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 2024 financial results are cycling the significant revenue and net profit declared in FY 2023, following the Telco 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 NZD 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, which were intensified competition in business mobile and led to lower mobile device and accessory sales. As a result, adjusted revenue decreased 1.2% to NZD 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 2025. As a result, FY 2024 adjusted EBITDA reduced 2.5% to NZD 1.163 billion. Lower EBITDA, higher finance expenses, and higher depreciation impacted adjusted NPAT, which declined 21% to NZD 342 million. Free cash flow reduced 32.5% to NZD 330 million as a result of lower EBITDA and higher interest and non-cash 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 2025, which I'll speak to in more detail shortly. We're also pleased that customer satisfaction grew seven points, employee engagement remains strong, and our top quartile sustainability benchmarking was maintained. Finally, the board approved a total FY 2024 dividend of 27.5 cents, 100% imputed. If we turn now to our telco market performance on slide four, mobile service revenue increased 3.1% as 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.
Consumer mobile service revenues grew 4.3%, and P ay Monthly, they was up 1.6%. Broadband performance was consistent with prior years, decreasing 2.1% to NZD 613 million. This is a price-driven market with a 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 addressable market for wireless broadband. If I look at our digital services market performance on slide five our overall IT revenues decreased 1.6% to NZD 692 million. This marks 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 investment drove a 14.9% decline. Our focus in FY 2025 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 NZD 37 million as our Takanini campus expansion completed and new revenue streams came online. Finally, our high tech revenues grew 21.5% to NZD 79 million, as IoT hit a new milestone of over two million devices connected to our networks, and Matter continued to scale. Looking at our ESG performance on slide six, 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 Energy. 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 2024 indicators of success are outlined on slide seven, where we're 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 2023 as we made changes to our operating model, we are pleased to remain above the median for large companies in New Zealand.
Turning now to our strategy and our plan to return to growth in FY 2025, starting on slide nine. 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, 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'll 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 MW, 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 EBITDA and lower FY 2025 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 while 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 pipeline now totals 118 MW. In the context of a market set to grow to 500 MW by 2030, this positions us to maintain a material share of a much larger market. We have 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. Our 12-megawatt Takanini site is currently close to 100% contracted, and in FY 2025 will commence construction on another 15-megawatt expansion. The campus can grow to a total capacity of around 75 MW in the future. Our 3-MW 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 MW in the future. During the year, we secured land and resource consent to 3 strategic sites, our third strategic site, sorry, on the North Shore. As part of our 43-hectare master plan development with the Surf Park creator, Aventuur, this campus can grow to a total capacity of 40 MW, which will be delivered in stages. This pipeline will see us invest around NZD 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 2024 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 gonna cover more on that funding plan in more detail shortly. If we turn now to our focus on cost and our SPK26 Operate Program. As we transition through the current economic conditions, we plan to significantly reduce our cost base to support margin growth in FY 2025. In FY 2024, we brought labor costs back to largely flat, and operating costs were down in an inflationary environment. In FY 2025, we must go further, and we're targeting NZD 50 million net labor cost reduction and a NZD 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 Program. 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 2024 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. The market conditions to persist some way into FY 2025, and we have a robust cost reduction program in place to insulate Spark. Cost focus is matched by our clear ambition to return to growth in FY 2025 through our core markets and mobile, our digital infrastructure investments, and disciplined capital management. I'm now going to hand over to Stef 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 NZD 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 NZD 30 million, or 3.1%, and Jolie's already outlined the key drivers of growth here. IT product revenue growth continued and was up NZD 18 million, or 3.5%. The growth was driven by new client wins, increased workloads as customers continued to move to the cloud.... Well, it was pleasing to see growth in these core products.
Our IT services revenue were down NZD 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'll realize significant labor or net labor cost reductions in FY 2025. Mobile non-service revenues, which primarily relate to devices, were down NZD 26 million or 5.3%, as customers refreshed devices less frequently in response to the inflationary environment. Voice revenues also declined at a faster rate than FY 2023 and were down NZD 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 NZD 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 NZD 69 million to NZD 102 million. And there are 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 canceled 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 2025. 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 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 SPK26 Operate Program to align labor costs with changing revenue trends.
Operating costs increased by NZD 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 NZD 47 million and costs down NZD 17 million, we saw EBITDA reduced by NZD 30 million. And so while adjusted EBITDA was up NZD 20 million in H1, challenging trading conditions intensified in the second half, and as a result, we saw adjusted EBITDA reduce 2.5% to NZD 1.163 billion for the year. The decrease in adjusted EBITDA was one of the drivers of lower adjusted NPAT, which was down NZD 91 million or 21%.
Depreciation and amortization increased by NZD 23 million, as our asset base grew following increased investment in 5G and data center assets, while finance expense also increased by NZD 45 million, primarily due to higher debt and increased rates. 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 Program. Moving now to CapEx on slide 18. FY 2024 CapEx was NZD 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 NZD 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 NZD 159 million was similar to prior year. However, the composition was different, with less growth CapEx committed to data centers as our 10-megawatt pod two expansion at our Takanini campus completed, and we commenced planning for pod three. This was offset by an increase in 5G as we accelerated our rollout and invested in the foundations of 5G standalone. In FY 2025, we'll reduce our CapEx investment to around NZD 460 to NZD 480 million. So moving now to free cash flow and net debt on slide 19.
It is important to remember that we started the year with around NZD 500 million lower opening net debt, reflecting the receipt of Telco proceeds, which were reinvested and returned to shareholders during FY 2024. Free cash flow for FY 2024 was NZD 330 million, which was down NZD 159 million on prior year. The decline was driven by lower EBITDA 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 EBITDA ratio increased to 2.1 times at 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 EBITDA around 1.7 times. Our on-market share buyback is now concluded, and we have a clear focus on net debt reduction in FY 2025. So this includes growing free cash flow to between NZD 400 million and NZD 440 million through EBITDA 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 2025. 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 2025 dividend of NZD 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 2025, we'll impute the dividend at 75 cents , reflecting lower FY 2024 tax payments.
We'll continue to invest for growth, with maintenance CapEx funded through EBITDA 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 2025, 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 2025, while noting some emerging signs of economic recovery.
We're not relying on this and have instead made material interventions during the year through our Operate Program to adjust our cost base to match our revenues. This will continue in FY 2025, and we're targeting a NZD 50 million reduction in net labor costs and a NZD 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. We've outlined our FY 2025 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 2025, we have set guidance subject to no material change in operating outlook as EBITDA of NZD 1.165 billion-NZD 1.22 billion, CapEx of around NZD 460 million-NZD 480 million, and a total FY 2025 dividend of NZD 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?
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Arie Dekker with Jarden. Please go ahead.
Oh, good morning. Just on the guidance, firstly, and as you noted, subject to no material adverse 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 2025 is, for that guidance range?
I think if you break it into different components, there's sort of three key components there, Arie. Firstly, on mobile markets, expect it to grow at around 3%, so it's maintaining share within that. If we look at our cost program, so NZD 50 million net reduction in labor and NZD 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 2025, we don't expect to see significant improvement in that.
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. No, thanks for that. I noticed there was nothing on fixed wireless targets for FY 2025, or maybe I, I've missed it. Yeah, could you just talk a little bit about that? You know, is it a feature of your other OpEx savings? You know, as the 5G penetration increases, what your plans are? Yeah, what are the internal targets on fixed wireless for 2025?
... We haven't set a target specifically that for wireless broadband to be shared, but it continues to be an opportunity for us to continue to grow within, particularly as we have the rollout of 5G. And you can see now that we have the SamKnows modems have the measurement of the speeds, and you can see those speeds have grown quite substantially in terms of particularly on 5G. I think it's, you know, 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, as it grow-- and broadband in the current economic environment is very price competitive as well.
So that, from an overall sort of setting perspective, it is still part of our growth ambition ahead, and we're investing in the network to help support that.
Sure, and 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.
Yes.
then the areas where those costs are focused. I mean, how are you sort of managing, you know, the risks within the business, and also, I guess, the risk, you know, that you don't sort of cut costs or lose people in an area where, you know, cyclically, you're down at the moment, but you know, things should return back to growth in time.
Sure.
Could you talk a little bit about that?
Let me. So the Operate Program, 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 2024, and also 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 subsidiary, 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.
Okay. And then just on capital management, a couple of last questions. I mean, I guess it's proving challenging to consistently hit the aspirational target on free cash flow. You know, and I know that the target for FY 2025 is below what it was for FY 2024. 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?
Yeah. Hi, Arie, Stefan here. So look, the capital management framework outlines our long run approach to the dividend. Obviously, we set, in conjunction with the board, an absolute amount for each year. So the amount for FY 2025, you know, with free cash flow, 400-440 million, funds a good portion of the dividend, but not all of it. Our intention then is to grow free cash flow back over time, and that is absolutely in line with our capital management framework, which is aligned around EBITDA 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-
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 2025? And can you just comment briefly on where in that partnering process you sit today?
Yeah. So 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 provides enough funding to see us through at least the next eighteen months, so that gives us some timing 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.
Thank you.
The next question comes from Kane Hannan with Goldman Sachs. Please go ahead.
Hey, guys. Maybe just the mobile service revenue outlook again. I mean, you're talking about 3% next year. I think it's 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.
Yeah. So if you look at, second half, you do see seasonal impacts to travelers and others. You can see that in our prepaid as well, which where we saw, over time, some of those coming through. We think about, if we break it into the components, consumer, we still see the opportunity to grow. Customers are looking for more data and are moving up 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 really does remain competitive. There has been also some line shedding in relation to restructures. As we go through 2025, we'd expect that to stabilize somewhat, and some areas in growth.
So we think all of those factors, and the combination of continuing to see demand for data growing, will support the 3% growth ahead.
... Yep, 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 2025, and so maybe a bit of a benefit coming through in FY 2026. I suppose just how do I think about the timing of all those OpEx initiatives really?
We've made significant changes during 2024, but yes, there are some that commenced in 2025, so you'll have a component that will flow into 2026 as well, as we do that into the kind of the first half of FY 2026.
Yep, 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, I suppose, what you'd be looking for in a partner, how you think about, you know, the terms of any sort of agreement and how it might change the economics, on your side? Cheers.
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 come into this part of the business, but because we're still a way away from that, when we are closer to that time, be able to disclose more about who that might be and how we do that.
Thanks, Stef.
Your next question comes from Entcho Raykovski with E&P. Please go ahead.
Hi, Jolie. Hi, Stef.
Hi, Entcho.
Hi, Entcho.
My first question is on mobile. 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?
It, it is mainly in relation to business, although we did see that, as 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, 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 2025, we took it in FY 2024. Our price increases are being executed right now in August, so broadband and, and mobile. So they have-- that has gone out.
So we'll get the majority of the benefit of that, of the benefit of it? Yeah.
Yeah. Still to come in terms of that growth.
Okay, thank you. And just I don't know whether this is too specific, but I think consumer's 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've been higher in the first half-
Yeah
... 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.
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 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 of it.
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.
Yeah, and if you think about the net reduction target, we put around OpEx of NZD 30 million, that is obviously addressing some of that cost base.
Yeah.
Okay. So just to be clear, it's not those costs coming out, an additional NZD 30 million, that's included in those costs being taken out, yeah, they are included in the NZD 30 million?
What we're saying is for FY 2025, we've got a net cost reduction for OpEx of NZD 30 million. So, you know, close 2024 and on, from there on, in, it'll be a reduction against that.
Yeah.
Okay, got it. Thank you. And my final question, so in IT, IT services revenue, just that question around what's cyclical and what's structural.
Yeah.
Are you able to talk to how extensive the simplification of the product portfolio is in enterprise and government? You know, what sort of number of products are you taking out? Feels like you can probably get away with taking out some. Do you think most-
Yeah
... of the spend will come back in a better economic environment? I mean, is that, I suppose you've got some-
Yeah
... project spend and stuff like that.
I think when you break it into the different compartments of IT services, so you have projects, digital transformations, those have gone on. 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, as there's been large changes in organizations, those things are just holding till they start again, and we have seen some indication of that. Then you look at more across the product line of an 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 effect both from a complexity reduction, but also in terms of slice of costs or other costs to support that. That program will exist over a period of multi-year. It's not just going to be in FY 2025. 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 cyclically? So we haven't taken an approach that everything is structural out of this last twelve 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.
Okay, got it. Thank you.
Thank you.
Your next question comes from Brian Han with Morningstar. Please go ahead.
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?
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 2025. So the combination of those things and of the economic environment accelerating further away in that second half is really what drove the changes.
Just out of interest, Jolie, Spark's 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, perhaps the number of offerings we might have within a portfolio as we look ahead to sort of 2025, 2026. They are. They have a role to play, but equally, those services can 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.
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, you know, over two hundred thousand customers using our broadband. Wireless broadband.
31% of our base as well.
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 on that.
Okay, thank you.
Thanks.
Your next question comes from Aaron Ibbotson with Forsyth Barr. Please go ahead.
Hi there. Good morning. Apologies.
Hi, Aaron.
Calling in from mobile, so hopefully you can hear me okay.
Yes, we can.
Thank you. I've got a few questions, primarily around capital management. You know, what's the sort of logic, I guess, around paying a partly unimputed dividend funded by the DRP, and, you know, if you're sort of continue next year not to be able to afford to pay fully imputed, would you continue to pay partly imputed, or do you think it's more likely that you would just sort of cut the dividend? Thank you.
When we consider what's our approach to capital management, frankly, 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. We understand the importance of the dividend, holding it at $0.275 per share and using it is, we think, 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.
Okay, but if I can just-
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 2025. So while FY 2024 was low, for FY 2025, you know, it's much more around returning back to EBITDA 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, you know, really the driver here is about growing free cash over time, and that's very much what the SPK26 strategy is designed to deliver.
Okay, thank you, Stefan. But so should we think about this as, you know, 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-
I think-
If you're 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. Yeah.
Okay, perfect. And, 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?
Yeah.
It sits under a title which says FY 2025 approach. That would be quite substantial issuance of hybrid capital notes in order to get that happening. It's you sort of, at another place in the presentation, you talk about potentially issuing them, but if you're gonna bring it back to 1.7 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. You know, 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. 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. It's a combination of all of those things which help address the net debt position.
Okay, thank you. That's very comprehensive. Final question from me, and it's just on EBITDA and what you're including adjusted EBITDA. 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, you know, the type of gains is something that the market should pay a multiple for, similar to what they pay for your other EBITDA earnings from, you know, mobile and IT services, et cetera? 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.
I think if you stand back, we've had a long-held position around the difference between reported and adjusted being around individual items greater than NZD 25 million. So anything that is over NZD 25 million, so in the past year, that was TowerCo 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, and that's how we think about our EBITDA 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.
As we've said, as we look ahead to 2025, our focus is on returning our EBITDA 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 that.
So, how do you get to below 25 then? I mean, how, like, how do you cut it? Because you've got two items above 25 in your disclosures, as far as I can tell.
No, we haven't.
No?
No.
Gain on lease modification and terminations, NZD 36 million. Gain on sale and acquisition of property, plant, and equipment, NZD 62 million, yeah?
Yeah. When you actually break them apart, there is a number of. They've 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 contractual bases, and so don't trigger that NZD 25 million threshold.
So when you talk about a NZD 25 million threshold, if I think about gain on lease modification, which I assume are these tower leases, do you count each tower individually, then? So if you got, like, if each tower individually is a few million, if you have 20 of them, it's a NZD 50 million.
No. So part of it relates to tower relocations. We aggregated all those together, and that's one component that sits well under the NZD 25 million mark. Then there is another one, which is a change in the terms, which relates to some of our co-location capabilities, an entirely different basis. Once again, it sits under the NZD 25 million mark and done, you know, with entirely different rationale.
Okay. Very clear. Thank you.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Phil Campbell with UBS. Please go ahead.
Yeah, morning, Jolie and Stefan. Just a couple of questions on data centers. Obviously, looks like you've increased the pipeline from 93 MW to 140 MW. Can you just give us a bit of color on what's driving that? You know, 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 the potential pipeline, the increase is to do with further land purchase, 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. Good discussions around demand. We're building out Takanini Pod 3 in 2025, so 15 MW 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.
And just the-- obviously, you've-- 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, obviously, been going up. What is kind of driving the, the kind of IRR 10% to 15%?
Yeah, 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 is what is obviously, you know, 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. 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, you know, around that, above that 10%.
Okay, awesome. I suppose the other question is, you know, 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 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 know, have you got any ideas on how people could-
Well-
-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 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.
Great. And then just a last one: like, if I was, say, hypothetically a hyperscaler, and I'm-
Yes
... and I'm wanting to put some workload in New Zealand, why, why would I put workloads with Spark rather than just going to CDC?
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 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 support our growth and help to separate out growth of business from growth and emissions.
Okay, great. Awesome. Thank you.
Thanks.
There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.