[Foreign language] Good morning, thanks to everyone for joining us here today for Spark's full-year results. Naturally , not the day we expected it to be, following last night's alert level 4 lockdown announcement for New Zealand. Like most businesses, we've got used to adapting pretty rapidly. With me today on the call is Spark's Finance Director, Stefan Knight. As always, we're going to leave some time at the end for questions at the end of the presentation. If I shift now through the environment we've been in. During the year, New Zealand experienced a stronger-than-expected economic recovery, with low unemployment and GDP back in growth. This moderated the anticipated impact of COVID-19 on Spark in some areas.
However, with the borders still largely closed, we continued to be impacted by the loss of roaming, lower overall growth in the broadband and prepaid markets, and increasing talent scarcity. This, along with some one-off costs, meant top-line revenues were down 0.8% year-on-year to roughly NZD 3.6 billion. That decline masks a strong underlying revenue performance, especially in our established markets of Mobile and Cloud, security, and service management, which I'm going to touch on shortly. When that momentum is combined with our disciplined cost management, we were able to deliver FY 2021 EBITDA growth of 1% to NZD 1.124 billion, and that was at the top end of our guidance range.
NPAT declined 8.6% to NZD 384 million, driven by higher depreciation and amortization costs as we invest in a greater share of digital products with shorter asset lives and an increase in tax expense as we cycle the one-off reductions experienced in FY 2020. Resilience in our customer demand for our core services and disciplined cost and capital management mitigated the impact of loss of roaming on free cash flow, which decreased 1.1% to NZD 433 million during the year. This enabled us to declare a total FY 2021 dividend of NZD 0.25 per share. That's 100% imputed for our shareholders. At our half-year results, we announced a review of our infrastructure assets, and today we're going to share the outcomes of the first phase of that review, including two significant investments planned for FY 2022, our accelerated 5G rollout, and an expansion of our data center capacity.
We have also identified further opportunities to drive value from the passive components of our mobile network and fiber. I'm going to speak to that in more detail shortly. If I just focus now on the established markets, as we outlined on slide seven. Particularly proud that we were able to grow Mobile service revenue 0.5% to NZD 852 million, even when you take out that significant loss of roaming revenues. Stripping back that impact, Mobile service revenues grew a healthy 4.3%. We also grew our mobile market share and revenue share by 1.1 percentage points to 41.5%. Our focus on generating deep customer insights through data and analytics supported this growth and an 89% increase in Endless mobile plan adoption. The broadband market did remain challenging, with lower overall market growth, continued competition, and pricing pressure leading to a 1.5% revenue decline to NZD 670 million.
As a result, our wireless broadband growth was below our target for the year. We did see momentum pick up in the final quarter, finishing the year with an increase of 19,000 connections. We remain committed to our long-term target of 30%-40% of our broadband base on wireless, and the acceleration of our 5G rollout will support that goal. We are targeting the bottom end of that range by the end of FY 2023, given the slower rate of growth. Cloud, security, and service management revenues grew 5.5% to NZD 443 million, as businesses continued to digitize and transition to cloud-based solutions. We saw particularly strong performances in service management and collaboration, and our data center expansion that we'll speak to shortly , will continue to support our growth in this market.
We've made strong progress in building the core capabilities we identified in our three-year strategy as critical to our competitive advantage, and we're already seeing this translate into improved customer experiences and growth in the market. We're a simpler business than we were a year ago. We've invested in improved digital customer experiences, supporting a 32% increase in digital sales and changing customer journeys. We retired 210 legacy mobile and broadband plans that added complexity to our business, and overall, that's about a 30% reduction in those plans. A key enabler of better customer experiences is having a deep understanding of what our customers need and when they need it. We finished FY 2021 with a robust data capability that is providing us with that insight, and that helped to increase our marketing efficiency by 16%.
Our long-term investment in culture is paying dividends, with 86% of our squads now scoring 3.5 out of 5 or above for their agile maturity. Our employee engagement continued to grow up 10 points, and strong progress against our inclusivity goal, with 42% of senior leadership roles, and that's beyond the leadership squad and board, now held by women. We continue to invest in the smart automated network that underpins our success in the market. With 5G launching in nine locations, rural connectivity expanding, and improved automation and resilience of the Optical Transport Network, Spark's fiber backbone. Now I'm going to turn to the infrastructure review. In February, we announced a review of our infrastructure assets, and that was the aim of giving greater capital efficiency, increased resilience, and better customer experiences.
We've now grouped our assets into three classes based on their strategic importance and the role in providing resilience to guide our future investment decisions. Class 1 assets are important for competitive advantage and resilience and include the active components of our mobile network, multi-access edge compute, our critical network exchanges, and data center capacity. We will invest in these assets for growth. When combined with our spectrum holdings, our active mobile assets are currently an important enabler of our competitive advantage. There's plenty of opportunity for us to leverage these assets further in the future, as our 5G rollout opens up new commercialization opportunities and expands the addressable base for wireless broadband. Approximately 10% of our network exchanges are critical sites. They provide resilience and will become future multi-access edge compute nodes.
Our data center capacity supports our ability to participate in a growing cloud market and creates cross-sell opportunities across our broader IT and managed services portfolio. Based on the strategic significance of those Class 1 assets, we are today announcing two significant investments in FY 2022. Firstly, we are going to be accelerating our 5G rollout. We are already moving at pace, but with the rapid shift from physical to digital as a result of COVID-19, and the potential for 5G to open up new use cases for businesses to transform, we see a real potential in bringing the next generation of mobile technology to New Zealand even faster. In FY 2022, we will invest an additional NZD 35 million into 5G, bringing our total investment in mobile connectivity to NZD 125 million for the year.
That means by the end of the calendar year 2022, we'll have upgraded half of all Spark towers nationally to 5G, and by the end of calendar year 2023, approximately 85% of our towers will be 5G, in turn delivering 90% of population coverage. These forecasts assume the necessary spectrum is made available by the government. We've also identified an opportunity to upgrade our Mayoral Drive exchange. We intend to invest in approximately 10 MW of additional capacity at our Takanini Data Center, which will make it the largest in New Zealand once completed. We are in advanced negotiations to contract at least 60% of this capacity. Combined, our accelerated 5G rollout, exchange upgrade, and intended data center capacity expansions mark a significant investment into New Zealand's connectivity and resilience and position us to capitalize on the strong momentum we have in our established markets of mobile and cloud.
Moving now to the Class 2 assets. These assets are important for network resilience and include our regional and local network exchanges, our stakes in subsea cables, and our satellite station. We want to optimize our continued investment in these assets. Our regional and local exchanges can be grouped into two categories. Those that enable resilience and house our modern technologies, and those that hold our legacy technologies and are not part of our future roadmap. We'll continue to invest efficiently in our exchanges that enable resilience and will progressively exit our legacy exchanges over time as we retire those older technologies. We do not expect the proceeds of these sales to be material. We intend to maintain our long-term shareholding in subsea cables, recognizing the value and shared ownership of key data transport assets that provide international resilience.
Finally, while our satellite station has lower strategic value currently, it also provides resilience and has potential future value as the satellite market grows , and we'll therefore retain this asset. I now move into the Class 3 assets, including passive mobile and fiber, which we've identified as assets that can be shared. To be clear on the difference between Class 1 assets and the active components of our mobile network, and Class 3 assets and the passive components of our mobile network, we define active as anything in our core network , as well as radio equipment that creates the mobile network, including the antennas. These assets leverage our spectrum holdings, providing differentiated customer experiences and supporting our wireless broadband aspirations, and therefore provide a competitive advantage. Passive towers are the physical towers that support the active equipment, so they include standalone macro towers, rooftops, and lampposts.
These assets do not provide a significant competitive advantage. We have approximately 1,500 mobile sites with an occupancy ratio of 1.07. We've got fiber assets with large amounts of overlap across the broader industry in a highly competitive market. We'll therefore explore opportunities to maximize the value of our passive infrastructure assets through efficiency, increased utilization, and exploring shared ownership models. You'll note that there have been a number of international precedents across a range of models demonstrating that this can be an effective way of managing our assets and returns. We're exploring all of the options available to us and having ongoing discussions regarding this opportunity. I will note, however, that it is very early days and there is no certainty that any transactions will proceed. We plan to provide a further update at our half-year results in February.
We will update the market earlier if there is anything more material in the interim. Moving now to progress in our future markets as outlined on slide 16. We saw solid IoT connection growth of 83% with over 450,000 devices now connected across a range of industries, including utilities, health, and logistics. The launch of our new innovation studio in Auckland is improving understanding of IoT and is also driving better uptake in businesses. Through Spark Health, we're supporting the digitization of the healthcare sector and grew cloud, telecommunications, and collaboration revenue 10.6% off a large base. We've selected a vendor for the development of our digital health platform, and we're targeting a launch in Q1 of FY 2022. Spark Sport delivered its first cricket season in partnership with New Zealand Cricket, with 99.9% platform availability and a positive reception to the new production format.
We've continued to build our content, introducing a pay-per-view model, e-sports, and securing the exclusive New Zealand rights to UEFA Champions League and the Rugby League World Cup. Our focus will be on partnerships to drive access to additional premium content, subscription growth, and improved returns, and you can expect our future investments to be consistent with current levels. The core pillar of our three-year strategy is to create a positive digital future for all of New Zealand, and we set strong sustainability foundations in the business in FY 2021. Boosting digital equity remains a key focus, and we grew connections to our not-for-profit broadband product, Skinny Jump, by 58% during the year, surpassing 15,000 connections by year-end.
We are focused on playing our role to support New Zealand's transition to a low-carbon economy, both through taking meaningful action to reduce our own impact and by harnessing the power of technology to support environmental improvements in others' businesses. We introduced a new environmental policy and assessed our climate change risks and opportunities across the business , aligned to the TCFD. We set a science-based emissions reduction target that has received approval from the Science-Based Targets initiative. It is an ambitious target, but achievable over time. With 80% of our emissions generated through electricity, New Zealand's transition to a greater share of renewable energy generation, alongside our own investments into energy efficiency, will be the focus. Lastly , now, if I turn to our FY 2021 indicators of success.
We are pleased to have met or exceeded the majority, growing our position in established and future markets, building the capabilities that will set us up for long-term growth by increasing our competitive advantage and maintaining our cost discipline, and building a sustainable future. As I've already noted, the overall broadband market remained challenging from a competitive perspective and experienced lower overall growth, which had a flow-through impact on our wireless broadband target, as well as our Skinny Jump connection target. While we did see some improvements in our customer experience in FY 2021, we did not hit our target of an 8-point lift. This was due to a combination of more frequent than usual weather events impacting our networks and systems, a change to our operating model, creating some short-term disruption, and higher-than-anticipated attrition in a tight labor market.
Over the second half, we've seen a steady improvement in customer experience, and a number of recent digital journey enhancements are delivering satisfaction scores almost double those of our traditional voice channels. This remains a focus in FY 2022. I'm now going to hand over to Stefan, who'll take you through the financials. Thank you.
Thanks, Jolie. Good morning, everybody. It's my pleasure to skip through the full-year results for FY 2021. Starting with a summary of the key financials, as set out on page 20 of the result presentation. Spark generated revenue of NZD 3.593 billion, which was down NZD 30 million or 0.8% on the prior year. We're really pleased to announce EBITDAI of NZD 1.124 billion, which was up NZD 11 million or 1%. NPAT of NZD 384 million was down NZD 36 million or 8.6% as depreciation , amortization , and tax expense growth. Free cash flow of NZD 433 million was down NZD 5 million or 1.1%. We've confirmed the H2 FY 2021 dividend at NZD 0.125 per share, fully imputed and in line with guidance. Now , let's skip through some of the key elements in a bit more detail so I can provide you with some more color.
Let's start with an overview of the key movements in revenue as outlined in the FY 2021 operational performance section of our presentation. While top-line revenues declined due to the ongoing loss of roaming, underlying revenue growth continues to be driven by our two key established markets of cloud and mobile. In Cloud, security, and service management, we saw revenue growth of NZD 23 million or 5.5% as we supported businesses on their digital transformation journeys. The growth in service management was primarily due to increased demand for managed as a service propositions, and especially our desktop management offerings. We experienced slower growth of NZD 4 million in cloud as we see the price implications of a change in mix, with growth in public cloud partially offset by lower private cloud revenues.
In Mobile, revenues grew NZD 23 million or 1.8%, of which NZD 19 million was due to increased handset and accessories revenues. Service revenues grew NZD 4 million or 0.5%. However, this included the loss of roaming revenues, and when you exclude that impact, underlying service revenues grew by 4.3%. We're very pleased with our sustained and strong performance in mobile, which was driven by growth in our pay monthly customer base of 56,000 connections and ARPU growth of NZD 0.81 or 2.9%. The growth in ARPU reflects customer demand for more data and the benefits of our precision marketing efforts. Our Voice revenues were down NZD 78 million or 20.2%, and that reflects the non-recurring refunds of NZD 16 million for historic wire maintenance charges. Connection declined , and lower usage as Voice becomes a smaller part of our business.
Our Broadband revenues declined NZD 10 million or 1.5%, reflecting lower overall market growth and the very competitive nature of the broadband market. Other gains of NZD 28 million were down NZD 7 million from FY 2020, and were mainly generated from the sale of mobile network equipment and gains on lease modifications as we renegotiated some of our property leases. When we look forward to FY 2022, our ambition is to return to revenue growth by maintaining the momentum we have in our established markets and continuing to grow our customer base and share of wallet in our future markets of Health, IoT, and S port. We expect Mobile service revenue growth of around 2%-4% and Cloud, security, and service management revenue growth of around 5%-8%. Shifting focus to now look at our costs.
Entering the year with the uncertainty that COVID-19 created, we knew that cost management would be key. As such, we implemented an accelerated cost reduction program to mitigate the COVID-19 impacts. As a result of the cost reduction program and the ongoing shift to digital customer interactions, we saw operating expenses fall by 1.6% to NZD 2.469 billion. The cost reduction program drove lower costs across product marketing and our general OpEx. Our product costs fell by NZD 4 million, and that was driven by declines in Voice and in Broadband as our wireless broadband base grew. Our other product costs fell versus the prior, which included the cost for Lightbox that's been divested. Those declines were mostly offset by increased costs in mobile and Cloud, security, and service management that supported our revenue growth.
Labor costs fell by NZD 20 million or 3.9% as services transitioned to digital and customers accessed an expanded range of self-service options. We also saw a lower bad debt expense as the impacts of COVID-19 on our collections were less than expected , and provisions we'd raised in FY 2020 were able to be released. Also , as we start to see the benefits from investments we've made in biometrics and automation. Looking forward, we continue to see opportunities to drive efficiency in our cost base as we transition to a digital services provider and maintain our long-term focus on sustainable cost reduction. As a result of the cost reduction program, the decline in operating expenses was more than the decline in revenues, and EBITDAI grew by NZD 11 million or 1% to NZD 1.124 billion. Within the result, we estimate the COVID-19 impacts of around NZD 40 million.
As previously mentioned, the most significant impact was roaming. At the half-year result, we'd indicated that the impact of COVID-19 was expected to be around NZD 50 million. However, with a lower bad debt expense than anticipated, it has resulted in a NZD 10 million lower impact. As we look forward to FY 2022, we expect to see a modest improvement in roaming revenues, noting limited travel bubble openings with Australia, which is currently paused. While EBITDAI grew by NZD 11 million, the increase in depreciation and tax expense meant that the impact fell by NZD 36 million or 8.6%. Depreciation and amortization were NZD 13 million higher for property, plant , and equipment and intangibles, reflecting the shorter asset lives, and NZD 22 million higher for right-of-use assets and leased customer equipment assets due to increased customer and commercial lease activity.
Our tax expense was up NZD 21 million due to one-off decreases in tax expense recorded in the prior year for depreciation allowances being reintroduced for commercial buildings. In FY 2022, we expect total depreciation and amortization expense to be broadly flat. We also expect tax payments to normalize and , therefore , expect to see NPAT improve as EBITDAI grows. Moving now to CapEx and free cash flow. FY 2021 CapEx was NZD 354 million excluding spectrum and NZD 405 million including spectrum. Our CapEx spend during the year was heavily focused on improving capacity and resilience across our key infrastructure assets. We've now rolled out 5G to nine locations , and our investment in the Optical Transport Network, which is the fiber backbone of our network, has provided us with an increase in capacity of five times that of the existing OTN and with greater redundancy and resilience.
We continue to invest in our converged communications network, which shifts all of our services to IP and provides the foundation for our exit from the legacy PSTN. In FY 2022, we expect to spend around NZD 400 million in CapEx again, with no spectrum requirements in FY 2022. We'll focus on investing in infrastructure that supports New Zealand's connectivity and resilience. As a result, we've committed an additional NZD 35 million to accelerate our rollout of 5G, which will see NZD 125 million of our envelope committed to mobile connectivity. We'll also increase our spend on data center capacity with a modest level of investment required in FY 2022 to support development at Mayoral Drive. We are planning for further investment in FY 2023 and in FY 2024 related to a new development in Takanini.
We expect to be able to maintain this within our 10%-11% CapEx to sales ratio, albeit at the top end of that range. Free cash flow for FY 2021 was NZD 433 million, which was down NZD 5 million on the prior year. This includes the impact of an increase in our tax payments of NZD 48 million, reflecting the timing of higher provisional tax payments under the uplift method. The increase in cash tax payments was able to be offset due to the continued focus on managing our working capital and strong cash conversion. Free cash flow, when combined with the DRP, is sufficient to fund the total FY 2021 dividend of NZD 0.25 per share and the renewal of our 1,800 and 2,100 MHz spectrum.
For FY 2022, we continue to focus on funding the dividend from free cash flow and aspire to achieve NZD 420 million-NZD 460 million. That will be supported by our targeted return to revenue growth. The impact of the steady free cash flow and the strong DRP participation meant that net debt reduced by NZD 46 million. Our reported net debt to EBITDAI ratio was 1.16 x, within Spark's internal threshold of 1.4x and consistent with S&P A- credit rating. Moving on to our FY 2022 indicators of success. To help investors monitor progress, we've laid out the critical factors that will influence business performance and free cash flow , and report on the progress of these at the half and full year. The indicators of success are aligned against our strategic pillars. You can understand the progress we're making towards the delivery of our three-year strategy.
The majority of them are self-explanatory and consistent with the success factors we have laid out in the past. I will, however, draw your attention to the wireless broadband target of 15,000-20,000 growth in FY 2022. I know this is of high interest. The target represents growth of a similar level to FY 2021. As Jolie stated, while we remain committed to the ambition of 30%-40% of our base on wireless broadband, we now believe we'll be at the lower end of that range by the end of FY 2023. We do still see plenty of opportunity to grow our wireless broadband base as our 5G rollout progresses. We will not only make 5G wireless broadband available in more areas, but we'll also create additional capacity on the 4G network for wireless broadband. Now moving on to guidance for FY 2022.
We have set guidance subject to no material change in operating outlook as EBITDAI of NZD 1.13 billion-NZD 1.16 billion, CapEx of around NZD 400 million, and a total FY 2022 dividend of NZD 0.25 per share, fully imputed. Finally, we've retained the dividend reinvestment plan for H2 FY 2021, as this is a useful capital management tool, and it will operate at a zero discount. Shares issued under the DRP will be issued at the prevailing market price as determined around the time of issue. That now concludes our financial summaries. Operator, we'll hand back to you, and open the line for questions.
Thank you very much. We'll now begin the question -and -answer session. 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 pound hashkey. Please stand by while questions are being queued. Once again, it's star one and wait for your name to be announced. Thank you. Okay, we have several questions in the queue. Our first question comes from the line of Kane Hannan from Goldman Sachs. Kane, please ask your question.
Good morning, guys. Just three questions from me. I'm happy to ask them in turn, so it's easiest. Maybe just starting on the tower assets, and obviously , appreciate the co-tenancy comments , and obviously , the infrastructure review is progressing. If I just use some of the earnings metrics from your international peers and that co-tenancy ratio, I get to an EBITDA of the tower portfolio in the low 30%. Just wondering if that's the right way to be thinking about it, or if there are any comments you can make around what the telco earnings would be?
Look, Kane, I understand your desire for a lot more detail in this space. At this stage, we are just considering all of our options. The discussions that we're having remain confidential. Look, it's really just too early to be able to give that level of detail. We've still got to work through the options in that space.
Yep. Just in terms of free cash flow, given that capital spend comments and sort of the 11% aspirations in 2023, are you guys still aspiring to that NZD 500 million free cash flow target that you set out at the strategy day? If you are, could you just step us through the moving parts from that FY 2022 guidance to the NZD 500 million range in FY 2023?
Look, Kane, yes, we are. We remain committed to that NZD 500 million free cash flow aspiration. What we laid out at the Investor D ay still remains absolutely valid, which is that we see the opportunities coming through ongoing EBITDAI growth. That has been something we previously indicated. We still see the opportunities there. Tight management of our working capital, a consistent level of CapEx spend, and we'll give further guidance on that in FY 2023.
Perfect. Just finally, just digital health, talking about 8% - 10% revenue growth next year. It's obviously on a pretty meaningful revenue base. Just talk about where you're seeing that growth coming through, I suppose , where that business can get to longer term?
You want me to take that? Yeah. If I can talk to that. At the moment, we've got a good , strong revenue base there, and the growth is primarily coming in the IT and managed services space. When we look ahead, we see it coming in a number of areas. Firstly, there are some opportunities around the digital health reform that give us a chance to operate in a national manner. At the moment, the industry is largely regionalized. As a national operator, that puts us in a very good position. The second area where we are focusing some of those growth opportunities is around a digital health platform. This is a platform that we're currently developing. We expect to go live in the coming year and build off the current connectivity that we have across the DHBs and the various other parts of the health industry.
We see the opportunity to stand that up, launch applications off the back of it, and grow revenues off that, too.
If you look at the health sector, a significant amount of still manual paper-based activity, and the opportunity is whether it's around workforce management or other elements of that. Digital health platform would provide a strong base, whether that's in data, whether that's in some of those applications being provided through that. That's where the broader opportunity sits as well.
Perfect, guys. Thanks very much.
Thank you.
Thanks, Kane.
Our next cell phone question is from Arie Dekker from Jarden. Arie, please ask your question.
Morning. Yeah, just starting with Broadband segment. I've got a few questions there. It looks like when you strip out wholesale, you were down 16,000 connections on the retail brands. You talked about sort of looking to hold connections. Growth in the market is starting to slow as penetration sort of hits a point. Can you talk about what your strategy is going to be there? You're obviously pursuing fixed wireless still, but under-indexing in market share on fiber. You do retain premium, and ARPU is above some of your peers. Can you just give some guidance on what you're looking to do on Broadband, and what your revenue target is for Broadband in FY 2022?
We don't have a specific revenue target for Broadband, Arie. In terms of the market, the points that you've highlighted are absolutely right. It's a competitive market. We've seen many different players enter. We have seen lower growth in the overall market. It's about 3% growth this year versus 5% in the prior year. Some of that is due to border closure, but in general, the market has slowed. Pricing continues to be something that we review, but also the offerings that we have. Wireless broadband, we have had a lower gigabyte offering, which has proved quite successful as well for different needs. What we're looking at is the different elements of our product portfolio, but we will always continue to assess whether we are priced to be competitive in the market or not, and what we need to do to make sure that we are.
That will be a continuing focus for us in FY 2022. Obviously, the entertainment things that go alongside that are an important part too of our offering. Whether that's Netflix or you bought Neon or Spark Sport as well. We look at all of those components when we're looking at the offering for our customers.
Sure. I mean, just a question on your fixed wireless adds. I think your landline fixed wireless product now includes 40 GB of broadband as standard. Are those customers now included in your fixed wireless adds as opposed to fixed line voice?
They will only be included if they've activated broadband. They won't be included if it's not an activated account.
Yeah.
If that makes sense.
It does look like, because you're turning off PSTN , and your voice over wireless is very static. Would it be right to assume that there is a decent amount of those being activated? Obviously , they can do Wi-Fi on the phone , and that sort of thing, and they are a decent chunk of your fixed wireless adds.
No, it's not a material driver of the movement.
Okay.
It's very small.
Just lastly on the broadband one, obviously , the ComCom's come out with a greater focus on just marketing of alternate technologies, and it's obviously focused on copper withdrawal and that. Just thinking about your reduced target now to 30%, and I guess what you outlined at the strategy day about being able to direct customers to fixed wireless instead of fiber with the investment you're making in 5G. Do you think that it's getting incrementally harder to actually direct your customers to fixed wireless over 5G? Or is there something else behind the reduction to the lower end of the range?
I think when you look at the overall market and where that's at, broadband market full stop, regardless of wireless or fiber or any component, that growth is slow. That's what has impacted our view around by the end of FY 2023 , being at the lower end. We further roll out 5G, and as you can see, we've got a target of roughly 90% population coverage getting towards the end, therefore , it becomes more opportunity for us to grow, both from a 5G perspective. Also , what's happening is you're moving traffic off 4G to 5G, which then opens us up to push equipment and coverage further out from urban , more into rural, and that provides some different opportunities as well.
I think from a point of view of the overall market's competitiveness, yes, there are no easy wins in this space, so we have to work pretty hard to get what we are getting. We still see opportunity within wireless broadband, just probably given the slow growth of the market overall and what we're seeing, a slow build to that, so the lower end of that target.
Yeah. Just quickly on Spark Sport. I see that it's come out of the FY 2022 objectives, and you've talked about, I guess, investment being consistent with existing levels and, clearly, with the Rugby League World Cup going to Sky , and that point you made at Investor Day about there not being a lot of content available sort of thing. Where are you at in terms of, I guess, your outlook? I think your objective was to own entertainment in the home. There are obviously lots of means to doing that , with a plethora of value-added services you could add that you don't actually provide as principal. Can you just give an update on where you see the relevance of Spark Sport being in your future markets?
Yep. Arie, I'll pick that one up. Look, from our perspective, Spark Sport is a really important part of our VAS portfolio, which provides really meaningful differentiation to our portfolio of broadband and mobile offerings. We still see Spark Sport as being an important part of that. As we've said before, we obviously want it to be substantially bigger than where we are, and we've got a long-term ambition where obviously we want it to be commercially viable. As we work through that, really , the key to it is clearly subscriber growth. When we look forward, the biggest opportunities we see to get subscriber growth are really around additional content, and we see the best way to do that through partnerships. It absolutely remains a core part of our strategy. Partnerships will be the key to driving content subscriber growth and improved returns over time.
Yeah. Okay. Where essentially you sort of clip the tickets or a partner, and they use your platform?
It could be a combination of things, Arie, because obviously , we have certain content as well. It could be a combination of sharing different content, or it could be, as you say, a combination of clipping. A number of little things we've done, even in our cricket association, ticketing, et cetera. We've looked at different partnerships that work. I think we'll continue to explore that across content, and that'll be the way we'll be looking at adding to that.
Yeah. Just Stefan, your comment about differentiating for your customers with Spark Sport, are you sort of signaling that you're, in terms of the next iteration of it, that you might look to more heavily discount your Spark Sport offering to your existing customers so it is more differentiated from people that are accessing it on other networks?
No, that's not the steer I'm trying to create. It's more of a fact that when you look at our offering, we currently have discounts on things like Netflix. We have the ability for customers to get Netflix at better rates. At the moment , you can get Spark Sport if you put it on your bill at a better rate. That's the way in which we're thinking about it. Ultimately , it provides differentiation against other offerings.
Sure. Last one, just a follow-up on infrastructure. I guess when I look at the balance sheet and your investment sort of across your right-of-use assets and PP&E, just a bit of a steer of where the relative value sits between those three classes of assets. I guess, specifically, in Class 3, what sort of level of book value investment do you have in each of the passive mobile and the fiber?
I think if you, Arie, if you think about the passive mobile towers, their book value sits roughly above NZD 100 million. In terms of fiber, we've got a combination of value across all, both backhaul and the optical transport links. We haven't broken that up specifically.
Yep.
As we progress through it, clearly , we'll do more of that. That sort of gives you a sense, at least around the towers piece.
Yeah.
About NZD 100 million?
Yeah. Just over NZD 100 million.
Over NZD 100 million.
Yeah.
Yeah. Great. Thank you.
Yeah.
[audio distortion] COVID.
Sorry, we missed the end of that.
Sorry, I missed you there.
Oh, I was just saying no, that's all, thanks. Well done on producing a solid result in that COVID-19 environment.
Thanks, Arie.
Thanks, Arie.
Once again, it is star one. Our next telephone question is from Lucy Huang from Bank of America. Lucy, please ask your question.
Thank you, and good morning, Jolie and Stefan. I have three questions. Firstly, if we can touch on mobile. I think you're flagging potentially Mobile revenue growth of 2%-4% going into FY 2022. I'm just wondering whether you think that the majority of this growth is likely to come from continued subscriber additions or whether you think the majority of it will come from ARPU growth. If you can comment on the kind of competitive dynamics at the moment in mobile, that'd be great. Just my second question, just in terms of-
Maybe we should just respond to that one first.
Oh, yes. Sorry.
And then we'll pick up the other one.
Yeah.
No, that's fine. In terms of the Mobile revenue growth, I think what we're seeing in our marketplace and probably globally is the shift of data consumption, which is leading to people moving up the data curve, and so forth into higher plans. Also , as they buy different devices, that's leading to more activity. There will be a combination , like we have seen this year , of subscriber growth, particularly in that pay-monthly post-paid area. A lot of it's to do with paying a higher rate effectively for more data usage. We don't see that sort of change. Obviously , we've largely cycled through this last 12 months. The implications of that have been experienced effectively.
Wonderful. Thank you. That makes sense. Just my second question. I think you guys flagged some cost savings in FY 2021 due to COVID-19 restrictions. Just wondering, coming into FY 2022, obviously , the new lockdown poses some more uncertainty. Just overall, what are your thoughts on whether these costs will creep back into FY 2022? Just alongside that, where do you think kind of medium-term EBITDA margins for the business could land? What are your targets for the next kind of three years? Thanks.
Maybe to pick those two up. In terms of costs, over many years , we've operated a disciplined cost program. While we saw costs come out in 2021, we did in 2020, and we will then continue to see that in 2022. That's a combination as we move to greater digital technology, we virtualize more of our own networks, and we look at our overall cost base each year and retire some legacy elements of that as well. We don't see any shift out in that approach or program. That will always be part of our operating model. I think your second question, or third question , was around the EBITDA margin. We target around that 31% of EBITDA margin, which is pretty world-leading when we look across, and so we don't see a huge shift. We don't expect a huge shift in that.
Great. Thank you so much.
No problem.
Once again, it is star one. Our next telephone question comes from the line of Entcho from Credit Suisse. Entcho, please ask your question.
Good morning. Entcho Raykovski here. My first question is on Cloud segment, and in particular, the cloud competitive environment. Just interested in whether you're seeing competition accelerating in that space, particularly with CDC announcing that they'll be pursuing hyperscale development in Auckland. I guess, what does that mean for your longer-term projections within the Cloud segment?
I think if you stand back from the Cloud segment in New Zealand, you've probably got around about a 30% penetration and a forecast of it growing over the next five years to about 60% penetration. You've got a combination of public cloud, private cloud , and on-premise, and we see customers having a range of those different elements. Generally, we're seeing a shift towards both public cloud. If you're an organization that has a lot of legacy applications and has been around for a period of time, it's quite difficult to shift your estate just straight into the public cloud. We see a mixture, and depending on what data and workload set is, people are choosing different environments for that. We offer services that wrap around all of those things. We also work with all of the hyperscalers effectively.
There's no doubt there's a shift in terms of the margin profile between public cloud and private cloud, and therefore , you can see that in the mix of our work. When you outline , or you look at the volume potential of growth, there's a combination of growth driving that perhaps , at a lower rate , effectively.
Okay, got you. Is it fair to say that's a dynamic that you've seen over a period of time, nothing that's really changed-
Yeah.
Modestly?
Yeah. We're also considering that a lot of the significant data center investments are a few years out to opening as well. There's a combination of things happening, including our own investments.
Got it. Thank you. In mobile, the transition of prepaid to pay monthly has continued into the second half. I know you spoke just then about greater take-up of high data plans, et cetera. Just interested specifically in that transition, how much more of it do you see? Is it perhaps something that's been accelerated during that COVID-19 impacted period?
I think there's no doubt that, as more and more applications, more and more working on the move, and going to different locations , is leading to people using data in a different way than perhaps they have. COVID-19 has probably contributed to that as well, but it has been a consistent theme for a number of years for us. I guess our market overall was predominantly more prepaid than postpay, which was unusual compared to most of the rest of the world. We're seeing a little bit of a catch-up. The other thing we are doing within our prepaid market is our Endless plans , offered there also have larger data. We're seeing growth in our prepaid ARPU as well , at the same time. Borders shutting too impacted the number of travelers who were on prepaid connections as well, so they fell away.
They're generally for short periods of time, with a lesser ARPU. You see both of those things affecting it. If you say what's the longer-term trend, we're still seeing that shift upwards across that, and we would expect that to continue to happen between pre and post.
Got it. Thank you. Just finally, I know you mentioned it's modest, but can you quantify what sort of roaming benefit you've got factored into the FY 2022 guidance? I mean, maybe asking it a different way, how much of the NZD 40 million of COVID-19 NPAT in FY 2021 do you expect to reverse?
I'll answer your question in a slightly different way. I'll talk about it more from a revenue perspective. In a standard year, our roaming revenues, as we've previously said, sit at a little over NZD 50 million. We've had a reduction in FY 2020 and a further reduction in FY 2021. To give you a general sense, in FY 2021, our roaming revenues were about 10% of a normal year. It gives you a pretty good sense of how significantly they were impacted. We're expecting a small increase. I'm not going to give you a specific number because , at the moment, 24 hours ago, we were not in lockdown. The landscape evolves too quickly. What I can say is that the amount we've allowed for is expected to be pretty small and not material-
Not material.
In the grand scheme of the overall revenue-
Yeah.
And guidance.
Yeah.
Okay. That's great. Thank you.
Thank you.
Our next telephone question is from Phil Campbell from UBS. Phil, please ask your question.
Yeah, morning. Just a few questions from me. Stefan, the first one was on the new accounting standard in terms of accounting for IT spend. I'm just wondering if the FY 2022 guidance had any expenses for the ERP upgrade that I think is dropping in FY 2022? That was just my first question.
Just for the benefit of others on the call, Phil, I'll just give a quick overview. Basically, there's a new interpretation of an accounting standard which requires organizations to look at the amount of cost they have incurred in relation to standing up new cloud-based software tools. In the past, most organizations, including ourselves, have capitalized that cost as part of the creation of a new asset. The new interpretation says any part of that cost that is actually related to configuration should be expensed going forward. We've seen in our accounts that we've got about a NZD 50 million spend over three years. A portion of that will relate to configuration. We will go back and have a look at that. There's a bit of work to be done to understand what the NPAT is.
When we look forward to FY 2022, we're not expecting that to have a material NPAT on our accounts or guidance.
Okay, great. That's very clear. The second one was just on mobile. I noticed that you did recently lose quite a large customer. It seems as though competition in the kind of B2B space is intensifying a little bit. Would you be just able to make a bit more comment around that? I'm assuming there is customers won and lost all the time, but just wondering kind of, that was quite a large customer. Just kind of what is the kind of response to that?
Overall , in our business enterprise customers, we grew connections. As you say, there is always customers won and lost across that. We saw greater growth than we saw loss, effectively. The business enterprise market has always been competitive. Nothing much has really changed around that, particularly in the big end of town in regards to that. I don't see any significant concern or issue in relation to that.
Great. Awesome. Just a last one from me. I think we've seen a new consultation document from RSM just in terms of spectrum, which would, when you first read it, tend to indicate that there's a chance that the MNOs may be able to get more than 100 MHz of capacity in 5G. Just, is that your interpretation of that potential consultation?
I'm not aware of that specific thing that you're referring to. There is a continuing review of how the spectrum auctions might work and the components of what might sit in there. We can pick that up with you offline if you'd like , in terms of we'll follow that up.
Oh, yeah. That would be great. I think they're just reserving the 3.3 GHz-3.4 GHz for the WISPs and for enterprise, and so it just means that that 400 MHz from 3.4 GHz-3.8 GHz could be available for three MNOs and potentially Māori.
Yeah.
Sorry, last question.
Yeah.
Yeah. Sorry, the very last one was just, with the copper withdrawal coming up soon, how do you view that? Some people are talking about it as a bit of a churn event. I'm assuming that a lot of those kind of remaining copper customers are Spark customers. Do you think of it as a churn event, or do you think it's going to be less of an issue and you would just be able to migrate your existing kind of copper customers onto fiber or wireless?
We've obviously got quite experienced at migration through our PSTN, as we've started to remove that from certain markets. We've done a lot of work around how we work with customers to offer them the right options as they migrate off. We've done a lot of work with that. From our perspective, certainly not complacent about it as an opportunity for customers to reconsider, but we certainly are focused on making sure any kind of migration offers a positive one for them and one that's easily managed. We don't see it as a significant churn event per se.
Great. That's awesome. Thanks.
Okay. Thanks, Phil.
Our next telephone question is from Brian Han from Morningstar. Brian, please ask your question.
Jolie, the accelerated investment in 5G in FY 2022, I'm still a little bit confused about how that marries with your thinking that your fixed wireless will be towards the low end of the 30%-40% target in FY 2023. Are you not counting the potential benefit of 5G in lifting your wireless bypass of fiber above and beyond fixed wireless? Are you simply assuming-
No, we are. Yes. We are, but as we-
Right.
As you roll out, you go into different markets at different times. It just takes time. We're talking over the space of two years. That's why we're aiming or suggesting it's probably towards the lower end of that. We're not saying that 5G won't have a role to play, and it absolutely it will. We're just as we look ahead, recognize that it's sort of by the end of calendar 2023, we'd be at 85% of the country. If you think about that, the opportunity probably sits just beyond the end of FY 2023.
Right. Okay. Are you assuming the slower broadband market will persist for some time?
Well, at the moment, when you look at it, with borders shut, that is not the only reason why the market is slow, but that has definitely had an impact. We've seen a halving, roughly, of the growth in the market in the last 12 months. If you look ahead this year, given the situation we're currently in as of today, but also globally, it's not clear when we would see them materially open anyway. That sort of factor for the next 12 months feels like it's potentially in play. Secondly, when you look at that, it is a well-penetrated marketplace. Unless population is substantially growing, which has historically been about immigration coming in, then it's difficult to see that there'll be a significant shift up in the market size in a pretty mature market.
Okay. If you don't mind, just one more question. How would you describe the competitive landscape in the consumer mobile space right now? Are you concerned in any way about Vodafone perhaps moving beyond cost cuts and maybe going a bit harder on the market share front?
Look, at the end of the day, mobile's always been a competitive market. If you think about what's driving growth in our marketplace, it's a shift up in people in their data usage, and that is available for all of the market participants. I don't see it necessarily accelerating in terms of where we're at, because that opportunity exists for everyone. That's not to say that there won't be , I can't call what they will choose to do or not do. Certainly, there's a lot of focus on just trying to meet the needs as we grow data demands for our customers.
Thanks, Jolie.
Thank you.
Our next telephone question is from Ian Martin from New Street Research. Ian, please ask your question.
Oh, thanks. I just have two related questions around infrastructure investment. In your class structure, you're obviously investing for growth in Class 1, optimizing investment in C lass 2. What's the ongoing investment focus in Class 3 while you're going through these exploration opportunities, both in terms of how material and what the focus is? I'm thinking here , particularly small cell.
If you stand back, there'll be some operational investment we would always make. If you think about fiber, for example, the Optical Transport Network, we're in the process of automating a lot more of that, and we've been going through the country doing that. That would continue within our existing capital envelope, as you can see it. In mobile, our 5G investment is really in and around our existing assets and towers that we already have in place. What we're doing is upgrading all the active components of our network. Therefore, not a significant rollout to standalone or anything like that in the interim period.
All right. Just a related question then. On the right of use assets, that's quite a material part of the balance sheet. The additions were NZD 129 million in the last year. That's not counting in CapEx, I'm assuming. Some of that's also in network infrastructure, particularly mobile sites. I just wonder how material part of the asset base is mobile sites and right of use assets?
The right of use assets change that you're talking about, a lot of that will be driven by lease activity and the way that that's reflected. I think what we talked about earlier was if you look at those passive infrastructure assets, the book value that we carry on those is a bit in excess of the NZD 100 million mark.
Including what's in right-of-use assets? In effect, that's a kind of form of funding already to expand your mobile footprint. Is that it?
Maybe what would be better is, maybe Stefan, can you take us offline, and comeback to-
Yeah.
Ian?
I think that's right.
All right. Thanks for that.
Thank you.
Our final question today is from Aaron Ibbotson from Forsyth Barr. Aaron, please ask your question.
Hi there. Good morning. Thank you for taking my questions. Just two quick ones from me. First, just a clarification on your comment on Cloud, security, and service management margins or mix shift. If I look at gross margin drop through, it was around 40% this year. If I think, maybe not just FY 2022, but over the next few years, how should we think about sort of incremental gross margins, if I put it that way? Is that too simplistic to think about it? That's my first question.
I can pick that one up. I think you will see continuation of current trends to some extent because there is a shift in the mix there. Public cloud, we're reselling it, obviously , comes with a lower margin, and we are seeing some pricing pressure on our private cloud business, which is , in turn , being offset by volume growth. I think that the NPAT of the private cloud will have some price NPAT and therefore, will put a little bit of pressure on the margin there.
Okay. Thank you. Very clear. I'm not sure what you have given, to be honest. If I look at your fixed wireless customers, could you give some sort of color on where they are, in the sense, I know you're targeting low users, et cetera. What proportion of these are in sort of UFB zone 1 and 2, and what are outside, sort of on rural at the moment? Is there anything-
We don't-
You can share with us there?
As an overview, we have customers sitting in both urban and rural areas. Clearly, there are opportunities where there is not necessarily access to fiber or copper lines. When you think about the types of users that initially came onto that were people who were more on ADSL or couldn't access the high speeds. There are also people in urban areas who are using it as well. We don't present that information out in more detail, like a map of the country or anything like that , that shows that or the combination of that. You think about it being used in both locations. Really , what we're looking at is, who is the customer? What are their needs? What is the best available form of technology? At the end of the day, we sell all forms of those technologies and make sure that that's met.
Okay. If I ask, just on 5G versus 4G, what proportion is that you have ready today and having fixed wireless customers on 5G? If you look at new sales you're doing today, is the majority going to 5G if you look at incremental fixed wireless customers? Is there still a lot of 4Gs being sold today?
We're selling wireless broadband on both 4G and 5G. We have around nine new locations of 5G in this last financial year. You can see that as we add locations, the opportunity comes for people to come on board. If you think about our predominant wireless broadband base at the moment would still be predominantly 4G because of its size and scale of it. We've got almost 175,000 customers , or 25% of our broadband base is on wireless. That would be shifting, and the opportunity is obviously arising as we move through with more 5G. We've got 10-15 additional locations, including expansion of coverage in some areas , and we've already gone over the next financial year. We'll see the opportunity left and then , beyond that, obviously , FY 2023 as well.
I'm basically just trying to get you to answer my previous question without wanting to. I was just wondering, the 9,000 you signed up this last six months, is it fair to assume that the majority of that was on 5G or that the vast majority is still on 4G if you take it?
No, it's a combination. It would be a combination of both. We don't provide that.
Okay. Thank you very much.
Thank you.
Thank you.
There are no further questions at this time. I would like to hand the call back to today's presenters. Please continue.
Thank you. Thank you , everyone , for joining us today and for the conversation. Cheers.
Thank you all for joining. You may all disconnect. Have a great day. Goodbye.