Earnings call: Spark New Zealand reports mixed FY '24 results amid growth efforts

Spark New Zealand (ticker: SPK) has reported a mixed financial performance for the fiscal year ended June 30, 2024. While the company achieved a milestone with mobile service revenues surpassing $1 billion, overall adjusted revenue saw a decline of 1.2% to $3.861 billion. Adjusted EBITDAI also decreased by 2.5% to $1.163 billion, and adjusted net profit after tax (NPAT) fell sharply by 21% to $342 million. Free cash flow was down by 32.5% to $330 million. Despite these setbacks, Spark New Zealand is focusing on growth in the upcoming fiscal year, with significant investments in mobile and digital infrastructure and a strong emphasis on cost reduction measures.

Key Takeaways

• Spark New Zealand's mobile service revenue exceeded $1 billion.
• Adjusted revenue declined by 1.2% to $3.861 billion.
• Adjusted EBITDAI fell by 2.5% to $1.163 billion.
• Adjusted NPAT dropped significantly by 21% to $342 million.
• Free cash flow decreased by 32.5% to $330 million.
• The company plans to invest around $1 billion in data center CapEx over the next five to seven years.
• Spark aims to reduce net labor costs by $50 million and net operating expenses by $30 million in FY '25.
• The company's AI program is highlighted as a key component for cost reduction and improved customer delivery.

Company Outlook

• Spark New Zealand is aiming for a return to growth in FY '25 through investments in mobile and digital infrastructure.
• The company plans to reduce net debt while targeting growth in mobile, high tech, and data center markets.
• A cost reduction program is in place, aiming for significant savings in labor and operating expenses.
• Spark expects the mobile market to grow around 3% and aims to maintain its market share.
• The IT market is anticipated to stabilize, particularly in IT services.

Bearish Highlights

• Economic conditions have led to a decline in IT services demand.
• Adjusted revenue, EBITDAI, NPAT, and free cash flow all experienced declines in FY '24.

Bullish Highlights

• Growth in key markets such as mobile services, IT products, data centers, and high tech.
• Roaming revenue has returned to normal levels.
• The company is focused on growing free cash flow over time to fund dividends.

Misses

• No specific targets were set for fixed wireless, although it is seen as a growth opportunity with the 5G rollout.

Q&A Highlights

• CEO Jolie Hodson and CFO Stefan Knight discussed the inclusion of gains in adjusted metrics and the company's focus on EBITDAI growth.
• Spark's new Internal Rate of Return (IRR) for projects is now in the 10% to 15% range.
• The expansion and potential of the data center business were emphasized, with more detailed disclosures on revenues and capacity.

In conclusion, Spark New Zealand is navigating a challenging economic landscape with a strategic focus on growth and efficiency. The company's efforts in mobile and digital infrastructure, coupled with aggressive cost-cutting measures, are aimed at fostering a robust financial performance in the fiscal year 2025. Spark's leadership remains committed to capitalizing on opportunities in the mobile market, particularly with the advent of 5G technology, and bolstering its data center operations to meet the evolving demands of enterprise and government customers.

Full transcript - Spark New Zealand Ltd DRC (SPKKY) Q4 2024:

Jolie Hodson: [Foreign Language] And thanks for joining us today for Spark's Full Year Results for the Year Ended 30 June, 2024. I'm joined today by CFO, Stefan Knight and as always, we'll leave time for questions at the end of our presentation. As you know, our FY '24 financial results are cycling with significant revenue and net profit declared in FY '23 following the TowerCo and Spark Sport transactions. As such, both reported and adjusted year-on-year comparisons are provided. I'll speak to the adjusted numbers, which strip out the impact of the one-off gain, to provide a like-for-like performance comparison. Fair to say, it's been a challenging year for Spark, with recessionary economic conditions, creating a tough operating environment. We saw growth in key markets, with mobile service revenues surpassing $1 billion for the first time and IT products, data centers and high tech continuing to grow. This was offset as economic conditions impacted demand in IT services with our intensified competition in business mobile and led to lower mobile device and accessory sales. As a result, adjusted revenue decreased 1.2% to $3.861 billion. We accelerated our SPK-26 Operate Programme in half two, but could not adapt the cost base to changing demand quickly enough, with benefits to be largely realized in FY '25. As a result, FY '24 adjusted EBITDAI reduced 2.5% to $1.163 billion, lowered EBITDAI, higher finance expenses and higher depreciation impacted adjusted NPAT, which declined 21% to $342 million. Free cash flow reduced 32.5% to $330 million, as a result of lower EBITDAI and higher interest and non-cash earnings, and contributed to high net debt. This was a disappointing outcome, but as we look to the year ahead, our business fundamentals remain strong. We've got a clear path to return to growth in FY '25, which I'll speak to in more detail shortly. We're also pleased that customer satisfaction grew 7 points, employee engagement remains strong and our top quartile sustainability benchmarking was maintained. Finally, the Board approved a total FY '24 dividend of $0.275 100% imputed. So if we turn now to our Telco market performance on Slide 4, mobile service revenue increased 3.1% of connections grew and price increases were implemented. This was below our aspiration of 5%, with headline growth impacted by business mobile, which declined 3.5% as price competition intensified, and we saw some line shedding as businesses restructured, and consumer mobile service revenues grew 4.3%. And SME, it was up 1.6%. Broadband performance was consistent with prior years, decreasing 2.1% to $613 million. This is a price driven market. With the recessionary environment tightening consumer budgets, we saw intensified price competition, particularly from non-Telco operators. We continue to manage profitability through our annual price reviews and growing the addressable market for wireless broadband. If I look at our digital services market performance on Slide 5, our overall IT revenues decreased 1.6% to $692 million. This masked a return to growth in IT products, which is driven by a 7.7% increase in cloud as businesses continue to digitize. It was in IT services that we saw the most significant impact from broader economic conditions, as public sector spending cuts, project deferrals, and lower private sector investment drove a 14.9% decline. Our focus in FY '25, is to transform our enterprise and government division, to better deliver better customer experiences at a lower cost. Our datacenter revenue growth exceeded our target, increasing 54.2% to $37 million. As our Takanini campus expansion completed, and new revenue streams came online. Finally, high tech revenues grew 21.5% to $79 million, as IoT had a new milestone of over 2 million devices connected to our networks and MATTR continued to scale. Looking at our ESG performance on Slide 6, we were pleased to see our external benchmarking increase into the top quartile, of all global telecommunications companies during the year. Our 5G rollout and Skinny Jump ambitions remained on target, for our science-based emissions reduction target. We're currently tracking 18.6% above the pathway, we need to be on to hit our 2030 ambition. The most significant contributor to this, increase was a one-off event where an alarm triggered the release of fire suppressant at one of our exchanges. Without this event, we would be 5.7% above our pathway, due to the increased emissions intensity on the New Zealand grid. We did, however, make strong progress towards future emissions reductions, when we signed a 10-year renewable energy partnership with Genesis. This will account for around 60% of our annual electricity requirements, and will make a significant contribution towards our reduction target, once it comes online in January 2025. Our FY '24 indicators of success are outlined on Slide 7. While we were pleased to exceed a number of our targets, including data center revenue growth, IoT connection growth, and our gross cost out reduction target and our customer satisfaction score, we also made solid progress in mobile service revenue growth and 5G capable sites. As I spoke to earlier, we did not hit our targets for IT and procurement. And while high-tech revenue grew 21.5%. It was below our original ambition. These areas of the business are more exposed, to the current downturn we're experiencing. Wireless broadband growth was also below our aspiration, as competition intensity increased. While we saw employee engagement drop slightly from FY '23, as we made changes to our operating model, we are pleased to remain above the medium for large companies in New Zealand. Turning now to our strategy and our plan to return to growth in FY '25, starting on Slide 9. This was the first year of SPK-26, our new three-year strategy. As we look ahead, we remain committed to the ambitions we set out on this strategy, with a particular focus on mobile digital infrastructure and cost reduction, as we transition through this challenging period. Positively, many of our key growth drivers are enduring. Our leadership in the growing mobile market, will support top line growth as demand for data continues to grow, customer experience remains strong and annual price reviews enable us to realize, the value of our mobile network investments. Through the Operate Programme, we will deliver further material, labor and OpEx net cost reductions, to help insulate margins. Our data center strategy is a strong growth opportunity over the medium-term. With our development pipeline now sitting at 118-megawatt, we are well positioned to capture a significant share of predicted market growth. Finally, we remain committed to maintaining financial strength and flexibility, our focus on free cash flow growth and net reduction, through higher EBITDAI and lower FY '25 CapEx. I'm now going to provide an update, on our data center strategy as outlined on Slides 10 to 12, it's a highly attractive market that is set to grow rapidly. Cloud uptake is still scaling in New Zealand and AI is driving significant increases in capacity demand globally across all sectors. Data centers are at the heart of that modern digital economy with the infrastructure we build supporting the long-term growth. Spark is a natural owner of data center assets and a large user of data centers ourselves. We currently have around 25% market share, and our development pipeline now totals 118-megawatt. In the context of a market set to grow to 500-megawatt by 2030, this positions us to maintain a material share of a much larger market. There are three strategic Auckland locations that deliver a compelling investment portfolio. Auckland remains the epicenter of data center investments in New Zealand, as the location of hyperscaler cloud regions, and demand from customers is seen there. A 12-megawatt Takanini site is currently close to 100% contracted, and an FY '25 will commence construction on another 15-megawatt expansion. The campus can grow to a total capacity of around 75-megawatt in the future. A 3-megawatt Aotea site is strategically sought after, due to its location as a key connection point for large customers, international submarine cable systems and national networks. This campus can grow to a total capacity of around 90 megawatts in the future. And during the year, we secured land and resource consent for a third strategic site on the North Shore. As part of our 43-hectare masterplan development with the surf park creators Aventuur. This campus can grow to a total capacity of 40-magawatt, which will be delivered in stages. This pipeline will see us invest around $1 billion of CapEx over the next five to seven years, and we will be targeting an internal rate of return of around 10% to 15% over the expected investment horizon. The reinstatement of the dividend reinvestment plan for the FY '24, H2 dividend and a potential hybrid capital notes issuance, will help fund this growth opportunity in the near term. We'll also explore other equity funding options such as capital partnerships. Stef's going to cover more on that funding plan, in more detail shortly. So if we turn now to our focus on cost and our SPK-26 Operate Programme, as we transition through the current economic conditions, we plan to significantly reduce our cost base to support margin growth in FY '25. In FY '24, we brought labor costs back to largely flat and operating rating costs, were down in an inflationary environment. In FY '25, we must go further and we're targeting $50 million net labor cost reduction, and a $30 million net OpEx reduction. A key enabler of this cost reduction, is the transformation of our enterprise and government division. This change will address structural segment challenges by integrating our subsidiaries into Spark to reduce duplication, simplifying our product portfolio and processes, and delivering better customer experiences at lower cost. Lastly, I want to touch on our AI program as outlined on Slide 14, which is another key enabler of our Operate Programme. This year has seen a significant acceleration in generative AI capabilities globally, which enables use cases with wide applicability across our business. After years of investment in data driven marketing, we are in a strong position to leverage this development, with extensive in-house AI capability already in place. We have established a dedicated transformation team that, is driving the testing and deployment of our highest value use cases across Spark, which are outlined on the Slide for your reference. This will not only support our focus on cost reduction, but also sharpen our competitive edge, by helping our people to deliver for our customers in new and more effective ways. So, to summarize, FY '24 was not the start, to our three-year strategy we had aimed for and like all businesses in New Zealand, we've had to adapt at pace. Market conditions to persist some way into FY '25 and we have a robust cost reduction program in place, to insulate Spark. Cost focus is matched by a clear ambition to return to growth in FY '25 through our core markets of mobile, our digital infrastructure investments and disciplined capital management. I'm now going to hand over to Stef to talk you through the financials.

Stefan Knight: Thanks Jolie and good morning everyone. So I want to go through the key financial summaries. So starting with an overview of the key movements in revenue as outlined on Slide 17. So revenues of $3.86 billion were down 1.2%, with the impact of challenging economic conditions outweighing growth in mobile IT products, and high tech. Mobile service revenues were up $30 million, or 3.1% and Jolie has already outlined the key drivers of growth here. IT product revenue growth continued, and was up $18 million or 3.5%. The growth was driven by new client wins, increased workloads as customers continued to move to the cloud. While it was pleasing to see growth in these core products, our IT services revenue were down $29 million, or 14.9% as public and private sector spending cuts deepened, and digital transformation projects were deferred. As market conditions deteriorated, we moved decisively on the cost base in H2. And when combined with the transformation of the enterprise and government that Jolie spoke to earlier, we will realize significant labor or net labor cost reductions in FY '25. Mobile non-service revenues, which primarily relate to devices, were down $26 million or 5.3% as customers refresh devices less frequently, in response to the inflationary environment. Voice revenues also declined at a faster rate than FY '23, and were down $51 million, or 22.1% as elevated 0800 volumes in the prior year did not repeat, and as we continue to decommission legacy technologies such as the PSTN. Lastly, other product revenue declined $36 million or 20.9%, due mainly to the exit of Spark Sport, and we saw an increase in other gains revenues, which were up by $69 million to $102 million. And there were two primary drivers of this increase. So firstly, as we implemented our new three-year strategy, we secured a number of key technology partnerships with strategic suppliers, to support our 5G and cloud strategies. This included the investment of supplier equipment into our network at no cost, which helped unlock new markets, or will help unlock new markets and customer growth in line with our strategy. Secondly, we made adjustments to mobile tower leases, which including the tower relocations that we have seen leases cancelled, and new leases created. And this gives rise to a non-cash gain. We expect these other gains to return, to more normalized levels in FY '25. So also on Page 17, we outlined that adjusted operating costs of $2.7 billion were down 17 million, or 0.6 of a percent, as lower product costs were offset by restructuring costs and inflationary pressures. Product costs decreased by $53 million, or 2.9%, which included the exit of Spark Sport, lower procurement volumes, and lower voice input costs. Labor costs were broadly flat at $512 million. This represents a change in trajectory from the first half where labor costs were up $10 million and reflects interventions made as part of the SPK-26 Operate Programme to align labor costs, with changing revenue trends. Operating costs increased by $35 million or 8.7%, driven by a full year of charges under the Connexa lease arrangement, bad debt costs and severance costs. With adjusted revenues down $47 million and costs down $17 million, we saw EBITDAI reduce by $30 million. And so while adjusted EBITDAI was up $20 million in H1, challenging trading conditions intensified in the second half, and as a result we saw adjusted EBITDAI reduce 2.5% to $1.163 billion for the year. The decrease in adjusted EBITDAI, was one of the drivers of lower adjusted NPAT, which was down $91 million or 21%. Depreciation and amortization increased by $23 million, as our asset base grew following increased investment in 5G and data center assets, while finance expense also increased by $45 million, primarily due to higher - debt and increased rates. So overall this is a disappointing outcome driven by the recessionary economic environment, and structural issues within our cost base, the latter of which we are addressing through our Operate Programme. Moving now to CapEx on Slide 18. FY '24 CapEx was $518 million, broadly flat with the prior year and in line with guidance. Over two-thirds of our capital investment was invested into our network and digital infrastructure, improving resilience and underpinning growth in key markets, such as mobile data centers and high tech. Maintenance CapEx was flat at $359 million with spend focused on mobile, delivering a 28% uplift in capacity. Our IoT networks IT systems to support efficiency, and better digital customer experiences, accelerated AI deployment and licensing for automation. Growth CapEx of $159 million was similar to prior year, however the composition was different with less growth CapEx committed to data centers, as our 10-megawatt POD2 expansion at our Takanini Campus completed, and we commenced planning for POD3. This was offset by an increase in 5G, as we accelerated our rollout and invested in the foundations of 5G standalone. And FY '25 will reduce our CapEx investment to around $460 million to $480 million. So moving now to free cash flow and net debt on Slide 19. So it is important to remember that we started the year, with around $0.5 billion lower opening net debt, reflecting the receipt of TowerCo proceeds, which were reinvested and returned to shareholders during FY '24. So free cash flow for FY '24 was $330 million, which was down $159 million on the prior year. The decline was driven by lower EBITDAI, and a higher portion of non-cash gains during the period, which were excluded from our free cash flow and also higher interest costs. This result was significantly below our aspiration. Our capital investment program was heavily weighted to H1, and when the market turned significantly in the second half we didn't have the flexibility to adjust quickly enough to impact our debt metric. As a result of this, our net debt-to- EBITDAI ratio increased to 2.1 times at the 30 June, in excess of S&P's A- credit rating guidelines of 1.7 times. We remain committed to our A- credit rating, and plan to reduce debt back to targeted levels of net debt-to- EBITDAI, around 1.7 times. Our on market share buyback has now concluded, and we have a clear focus on net debt reduction in FY '25. So this includes growing free cash flow to between $400 million and $440 million through EBITDAI growth and non-cash items returning to normalized levels. Through reduced capital investment, the reinstatement of the DRP with a 3% discount and a potential hybrid capital notes issuance, to provide greater balance sheet strength and flexibility. As Jolie mentioned earlier, we're also exploring other equity funding options, to support our data center growth strategy, including capital partnerships. We remain committed to the capital management framework and on Slide 20, we've outlined how it will be applied in FY '25. Our focus is on maximizing shareholder value by increasing dividends over time through free cash flow growth, continuing to invest for future growth and maintaining our financial strength and flexibility. We are guiding to FY '25 dividend of $0.275 per share, which will be funded through a combination of free cash flow, and the reinstatement of the dividend reinvestment plan. This does equate to a payout ratio in excess of 100%, but noting that the DRP will reduce the cash payment. For FY '25, we'll impute the dividend at 75%, reflecting lower FY '24 tax payments. We'll continue to invest for growth with maintenance CapEx funded through EBITDAI and data center growth CapEx funded through a combination of the DRP, a potential issuance of hybrid capital notes and exploring other equity funding options, such as the capital partnerships I mentioned earlier. As previously outlined, we remain committed to the investment grade credit rating, and have an active plan in place, to reduce debt levels accordingly. So, turning now to our outlook on Slide 22. Looking ahead to FY '25, we are resolutely focused on returning to revenue growth, while significantly reducing our cost base to insulate the business, from the economic environment. We expect challenging conditions to persist somewhere in FY '25, while noting some emerging signs of economic recovery. But we're not relying on this, and have instead made material interventions during the year through our Operate Programme to adjust our cost base to match our revenues. This work will continue in FY '25, and we are targeting a $50 million reduction in net labor costs, and a $30 million reduction in net operating costs. Our focus on cost is matched by our focus on growth. We're targeting 3% growth in mobile, around 20% to 25% growth in high tech revenues, and 15% growth in data center revenue, as scale builds progressively over time and stabilization in IT services. This will be partially offset by market pressures, and ongoing voice decline. So, we've outlined our FY '25 indicators of success on Slide 23. These measures reflect our focus on revenue growth in mobile data centers and high tech, and our significant cost reduction program. As always, we've also included measures of broader organizational health, including customer satisfaction, employee engagement, and our sustainability performance. So lastly, moving on to guidance on Slide 24. For FY '25, we have set guidance subject to no material change in operating outlook as EBITDAI of $1.165 billion to $1.22 billion, CapEx of around $460 million to $480 million and a total FY '25 dividend of $0.275 per share, 75% computed. So that now concludes the formal component of the presentation. Let's move to questions. Operator, could I get you to please introduce the first question?

Operator: Thank you. [Operator Instructions] Your first question comes from Arie Dekker with Jarden. Please go ahead.

Arie Dekker: Good morning. Just on the guidance firstly, and as you noted, subject to no material efforts, change in operating outlook. I mean, given momentum currently in the business and the macro backdrop is difficult, could you just provide a little bit of clarity on what your base assumption, on operating conditions through FY '25 is - for that guidance range?

Jolie Hodson: I think if you break it into different components, there's three key components there, Arie, especially on mobile market. It's expected to grow at around 3%. So it's maintaining share within that. If we look at our cost program, so $50 million net reduction, in labor and $30 million, in OpEx that underpins a lot of that growth. And then IT market looking more at stabilization in terms of IT services, because IT products was in growth already. And much of the work we've done around the cost reduction also, is in that part of the business in terms of enterprise and government. So they're the things that underpin it. We think about the macro conditions. First half of '25, we don't expect to see significant improvement in that. And then beyond that, I guess we're relying on the work that we're doing internally within the business, to support sustainable cost base and earnings.

Arie Dekker: Okay nice. No and thanks for that. I noticed there was nothing on fixed wireless targets for FY '25, or maybe I've missed it. Yes, could you just talk a little bit about that? Is it a feature of your other OpEx savings as the 5G penetration increases? What your plans are? What are the internal targets on fixed wireless for '25?

Jolie Hodson: We haven't set a target specifically for wireless broadband to be shared, but it continues to be an opportunity for us to continue to grow. We've earned, particularly as we have the rollout of 5G and you can see now that we have the same nodes. Modems, have the measurement of the speeds and you can see those speeds, have grown quite substantially in terms particularly on 5G. I think it's significantly greater than 4G. So that looks to be an area of growth for us ahead, and it helps contribute to that, to the cost savings. That market has matured more obviously, and broadband in the current economic environment is very price competitive as well. From an overall sort of settings perspective, it is still part of our growth ambition ahead, and we're investing in the network to help support that.

Arie Dekker: And then just the labor cost savings. I mean they're obviously pretty significant in the context of overall labor costs. I think you called out just, then the areas where those costs are focused. I mean how are, you sort of managing the risks within the business and also, I guess the risk that you don't sort of cut costs, or lose people in an area where cyclically you're down at the moment, but things should return back to growth in time. Could you talk a little bit about that?

Jolie Hodson: So let me, so the Operate Programme, while it's mainly around enterprise government, it is not only around enterprise government. And we have made changes across other parts of our business. So consumer in the areas that look after mobile and broadband, they were made in the latter part of '24, and also in network and operations. Anytime we shift our operating model, we're always looking at the balance of risk and making sure that we have a balanced approach to that. And we never take these decisions, obviously lightly to do. In terms of cyclical versus structural, when we thought about enterprise and government, while there are macroeconomic factors affecting IT services, we have also looked at where we have duplication. So part of our changes about integrating subsidiaries, simplification of product lines and processes, which lead to both potential labor and OpEx costs. So, we have thought about, which parts do we need to sustain and the talent that we need to retain within that and, which parts do we need to make some adjustments, I guess, to just fit where the markets are.

Arie Dekker: Okay. And then just on capital management, a couple of last questions. I mean, I guess the sustain I guess, it's proving challenging to consistently hit the aspirational target on free cash flow. And I know that the target for FY '25, is below what it was for FY '24. How long are you willing to sort of, I guess, pay a dividend that sort of sits outside of the 80% to 100% of that cash flow figure that, you're targeting over the long run?

Stefan Knight: Yes. Hi, Arie, Stef here. So look, the capital management framework outlines, our long run approach to dividend. Obviously, we set in conjunction with the Board, we set an absolute amount for each year. So the amount for FY '25 with free cash flow, $400 million to $440 million funds, a good portion of the dividend, but not all of it. Our intention is to grow free cash flow back over time, and that is absolutely aligned with our capital management framework, which is aligned around EBITDAI growth, and continuing to grow that free cash flow, so that it does fund the dividend over time. We'll obviously make a decision each year, according to where we….

Arie Dekker: And then last one just on the data center partnering. Is it a focus in the business for that partnering process, to be completed in FY '25? And can you just comment briefly on where in that partnering process you sit today?

Stefan Knight: Yes, the data center funding approach is really in the immediate term, a combination of the DRP and the potential issuance of hybrid cash capital notes. We think that sees us through our, provides enough funding to see us through at least the next 18 months. So that gives us some time then to work through the capital partnerships. And so, we'll - commence work on that. But we wanted to make sure that we have funding in place, to see us through our immediate requirements, which we do. And then we'll update the market as that evolves over time.

Arie Dekker: Thank you.

Operator: Our next question comes from Kane Hannan with Goldman Sachs (NYSE:GS). Please go ahead.

Kane Hannan: Hi guys, maybe just some mobile service revenue outlook again, I mean you're talking about 3% next year. I think it was basically flat in the second half you talk of, I suppose, the building blocks to get back to that 3% growth. I suppose what you're assuming from an enterprise market perspective?

Jolie Hodson: Yes. So if you look at second half, you do see the seasonal impacts, travelers and others. You can see that in our prepaid as well, which where we saw a decline some of those coming through. We think about, if we break it into the components consumer, we still see the opportunity to grow, because customers are looking for more data and moving up plans alongside that. We'll also have, every year we review price and the different levers that sit around that are considered what we need to do there. In enterprise, the market where it does remain competitive, there has been also some loan shedding in relation to restructures as we go through '25. We would expect that to stabilize somewhat and SME is in growth. So, we think all of those factors, and the combination of continuing to demand for data growing, will support the 3% growth ahead.

Kane Hannan: Yes, perfect. And just, I suppose, the labor cost reduction. I think you made the comments in the presentation, but it sounds like we should be expecting more FTE changes, more initiatives through '25, and so maybe a bit of a benefit coming through in FY '26. I suppose, just how do I think about the timing of those OpEx initiatives through the year?

Jolie Hodson: We've made significant changes during '24, but yes, there are some that commenced in '25. So you will have a component that will flow into '26 as well, as we do that into the current first half of FY '25.

Kane Hannan: Yes, perfect. And just the capital partner data center discussion. I mean, you guys have warned a lot of the upfront risk. I mean, you've got the strategic value, sort of relationships. So just interested, I suppose, what you'd be looking for in a partner, how you think about the terms of any sort of agreement, and how it might change the economics on your side?

Jolie Hodson: I think, when we think about partners, there's an opportunity to consider whether we'd accelerate growth on the back of introducing a partner. There's a range of different partners that could be come into this part of the business, but because we're still away, away from that, when we are closer to that time, we'd be able to disclose more about who that might be, and how we do that.

Kane Hannan: Thanks, guys.

Operator: Your next question comes from Entcho Raykovski with E&P. Please go ahead.

Entcho Raykovski: Hi, Jolie. Hi, Stef.

Jolie Hodson: Hi, Entcho.

Stefan Knight: Hi, Entcho.

Entcho Raykovski: My first question is on mobile, and just looking at the mobile slowdown into the second half, you've given us the components of consumer SME, enterprise, government for the full year. But are you able to break that down first half versus second half? I guess just trying to work out, whether that second half slowdown is only business mobile, or are you seeing consumer slowing down a little bit as well?

Jolie Hodson: It is mainly in relation to business, although we did see that, as I sort of mentioned, prepaid in terms of the mix of revenues within there, in terms of people looking for greater value in a more, challenged economy that feels more cyclical. And then, so that component and then in terms of pay monthly, largely, that has been driven off. People searching for greater data. And the price increases that we've taken. We have taken price again this - in FY '25. We took it in FY '24. Our price increases are being executed right now in August. So broadband and mobile. So they have - that has gone out.

Stefan Knight: And so we started to benefit from that - felt the benefit of it. Yes.

Jolie Hodson: Yes. Still to come in terms of that growth.

Entcho Raykovski: Okay. Thank you. And just I don't know whether this is too specific, but I think consumables up 4.3% for the full year. Do you know where that was in the first half, or is that a number that you can disclose?

Jolie Hodson: It would have been higher in the first half, because you still had some remnants of roaming returning. And there's some seasonality within that, as what we've seen now is roaming's pretty much returned to normalized. If you look at it sort of year-on-year and you think about that 3% ahead. So that would be main drivers.

Entcho Raykovski: Okay. Great. Thank you. And then if we look below the GP line. I know, Stef, you spoke about this in your prepared remarks for the full year, but other operating expenses, they were up quite significantly in the second half, up close to 20%. Is there any one-off element to those costs, or is that the new baseline that we should be thinking about?

Jolie Hodson: There's some costs in there, like severance costs, for example. There's some property, electricity. We saw a small increase in there. And I mean, they're the main drivers.

Stefan Knight: They're the main ones. And there was a little bit around the full year impact of Connexa, and a small increase in bad debts, but I wouldn't call that as being overly material.

Jolie Hodson: And if you think about the net reduction target we put around OpEx of $30 million that is obviously addressing some of that cost base.

Stefan Knight: Yes.

Entcho Raykovski: Okay. So it's got those, so just to be clear, it's not those costs coming out, an additional $30 million that's included in those costs being taken out, that yes, they are included in the $30 million?

Jolie Hodson: What we're saying is for FY '25, we've got a net cost reduction for OpEx of $30 million. So, FY '24 and on - from there on in, there will be a reduction in that.

Entcho Raykovski: Okay. Got it. Thank you. And my final question in so United IT services revenue, just that question around what's cyclical and what's structural. Are you able to talk to how extensive the simplification of the product portfolio is, in enterprise and government? What sort of number of products are you taking out? Feels like you can really get away with taking out some. And do you think much of the, spend will come back in a better economic environment? I mean, is that I suppose you've got some visibility out project spend and stuff like that?

Jolie Hodson: I think when you break it into the different parts of IT services, so you have projects, digital transformations, those have gone on they've not gone away. They've probably gone on hold. So as we've seen, particularly in the public sector, but also private sector, as they've been large changes in organizations, those things are just holding till they start again. And we have some seen some indication of that. Then you look at more across the product line of, an enterprise and government against core products, whether that network in various components. We have multiple products across subsidiaries and Spark. So really what you're talking about is refinement of the portfolio. So, they're not that we don't really offer as many services as we did, but the number that we do within each of those areas starts to come down, which obviously has a flow on up here, both from a complexity reduction. But also in terms of slice of costs or other costs to support that. That's a period, that program will exist over a period of multi-year. It's not just going to be in FY '25, but what we have looked at, is what do we think structurally needs to adjust in our cost base, to offset the things we don't see returning sickly. So, we haven't taken approach that everything is structural out of this last 12 months, because clearly it hasn't been. Some will return and we're clear about those parts, but we're adjusting the base, to make sure the things that are more structural or longer term, we're addressing them now rather than waiting for that to occur.

Entcho Raykovski: Okay. Got it. Thank you.

Operator: Thank you. Your next question comes from Brian Han with Morningstar. Please go ahead.

Brian Han: Jolie, were you more surprised by the sudden economic impact in the second half, or was it more the structural cost issues in IT that caught the company by surprise?

Jolie Hodson: I think probably those two things are related, because in the first half we didn't see the same sort of impact that we saw in IT services, which aligned to really when public sector changes started to hit more, we saw private entities also reducing. So if you think about that, the revenue decline accelerated. That meant we looked to our cost base to adapt and we did put in place things in the second half, but most of the benefits of that will be realized in FY '25. So the combination of those things, of the economic environment accelerating further away in that second half is really what drove, the changes.

Brian Han: Just out of interest. Jolie, it Spark's various IT products and services and procurement. How intricately are they tied to your mobile and connectivity businesses, do you think?

Jolie Hodson: We offer a range of services, to our enterprise customers. And so, when we think about that, as I said, we're not necessarily removing all of those offerings, removing perhaps the number of offerings we might have within a portfolio as we look ahead to sort of '25, '26. So they have a role to play. But equally, those services can be go-to-market separately as individual towers and do so. So, we think we offer a range of services that meet enterprise customers' needs, but it's not to say that they can't be bought singularly as well.

Brian Han: Okay. And just last question, are there any issues within the company that's kind of hampering the performance of fixed wireless in the broadband business?

Jolie Hodson: No, nothing that I'm aware of. We continue to roll out the mobile networks and we're sitting at over 200,000 customers using our broadband…

Stefan Knight: 31% of our base….

Jolie Hodson: 31% of our base. So by far the market leader in that by a long shot. And so no, we don't see any issues.

Brian Han: Okay. Thank you.

Jolie Hodson: Thanks.

Operator: Your next question comes from Aaron Ibbotson with Forsyth Barr. Please go ahead.

Aaron Ibbotson: Hi there. Good morning.

Jolie Hodson: Hi, Aaron.

Aaron Ibbotson: Apologies calling in from mobile, so hopefully you can hear me, okay?

Jolie Hodson: [indiscernible]

Aaron Ibbotson: Thank you. And I've got a few questions, primarily around capital management. What's the sort of logic, I guess, around paying a partly un-imputed dividend funded by the DRP? And if you sort of continue next year not to be able to pay fully imputed, would you continue to pay partly imputed, or do you think it's more likely that you would sort of cut the dividend? Thank you.

Stefan Knight: So when we consider what's our approach to capital management we're always trying, to get that balance right between shareholder returns, investing for the future, and balance sheet strength and flexibility. We think that the approach we've got for this year actually is striking that right balance. So we understand the importance of the dividend holding. That the $0.275 per share in using is, we think is an important step. We can then reduce the cash implication of that, or the cash payment from that through the use of the DRP. And we think that's a sensible approach and it also ensures that we've got then, the flexibility to continue to invest in data center assets, et cetera. I'll just add one other point, Aaron. So the other thing that has obviously been essential within that, is around the focus on growing free cash in FY '25. So while FY '24 was low for FY '25, it's much more around returning back to EBITDAI growth. And we've talked about that coming through mobile and cost reduction, and also through a normalization of those non-cash or those other gains. And so really the driver here is about growing free cash over time. That's very much what the SPK-26 strategy is designed to deliver.

Aaron Ibbotson: And okay, thank you, Stefan. And so, should we think about this as the dividend, is covered by basically your adjusted free cash flow and the DRP. And then your hybrid capital notes is going to cover your growth CapEx, or where does the growth CapEx, how does that get funded, if you're not going to increase?

Stefan Knight: The reality is that it's a combination of all of those things. We don't specifically attribute one to a particular area, but that is clearly a way to think about it. The DRP will offset the cash payment of the dividend, to ensure that the free cash flow can cover. And then we have got the hybrid capital notes, which help support the growth CapEx component of our capital investment program, whereas maintenance CapEx is actually funded through the free cash flow, yes.

Aaron Ibbotson: Okay. Perfect. And can I just then finally, on this topic, clarify, I think it's Slide 20, where you talk about bringing net debt back to target metric of 1.7. And it sits under a title, which says FY '25 approach. So that would be quite substantial issuance of hybrid capital notes? In order to get that happening, you sort of, at another place in the presentation, you talk about potentially issuing them. But if you're going to bring it back to 1.7, with your cash flow aspiration and your dividend guidance, you need sort of definitely issue quite a few of them. Is that correct?

Stefan Knight: So look, we won't go into the specifics of the exact amount. It is still a potential issuance. But really the key point is that there's a number of factors, which help drive an improvement in net debt. And so, it's a combination of the growing free cash flow, it is working capital initiatives, it is a - reduced capital investment program, and it is also the DRP. And so it's a combination of all of those things, which help address the net debt position.

Aaron Ibbotson: Okay. Thank you. That's very comprehensive. Final question from me, and it's just on EBITDAI and what you're including adjusted EBITDAI, you know, it's a non-GAAP measure. It's sort of largely up to you to define it, particularly since it's adjusted. What do you think is the benefit of including all of these other gains in this metric? Do you think it sort of increases the transparency? Do you think the type of gains is something that the market should pay out multiple for, similar to what they pay for your other EBITDAI earnings, from more mobile and IT services, et cetera. Sort of feels a bit excessive, if I'm honest, to include all of it. So I'm just trying to understand the logic from your guys perspective?

Jolie Hodson: I think if you stand back, we've had a longly held position around the difference, between reported and adjusted being around individual items greater than $25 million. So anything that is over $25 million. So in the past year, that was Telco sale, Spark Sport provision is separately disclosed. Anything that sits below that individually sits within the result, always has done. There's been no change in that approach. That's how we think about our EBITDAI component. Between adjusted and reported in any given year, there can be changes between what's in other gains, what's in other parts of the business. We have very clear disclosures on them, so people can see that and understand what they are. And as we said, as we look ahead to '25, our focus is on returning EBITDAI to growth, leveraging cost reductions very clearly to get that sustainable cost base, and growth in mobile. And in terms of data centers, and making sure that other gains are a smaller component of that.

Aaron Ibbotson: So how do you get to below $25 million then? I mean, like how do you cut it? Because you got two items above $25 million in your disclosures, as far as I can tell. Gain on lease, modification and terminations $36 million, gain on sale and acquisition on property, plant and equipment, $62 million?

Stefan Knight: Yes. When you actually break them apart, there is a number. They've been aggregated for the purposes of reporting, but they're actual individual, quite separate transactions done at different times over different parts of the year, under very different contractor basis, and so don't trigger that $25 million threshold.

Aaron Ibbotson: When you talk about a $25 million threshold, if I think about gain on lease modification, which I assume are these tower leases, did you count each tower individually then? So if you got, like, if each of tower individually is a few million, if you have 20 of them, it's a $50 million?

Stefan Knight: So we look at the - so part of it relates to tower relocations. We aggregated all of those together, and that's one component that sits well under the $25 million mark. Then there is another one, which is a change in the terms, which relates to some of our colocation capabilities. An entirely different basis, once again, sits under the $25 million mark and done with entirely different rationale.

Aaron Ibbotson: Okay. Very clear. Thank you.

Jolie Hodson: Thank you.

Operator: [Operator Instructions] Your next question comes from Phil Campbell with UBS. Please go ahead.

Phil Campbell: Yes, morning, Jolie and Stefan. Just a couple of questions on data centers. Obviously, it looks like you've increased the pipeline from 93 megawatts to 140 megawatts. Can you just give us a bit of color, on what's driving that? Is Spark taking on vacancy risk for that, or do you have some orders from some large customers that kind of is underwriting a portion of that increase?

Jolie Hodson: So in terms of the potential pipeline, the increase is to do with further land purchased, conditional purchase of land adjacent to Takanini, which just allows us to have those three-strategic sites that we will develop based on as demand grows, both in the North Shore and the center of the city, and then Takanini. So, we are seeing good discussions around demand. We're building out Takanini POD3 in '25. So 15 megawatts will be that stage development, and then after that, we will look at the next sites that we develop based on a combination of the market growth, and what we're seeing in customer commitments and demand.

Phil Campbell: And just obviously we've got a potential increase in the pipeline, but also looks like the IRR 10% to 15%. Obviously, previously you were guiding, like, more of an ROI of 9% to 10%. What is the - and obviously Capex per megawatt's obviously been going up. So what's kind of driving the kind of IRR 10% to 15%?

Stefan Knight: Yes. So, we took an opportunity to stand back and go, what is, we think the most appropriate measure. So, hence why we've tried to be a bit more comprehensive, and give some additional detail around the IRR. When we think about that, the way we've - looked at it, as what is obviously the sum of the cash flows, over the period of the life of those assets. At the moment, that's around 25 years, which is a blended average. I guess in the way we think about it, is where we have got higher degree of certainty, then we're willing to accept a project with a lower IRR, because it's obviously lower risk. But where it's more developmental and there's a high degree of risk, then our threshold sits a little higher. And that's why we've kind of put a range around that. But it's still, from my perspective, broadly consistent with that same return on investment kind of profile of around that, above that 10%.

Phil Campbell: Okay. Awesome. I suppose the other question is, you're looking at the result today, the underlying Telco business is obviously weaker, and we've discussed the reasons for that. But you've got an expansion of the data center side of things. So - what's the best way? Or how do you get a people to value the data center part of the business? Because probably - we can relatively easily value the existing Telco business, but obviously the data center is probably more of a medium term growth play. So have you got any ideas, on how people could value that?

Jolie Hodson: Well, we've started by breaking out a lot more disclosure of both the revenues, but the capacity, the pipeline, how you think about those components in terms of modeling it, and sort of timeframe of investment over the next period, five to seven years. So that gives you a sense of the build profile within that, and how we're looking at that growth. There's obviously a number of other markets you can look at too, to see how that value has grown over time and how these businesses are being valued. So the purpose of pulling it out separately, is to provide greater clarity and disclosure around that.

Phil Campbell: Great. And then, this is the last one. Like if I was, say I was hypothetically a hyperscaler and I'm wanting to put some workload in New Zealand, why would I put workloads with Spark, rather than just going to [CDC]?

Jolie Hodson: Well, we have been in data center business for quite a long period of time. We have demonstrated capability, about building on time and at cost. We've got locations in the regions that hypothetically hyperscalers might be looking at in terms of that. And we have a range of broader services that we offer to enterprise and government customers too, that complement those data centers. We also have significant renewable energy contracts as well that supports our growth and help to separate out growth in business from growth in emissions.

Phil Campbell: Okay. Great. Awesome. Thank you.

Jolie Hodson: Thanks.

Operator: There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.

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