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

[Foreign Language] and thanks for joining us today for Spark's full year results for the period ending 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 transaction. 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 2, but could not adapt the cost base to changing demand quickly enough with benefits to be largely realized in the FY '25. As a result, FY '24 adjusted EBITDAI reduced 2.5% to $1.163 billion, lower 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 noncash earnings and contributed to higher 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 in 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. In 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 IP revenues decreased 1.6% to $692 million. This masked a return to growth in IT products which was 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 investments 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 data center revenue growth exceeded our target, increasing 54.2% to $37 million as our Takanini campus expansion completed and new revenue streams came online. Finally, our 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 continue 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, were 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 an one-off event, where an alarm triggered the release of 5% 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 growth. 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 were pleased to exceed the number of our targets, including data center, revenue growth, IoT connection growth our gross cost-out reduction target and our customer satisfaction scores, 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 are experiencing. Wireless broadband growth was also below our aspiration as competition intensity increased. While we saw employee engagement dropped slightly from FY '23 as we made changes to our operating model, we are pleased to remain above the medium-to-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 3-year strategy. As we look ahead, we remain committed to the ambitions we set out in 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 investment. 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 megawatts, 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. And now I'm 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 now 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 megawatts. In the context of a market set to grow to 500 megawatts by 2030, this positions us to maintain a material share of a much larger market. We have 3 strategic Auckland locations that deliver a compelling investment portfolio. Auckland remains the epicenter of data center investments in New Zealand, is the location of hyperscaler cloud regions and demand from customers is seen there. Our 12-megawatt Takanini site is currently close to 100% contracted. And in FY '25, we'll commence construction on another 15-megawatt expansion. The campus can grow to a total capacity of around 75 megawatts in the future. Our 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 the total capacity of 40 megawatts, which we delivered in stages. This pipeline will see us invest around $1 billion of CapEx over the next 5 to 7 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. Stefan's going to cover more on that funding plan in more detail shortly. So if we turn now to our focus on cost in 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 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 in 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 investments 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 3-year strategy we had aimed for. And like all businesses in New Zealand, we've had to adapt at pace. We expect challenging market conditions to assist 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 in mobile, our digital infrastructure investments and disciplined capital management. I'm now going to hand over to Stefan to talk you through the financials.

Thanks, Jolie, and good morning, everyone. So I'm going 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 continue 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 -- 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 games revenues, which were up by $69 million to $102 million, and there are 2 primary drivers of this increase. So firstly, as we implemented our new 3-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 the mobile tower leases, which -- including the tower relocations that we have seen, leases canceled and new leases created, and this gives rise to a noncash 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% as lower product costs were offset by restructuring costs and inflation refreshes. 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 our adjusted EBITDAI was up $20 million in H1, challenging trading conditions intensified in the second half. And as a result, we saw adjusted EBITDAI reduced 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 interest -- sorry, 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 2/3 of our capital investment was invested into our network and digital infrastructure, improving resilience, underpinning growth in key markets such as mobile, data centers and high-tech. Maintenance CapEx was flat at $359 million which is being 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 stand-alone. In FY '25, we'll 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 noncash 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 2.1x at 30 June, in excess S&P's A- credit rating guidelines of 1.7x. We remain committed to our A- credit rating and plan to reduce debt back to targeted levels of net debt to EBITDAI around 1.7x. 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 noncash items returning to normalized levels through reduced capital investment, the restatement 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 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 an 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 our 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 into 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 Operator Programme to adjust our cost base to match our revenues. This 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 a 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% imputed. 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 Instructions] Your first question comes from Arie Dekker with Jarden.

Just on the guidance firstly, and as you noted, subject to no material as it 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?

I think if you break it into different components, there are sort of 3 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 and labor is $30 million and OpEx, that underpins a lot of that growth. And then IT market looking more 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 there are 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.

Okay. nice. 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 you're planned -- yes, what are the internal targets on fixed wireless for '25?

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 speed, and you can see that speed has grown quite substantially in terms of -- particularly on 5G. I think it's significantly greater than 4G, so that looks to be an area of growth for us to hit and 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 for that. From an overall sort of seatings perspective, it is still a part of our growth ambition ahead, and we're investing in the network to help support that.

Sure. And then just as cost savings, I mean they're obviously pretty significant from the context of overall labor cost 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 just talk a little bit about that?

Sure. Let me -- so in 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 and the areas that look after, mobile and broadband, they were made in the latter part of '24 and also network and operations. Any time 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 integrated [ sceneries ], 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 stay and the talent that we need to retain within that. And which part do we need to make some adjustments, I guess, to just fit where the markets are.

Okay. And then just on capital management, a couple of last questions. I mean, I guess the -- 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. I mean 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?

Yes. Arie, Stefan here. So look, the capital management framework outlines our long-run approach to dividend. And obviously, we set a -- in conjunction with the Board, we set an absolute amount for each year. So the amount for FY '25 with free cash flow of $400 million to $440 million funds a good portion of the dividend, but not all of it. Our intention in this, 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 continue 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...

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?

Yes. So look, the data center funding approach is really, in the immediate term, a combination of the DRP and the potential issuance of hybrid capital notes. We think that sees us through our -- provides enough funding assist for at least the next 18 months. So that gives us some time then to work through the capital partnerships. And so we'll be -- we've commenced 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.

The next question comes from Kane Hannan with Goldman Sachs.

Maybe just on the mobile service revenue outlook again. I mean you're talking about 3% next year. I think it was basically flat in the second half. 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?

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

Yes. Perfect. And just, I suppose, the labor cost reduction. I think you made 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 for the year?

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.

Yes, perfect. And just the capital partner data center discussion. I mean, you guys have worn a lot of the upfront risk. I mean, you've got the strategic value, sort of relationships. So just interested sort of 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?

I think when we think about partners, there's an opportunity to consider whether we accelerate growth on the back of introducing a partner. There's a range of different partners that could be -- come into this part of business. But because we're still a way 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'd do that.

Your next question comes from Entcho Raykovski with E&P.

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 slowed down is only business mobile? Or are you seeing consumer slowing down a little bit as well?

It is mainly in relation to business, although we did say 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, there has been driven off people switching for greater data and the price increases that we've taken. We have taken price again 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.

And so we started to benefit from that -- [ felt ] the benefit of it. Yes.

Yes, still to come in terms of that growth.

Okay. And just -- I don't know whether this is too specific, but I think consumer was 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?

It would have been higher in the first half because we still had some remnant of roaming returning and there's some seasonality within that. And what we're seeing now is roaming has pretty much returned to normalized if you look at it sort of year-on-year and you think about that 3% to hit. So that would be the main drivers.

Okay. Great. And then if we look below the [ JP ] line, I know Stefan, you spoke about this in your prepared remarks for the full year, but other operating expenses were -- 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?

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.

These are 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 pull it as being is overly material.

Yes. 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.

Yes. 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 there? Yes, they are included in the $30 million?

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

Yes.

Okay. Got it. And my final question in non-IT services revenue, just -- that question around what's cyclical and what structural.

Yes.

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 you're taking out? Feels like you can only get away with taking out some. And do you think most of the spend will come back in a better economic environment? I mean is that -- I suppose you've got some -- yes, project spend and stuff like that.

I think when you break it into the different parts of IT services, so you have projects, digital transformations. Those have got -- they have not gone away. They've probably gone on hold. So as we've seen, particularly in the public sector, but also private sector is there have been large changes in organizations. Those things are just holding to, like, [ get ] done. And again, we have some -- seen some indication of that. Then you look at more across the product line of -- in the enterprise and government against core products, whether that's sort of network and various components there. We have multiple products across subsidiaries and Spark. So really, what you're talking about is a 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 where slice of costs or other costs to support that. And that's the period -- that program will exist over a period of multiyear. 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, [ exactly ]. So we haven't taken approach that here, we were think it's 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 those things that are more structural or longer term, we're addressing them now rather than waiting for that to occur.

Your next question comes from Brian Han with Morningstar.

Jolie, were you more surprised by the sudden economic impact in the second half? Or is there more the structural cost issues in IT that caught the company by surprise?

I think probably those 2 things are related because the -- in the first half, we didn't see the same sort of impact we saw in IT services, which aligned to really win. Public sector changes started to hit more. We saw private entities also reducing. So if you're thinking about that, the revenue decline accelerated. That meant we look 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 is accelerating further away and that second half is really what drove the changes.

Just out of interest, Jolie, Sparks' various IT products and services and procurement, how intricately are they tied to your mobile and connectivity businesses do you think?

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 or removing perhaps the number of offerings we might have within a portfolio as we look ahead to sort of '25, '26. So they are -- 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 may enterprise customers need, but it's not to say that they can't be bought singularly as well.

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?

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

31% of our base...

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.

Your next question comes from Aaron Ibbotson with full Forsyth Barr.

Apologies for calling in from mobile. So hopefully, you can hear me okay.

Yes, we can.

I've got a few questions, primarily around capital management. What's the sort of logic, I guess, around paying a partly unimputed 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?

So when we consider what's our approach to capital management front, 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 at the $0.275 per share and 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. 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 noncash or those other gains. And so really, the driver here is about growing free cash over time, and that's very much what the SPK-26 strategy is designed to deliver.

And -- okay. 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? It's not going to increase?

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 or 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.

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 million.

Yes.

So -- and it sits under a title which says FY '25 approach, so that would be quite a substantial issuance of hybrid capital notes in order to get that happening. You sort of -- at another place in the presentation, you talked about, potentially, issuing them. But if you're going to bring it back to $1.7 million with your cash flow aspiration and your dividend guidance, you need [ to ] sort of definitely issue quite a few of them. Is that correct?

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 pulling -- 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.

Okay. That's very comprehensive. Final question for me and it's just on EBITDAI and what you're including adjusted EBITDAI. 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 a multiple for, similar to what they pay for your other EBITDAI earnings from mobile and IT services, et cetera? It sort of feels a bit excessive, if I'm honest, to include all of it. I'm just trying to understand the logic from your guys' perspective...

So I think if you stand back, we've had a long-lead 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, it was a telco sale. Spark Sport provision is separately disclosed. Even if it sits below that, individually, it sits within the results. All it has done -- there's been no change in that approach. And that's how we think about our EBITDAI component of between adjusted and reported. In any given year, there are some -- 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 a sustainable cost base and growth in mobile. And in terms of data centers, and making sure that other gains are a smaller component of it.

So how do you get to below $25 million then? I mean, how -- like, how do you cut it? Because you've got 2 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 of property, plant and equipment, $62 million?

Yes, they have -- when you actually break them apart, there is a number that's been aggregated for the purposes of reporting, but the 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.

So when you talk about the $25 million threshold, if I think about gain-on-lease modification, which I assume are these tower leases, did you count each tower individual events if you've got, like, if each of tower individually is a few million, if you have 20, then it's...

No. No, so we look at the -- so part of it relates to tower relocations. We aggregated all 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 their co-location capabilities in entirely different basis. Once again, it's under the $25 million mark and done with entirely different rationale.

Okay. Your next question comes from Phil Campbell with UBS.

Jolie and Stefan, just a couple of questions on data centers. Obviously, 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?

So in terms of that potential pipeline, the increase has to do with further land purchase -- additional purchase of land adjacent to Takanini, which just allowed us to have those 3 strategic sites that we will develop based on as demand growth, 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 at Takanini POD3 in '25. So 15 megawatts will be that stage of element. 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.

And just -- obviously, we've got a potential increase in the pipeline, but also it looks like the IRR 10% to 15%. Obviously, previously, you were guiding, like, more of an ROI of 9% to 10%. What is the -- obviously -- CapEx for megawatts have obviously been going up. So what's kind of driving the kind of IRR 10% to 15%?

Yes. So we took an opportunity to stand back from [ it ] 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 is 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. And the way we think about it is where we have got a 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 in our thresholds. It 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 -- above that 10%.

Okay. Awesome. I suppose the other question is you're looking at the results 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 how -- what's the best way? Or how do you get 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 place. So you got any ideas on how people could value that?

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 molding and sort of time frame of investment over the next period, 5 to 7 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 for the purpose of pulling it out separately as to provide greater clarity and disclosure around that.

Great. And then just the last one. Like if I was -- let's say I was hypothetically a hyperscaler, and I wanted to put some workload in New Zealand. Why would I put workloads with Spark rather than just going to [ CEZ ]?

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 specifically hyperscalers might be looking at in terms of that, and we have a range of water services that we offer to enterprise and government customers to the complement those data centers. We also have significant renewable energy contracts as well that supports our growth and help to separate out growth of the business from growth in emission.

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