Release Date: February 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Spark New Zealand Ltd (NZSE:SPK, Financial) delivered adjusted revenue growth of 1.3% to $1.98 billion, driven by strong mobile performance and momentum in data centers and high-tech.
- Adjusted EBITDAI grew 3.9% to $530 million, indicating effective cost control and operational efficiency.
- Mobile service revenues increased by 6.3% to $510 million, capturing 47% of total connection growth.
- Cloud revenue grew by 3.8%, with gross margins improving by 7.6% due to a reset cost base.
- The company declared a half-year FY24 dividend of $0.135 per share, fully imputed, reflecting strong shareholder returns.
Negative Points
- Adjusted NPAT decreased by 4.8% to $157 million, primarily due to higher average interest rates on debt and higher interest payments on Connexa leases.
- Capital expenditure was higher in the first half, impacting free cash flow negatively.
- Broadband revenue declined by 1.3% to $309 million, reflecting high competition and inflationary pressures.
- Digital health revenues fell by 8.7% to $42 million, impacted by a slowdown in public sector demand.
- The economic environment, including high inflation and cost of living pressures, dampened demand in some parts of the public and private sectors.
Q & A Highlights
Q: Good morning, and congratulations with the great performance in mobile in particular. First question on labor costs. You gave some detail on what drove the increases in the first half, about 3.7% on the PCP. Should we expect lower PCP growth by the time you get to full year?
A: Hi. Yes, Arie, you should. Part of our operating model redesign is really looking at that labor 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. (Jolie Hodson, CEO & Executive Director)
Q: Outside of Entelar, which areas are getting increased investment in people at the moment out of the redeployment of some of those gross cost-out savings?
A: I think if you think about data centers, our AI and data investments 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, et cetera, are well managed using those tools and then also converged tech and areas like that, where we see new opportunities for solutions for customers. (Jolie Hodson, CEO & Executive Director)
Q: Just turning to high-tech. Look, 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 driving that lack of gross margin leverage in that business? And also, below gross margin, what investment is going on? And what quantum of labor cost growth are those businesses getting?
A: So I think if you break it into the different component parts within the high-tech, you've got our IT business, which is much more mature and established and we've 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 that is, for example, the Qrious scenario, that is impacted by some of the environment -- economic environment we've seen. So a slowdown in some of that demand around more professional services type work and digital transformation. So there are a number of different things running through that, when you look at the components that were in that. (Jolie Hodson, CEO & Executive Director)
Q: And just the last --
A: Sorry. The only other thing I'd add is from an investment perspective, clearly, the investments we're making in 5G and stand-alone really set up a lot of the foundation for these. So this is the -- making sure that we've got them the teams to support the product as they come online as well. So it doesn't require a lot of additional capital investment. (Stefan Knight, CFO)
Q: Sure. And then just a last one. I guess, you mentioned Qrious, MATTR. I mean, those aren't new area, like you've been in those already for a reasonable amount of time not signaling that they'll be doing necessarily a lot in the FY26 plan. What are the things that you're doing just to test just how long you're willing to stay in something like MATTR?
A: 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 our longer term build around our -- the global opportunity for that business. (Jolie Hodson, CEO & Executive Director)
Q: Cool. Thanks. And then, last one is just on Connexa. We weren't expecting much initially in the first year or so, but when will they start building towers under your build commitment?
A: So I can pick that up. They are -- currently, build program is underway. As you would expect, when you're setting 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. (Stefan Knight, CFO)
Q: Yes. 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 $15 million on the PCP, can you give us a bit of a guide to what level we should expect to see in cash lease growth over the next couple of years, particularly with that build commitment now starting to come through?
A: I would think about it as relatively modest over the first couple of years and more aligned with inflationary pressures. So moving it more in that. More aligned with inflation, yeah. (Stefan Knight, CFO)
Q: Okay. So yes, 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?
A: No. I mean the -- if you really try and stand back from it, I think the impact at NPAT 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 effectively replaced with those lease costs. And then, to your point, Arie, then that grows modestly over time. The bigger component of the build program is a couple of years out. So that next couple of years is not a substantial (inaudible). (Stefan Knight, CFO)
Q: Okay. Thanks. That's all for me. Yeah. Thanks a lot.
A: Thanks, Arie. (Jolie Hodson, CEO & Executive Director)
Q: Hi, Jolie. Hi, Stef. So my first question is on free cash flow. And I know you've got the usual seasonal skew towards the second half, but it does feel pretty substantial this year. So I'm just interested apart from the lower CapEx. Are there any other items that are driving that second half free cash flow skew? And 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?
A: The key driver
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
