.

Good lord -- i agree @Maaxweell , that's a brutal reaction!

As recently as March 23 they were calling for underlying EBITDA to be between $27-30m (see slide 27 here), and today they narrowed that to between $27-28m (see here). At the midpoints, that a reduction in guidance of 3.5%.

Sure, it's not great news, but does it make the business 24% less valuable!? Especially with a 42% YoY lift in total services and increased market share (in a largely mature market).

I suspect it is in part due to the fact that shares were priced for particularly strong growth, and the market is presently in no mood for anything that undermines such expectations -- even just a little.

There was also an 18% lift in the CVC expense, and the company seems to be facing difficulty in recruiting staff (which may point to higher wage costs going forward?).

I've not looked closely before, but on some rough numbers: Adding in OTW, you have a business on a EBITDA run rate of roughly $60m. Prior to today, the business was valued at about 22x that (probably around 50x underlying earnings). After the drop, the business is on an EBITDA multiple roughly 17x. Let's call that a forward PE (accounting for a FY contribution from OTW) of roughly 34.

With some threat to margins and the business needing to win share of incumbents to grow, perhaps that's reasonable? Could this be a case of the market simply getting ahead of itself prior to today's very decent update?

I'm not sure. Just throwing out some early thoughts

Phil Britt – ABB’s Managing Director – recently spoke at the AusNOG (link here). The presentation mainly references the fibre rollout, in addition to a general overview of business activity over the last five years. It provides insight into how much the company has matured over that time.

Phillip Britt (co-founder and MD) sold another 2m shares on market a few days ago -- at a share price of $4.95 -- so almost $10m. I wouldn't consider this price overvalued by any means. In fact I think ABB are fair value around $4.50 - $5.00.

He still owns around 17m shares post-sale, so around 8% ownership (according to Simply Wall St data). He remains one of the company's two largest shareholders.

I would argue that, of all the companies I own, ABB's management team is at the top of the pile for being aligned with shareholders. It is very clear that he gives a toss and genuinely cares about staff, shareholders and customers. He has also demonstrated a willingness to make logical, forward-thinking decisions that will benefit the company long term -- the very company he co-founded. So no major issues here for me at all, just something to keep an eye on going forward. Britt remains absolutely key to my investment thesis, so I would rather he be selling shares than calling it quits. Heck, buy yourself a yacht Phil, you deserve it!

Disc: held - largest position in portfolio

Trading update

Positives

• Previous guidance was 53,000-60,000 net additions. This was made up of 33,000 to 40,000 organic broadband net additions through all channels, in addition to the migration of 20,000 white label services. Organic net additions for Q2 – the most important metric – expected to be at the top end of guidance (38,000 to 40,000). This demonstrates that ABB continues to take significant market share off its competitors.
• Total broadband services in Q2 is expected to have increased by around 10%. Gradual, but additions are moving in the right direction.  
• The migration of white label services should be around 15,000 in Q3 based on new estimates. This bodes well for future total broadband forecasts.

Slight negatives

• White label migration – only 8715 services (of expected 20,000) migrated. The remainder will instead be migrated in Q3. The delay was due to ‘teething issues’.

ABB continues to tick along nicely. Looking forward to delving into the Q2 report in a few weeks’ time.

DISC: Held 

I am a long time customer from well before the IPO, and also a shareholder having averaged up from a small IPO holding.

I have been very impressed with how Aussie have been taking big chunks of market share in a utility sector where there is no real differentiator between retailers.

One obvious area is customer service and tech support, which has always been excellent. They have always treated me or other residents in my house with respect when making a phone call to tech support, and crucially didn't go down the toilet after the IPO like iiNet did.

The other area I have been impressed with is their very persuasive attempts to onboard new customers. I made a service request enquiry for a property that I'm intending to set up as a weekender, and within 48h, I received a follow-up call that was unprompted, yet polite, respectful, and the sales agent I spoke with couldn't have been more helpful.

So much so that when I am ready, I am confident that the internet service provider I'll be picking is ABB.

I suspect I am not the only one which is why this company seems to keep kicking goals.

Disc: Held (against my better judgement about owning utilities)

@rocket6 very well timed. I wrote up a response yesterday but for whatever reason it didn’t go through. Then couldn’t be bothered trying again.

I am really happy about the potential acquisition of OTW. Seems like a really well run business, tightly held by insiders with good recurring revenue, the recurring revenue for me is the key thing. This indicates users are happy with the service and as ABB is all about customer service I feel this fits the mould of a good addition that maintains the values of ABB. Given the SP has floated around $5 or less for a long time now I believe that it will be approved/recommended by OTW management and will make ABB a seriously large player.

in regards to the analyst saying it’s a odd acquisition option I cannot agree. I do agree however that ST1 is the obvious option. I might be bias as I hold ST1 IRL and SM. Having said that OTW seems a much more stable business with years of execution behind it. ST1 is certainly developing into a solid business. The SP popped a little due to the Australian article where the analyst suggested it was the obvious target. The results released by ST1 the day before for me were really “meh”. However I believe the SP is extremely undervalued for a profitable telco that offers security, cloud, mobile and voice in addition to high speed internet with contracts with mainly SMBs and corporates and government sectors like education. ST1 has struggled due to their biggest markets in VIC and NSW being locked down and SMBs and schools being closed. Management have said they are already seeing improvements as we open up. In addition ST1 has divested its consumer assets for $5.1mil and are getting bids for their fixed wireless towers. With this additional capital they will look to do their own acquisitions. Although not my thesis for owning ST1 I do believe it is an ideal takeover and could see ABB doing so. But for now OTW is a much better business and IMO an ideal option.

Disc I own ABB IRL

I own ST1 IRL & SM

ABB is now a top 20 holding for Wilson Asset Management’s (WAM) Microcap Fund - see their September Update here. It wasn’t previously in their August update, so they have recently bought or strengthened their position. This is good to see. 

WAM made the following comments – see attachment below.

Highlights

• Highly strategic fibre swap to enable greater geographic reach
• Underpins launch of business fibre services in key regional Victorian towns
• Increased redundancy and protection for the Victorian network
• Complements Aussie Broadband’s own fibre network build & recently announced Telstra Wholesale deal.

ABB has announced a 10-year deal (including two 10-year options) with VicTrack to swap access to their respective fibre networks. VicTrack is a Vic government business enterprise that operates the state’s fibre assets.

Under the agreement, VicTrack will provide its fibre network throughout Vic and will construct access for VicTrack to several NBN POIs.

Why is this important? It will increase ABB’s geographic reach, particularly relevant to regional Victoria. This will enable ABB to roll out business fibre services to regional areas – which continue to grow and expand at a steady rate, particularly due to Covid 19 tailwinds (more numbers heading into regional areas and working remotely etc.). It also frees up capital to improve its reach in other states/territories.

The move will also provide ABB with redundancy and protection options without needing to construct further backbone links. This all links back in nicely with the business’s unique point of difference – quality over quantity – and ensuring it can guarantee customers high-quality and reliable connection.

Impact on finances:

• 'the lease of Aussie Broadband’s fibre paths to Victrack takes the form of an operating lease and as such will be recognised as lease income over the term of the lease ($3.1m per annum).'
• 'the lease of Victrack’s fibre capacity by Aussie Broadband at an annual lease cost of $3.2m will require the recognition of a AASB16 right-of-use asset and corresponding liability.'

The impact on after-tax earnings will be immaterial but EBITDA will be improved by the impact of the operating lease income. This looks like great business to me – enhancing reach across regional Vic with minimal cost outlay. 

Mr Market likes the news – ABB is up 8% at the time of writing.

DISC: HELD

Another fantastic result from this well managed company.

a few really key parts to the presentation and to add to @rocket6 earlier straw.

the business has 2 divisions

1) Residentual

• revenue $305 mil up 84%
• Ebitda 12.5 mil
• customers 362,260
• APRU $78.19 per month
• includes the mobile services they offer which has seen strong growth and an improvement since the Optus agreement as it is a more competitive offering. We saw a doubling in customer numberws
• CAGR 91% since 2018

2) Business

• Revenue $45.2 mil up 83%
• EBITDA 6.7mil
• customers 24,152
• APRU $129.67 per month
• will look for M&A in this segment. Should see strong growth if FY22 within this area.
• CAGR 56% since 2018 (future growth lies here)

Additional info:

Churn of 1.6% mgmt said this should stabilise here

FY22:

• Increased marketing towards the end of the last financial year across the entire sector. ABB were forced to market more aggressively which saw a strong increase in NBN volume. Last quarter was ABB record month with 23,000 additional customers in July. Already in August they have had 24,000 and a record month. This bodes well for FY22 results.
• Inventory levels of 4-5 months to deal with any chip shortages. Company is in a strong position.
• business is debt free
• complete fibre build this year. Currently have 35 completed and should have 55-59 completed by end of September. This is a huge project and will be one of the largest fibre networks in Australia (1200kms). This enables the comoay to turn up capacity easily as they are not relying on wavelenghts. 
  • enhances customer experience
  • more suitable for business segment
  • massive saving ~15% each year.
• Carbon platform: I need to do more work on this and they are due to provide a presentation to better understand it. However simply it is a single platform that enables businesses and parters to quote, service qualify, connect, modify and manage NBN services in mins. Interestingly they have signed 400 partners including a major corporate with over 3000 services, so it must be an exciting product. 
• White Label is the most exciting area currently. Already they have seen 32000 clients opt for this without any promotional activity. Majority of clients should be connected by FY22 2nd qtr.
• NBN should see an uptick of services and so far the 1st qtr has started strongly. ABB are winning a large chunk of these customers compared to customers. 
• No FY22 guidance was provided which some people found as a disappointment however mgmt are very transparent and plan to do regular trading updates. 

Unfortunately I do not own in my strawman portfolio but it is one of my larger holdings in real life. 

DISC Held.

FY21 Highlights:

• Revenue of $350.3 million, up 84% on prior corresponding period (pcp) and 3.6% ahead of prospectus forecast
• EBITDA (before IPO expenses) of $19.1 million, up 433% on pcp and 55% ahead of prospectus forecast
• 400,848 total broadband services, up 53% on pcp
• 37,498 broadband business & wholesale services, up 90% on pcp
• 25,606 mobile services, up 102% on pcp.
• Customer churn remained under 1.6% (per month) for FY21
• Cash reserves are steady at 57m, with a loss of 4.2m reported for the year.

As expected, ABB’s FY21 was bloody impressive. The company attributed its impressive year to customer growth in both business and retail segments, an increase in ARPU, solid CVC management and NBN extending CVC credits and promotions rebates. This doesn’t take into account the single largest factor in ABB continuing to disrupt and grow – their management team.

Phil Britt was 1 of 3 reasons I invested in ABB (see my previous thesis Straw). He understands the business and the industry, but importantly he appears to be a genuine person who cares about his business, staff and shareholders. This is a recipe for success in my opinion. He and his management have performed exceptionally well in a difficult period – performing well ahead of expectation. I am confident that they will continue to deliver strong results for the company going forward. 

Now, back to the business. As I have indicated in recent straws, I am looking for solid market share capture relevant to retail and phone services – the latter provides ongoing insight in ABB’s customer loyalty, with onselling capabilities a powerful tool for a popular company with high retention. But where I am really interested in their growth is the business NBN segment, this will provide the bulk of their growth in 1-2-3 years’ time. As expected, the numbers are impressive:

Residential: 241,627 to 363,350 – 50% YoY increase.
Business and wholesale: 19,734 to 37,498 – 90% YoY increase.

The company achieved more than 20% of net NBN order in Q4 FY21. This is well and truly ahead of expectations and is good to see.

I also found the following metrics interesting:

• 138 seconds average call wait time
• 5.76 complains per 10,000 services.

I think its great the company has reported this. It provides another metric to help determine that customer service remains a priority for the company. In addition, customer reviews on Product Review, Facebook and Google continue to be impressive. The company and CEO also won various awards in the reporting period, which is also great to see.

Fibre rollout

The project remains on track to complete in FY22, which will result in connections to 106 POIs and data centres. Builds have now been completed to 13 on-net customers, with another 35 currently under construction.

Why is this important? The combination of the fibre rollout and new Telstra Wholesale agreement will bring $15m in savings from FY23 onwards, with additional capabilities to bolster customer speeds and deliver impressive service.

FY22

The company provided a small insight into its FY22 figures, indicating it was expecting a record sales month in August. So far, so good.

In addition, migration of 32,000 white label broadband services onto the ABB network will commence in 2Q FY22 (due to customer request).

Unlike many other businesses, lockdowns typically don’t impact ABB too much. In fact, there is an argument to be made (as I have indicated in other straws) that lockdowns and an increasing focus on a digital environment provide tailwinds for the company – with more seeking high-quality connection speeds and service. 

Possible headwinds/risks to be aware of include ongoing CVC expenses associated with the lockdown. More is not always better. The company needs to ensure it delivers reliable speeds for customers. It’s essential for their business and provides them with a point of different in the market. In short, it will cost the company more to keep speeds high during higher traffic times. NBN has indicated it will provide CVC relief for August and September, which will partly assist in mitigating increases to CVC expenses.

Due to this and the dynamic current environment, the company has elected not to provide FY22 guidance. I trust Britt in making this call and I am not overly concerned, particularly with August shaping up to be a record month for the company.

I am hoping to tune in to the investor presentation at 1300 hrs today. I will provide further updates if necessary. I also plan to have a more detailed read of the reports later in the week week. 

DISC: HELD - ABB are the largest positions in my RL and Strawman portfolios. 

Aussie Broadband upgrades network capacity through strategic backhaul deal

This deal increases ABB's nbn POis by over a 3rd. Which opens up great opportunity for the company. 

Aussie strategy of providing higher quality higher margin internet seems to be playing out. Their target of large business and corporates. The company keeps flagging their Carbon platform as the "game-changer" which helps them win and keep these corporate clients. Does anyone on strawman have real world experience with the Carbon platform? It would be awesome if someone has actually used it and how it compares to other platforms from other companies?

Highlights:

•        Five-year deal with Telstra Wholesale to provide fibre connectivity to 42 nbn POis (point of interconnect) and data centre connectivity not covered by Aussie Broadband's own fibre network

•        When combined with Aussie Broadband's own fibre network build, brings forward combined savings of $1m in FY22 and $15 million annually from FY 23 onwards

•        Provides a significant network upgrade capacity across the Aussie Broadband network

•        Is highly complementary to Aussie Broadband's own fibre network build

•        The upgrade underpins Aussie Broadband's strategy to increasingly target the enterprise and business market

A positive update for Aussie Broadband. They are well ahead of my assumptions in some areas, which give me great confidence in my valuation. Ill wait until full year results are released to reassess.

Highlights:

• 4Q FY21 Revenue grew 8% quarter on quarter (QoQ)1
• FY21 EBITDA excluding IPO costs is expected to be at the upper end of guidance ($17 million - $20 million)1
• 4Q overall broadband connections increased 7.4% and business broadband connections increased 12% on the previous quarter
• 4Q mobile services increased 20% from the previous quarter, from 18,684 to 22,454 connections
• Signed first white label customer
• Launched services on new Optus mobile virtual network operator (MVNO) agreement.

Aussie Broadband Limited (ASX:ABB) is pleased to provide the following trading update for the quarter ending 30 June 2021 (4Q FY21).

Over the quarter, Aussie Broadband has grown connections and revenue and expects EBITDA for the year excluding IPO costs to be at the upper end of the guidance provided on 28 May 2021 ($17 million to $20 million)1.

Overall broadband connections were 400,848, an increase of 27,790 or 7.4% QoQ. At the end of the quarter business broadband connections were 35,354, an increase of 3,825 or 12% QoQ, and mobile services were 22,454, an increase of 3,770 or 20% QoQ.

At the end of the quarter, Aussie Broadband had increased its market share of NBN services to 4.9%, up from 4.4% the previous quarter.

Revenue for the quarter was $100.1 million, an increase of $7.42 million or 8% QoQ

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02402360-3A571924?access_token=83ff96335c2d45a094df02a206a39ff4

I will be the first to admit that reselling NBN subscription plans is not particularly ‘sexy’, nor an attractive business model given its typically a highly competitive low margins game. That aside, I am a fan of Aussie Broadband (ABB). I posted a straw in June which details my thesis and provides insight into why I am a current shareholder. The below is a quick summary of ABB's recent activity. More importantly its an opportunity for me to assess my thesis, with the company expected to release FY results in a few weeks time. 

Positives

• In HY21, ABB posted revenue of $157 million, an increase of 89% YoY and almost 5% better than forecasted in the IPO prospectus. ABB provided a recent market update in late-May reporting that, based on preliminary accounts, EBITDA would be in the range of $16-19 million (or $17-20 million excluding IPO-related costs). This compares to the prospectus forecast of $12 million. The growth component of the thesis is doing well.
• Most of the funds raised during the recent IPO will be used to progress the construction and deployment of ABB's own fibre network across Australia. From all accounts this is progressing well. Upon completion this will replace 63% of ABB’s leased capacity – this should minimize reliance on other carriers and improve margins (lower leasing requirements).
• ABB has launched a new white label solution for major retail brands that allows them to sell ABB’s internet services under their own brand. ABB has already signed its first white label customer – Origin Energy. I think the move into white label solution is sensible and should provide ABB with significant revenue opportunities in the future. It will also onboard customers with typically lower internet demands in comparison to ABB's normal clientele (good for operating costs). 
• A recent Choice survey ranked ABB customers as the most satisfied in Australia, with the ISP topping the charts for connection speed, value for money, reliable connection and overall satisfaction. This is fundamental to the thesis (reliable, high-quality speeds and excellent service) and is good to see. 
• Other tailwinds: ABB are partly a strategic holding for me, offsetting some risk associated with the pandemic (particularly with my tendency to invest in the smaller end of the market). Current or future outbreaks/lockdowns shouldn’t have any major impact on ABB, other than resulting in slightly higher operating costs (less off-peak periods with more people at home). In fact, the pandemic (and what we subsequently take away from it as a society) will probably benefit ABB’s business model. This will probably result in more customers looking for providers at the top end of the internet market - where ABB position themselves. This is due to the demands of working from home, growing emphasis on flexible working arrangements and those seeking a more enjoyable gaming and streaming experience (due to being at home more often). 

Negatives

• The company recently lowered residential connection guidance to a range of 360,000 to 364,000 (was previously 380,000 to 410,000). Previous guidance included white label customer transfers anticipated to occur in FY21. This will now occur in FY22.
• Two substantial shareholders (Bennelong Funds and Regal Funds) recently sold out of their positions. This is not particularly concerning as they were likely taking some profits following their involvement in a successful IPO. Unfortunately, this appears to have placed downward pressure on the share price in recent months. In addition, the Executive Director (Phillip Britt) also sold a small portion of his holdings. It’s never a great look seeing this, but he still maintains 9% ownership and was likely taking some profits post-IPO. No huge concerns here but keeping a close eye on any additional insider selling that occurs. 

Some minor blips along the way, but I am happy with how the company has expanded and grown post-IPO. I will provide an updated straw in a few weeks time following the release of full year results.

DISC – HELD.   

Aussie Broadband Limited (ABB) is an Australian owned and operated telecommunications company, focused on NBN subscription plans and bundles to residential homes, small businesses, not-for-profits, corporate/enterprise and managed service providers. The company also offers a range of other telecommunications services including VOIP, mobile plans, entertainment bundles (through its partnership with Fetch TV) and connections through the Opticomm network. It's primary business is providing NBN services to residential and business segments.

Thesis/three main fundamentals: 

- Sticky customers: the customers that choose to have their broadband provided by ABB do so knowing that they could absolutely get a cheaper deal elsewhere. Customer reasons for joining ABB are what sets the organisation apart from others in the industry - top notch customer service, Australia-based staff and reliable, good-quality internet connection. This thesis is broken if ABB moves it's call centres off-shore or if it reduces the quality of internet or service it provides. The latter would result in it losing its edge in the telecommunications sector and it becoming 'just another player'.  

- An excellent management team and founder-led: the company is in good hands with Phil Britt at the helm. He understands the industry and also what separates ABB from its competitors. He also, like myself and many others, believes in keeping the company's call centres and support services onshore. Further, management have under-promised and over delivered, with a logical strategy in place for continued growth. This is probably the most important point of the thesis. If Phil Britt leaves or steps down for whatever reason the thesis is broken. 

- The business performs well against competitors and contiues to grow: it took 16.5% of overall NBN net adds in the third quarter of 2021. The company's reputation should see it thrive in this area. I am personally looking for net adds of 10% or higher to justify itself as a big player in NBN services.

While NBN is a super tight margins game, I am strongly of the belief ABB have established themselves as a big player in an industry traditionally associated with underwhelming service and dissatisfied customers. This is where I think ABB thrive, and what allows it to continue growing and adding value to the industry. 

Disclosure: held since IPO - in it for the long term provided the fundamentals remain strong. 

Highlights:

~ Revenue of $157.4 million, an increase of 89% on prior corresponding period (pcp) and 4.9% ahead of prospectus forecast

~EBITDA of $7.3 million, an increase of 87% on pcp and ahead of forecast

~•Signed mobile virtual network operator (MVNO) agreement with Optus Wholesale

~ Completed 79km of dark fibre construction connecting 6 data centres and 7 NBN POIs (Points of Interconnect), which represents 7% of the project and is tracking to schedule and budget

~ Commenced selling broadband services on the OptiComm network

~ Won Customer Service Organisation of the Year – Large Business in the Australian Service Excellence Awards

Based on preliminary, unaudited management accounts Aussie Broadband Limited (ASX:ABB) expects half year EBITDA to be in the range of $6.9m to $7.4m with EBITDA excluding IPO costs in the range of $8.0m to $8.5m.

The company will release its half year results on Wednesday 17 February 2021