Spark New Zealand Limited (SPK) Earnings Call Transcript & Summary

[Foreign Language] and Good morning everyone. Thank you for joining us today for Spark's full year results for the year ended 30 June 2023 I'm joined today by Spark's CFO, Stefan Knight, and as always, we'll leave some time at the end of the presentation for some questions. Look, we're pleased to complete the last year of our 3-year strategy delivering to guidance with revenue, EBITDA, cash flow and impactful and growth. Before I detail the FY '23 results, I'd like to quickly reflect on the strategy period we've just completed. It is fair to say, this was a time like no other. And while the days of lockdowns and closed borders are thankfully behind us, businesses continue to experience the knock-on effects of the global pandemic, high inflation, challenging labor markets and subdued confidence. Despite these headwinds over the last 3 years, we have remained focused on delivering what we said we would, and we've created a strong platform for future growth. Our locally unique data and AI capability, our simplified portfolio and our significant network and technology investments have produced market leadership in mobile, a stabilized #1 position in broadband and strong high-tech growth across IoT. And our people are highly engaged at 70%, and we've grown customer engagement 9 points since FY '20 to plus 31. Our strategic divestment of a majority stake in our telco business delivered proceeds of $911 million, which has enabled us to return value to our shareholders. At the end of June, we've returned $146 million of the $350 million we had allocated to shareholders through our on-market share buyback. And as you know, we committed to an equal amount to future growth. I'm going to provide an overview of that progress later in the session. Overall, our performance over the last 3 years has delivered a 3-year total shareholder return CAGR of 9.3%, and that places Spark in the top 4 compared to global peers internationally. So turning now to our FY '23 performance as overviewed on Slides 3 and 4. Our TowerCo transaction and exit of Spark Sport resulted in net EBITDAI gain of $529 million, which contributed to reported revenues of $4.491 billion (sic) [ million ] . EBITDAI of $1.722 billion (sic) [ million ] and NPAT of $1.135 billion (sic) [ million ] . Adjusted revenues increased 5.1% to $3.908 billion (sic) [ million ] and that was underpinned by our mobile service revenue growth of 9%. When combined with our disciplined cost management, EBITDAI grew 3.7% to $1.193 billion (sic) [ million ] , in line with guidance. Adjusted NPAT increased 5.6% to $433 million and that was driven by EBITDAI growth, lower depreciation and amortization costs and partially offset by higher tax expense. We were pleased to generate free cash flow of $489 million, and that was towards the top end of our exploration which will largely fund our FY '23 dividend. The board has declared an H2 FY '23 dividend of $0.135 per share and a total FY '23 dividend of $0.27 per share, an increase of 8% year-on-year and in line with guidance. Turning now to our key market performance on Slide 6. As noted earlier, mobile continues to be a star performer in our portfolio with 9% growth driven by the strength of our Spark and Skinny brands, our data and AI capabilities the launch of our new Team Up innovation and a price refresh implemented in the second half. Our performance was also supported by the return of roaming to 86% of our pre-COVID level, which contributed about 3.3% of that 9% growth. Broadband connections and revenues remained broadly stable in line with our strategy. Increased competition drove a 2% revenue decline to $626 million while rising input costs put pressure on our retail margins. These costs were passed through in price increases during the year. And as a result, second half margin stabilize. The ongoing growth in wireless broadband also continues to support profitability in a highly competitive sector. We are pleased to achieve our 3-year ambition of 30% of our base on wireless broadband. Cloud security and service management revenues decreased 2.2% to $436 million, and that was driven by the ongoing mix shift from private cloud to public cloud and lower service management revenues as we cycle the prior COVID period that saw a high level of health sector activity. Positively, the private cloud revenues were stable for the last 3 consecutive halves and we actively refocused the business to a debt, realigning our cost base to change margin profiles and investing in product innovation within private cloud and enterprise service management with Spark is uniquely positioned to lay the hit. Future market revenues increased 1% to $122 million, with digital house revenues impacted by the delays in deferrals caused by health sector reforms. In IoT, we surpassed our 3-year target of 1.2 million connected devices, growing 76% to 1.46 million, and our exit of Spark Sport was successfully completed at the completion of FY '23. We've continued to mature our ESG practices and achieve top quartile benchmarking during the year through the worldwide benchmarking alliance Digital inclusion benchmark and the corporate sustainability assessment. Our performance has seen us join the DJSI, Australia Index as well. Our emissions reductions are on track against our science-based target pathway with Scope 1 and 2 emissions down 29.8%. This was driven by a higher share of renewables on the grid. We continue to focus on opportunities to support new renewable electricity production through our purchasing agreement as we balance our objective of maintaining lower emissions against the backdrop of a growing digital infrastructure portfolio. Our supplier audit program is underway with 5 audits to be completed by the end of 2023. This contributes to the broader activities of the Joint Audit Cooperation, which has completed 98 audits across its membership base in the last 12 months. A highlight of the last 3-year strategy has been the growth of our not-for-profit broadband service, Skinny Jump, which now supports over 27,000 households in need and FY '23, the commercial value of the data provided to jump customers totaled over $6 million. I'll now turn to our FY '23 indicators of success. We are pleased to have met or exceeded the majority, building the capabilities that are delivering improved customer and people experiences and market differentiation, leading the market in mobile, growing wireless and IoT, maintaining our cost discipline and building a sustainable business. While we continue to improve our customer experience and grew iNPS, we did not hedge our aspiration of a 6-point lift in FY '23. In FY '24, we will continue to invest in fractionalize digital experiences for our customers while using data to better serve their needs. As noted earlier, our cloud security and service management revenues were behind our aspiration and performance improvement remains a focus in FY '24. Spark Health and our aspiration to deliver growth in digital platform revenues didn't meet our ambition, and we continue to see strong customer demand to digitize the health experience. I'm now going to provide an update on the FY '24 to '26 strategy we launched to the market in April. We start the year from a strong position. Our customer, people, brand and sustainability fundamentals are healthy and growing. We have maintained and enhanced our #1 position in key markets, and we've got a clear strategy to maintain or grow those positions. Our data and AI capability gives us a competitive edge, and we are investing in data centers and high-tech solutions to grow incremental revenues and margins over time. And as we've demonstrated over the last 3 years, we have a strong track record on cost control. Our plan on pledge is outlined on Slide 11, and it's a clear mission for Aotearoa’s businesses to empower the people and businesses creating Aotearoa’s tomorrow. Because satellite has been topical lately, I'll briefly cover how we're expanding our portfolio in this space as outlined on Slide 13. Spark has owned and operated New Zealand's largest earth station at Warkworth for many years now and we provide a full suite of satellite services through our wholesale business. For our mobile customers, we've announced a new partnership with Lynk Global, which will allow them to use their phones in areas that are not easily reached by traditional mobile coverage. It's important to stress that the satellite capability is still evolving. And so we'll be starting with the trial of a text-only satellite-to-mobile service by the end of calendar '23 with a full rollout of the tech capability and vision during FY -- during 2024 calendar. For our business customers, we announced a partnership with Netlinkz to provide an enterprise-grade Starlink satellite broadband. A trial is currently underway with select customers with a full rollout planned for late 2023. In satellite overall is complementary to our existing connectivity portfolio, enabling us to reduce coverage gaps that may exist for customers and deliver greater resilience. Now I'd like to touch on the strategic investments we're making with growth CapEx from the TowerCo transaction proceeds of $40 million to $60 million 5G stand-alone investment is progressing to plan with our network build underway and new multi-access edge to complete use cases under trial. In our digital identity business MATTR, we continue to focus on global markets with customers across the U.S., Canada, Switzerland, Australia and New Zealand. As we updated in April, MATTR recently won a multiyear contract with the New South Wales government as a technology partner for its digital identity of verifiable credentials program, which is currently being implemented. The majority of our capital investment is focused on the high-growth data centre market where we will invest $250 million to $300 million and are targeting returns of 9% to 10%. Because of the scale of this investment, we've provided more background on a data centre business in the presentation materials today for your reference. As we shared in April, New Zealand's data centre market is expected to grow rapidly over the next 3 to 5 years. Spark is well positioned to gain a share of this growing market. We already operate the country's most excessive network of customer data centres across 16 sites, the $24 million in existing data centre portfolio revenue and the ability to add additional capacity. The diversity of our data centre assets mean we are able to meet a very broad range of requirements, including those of hyperscalers, government, larger businesses and small enterprises. And we have a technical engineering, security and infrastructure capabilities needed to deliver. Our core business is highly complementary and sets Spark apart from pure-play data centre operators. We can add additional value at the connectivity layer, providing international subsea, national and metro fibre services as well as across the top at the product and sales layer or extensive suite of IT and cloud capabilities and waiting the sales channel to market for global. On Slide 19, you'll find an overview of our data centre investments. These investments will generate long-term annuity revenues that benefit from inflationary pricing protections and support of market tailwinds. Capital deployed to the end of FY '23 is connected to investments that are fully committed to customers. Our Takanini 10-megawatt expansion was completed in August 2023, and this revenue will begin to scale in FY '24 and then growth for several years until it reaches full billing. Once we complete the additional 1 megawatt expansion of our Aotea campus which is underway now, our total data centre built capacity will reach 22 megawatts in FY '24. In FY '24, we will also commence the development of the second stage of our Takanini expansion, while investigating other potential development locations. Our decision to proceed with further builds will be based on meeting the investment criteria outlined in our capital management framework. So to summarize, I'm very proud of what the Spark far now has delivered over the last 3-year strategy period and that we've delivered to guidance, grown the dividend and returned $350 million to actually hold us through on-market buyback across this year and intending through FY '24. We've got a clear strategy for the 3 years ahead and a proven track record of adapting at pace when the plan is to change. So I'm now going to hand over to Stefan, who will talk you through the financials.

Thanks, Jolie, and good morning, everyone. So Jolie has already described the reported results and the adjusting items, so I'll focus on the adjusted results. So starting off with an overview of the key movements in revenue as outlined on Page 22. So we're really pleased with the top line adjusted revenue growth of $188 million in a challenging economic environment. As Jolie noted, mobile performance was strong with service revenues growing 9%. Growth in the base was a key driver with paid up monthly connections growing by 72,000 and prepaid growing by 156,000. Roaming contributed $31 million towards the overall growth of $81 million. And while revenues were tracking -- were averaging around 86% of pre-COVID levels during the year, that we're consistently tracking at around 100% in the second half. We also saw the return of more inbound roaming contributing a further $6 million of growth captured in the other mobile revenue line. Other product revenues grew by $89 million and to provide greater transparency, we have split this into 3 parts. So $47 million of the growth was in Entelar, which delivered significant infrastructure contracts during the year as well as public safety network revenues and growth in MATTR. $31 million of the growth related to a full year contribution of Connect 8 and the remaining $11 million was driven by future markets and reflects the strong performance of our IoT business, which grew by 33% year-on-year. As we look to FY '24, it's our intention to break this category into further detail as it reaches a material size, and we've outlined that in the appendix. Procurement revenues were the other key driver of revenue growth with strong software licensing deals, particularly in the health sector. Cloud Security and Service Management revenues declined 2.2% for the year, which was below our original aspiration of 2% to 5% growth. Cloud revenues declined 3.1% as we saw private cloud pricing pressure. It is worth noting that the second half revenues for private cloud were broadly flat reflecting the stability of the largely government customer base and the fact we're now cycling period, which included price decreases. Service Management revenues declined 7.4% as we cycle the prior COVID period where health sector revenues were higher than usual. Broadband revenues were down $13 million or 2% for the year, but more pleasingly, have now been flat for 3 consecutive halves as we've stabilized the base and lifted prices. Legacy voice continues to become a smaller part of our business and future headwinds will moderate as it trends below 5% of revenues. During the year, we saw a higher voice revenue decline as calling volumes across 0800 and fixed to mobile normalise post COVID. Lastly, other gains of $33 million were up $7 million in the prior year and relate to gains on sale of mobile network equipment and changes in our leases. On Page 23, we outlined the adjusted operating costs that grew by $145 million or 5.6% to support revenue growth. Product costs grew by $108 million with the largest growth in mobile, procurement and other product costs, which is in line with the revenue growth that I spoke to earlier. Labor costs increased by $16 million, which was driven by the insourcing of field services, the full year impact of Connect 8, pay rises for our people in a tight labor market and investment in our high-tech growth businesses. These increases were partially offset by ongoing investments in automation and efficiency across the business. The other operating expense increase was primarily driven by an increase in accommodation costs, which was due to increased corporate site maintenance as we cycled a period where maintenance was less frequent due to COVID restrictions. We also saw higher operating charges relating to Connexa leases and higher travel expense following the easing of travel restrictions. So after a tough start to the year, we finished with adjusted revenues up $188 million, adjusted costs up $145 million, which saw EBITDAI grow by $43 million. The key drivers of improvement from the first half to the second, with the ongoing strength in mobile and return of roaming, stabilization of our broadband base in revenues, normalization of other revenues and gains, which were low in H1 and tight management of the cost base. The growth in adjusted EBITDAI flowed through to adjusted NPAT, which was up $23 million or 5.6%. Depreciation and amortization declined by $16 million as we sold a majority stake in our mobile towers during the period. Finance income was up $6 million, primarily driven by interest on the TowerCo proceeds and finance expense was up $25 million driven by an increase in lease interest expense rate in to Connexa and higher these interest rates. Adjusted tax expense was up $14 million as a result of higher net earnings. There was no Southern Cross dividends received during the period, but with Southern Cross NEXT Cable now live, we expect to see a return to dividends from this financial year. So moving now to CapEx and free cash flow. FY '23 CapEx was $515 million, up $105 million compared to prior year spend. This was in line with guidance and the key drivers of investments are highlighted on Slide 24. The increase of $105 million went primarily into data centres and 5G acceleration with Stage 1 expansion of Takanini now complete and with proof of concepts underway for 5G stand-alone and mobile edge compute. Free cash flow for FY '23 was $489 million, which was up $56 million on prior year. This was towards the higher end of our aspiration and higher than our expectation in H1 due to tight management of cash CapEx. Free cash flow of $489 million largely funds the $0.27 per share dividend and is a really pleasing outcome as this is a goal we've been working towards for some time. Looking ahead, our aspiration for FY '24 free cash flow is $490 million to $530 million, which reflects ongoing growth in EBITDAI and tight capital management. As a result, we are guiding to a higher total FY '24 dividend of $0.275 per share fully imputed. The combination of the FY '24 dividend guidance of $0.275 per share Which equates to around $500 million and the completion of the remaining share buyback of $204 million will see Spark return in excess of $700 million to shareholders. So moving now to net debt on Page 26. At the 30th of June, the net debt-to-EBITDAI ratio was 1.4x and consistent with [ Sten score ] minus credit rating, the decrease in net debt during the period reflects the proceeds from the TowerCo transaction. We expect net debt to continue to increase back to more normalized levels, while remaining within our credit rating as we complete the buyback in our investment program. We remain committed to the capital management framework that was most recently shared at our investor strategy Briefing. We've seen us focus on maximizing shareholder value by growing dividends over time through growth and free cash flow, continuing to invest for growth while maintaining our financial strength and flexibility. So now moving on to the FY '24 indicators of success. In mobile, we expect the market to continue to grow, and we're well placed to capture our share of this. We expect to see roaming average 100% of pre-COVID levels as well as continued growth in both usage and connections as immigration returns. As a result, our FY '24 expiration for mobile service revenue is growth of around 5%. Connections in the broadband market are expected to grow modestly as we see immigration return. Our ambition is to continue the stabilization of revenues we've seen over the last 3 halves, while maintaining our connection base in a highly competitive market. We will continue to support margins by growing the wireless broadband base by a further 10,000 to 15,000 connections. In IT, we are targeting a moderation in the rate of decline as we cycle previous price defines in cloud and as service management project activity normalizes post COVID and our new hybrid cloud and service management product offerings gain traction in the market. As a result, we aspire to around 2% IT and procurement revenue growth. We're also moving decisively on the cost base to align more closely to the changing margin profile of our segments in this space. Our expanded data centre completed in August, and we'll see revenue growth by around 46% to around $35 million as a result. We'll focus on the development and commercialization of new high-tech solutions for our business customers with $25 million to $35 million of revenue growth targeted within the year. And we also expect to see other gains remain at consistent levels with the last 3 years. Our focus on cost out and tight management of discretionary spend will continue to support reinvestment in the business and to insulate Spark from economic uncertainty with a gross FY '24 cost-out target of around $40 million to $60 million. We've also included operational performance indicators that are aligned to our new 3-year strategic ambitions and we'll be targeting a 3-point lift in customer iNPS, a 5-point lift in employee engagement and reductions in our greenhouse gas emissions in line with our science-based target. So lastly, moving on to guidance. For FY '24, we have set guidance subject to no material change in operating outlook is EBITDAI of $1.215 billion (sic) [ million ] to $1.26 billion (sic) [ million ] , CapEx of around $510 million to $530 million and a total FY '24 dividend of $0.275 per share fully imputed. It's also worth noting that we'll be adjusting our financial disclosures to provide great transparency around the growing parts of our business, such as data centres. And accordingly, we've provided a copy as part of the full year disclosures. We've included a reconciliation of the movements in the appendix to the presentation and intend to start reporting under the new format from H1 FY '24. So that now concludes the formal component of our presentation. Let's move to some questions. So operator, could you please introduce the first question?

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Just first question, on the the gross cost out $40 million to $60 million, can you just talk a little to the 2 to 3 key areas where that cost out is targeted for delivery?

Yes, sure. So it comes across a number of different places. Firstly, around simplification, what we're doing on exit of 3G and PSTN will drive some opportunities. We see an opportunity to automate more parts of our business, particularly in the areas like network deployment. We're seeing some good efficiencies there. We'll continue to drive our digital journey. So having more of our customer interaction through digital channels, helps reduce number of contact centres. And then there's always bet, what I would call kind of driving owners economic, so transferring more and more of our broadband base on to wireless broadband where we have the economics of our own network. So those are kind of the big areas, Arie, that we're focused on.

Sure. And then just in terms of I mean if we put Entelar to a side, obviously, there's activity sort of based there, so either put it to a side or assuring that it's more sort of stable in revenues in '24. Like -- with what you see across the rest of the business, would you expect at least some of that gross cost out to be -- to manifest itself and net cost out? Or do you sort of envisage reinvesting most of it?

I think you'll see in a high inflation environment, I think it's optimistic to see net cost out, which is why we positioned it that way. Also with the level of reinvestment we're doing into high-growth areas. So I think that will help us maintain our margins while we reinvest into those new parts of the business.

No, that's clear. Just on the free cash flow aspiration, I guess, just within that $510 million to $530 million of CapEx guidance of '24. What sort of level do you expect to be in the growth CapEx bucket sort of similar to FY '23 across 5G acceleration and data centre? Or all the growth component of the total CapEx guidance a bit lighter in '24.

Arie, that will be in the sort of $100 million to $120 million. So slightly more than a hedge per share.

Yes. So the growth component will be $100 million to $120 million.

Yes.

Perfect. And then just mobile services revenue growth, I mean, super impressive and sort of sustained that high single digit over first half and second half. With that in mind and your comments about how much of the contribution was from roaming with price increases that you put sort of through and, I think, more second half weighted, would you sort of describe your target of 5% as conservative for FY '24 services revenue growth?

No, I wouldn't describe it as conservative, I'd describe it as solid. Because in that 9%, we see the 3.3%, which was roaming. So back at around about 5.7% of underlying service revenue growth. So around that 5% gives you a sort of similar level, just strong as you said. Yes.

No, no, no. It's certainly solid. I just wondered whether there was an element of conservatism there that you wouldn't characterize it as such.

Well, look, we're facing into more economically challenged environment to hit as well, while we believe our services essential at [indiscernible] And we will see because we got to about 86% of our previous framing. So there is opportunity to within that outside of the underlying for some of that still return into is inbound growth further. And you see more claims coming back into New Zealand and different airlines.

The next question comes from Kane Hannan with Goldman Sachs.

Maybe just the free cash flow performance in the second half. I mean that's a lot stronger than you're talking to back in February. Can you talk about what drove that improvement? I think you're previously talking to the lower end of the guidance range?

Yes. I guess there's a couple of things there. One, I guess at a macro level, we always see a much stronger performance of free cash in the second half, our business tends to be somewhat cyclical as we invest both more CapEx in the first half and also in more advertising and handsets and promotion prior to the Christmas period, where we see returns from both of those in the second half. So typically, we have a stronger second half weighting as it is. And then really, I would just characterize it as a tight management of the cash CapEx envelope in that second half helped kind of drive it higher than what we had previously expected in the first half.

Yes, perfect. Then just a data centre piece, I appreciate the extra disclosure there. I think about what's been playing out in the last 6 months, obviously, AI and Nvidia will be very positive signals. Can you just talk about how you're conversations with the hyperscalers has sort of evolved since you initially set that $250 million to $300 million CapEx envelope from data centres.

They probably haven't involved as such the strategy we laid out there is the same strategy we're so -- and clearly, I recognize the comments you make around generative AI and other elements driving greater data generally, and therefore, the need for data in to grow. So our view is really based on a 3- to 5-year view of what we see happening, what we've seen announced and the overall trend, if you look globally at what's happening. So that's how we formed our assessment. It really hasn't changed that much in the last 3 months.

Okay. Perfect. So interesting like Australia has probably seen a bit of a tick up in demand through the last 6 months. So I just wonder whether you could be maybe the top end of that CapEx envelope, but it sounds like that's capturing a lot of that.

Yes, it is. And look, we've indicated what we will have built. We've also indicated what's starting in terms of that Stage 2. But also, we've got some land and areas already there for further development. And we are also looking at other locations. So as we -- as it evolves, we'll continue to keep the market updated. But I think what I would say is all of the trends you've highlighted there only support the importance of that growth ahead and the digital infrastructure building to support that.

Yes, perfect. And just lastly, just the Lynk Global offering and then that text-only offering. Just any thoughts about how you potentially charge that service, whether it's sort of bundled in and you're trying to spin people up to higher tier plans? Or is it something that would actually be charged for on a messaging basis?

Yes. Look, we're still on the early stages of that. So we don't have anything more to share on how we'll do that. We'll obviously go through the trials with customers first, and then we'll look at how we implement that. We'll keep probably at the half. You will have to more say on it.

Your next question comes from Aaron Ibbotson with Forsyth Bar.

Yes. A couple of quick ones. First of all, just coming back to the sort of other, which we understand or I understand includes a lot from Entelar and this Connect 8 consolidation. I was just curious if you could talk a little bit or 1 of you guys could talk a little bit how to think about this going forward? Are we seeing particularly high revenues coming through now because of the 5G build-out? Or how should we think about this sort of a line item going forward?

Yes. So if you think about what the organization of the group that covers a wide range of things from infrastructure construction and Mobile, as you pointed out, also IT supply and distribution. So when you think about those different streams, they have different themes around them. As you look at the growth ahead, we see that in low single-digit numbers on an annual basis, and you should think about an EBITDAI margin in that sort of 20% to 30%. And just going back to sort of the 5G discussion, obviously, that is still rolling out at pace. We've got standalone. So there's lots of opportunity within that across the industry for Entelar and Connect 8.

Secondly, just on broadband and just picking up on some of Stefan's comments. If I got it right, are you sort of suggesting that the sort of 3 halves we've seen with gross margin dollars being roughly flat, that's a reasonable assumption as well going forward? Because I specify with an increased proportion of fixed wireless, at least I had in mind that there was a chance that we were going to see gross margin expansion a little bit at some stage but maybe that's a bit optimistic.

I think, Aaron, when you look at here, this is obviously a really competitive marketplace. You've got a few tailwinds, which will help with the things like immigration returning, but no doubt there's also ongoing CPI pressure in this place. So our aspiration here is really to try and hold share -- sorry, hold our connection based and then use wireless broadband as our means of maintaining our margins in this space. I think that's a pretty solid expiration given the kind of competitive dynamic in this marketplace.

And as we laid out -- 3 years, we're looking to grow that from 30% to 35% of our broadband base by FY '26. So that will have an ongoing ability to supplement or improve that margin profitability. And 5G by nature will continue to help improve that with extra capacity that they bring into the network.

That makes a lot of sense. Final question. In your sort of indicator of success slide, you've also merged IT and procurement. And again, Stefan, if I sort of picked up on a couple of nuances when you talked to it, if I heard you correctly, you said something on the lines of moderation of decline of the IT business. So if we think about the old IT business sort of on a like-for-like basis, excluding procurement and excluding the Takanini data centre, should we think about the decline there as moderating a little bit? You talked to or somebody talk to stable private cloud revenues, for instance, but still an actual decline.

Yes. I think your point, Aaron, is right, that we're looking for a moderation there. The -- we have seen private cloud the last 3 halves, we've seen stabilization there that reflects we've got 70% of that customer base that's with government work. So that's a really strong place to be. There will be price pressure ongoing, but offsetting that, you've got some volume growth. And really, I think the focus for us has been about putting some new products into market there. So we're launching our new hybrid cloud offering. And at the same time, we take some pretty decisive action on the cost base to try and make sure that we are removing any duplication and moving more toward kind of what I call a volume-based type approach. So it's more aligned to the -- changing margin profile of the customer and see once we've got. So I hope that gives you a bit of additional color.

Your next question comes from Brian Han with Morningstar.

I have a couple of questions. In mobile, can you please talk about churns, within your subscriber base between postpaid, prepaid budget brands and virtual resellers?

So if you stand back and look at prepaid to postpaid, we've seen customers moving up. New Zealand still has an over representation of subscriptions in the prepaid area. So we've seen that, and that's been happening for many -- a number of bids and there's no real change in that. We've grown connections across both pay monthly and our prepaid base. And that's 221,000 connections over the years. So growth in both of those sites. We haven't seen any increase and churn rates in any of those areas. And what we are seeing is that desire for greater data usage, which is pushing people up into different plans, and we have done certain changes over the last 12 months that we'd be flying through to in terms of ARPU.

Right. So the annual price reviews hasn't had any impact on that trend from prepaid to postpaid?

No, because we have -- well, we have the ongoing trend upwards of people moving. So you will see the plan mix improvement and is part of the ARPU improvement in pay monthly. But we've also had some price increases in our prepaid base as obvious, you can see an ARPU improvement. Obviously, travellers having returned and roaming having returned to the marketplace this year. And so that affects that and you see that probably traveller component most of the prepaid when you look at the ARPUs and the connections within that.

Okay. Got you. And you may have said this before, my apologies, but on the 9% to 10% return goal for data centre investment, can you tell me what the numerator is on that target? Is that EBITDA pretax profit or some other number?

It's [ NOPAT ] for the specific to the data centre. And just as a reminder, that 9% to 15% is what we would achieve once they're at scale. So clearly, you've got the investment upfront returns come online as the capacity comes online, and 9% to 10% is a long-run return. But yes, that's no past over the investor capital.

Okay. Great. And while you're there Stefan just 1 last one. You talked about the cost reduction plans for '24. But on a gross basis, can you tell us how much cost you think you took out in '23?

On a gross basis. Why don't I -- maybe I'll come back to you off-line on that one, Brian. There's a few different ways we look at it, and I think rather than me giving you something off the come back to offline.

[Operator Instructions] Your next question comes from Phil Campbell with UBS.

Just a few questions from me. Just wondering, Jolie, obviously, on broadband, Spark put its prices up on the first of August, I think by about 6% on the fibre. And you keep the fixed wireless flat. So obviously, the price gap is widening. It's probably a bit early, but I'm just wondering, have you had any customer response for most products increase. Have you seen anyone possibly trading down or possibly even switching to fixed wireless?

When you look at our balance between fibre and broadband and wireless, as you can see we're growing that wireless space. it is probably a little early to say that that's a driver of that. I think we think the pricing strategy we have in place makes more sense and is good value for customers who want that wireless proposition. So probably the early to call on that particular product change.

Okay. Great. Second question was just on the aspirational free cash flow for FY '24. It's $490 million to $530 million. which is obviously a pretty good number given that the '26 aspiration is $500 million to $550 million. If I just kind of take that cash flow bottom end into the top end divided by a number of shares, you kind of have implied dividend potentially of like if it's 100% payout, 27% to 29%, just the 27.5% FY '24 just looks a little bit potentially bit light. I was wondering if you could make some comments on that.

So when we stand back and look at dividend free cash and obviously, earnings, we're looking at the balance of growing our a dividend in line with growing free cash and earnings, but also investing in the business for growth. So from our perspective is about making sure we've got that balance right. We think the movement in the $0.275 following the $0.02 increase in FY '23 is the right balance, and we'll continue to assist us every year as we lock our head around -- what is the balance there and stick to it [indiscernible] through the dividend profile.

Great. And then just the last 1 maybe for Stefan, I just noticed in your report, there's a tax note which looks as though there's quite a lot of tax losses in Australia, I think. So I was just wondering, it does talk about potentially utilizing those [ budgets ], it's kind of first time I've seen that. So I don't know if you are able to utilize those tax losses?

So there's a couple of things going on in the tax position. One is, obviously, you've got a reported position that's relatively low because of some large adjusting items that relate to the Connexa transaction and Spark Sport. When you normalize for that, your adjusted tax is effectively more in line kind of around 29%. In terms of the Australian piece, Phil, I think we might take that 1 off-line, I'll come back to you.

There are no further questions at this time. I'll now hand back to Jolie Hodson.

Okay. Thank you, everyone, for joining us for the call. We'll now hang up the call. Thank you.