Aussie Broadband (ASX: ABB) is an ASX-listed reseller of internet services. The company rents broadband capacity from the national broadband network (nbn) and onsells it to mostly residential and some business customers.
The market is saturated with 186 competitors, all selling an identical product, including large incumbents Telstra (ASX: TLS), TPG Telecom (ASX: TPG) and Optus. Margins are razor thin, and the required scale to yield meaningful profitability requires substantial upfront investment with no certainty of a payoff.
Despite the market dynamics, Aussie Broadband has managed to grab market share from competitors. In 2018 it commanded just 2.5% of the market. Today, it’s encroaching on 7%. In the ultra-high speed part of the market (500Mbps or higher), its market share is 43%.
Aussie Broadband subsequently reported FY 2022 revenue to $546.9 million up 56% year over year, and a small profit after tax of $5.3 million. However, after accounting for investing activities, the company recorded a free cash outflow of $16 million. Aussie Broadband has a market capitalisation of $595 million.
What is Aussie Broadband’s competitive advantage?
Aussie Broadband’s success is underpinned by a simple value proposition: superior customer experience. This fosters customer loyalty and advocacy. It also leads to higher average revenue per user (ARPU) as higher-speed consumers are willing to pay extra for better service. TPG earns $64 per plan whereas Aussie Broadband earns $80.
The strategy was pioneered by Fred Reichheld, who is also the creator of the net promoter score (NPS), which measures customer advocacy and loyalty. From 2011 to 2021, Recihheld’s NPS leaders outperformed the broader market index by three times. We’ve adopted the same methodology for domestic telcos, with the results demonstrating Aussie Broadband’s customer focus.
Source: The author used publicly available customer feedback from http://ProductReview.com.au and then applied the NPS methodology explained in the paragraph before the graph.
Customer advocacy is crucial in a low-margin market like telecommunications. People are more likely to listen to the recommendations of peers over non-targeted advertisements. It also lowers the cost of customer acquisition.
New Aussie Broadband customers are able to fully onboard online. Customer support is located in Australia and calls are typically answered in under 60 seconds. Conversely, the three big incumbents see call centres as a cost to minimise and subsequently offshore support to places like Sri Lanka and the Philippines.
Launtel, which is based in Tasmania, adopts a similar customer-centric strategy and outranks even Aussie Broadband. It’s a founder led business, albeit remains a private company. While still small, I believe Launtel could become Aussie Broadband’s main competitor over time.
What Is Aussie Broadband‘s CEO Like?
The CEO (or managing director, in this case) of Aussie Broadband is Phillip Britt. He has fostered a management culture that places great importance on superior customer service and brand identity. All employees, including executives, wear the same ABB cotton polo shirt. The business offered shares to employees and customers before institutions in its IPO. Excuse the below expletives, but it’s refreshing to see a CEO genuinely passionate about the people and business.
“These guys are what makes Aussie great. And I think they’re [f******] awesome to be honest.”- Phillip Britt, ABB 2022 Investor Day
“And we’re playing the long game. We’re not here for a quarter-by-quarter type success or anything like that. For us, it’s about this long-term, consistent, growing company that will all benefit from as shareholders going forward.”
The co-founders remain active in the business and are aligned with investors. Chief Executive Phillip Britt owns 7.6%, as does Chief Technology Officer John Resinger. Non-executive director Patrick Greene owns a further 5.1%.
Are Aussie Broadband’s internet plans faster?
Notwithstanding the high levels of customer advocacy, recent data suggests Aussie Broadband’s performance doesn’t stack up against the rest of the competition. The Australian Competition and Consumer Commission ranks Aussie Broadband dead last for average download speeds during busy hours. The company is also middle of the pack regarding outages, achieving advertised speeds and upload speeds.
This is interesting because management is quick to promote its CVCBot at each investor presetation. This software is built internally, and supposedly dials up and down bandwidth to ensure speeds are maintained. But judging by the data above, it’s not living upto the hype. One explanation is that the business over-benchmarks in higher speed plans, which are inherently more difficult to maintain speeds for. Nonetheless, this to me is something worth tracking and addressing with management. If the speeds are not above-standard, the customer goodwill built via high service standards will diminish quickly.
Will Aussie Broadband continue growing?
The transition to the nbn from the previously Telstra-owned copper network caused a churn event Aussie Broadband was able to capitalise on. Now the nbn rollout is complete, with market growth negligible moving forward. Aussie Broadband’s number of services increased 46% in FY22 and were skewed to the first half, whereas the recent first quarter recorded a 4.3% increase or 18% annualised.
One possible tailwind involves the nbn encouraging more uptake of higher-speed plans. The recently revised special access undertaking (SAU) offers lower wholesale prices for premium plans. It would also reduce CVC charges materially. However, the proposed changes won’t meaningfully contribute to long-term growth.
With residential uptake slowing from historical rates, management has earmarked growth in business, government and enterprise segments. These customers offer higher margins, are less likely to churn and often adopt more services including cloud and managed services. This is also the rationale behind the $344 million Over The Wire acquisition. It offers Aussie Broadband access to a business-to-business platform and a Tier 1 voice network.
This voice asset will be integral to Aussie Broadband’s second growth pillar of expanding its consumer product offering. Internal analysis shows current customers expect Aussie Broadband to offer more than just broadband, despite its company name. Currently, it’s utilising Optus’s network, but if it’s to seriously move into mobile it will need to purchase spectrum and infrastructure, a significant capital outlay currently unbudgeted for. The better path might just be to focus on the broadband niche.
Notes From Aussie Broadband’s Recent Investor Day?
At its recent investor day, Aussie Broadband hosted a vendor and customer, both ASX/200 constituents, to discuss their experience. As an aside, I have never seen an employee of another company, let alone two, take time out of their day to attend another company’s presentation.
The customer described how Aussie won the $30 million enterprise contract. Each of the three competitors said it would take 15-25 days to deploy a new connection. Aussie said two minutes. And then after a quick consultation, it decided to provide direct access so the customer could deploy connections itself.
While it’s only one anecdotal story, it seems that Aussie Broadband is more nimble than incumbent offerings. This is also evidenced by two recent Telstra employee reviews. I wouldn’t call it an economic moat, but Aussie Broadband’s superior service translates into a powerful brand message that resonates with a population dissatisfied with existing telco offerings.
Final thoughts 
When I think about Aussie Broadband I’m reminded of a quote by Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
The Oracle of Omaha isn’t wrong. Aussie Broadband hasn’t yielded a meaningful profit back to shareholders. It doesn’t operate a high-quality business model, and growth in its primary residential broadband market is negligible. It’s only recently digested a sizable acquisition and sprouted small green shoots into new adjacencies. The workforce has also doubled over the pandemic.
Potential investors would be naive to think that one or a combination of these factors doesn’t result in higher costs, slower growth or lower service levels in the near term. This has contributed to the derating of the stock over the past 12 months.
Based on guidance for FY23, Aussie Broadband should produce around $49 million in operating cash flow. But this will be consumed by $52 million in capital expenditure for improving the network. I estimate at least half of that is maintenance capex, implying a hypothetical, ex-growth, free cash flow upper bound of $23 million.
Trading on a hypothetical 4% free cash flow yield, it is hard to argue Aussie Broadband shares are obviously cheap. For investors to earn a market-beating return, the company will need to maintain its customer-centricity and growth in both broadband and new markets. It will also need to address the aforementioned speed concerns. Editor’s note, Monday 12 December: It’s also worth noting it had $174m of borrowings and just $47.7m in cash at June 30, 2022, bringing a moderate degree of balance sheet risk (while also acknowledging the predictable revenue streams of a telco generally means some degree of debt is reasonable).
Given the track record of growth over the last five years, I’m willing to back management. Because scale is an advantage for telecommunications, Aussie Broadband should improve in quality as it grows. Margins will also expand as business connections represent a larger proportion of the customer mix. While it is not a high quality growth company, I believe it is at least improving in quality.
Disclosure: the author of this article owns shares in Aussie Broadband but the editor does not. Neither will trade shares in ABB for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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