Good morning. Thank you for joining us today as we share Spark's half-year results for the period ending 31 December 2023. This morning I'm going to provide an overview of our results and an update on our strategy, and I'm then going to hand over to Stefan Knight, our CFO, to speak to our financial performance in more detail before we move to Q&A. So as was the case for most businesses, we experienced a challenging operating environment during the half with high inflation, cost-of-living pressures, and uncertainty resulting in lower levels of consumer and business confidence. Our core telco products are resilient during economic downturns but not immune, and uncertainty did dampen demand in some parts of the public and private sectors. Despite these challenges, we continue to deliver top-line growth and made solid progress in implementing our new three-year strategy.
I'm going to speak to the adjusted numbers for the purposes of providing a like-for-like comparison, which strips out the NPAT of the telco transaction and the exit of Spark Sport in FY 2023. So if we move to that, we delivered adjusted growth of 1.3% to NZD 1.98 billion, driven by a standout mobile performance and momentum in data centers and high-tech. When combined with strong cost control, holding operating expenses broadly flat. Our adjusted EBITDAI grew 3.9% to NZD 530 million. Adjusted NPAT decreased 4.8% to NZD 157 million due to higher average interest rates on debt and higher interest payments on finance leases. We expect to see a second-half improvement in line with stronger H2 EBITDAI, and Stef's going to talk through that a bit more shortly.
Capital expenditure was higher in the first half as we accelerated investments to gain a fast start on our new strategy and as we implemented upgrade programs like ERP, and this in turn impacted free cash flow. We remain committed to delivering our overall CapEx envelope within guidance and achieving our free cash flow ambitions. Finally, we declared an HY FY 2024 dividend of NZD 0.135 per share, 100% imputed. I'm now going to move to slide four and our telco market performance. Mobile remains central to our growth with mobile service revenues up 6.3% to NZD 510 million as the benefits of annual price review flowed through, and we captured 47% of total connection growth. Broadband revenue held broadly flat, so with a 1.3% decline to NZD 309 million despite high levels of competition in an inflationary environment.
Margins were maintained as fiber input cost increases were passed through and wireless broadband grew to 31% of our base. Moving now to our digital services market performance outlined on slide five. Pleased to have cloud backing growth with revenue up 3.8% through increased private and public cloud workloads and the launch of our new hybrid cloud service. Cloud gross margins grew 7.6% as the cost base was reset, with benefits continuing to flow through the second half. Overall, IT revenues held flat at NZD 345 million. That was impacted by a 10% decline in service management, primarily due to lower public sector demand. Our investment in the high-growth data center market is progressing to plan with a 10-MW expansion of our Takanini data center completed in August 2023 and revenue streams coming online during the half.
Data centre revenue increased 38.5% to NZD 18 million, and I will provide more detail on our data center investment shortly. High-tech revenues grew 12.9% to NZD 35 million. That was driven by strong IoT connectivity growth with Spark's IoT Networks now supporting around 1.8 million connections. We have several converged technology proof of concepts underway with customers to identify future commercialization opportunities. Digital health revenues were down 8.7% to NZD 42 million, and also impacted by public sector slowdown. We were focused on growing new revenue streams through further expansion and supporting the private sector. So looking at our indicators of success on slide six, in high-tech, the slowdown of public sector activity did impact growth in our data business Qrious, which we expect to improve in the second half. More broadly, we're on track or making solid progress towards all of our measures.
So H1 marked the first six months of our new strategy, and we've been operationalizing our new ambitions across the business. On slide eight, we overview our operate programme, which is focused on accelerating growth investment in digital infrastructure and redesigning our operating model to align to our FY 2026 goals. To do this, we were directing labour investment to new growth areas and are reducing investment in areas where EBITDAI profiles are changing, such as cloud. When we combine this work with our ongoing focus on AI and automation, simplification, digitizing our customer journeys, and growing wireless broadband, we are on track to exceed our growth cost out target of NZD 40 million-NZD 60 million in FY 2024. The dual focus of growth and resilience is a key feature of our strategy.
The strategic digital infrastructure investments we are making build on the strengths of our core connectivity assets, and when combined with the lowest cost operating model, creates the flywheel that underpins ongoing strength in our core business and new high-tech commercialization opportunities that will build out our future growth engines. On slide 10, we provide a roadmap for these high-tech opportunities. In the near term, our ambition is to continue scaling our presence in IoT and digital health. Leveraging what are now more mature technologies and mature markets, we'll continue to expand into new sectors while moving up the value chain into high-tech or converged solutions. Our investments into emerging technologies, including 5G Standalone and converged technology, will open up new commercialization opportunities in these markets. We're making progress with our satellite trials as capability matures.
We sent our first satellite text message on our network in November last year, and we have a Starlink business-grade satellite broadband solution in market for our business customers. Finally, we have MATTR, which is focused on building entirely new markets with new digital identity technology. Our ambition is to support the establishment of the market locally and globally and to secure high-growth, stress-based annuity revenues, building scale over time. This is turning now to our data center strategy on slides 11 and 12. We continue to experience positive tailwinds with the ongoing growth in data, business digitisation, and the rapid uptake of generative AI accelerating demand for data center capacity. We're well positioned to capture our share of this growing market, and our strategic ambition is to create three large-scale data centers in Auckland, at Takanini, our IoT campus, and on the North Shore.
The completion of our 10-MW expansion at Takanini brings our total built capacity to 22 MW with 88% contracted utilization. We then have a further 1-MW expansion due to completing our IoT campus by the end of the calendar year. Our potential development pipeline beyond this is significant, now totaling up to 70 MW. Of this, we have 5 MW in design at Takanini, which is expected to be under construction during the first half of FY 2025, and we have a conditional agreement to purchase land within a new development on Auckland's North Shore. Our intent is to develop an initial 10-MW hyperscale data center campus on this site with the option to add an additional 30 MW in the future. We'll consider appropriate funding models or partnerships for this investment and the broader potential development pipeline as we progress those opportunities.
Overall, we're targeting returns of 9%-10% over time as utilization scales. Finally, I'll touch on our sustainability performance. So to support our Aotearoa's economic transformation, we remain focused on investing in the digital infrastructure and technology capabilities our country and New Zealand businesses need to become more productive and sustainable. We recently released new research into the role of advanced technologies can play in addressing New Zealand's well-documented and persistent productivity challenges. The opportunity here is significant, with just a 20% uplift in the use of these technologies, increasing industry output by up to NZD 26 billion over 10 years and GDP by up to 2% each year. So we're exploring these opportunities now with our customers.
Our digital equity broadband product, Skinny Jump, is now supporting over 29,000 households, and we continue to invest in community solutions through the Spark Foundation and increased online protection for our customers. We've completed five supplier audits we committed to delivering in the 2023 calendar year. During the half, our scope one and two greenhouse gas emissions were down 8% compared to H1 FY 2023, and people engagement continues to climb. Overall, we're pleased to see that our continued ESG progress secured our ongoing inclusion in the Dow Jones Sustainability Australia Index during the half. So if I stand back and look at the overall result, we've delivered a resilient performance in a tough economic climate while reorienting the business towards our new strategic growth ambitions. Our business fundamentals are healthy and growing, with customer satisfaction up five points and people engagement up three.
With an ongoing focus on cost discipline, investment in new growth, and as signs of improvement in our broader economic environment start to emerge, we are well positioned to build further market momentum in the second half. I'm now going to hand over to Stef to talk you through the financial performance in more detail. Thanks, Stef.
Thanks, Jolie, and good morning, everybody. I'll step you through the key financial summaries for the half, starting with the reported results, where the prior year numbers include a NZD 584 million gain on sale from the telco sale and a NZD 52 million provision relating to the exit of Spark Sport. Reported revenue of NZD 1.98 billion was down 22%. Reported EBITDAI of NZD 530 million was down 49%, and reported NPAT was NZD 157 million and down 82%. I'll now focus on the adjusted results, which exclude the NPATs of telco and the Spark Sport provision. Adjusted revenue, NZD 1.98 billion, was up NZD 26 million or 1.3%. Adjusted EBITDAI of 530 was up NZD 20 million or 3.9%, and adjusted NPAT was NZD 157 million, down NZD 8 million or 4.8%.
So let's actually step through each of the components of the adjusted results in a bit more detail so we can understand the key movements. So first of all, if we start with revenues, will we maintain top-line growth despite the challenging economic conditions? Growth was underpinned by strong performance across key areas such as mobile, momentum in data centers and high-tech, the ongoing stabilisation of broadband, and a return to growth in IT products. In the telco market, mobile service revenues grew by NZD 30 million, up 6%, and NZD 7 million of this growth related to roaming, with volumes now sitting above pre-COVID levels. Service revenue, excluding roaming, grew by 5%, which is also a very strong result and consistent with prior year trends. This was driven by ongoing connection growth in both pay-monthly and prepaid, which grew by 54,000 and 92,000 connections, respectively.
Pleasingly, pay-monthly ARPUs grew by NZD 0.55, highlighting ongoing strong demand for data and the impact of price increases. Within the pay-monthly customer base, we saw ongoing growth in consumer segment ARPUs, which grew 4%, and a decline in enterprise segment reflecting the highly competitive nature of this market. Prepaid ARPU declined by NZD 1.17 as the impact of inbound travelers caused dilution. We saw broadband revenues stabilize with a small decline of 1.3%, which was very pleasing in a highly competitive market and following the path through of rising fiber input costs. Voice continued to decline as consumers shift to alternate technologies and businesses shed lines, reflecting the impact of hybrid working in a tougher economic environment.
As Jolie mentioned, IT product revenue returned to growth, with cloud revenues up 4%, while the IT services market remains challenging, with service management revenues down NZD 8 million or 10%, reflecting lower public sector demand. High-tech revenues grew 13% to NZD 35 million through strong IoT connection growth, and data center revenues grew as the new facility at Takanini came online and is now billing. We also saw a decrease in other product revenue, which was driven by the closure of Spark Sport and offset by growth in Entelar as it expanded delivery of 5G projects and increased distribution customers. So if we now shift to look at costs, where total adjusted operating costs were broadly flat, increasing by 0.4% to NZD 6 million, which was pleasing given inflationary pressure in the market. Product costs declined by NZD 5 million as voice costs continued to decline and we exited Spark Sport.
These declines were partially offset by growth in procurement in Entelar and supported revenue growth. Labor costs increased by NZD 10 million or around 4%, reflecting the impact of wage inflation in a low unemployment market and higher headcount in Entelar as we insourced field service teams to support additional work and new margins. As Jolie overviewed, as part of the operate program, we are redesigning our operating model, and alongside other efficiencies, we are on track to exceed our gross cost reduction target of NZD 40 million-NZD 60 million in FY 2024. With adjusted revenue up NZD 26 million and adjusted operating costs up NZD 6 million, adjusted EBITDAI was up NZD 20 million or 3.9%. While this is an improvement on the prior period, we experienced muted demand in some areas of the business, accompanied by a higher cost environment reflective of the broader economic environment.
We expect top-line growth, which I'll touch upon in more detail shortly, coupled with a strong focus on labor and operating cost efficiencies to deliver improved performance in the second half to achieve our full-year guidance. So if we now shift to the second half outlook, as outlined on page 18, we remain committed to delivering our full-year guidance of NZD 1.215 billion-NZD 1.26 billion. We expect to see growing momentum combined with a seasonal weighting of earnings to the second half and improvements in the following areas. So first of all, mobile, where connections continue to grow and we'll see further positive impacts from the price increases implemented to date. In broadband, we will optimize the margin as input costs are passed through and while broadband continues to grow.
We continue to see growth opportunities for hybrid cloud and data centers as favorable market tailwinds support demand in these areas, and in high-tech as IoT connections continue to scale. Further support for high-tech growth will be provided by MATTR as it moves customers into production, and we focus on growing new digital health revenue streams and expand further into the private sector. We'll implement a refreshed operating model aligned to our new three-year strategy, and alongside other efficiencies, we're on track to exceed our gross cost reduction target of NZD 40 million-NZD 60 million in FY 2024. These improvements will help offset the transition to the new IT services offerings and ongoing inflationary pressures. So now moving to CapEx. So CapEx was heavily weighted to H1 at NZD 286 million as we accelerated investment to gain a fast start on our strategy and continued our simplification and upgrade programs.
Maintenance CapEx increased to NZD 235 million as we continued to invest in IT systems such as our new ERP and better tools to support enterprise service delivery. These tools create the platform to drive greater automation and efficiency across our business. Total spend across 5G and 5G Standalone increased, and we now have 5G in 95 locations, and our 5G core build is on track. The balance between 5G and 5G Standalone will flip as we optimize delivery across the program. We continue to invest in data centers in line with the management framework, but spend in H1 was lower following the completion of the expansion of our Takanini site and while we begin work on the next phase and investigate further land purchases to support our growth strategy.
While spend in the first half was higher, we remain committed to delivering our overall CapEx envelope within the guidance range of NZD 510 million-NZD 530 million. Moving now to free cash flow. Free cash flow for the period was NZD 46 million and down NZD 69 million or 60% compared to the prior year, prior period. The primary driver of the decrease relates to the timing of capital investment that I just outlined, where the balance of spend is heavily weighted to H1. This will reduce significantly in H2. Free cash flow has also been impacted by higher interest costs as we saw higher debt levels and higher rates combined with lease costs paid to Connexa. Looking ahead, we remain committed to delivering free cash flow of NZD 490 million-NZD 530 million.
We'll deliver this through higher EBITDAI growth driven by mobile, data centers, and high-tech, and as we drive the cost base lower through new operating model and ongoing cost discipline. The other key driver will be a lower CapEx spend, which will see total spend for the year in line with guidance. So net debt increased by NZD 759 million, reflecting higher debt levels as we've almost completed the on-market buyback and invested additional CapEx in growth areas such as data centers and 5G Standalone. Net debt during the period has also been impacted by an increase in working capital driven by higher receivables and seasonally higher inventory levels. We would expect net debt to stabilize below 1.7x net debt to EBITDAI. As the buyback completes, we see higher EBITDAI and lower CapEx in H2, and as working capital returns to normalized levels.
In 2023 in New Zealand, NZD 100 million bond matured, and our next long-term maturity is a NZD 125 million bond in March 2024. Accordingly, we are considering making an offer of 250 million of unsubordinated unsecured fixed-rate bonds with up to NZD 50 million in oversubscriptions via our wholly owned subsidiary Spark Finance, and if this proceeds, we expect to release the full details of the offer in the week beginning the 4th of March. So to summarise our outlook for the second half, Spark is well positioned to build further momentum as economic conditions start to improve and as the ongoing demand for data and travel supports our core growth engine of mobile. Our strategy is on track with key digital infrastructure investments accelerating and building a platform for future growth.
Our operate programme is progressing well, with a number of initiatives already underway to create a more efficient operating model and benefits starting to flow through in the second half. A lower balance of CapEx spend in H2 will support the delivery of our free cash flow ambition, and we have reaffirmed our FY 2024 EBITDAI, CapEx, and total dividend guidance. Finally, our business fundamentals remain strong in brand, customer experience, people, and sustainability, supporting ongoing competitive advantage. So lastly, on our confirmed guidance for FY 2024, our EBITDAI guidance remains unchanged at NZD 1.215 billion-NZD 1.26 billion. CapEx guidance remains unchanged at around NZD 510 million-NZD 530 million, and guidance of an increased total FY 2024 dividend of NZD 0.275 per share fully imputed also remains unchanged. So that now concludes the financial summaries. I'd like to hand back to the operator to open the line for questions. Thanks.
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. Yeah, congratulations with the great performance in mobile in particular. First question just on labor costs. You gave some detail on what drove the increases in first half, about 3.7% on the PCP. Should we expect lower PCP growth by the time you get to full year?
Yes, Ari, you should. Part of our operating model redesign is really looking at that labour and what we need to support new investment in growth areas, but also a reduction in areas of the business that are not growing as much. And so we've already seen some of that in relation to our cloud cost reset, for example. But more of that will flow through the second half.
Yeah, great. And outside of Entelar, which areas are getting increased in people at the moment out of the redeployment of some of those gross costs out savings?
I think if you think about data centers, our AI and data investment in terms of and that also helps enable us, obviously, to win above the line, but also in terms of making sure our operating programs within the organization in terms of our OpEx management, etc., are well managed using those tools. And then also converged tech in areas like that where we see new opportunities for solutions for customers.
Sure. Yeah, just turning to high-tech. Look, and I know you're not overselling it in terms of how quickly it will get to scale, and it's great to have the visibility. But gross margin dollars, there remains flat on, I guess, a moderate level of revenue growth. So at the moment, in terms of what's happening in the early stages, what's sort of driving that lack of gross margin sort of leverage in that business? And also below gross margin, what sort of investments going on and what sort of quantum of labour cost growth are those businesses getting?
So I think if you break it into the different component parts within the high-tech IoT businesses, there's much more mature and established and got substantial growth in revenue and earnings each year. And then we've got businesses, for example, like MATTR that we're investing in. We also have Qrious within that business. And for example, in the Qrious scenario, that is impacted by some of the economic environment we've seen, so slow down some of that demand around more professional services type work and digital transformation. So there are a number of different themes running through that when you look at the components that were in that. In terms of investment, from a high-tech converged technology component, it's early stages. And to your point, we're not looking to oversell that yet. Over the basis of the three years, we look to see that grow.
We already have the MPI solution in marketplace from the fishing boats, for example, and we're also looking at water quality, some of the road. So there are a number of different elements that we're investing in there. If you stand back from the labor growth too, when we look at that, a component of that also includes insourcing as well, so around some of the field services around Entelar. So when you stand back and strip it all apart, there are a number of moving parts in there, but what you should probably just take from our discussions here today is that there is a focus on making sure we're bringing that back in balance and that it sustains business ahead.
The only other thing I'd add is from.
Just the last.
Sorry, Arie. The only other thing I'd add is from an investment perspective, clearly the investments we're making in 5G and standalone really set up a lot of the foundation for these. So this is the making sure that we've got then the teams to support the product as they come online as well, so it doesn't require a lot of additional capital investment.
Sure. Yeah, I mean, just a last one, I guess. You mentioned Qrious, MATTR. I mean, those aren't new area. You've been in those already for a reasonable amount of time, sort of not signalling that they'll be doing necessarily a lot in this sort of FY 2026 plan. What are the things that you're doing just to test just how long you're willing to, say, stay in something like MATTR?
I think, for example, in MATTR, it's obviously just moved more recently into commercialization. We've had the New South Wales government signed last year. And so as they move towards production, that allows us to grow those businesses more. And so we see that as a longer-term build around the global opportunity for that business. I think in Qrious, I think it's more a factor of the current economic environment, not that necessarily we don't see that it's delivering good revenues for us. It is. It's just in terms of the growth versus the previous half, we've seen some of the impacts there around professional services particularly.
That's cool. Thanks. And then last one is just on Connexa. We're not expecting much sort of initially in the first year or so, but when will they start building towers under your build commitment?
So I can pick that up. They are currently build programs underway. As you would expect, when you're standing up a new business and a new operating model, it starts with smallish volumes and then ramps up over time, but they have delivered some of the first towers already.
Yeah, so that is in ramp-up. So I guess just to get a bit of a guide, and I guess you're not cycling a PCP with the full Connexa transaction having gone through, but across interest and principal, cash lease costs, that went up NZD 15 million on the PCP. Can you give us a bit of a guide to what sort of level we should expect to see in cash lease growth over the next couple of years, particularly with that build commitment now sort of starting to come through?
I would think about it as relatively modest over the first couple of years and more kind of aligned with inflationary pressures, kind of. So moving it more aligned with inflation, yeah.
Yeah, okay. So yeah, so the build commitment, even though it's underway, it's not going to be putting a lot of upwards pressure on the lease costs, at least in the next couple of years.
No, I mean, if you really try and stand back from it, I think the impact at impact is actually relatively neutral because what you have is avoided depreciation because you don't own the towers anymore. You have lower interest because we've got some of the proceeds in, and then that's sort of effectively replaced with those lease costs. And then to your point, Arie, then that kind of grows modestly over time. The bigger component of the build program is a couple of years out, so that next couple of years, it's not a substantial benefit to it.
Okay, thanks. That's all from me. Yeah, thanks a lot.
Thanks, Arie.
Your next question comes from Entcho Raykovski with E&P. Please go ahead.
Hi, Jolie. Hi, Stef.
Hi, Entcho.
My first question is on free cash flow. I know you've got your usual seasonal skew towards the second half, but it does feel pretty substantial this year. I'm just interested, apart from the lower CapEx, are there any other items that are driving that second-half free cash flow skew? Are you perhaps now less confident you can achieve that full-year aspiration than you were back in August, or do you have pretty good visibility around the second half?
The key driver is really the improvement in EBITDAI. And so the way I think about it is it breaks down some of this we've noted, but just to bring it all together into one place, it breaks effectively into three parts. So first of all, you've got a seasonal weighting to the second half. We invest marketing and acquisition costs upfront. The customers come on board, and then you get the benefit of them in the second half. If you look at then the revenue trends, there's ongoing strong growth in mobile that will continue to deliver, plus the impact of the price increases already implemented. There's growth in IT products, which previously in the prior year had been in decline. And then you've got things like data centers, which also went in the prior period. So that comes along online to help provide that revenue trend.
And then the third component is the work we're doing on the operate program around cost. And so the new operating model, some of the interventions we've made have actually been executed already to date, and that will see the benefits, while they're only modest in the first half, starting to flow through more into the second half. And that's what gives us the confidence around the lift in EBITDAI into the second half. And when you combine that then with the substantial reduction in CapEx, that's what supports that strong second half and the free cash flow.
Okay, great. Maybe to pick up on your comment around productivity and the gross cost out target of NZD 40 million-NZD 60 million likely to be exceeded, what are the areas where you've seen a better outcome over the past six months?
I can pick that up. There are a number of things, opportunities that we are looking at. To give you some examples, we have redeveloped or redesigned our cost model that supports our cloud operating model, so making sure that we move to a lower-cost operating model and effectively taking some of that fixed cost and moving it to make it more variable in nature. We've got ongoing investment in automation, which is supporting efficiency. Some of the capital spend that we've invested in drives simplification, which in turn allows greater efficiency across our people. And we've got more digital journeys coming online. It's a combination of all of those factors combined with the operating model review, which effectively drive us to have the confidence in exceeding that NZD 40 million-NZD 60 million.
When you say exceeding, I assume it will be modestly in excess, nothing significant?
We're not going to give specifics, but we are confident that it's a meaningful change.
More the modest.
Yeah.
More the modest. Okay, great. Thank you. Final one, you've obviously spoken about the Hyperscale data center campus you're intending to pursue. How do you think about the ability to generate the 9%-10% return that you're targeting? I mean, I'm just conscious it's always more difficult to get those sort of returns from hyperscalers. So do you think that's achievable? And I mean, do you need some of that external financing that you've spoken about? It was always sort of alluded to in order to get to that target.
Well, when we talk about hyperscale, we're talking about sort of the size and scale of the type of data centers we're building, and they can be a combination of different customers included within those. If you look at our portfolio that we've got in place already, 88% of our customer or capacity is committed. So it's contracted. It has clear revenue pathways and the ability for inflation-driven price increases within that. So we have quite a clear view of what that looks like in terms of ahead. And that's what we've laid out in terms of the data center revenues, for example, for this year. But as we look ahead, we'll be taking the same type of approach to that as well.
Great. Thank you.
Thanks.
Your next question comes from Aaron Ibbotson with Forsyth Barr. Please go ahead.
Yes, thank you. Hi there. Good morning. Just a couple of small ones from me. So first of all, and you may have talked to this before, but on the data center returns of 9%-10% over time as utilization scales, first of all, what exactly do you mean by returns? And secondly, could we get some sort of IRR equivalent, which I'm sure you have, because it can take a little while to scale, particularly if you include the build process? That's my first question. Thank you.
When we talk about returns, we're meaning effectively net operating profit after tax over around the invested capital. That's what we target for that 9%-10%. In terms of an IRR, Aaron, why don't we take that offline? I think that's probably the best approach.
Okay, but can you confidently say that you believe your IRR is above your WACC or cost of capital?
Well, that's why we set that return base of the 9%-10%, effectively allowing for a risk premium to sit above our WACC. So yeah, that's certainly one of the ways in which we look at it to make sure it is above WACC.
But if I include a four-year or five-year scaling period on our 15-year or 20-year investments, I don't get to well, there's very little headroom between WACC and what that IRR is. But we can take it offline if you want. I'd prefer if we took it on the call, but that's okay. Secondly, just on yeah.
No, keep going, Aaron.
No, I'm going to next question, so.
Yep, yep.
Just on Connexa, just wondering if you could what was the contribution negative, I assume, in this first half? And could you give us any sort of steer on where you think it's going to be in the second half and maybe the first year or so next year?
It sits within our share of losses, and it's a combined amount that we put in there. It's around NZD 5 million, and it relates to both Connexa and RCG. The line share of that relates to the Connexa impact.
For our ownership interest.
For our ownership interest of it, yeah.
Is that a run rate we should expect over the next few periods, or is this just startup costs, basically?
I think that's more in the range of startup position. You would expect that to improve over time. So they're not going to want to run at a loss on a long-term basis.
Okay. Finally, just a little one on imputation credits and how confident you are about imputation, fully imputed dividends going into sort of FY 2025, FY 2026. Your EPS is running quite a bit below your DPS, so just trying to get some sort of visibility on your thinking going ahead for that.
So for 2024, obviously, we've reconfirmed that it's 100% imputed. If you look up then on the long term, our capital management framework says that we look to grow free cash flow to support the payment of dividend, and that's the basis in which we approach it. But we're not going to be able to give you long-term guidance around what those likely imputation levels would be because that's a conversation for the board based on the appropriate dividend level at the time.
Okay, final one just from me on seasonality. So you delivered 43%, I think, of your midpoint of your EBITDAI guidance in EBITDAI in the first half, similar to last year. This is sort of even higher, if I put it that way, seasonality than historically. And for some reason, I thought it was going in sort of slightly the opposite direction. So I was just curious if you could talk a little bit to if this is sort of a new normal or if it's been something unusual this year around the seasonality.
I think Stef touched on the sort of drivers of what drives the H2P standbacks as a new normal. There are some elements that start to shift when you think about licensing and things like that. A lot of those are weighted to the first half in terms of more of the payments. When also you think about the economic environment we've had in the last half, that has probably had a bigger impact on some of that seasonality. But as we have moved through election and uncertainty that sits around that, I think then we're starting to see more of that confidence. And then just the nature of the activities we have from an operating model cost perspective, that's what also gives confidence in the second half.
Okay, thank you.
Thanks, Aaron.
Thanks, Aaron.
Your next question comes from Brian Han with Morningstar. Please go ahead.
Hi. On the cost-based reset that you did for the cloud business, would that kind of cost-based review extend to other areas such as IT services management and digital health?
Yes. If you stand back from the overall operating that will look at the whole business. When you think about service management and what we've done some work on at the end of last financial year and the beginning of this financial year was a new product offering that is currently out of market in terms of being shared with customers, which will lead to, in the medium term, greater kind of automation, etc. So therefore, reducing cost-based but also a service that meets their needs. So we're seeing strong interest in that. And I think as those revenues start to come online, you'll see that shift there.
Overall, everything that we look at when we look at OpEx model, we'll look at all components of what's cost-based that you need to deliver the revenues that are available, and have we got the right mix there?
Jolie, on digital health, though, the fall in its revenue, how much of that do you attribute to cyclical factors, or do you think there's something fundamental that changes you weren't expecting?
No, if you stand back from it, it's really around some of the—if you think about the New Zealand health sector—significant amount of this that comes from Te Whatu Ora, which is the whole New Zealand health authority, effectively, with the DHB, what used to be the former 20 DHBs. So they have been undergoing a bit of changes, obviously, being the uncertainty around election. We expect, if you stand back from digitisation of government, that's still going to occur and need to occur. And health is absolutely in the area that that needs to happen. Equally, there are other opportunity areas when you look at the private health sector, too, in terms of private hospital, primary care, and community-driven health providers that we see opportunities ahead.
So it's more around the nature of the economic environment, the shift in uncertainty, while, like you have in any country when you go through an election, then as we move into this new phase, we expect to see that revert.
Okay. Lastly, Stefan, the 0.4% increase in OpEx, is that adjusted for the Spark Sports exit on a life-for-life basis, or does the prior period include Spark Sports costs?
It's not adjusted. The prior period does include those costs.
Provision from past is a provision that was accrued on exit, which sits outside of that. But the actual ongoing costs, which you can see if you look at the causes of change charts, I think in the deck, you'll see in other product costs called out there.
Yeah.
Right. Okay. Thank you.
Thanks, Brian.
Thanks, Brian.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Phil Campbell with UBS. Please go ahead.
Yeah, morning, Jolie. Morning, Stef. Just a couple of questions from me. I suppose on the data center business, you obviously have kind of talked about a kind of target ROI, 9%-10%. Obviously, you're spending quite a lot of money on 5G and standalone 5G. Is there any way we can kind of work out what the kind of return's going to be on that spend? I suppose just for the moment, it's probably not as obvious in the market as to products coming through on that side. So I'd just be interested in your views on that.
I think if you stand back and sort them into two different areas. So 5G obviously supports the mobile revenue that we help deliver, and 5G offers much greater capacity than 4G. Data continues to grow at exponential rates. So if you weren't investing in 5G, you'd be investing in 4G. So think about it in that way. The standalone component, obviously, helps with more of the converged, which is still early days yet in terms of that. And until that's rolled fully, in terms of network slicing and those components, you won't see that till then. And equally, you wouldn't see a price premium until you have a ubiquitous sort of 5G service across the country. So it's effectively a, I guess, work in progress as the rollout continues within that.
I think on data centers, you're starting to see the revenue growth there as we complete, and they immediately come online, which happened in August, and you can see the revenue uplift there. For any of the new builds that we have planned in terms of the build commitments that we have, again, we have customer commitments within that. And when you're sitting at 88% utilization, that means there's a fairly reasonable view in line to the revenue that follows.
Great. And maybe just coming back to the seasonality question because obviously, last year, we all got a bit of a surprise with that first half, second half skew, and obviously, there were some reasons for it. I suppose we were kind of forecasting a bit more normalization this year, but it seems to have been, as Aaron pointed out, kind of similar to last year. So I was just kind of interested in your views on what's causing that because obviously, the gross margins were lower than what we're going for. They're obviously better than the PCP, but they were definitely lower than the second half. So I'm just kind of interested in your views and kind of the impact of this half, the economy kind of versus competition and kind of versus seasonality. Just get a flavor for what.
I think it could be driving those kind of lower gross margins. Stand back and just break them into the components. Mobile, obviously, performed well, and particularly in a consumer sense in terms of growth and in the pricing flowing through. You did see in our mobile non-service revenues, the handsets and things like that, we did have impacts there where you saw a more subdued retail environment, particularly as you lean into the back end of the year, Christmas, etc. So that flows through and has an impact. Voice, while falling at sort of levels that we don't expect that to shift, it did accelerate slightly in the half, so that has an impact from a margin perspective overall. And then really, it's just for us as we look ahead about the work that we do on operating model, often falls into the second half.
And so making sure and as we're thinking about the end of this FY and the year ahead, we're trying to actually make that shift to more sustainable shifts earlier. I don't know if there's anything else you want to.
Maybe the only things would just be, I guess, you really notice the impact of the economic environment on areas like IT services and areas like Jolie has previously spoken to. That is where it was most evident. And certainly, you can see it in the result. Yeah.
Gotcha. And I suppose just if you looked to kind of monthly trading going through the half and then coming out of the half into the second half, I think there was a comment in the result talking about maybe economic conditions looking a little bit better. Is that in relation more to the IT services or enterprise space, kind of post-election, are people feeling a little bit more confident? And you actually are seeing that in the January, February, or maybe February trading?
Yeah. Well, I'm not getting into current period tradings. But what I would say is in any country where you go through an election, there's always uncertainty with it. And as that gets clearer around what's happening, what that looks like and people from a project point of view and investing in those components, we're seeing that. And just generally, I suppose, as inflation starts to drop a little bit - I know it's not fully down - yeah, we're comfortable with what we've obviously affirmed in terms of guidance and our look ahead.
Maybe just one last one from me. Just not a lot of commentary in the pack, just on competition. Just interested in your views kind of across some of those key segments, how the market's going, how competitive it is, or how rational it is.
I think from a mobile perspective, it's always a competitive marketplace. Our share was 44% for our service revenues. I think if you looked across kind of the broad base, it was fairly similar for most, maybe slight pickup in 2degrees. One was pretty stable. And then if you looked at broadband, again, sort of similar level share, more movement between the smaller components within that. So market competition remains competitive, but probably haven't seen a significant increase or change in anything.
Gotcha. Great. Thank you.
Thanks, Phil.
Your next question comes from Kane Hannan with Goldman Sachs. Please go ahead.
Morning, guys. Just sorry as well. Just the mobile service outlook, you obviously spoke to a lot of comments around the second half outlook on what's going to drive that. Is there any reasons we should think about that slows the service revenue growth back to that 5% target, or on track means that 6, 6 and a half would be how you'd consider on track?
I think some of the things to consider around roaming, for example. You really had a lot of those revenues come back into the comparative period. So I think we're now sitting largely at about 107% of where we were pre-COVID, so quite a high level. I think that's unlikely to continue to expect a high level than that, although I could be surprised if more inbound airlines continue to return to the country. But certainly, from an outbound perspective, it's sitting pretty high. I think in terms of you've always gained connections in the first half, and that tends to lead through to in the subscription business continued growth in the second part. And then price increases as you see the flow-through of them throughout the whole period. So some of those occurred late in 2023, but some occurred in the first half of 2024.
So you'll have a full-year impact of that.
Yep. That's helpful. And then just, I suppose, consumer and business telco trends. I mean, I think the mobile consumer performance was relatively stronger. The business broadband subs fared a bit better. So maybe just if you could talk about the dynamics you're seeing across those markets, how the macro's impacting them. I think you called out a bit of enterprise competition on the mobile side would be helpful.
Yeah. So in terms of mobile, particularly when you look at pay monthly, in business, what you do see is and it has been for quite a long period of time a more competitive space. So while we've powered and grown connections there, the ARPU has declined in line with that. And we're also seeing a little bit of shedding of some lines where there's multiple connections in a place. They're not losing a customer altogether, but that whole entirety economic environment, just standing back and looking at that. So business sort of reflects more of that, a tougher price competition area than we've seen consumer.
And then on prepaid, we've seen a lot of travellers returning to the market, which has an impact to wins as well in terms of because the base growth status quo was there, but sometimes they're on more casual rates or lower rates. And I guess also with a tougher economic environment, some of those prepaid, too, have moved more to casual versus being on monthly plans, but in a small percentage. So I wouldn't want to overcall that. And then in terms of broadband, not a huge amount of shift in the consumer marketplace. It's sort of as competitive as it has ever been. We did talk about the price increases that we took, which at the back end of 2023 for the changes that were coming through from input cost increases, which have been executed.
And we will continue to look, I guess, as the year ahead as we move towards the 2025 year around what might be required there as well. So there isn't a huge shift in dynamic in that broadband area. It's the normal. And obviously, copper decline continues to occur. The shifts between fiber and wireless are occurring. And just seeing that base sitting at 31 odd percent at the end of the half.
That's great. And then the cost out. So on track to exceed the target this year. I mean, do I think of that as a pull forward of those 26 targets you had out there, or is this sort of incremental savings that are coming through with the drivers you were talking to?
I think it'll be a combination of when you look at that whole pool over a three-year period, what are we doing now versus what are we doing later. But some of it will also be just as you shift, and knowledge of the environment you're in, the cost basis you're going to pull. Yeah.
Perfect. Thanks, guys.
Thanks, Kane.
There are no further questions at this time. I'll now hand back to Ms. Hodson for closing remarks.
All right. Thank you, everyone, for joining us this morning, and have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.