H1 FY25 Results transcript

This has resulted in us reducing FY '25 adjusted EBITDAI guidance to $1.04 billion to $1.1 billion. This excludes the anticipated benefit from the gain on the sale of Connexa of $66 million and the FY '25 non-recurring transformation costs of approximately $45 million to $50 million.

We know our shareholders will be rightly concerned about the ongoing headwinds we are facing. We're taking decisive action to improve that performance, and I'll spend time this morning outlining these plans and our progress to date in some more detail.

Before I do that, I will first focus on Slides 3 and 4 [of the H1 25 results presentation] to summarise our H1 performance. Reported revenue declined 1.9% to $1.93 billion, driven by mobile, IT services and the continued decline of legacy voice and partially offset by growth in mobile devices, cloud, data centers and IoT.

Reported EBITDAI declined 20.9% to $419 million, driven by lower IT services project activity, the mix shift from private to public cloud and the supply cost inflation. Reported NPAT declined 77.7% to $35 million due to lower EBITDAI and the higher depreciation and amortisation costs. In FY '25, we will recognise a non-recurring cost of transformation of $45 million to $50 million, with $29 million reported in the half one results related to the net labour and opex benefits we will deliver in FY '25 to '26.

Normalising for this non-recurring cost, adjusted EBITDAI declined 15.5% to $448 million and adjusted NPAT declined 64.3% to $56 million. Free cash flow increased 67.4% to $77 million. When including working capital and growth capex, free cash flow improved further against the prior year by $163 million as we're disciplined on that capital expenditure, which was down 12% year-on- year and we saw a working capital benefit.

The Board declared an H1 '25 dividend of $0.125 per share consistent with FY '25 total dividend guidance of $0.25 per share and in recognition of the receipt of the Connexa proceeds that are due in Q3 FY '25.

Turning now to the action we are taking to improve performance, which is summarised on Slide 5. As we shared in October, we have four strategic priorities that will not only improve Spark's underlying performance in the short

term, but deliver sustainable competitive advantage in future years. We're firmly focused on driving momentum in our telco core, simplifying our portfolio, transforming our cost base and creating long-term shareholder value through our data center strategy.

I'm going to talk to each of these priorities in more detail now. So we start with our telco core in our priority market of mobile, as outlined on Slide 6. It's important to first set the market context for the H1 period. Mobile service revenue across the total market was broadly flat over the last six months.

Spark's mobile service revenue declined 3.7% to $491 million, and there are a few different drivers of this. The predominant driver was a 17.7% decline in mobile service revenue within Enterprise and Government. Our teams have done well to hold customers within a challenging and highly competitive market, but with high market share in the segment, we're more exposed to rapidly shrinking mobile fleets as customers have reduced headcount or sought cost efficiencies, for example, within government.

When looking at our connection loss in H1 '25 versus H1 '24, approximately 80% was driven by shrinking of fleets versus losing business to competitors. We then also saw the ongoing impact of aggressive competitive pricing, which is driving down the value of contract re-signings and new business wins, and that impacted our service revenue share.

The step now to Consumer and SME, we saw a 2.3% decrease in mobile service revenue, and that was predominantly driven by our decision to discontinue a Spark-owned mobile insurance product, which reduced ARPU. Outside of this, pay monthly connection growth continued with acquisitions up 1.1% year-on-year.

The prepaid market was tougher with mobile service revenues across the total prepaid market declining versus the second half of last financial year. While we saw connections decline, around 70% of this loss was attributable to casual users with low or no spend, meaning our prepaid ARPU increased. Of these casual users, over 80% of connection loss was due NA listers movement to competitors.

Overall, we saw a 0.7 percentage point decline in our total mobile service revenue market share with about 0.2 points of that attributable to the change in mobile insurance. Despite this, we remain the market leader by some distance in that category.

While the mobile market was challenging during the half, we have built strong momentum that will flow into H2, as outlined on Slide 7. In Consumer and SME, we refreshed our pay monthly plans at the end of October, introducing big data caps for our customers.

The response has been very positive with acquisitions over November and December up 7% versus the same period in H1 '24 and acquisition ARPU also up $1.40. We then completed a refresh in prepaid in December, which has improved our competitive positioning, and the early data shows a good uptick in acquisition going into the second half.

We implemented price increases across our pay monthly and prepaid base in December, offering customers more data for dollars, which will deliver further benefits in H2, equating to around 3% of expected service revenues.

In Enterprise and Government, we're pleased to see the rate of mobile fleet shrinkage slowing in the first half to around half the rate of what it was in the second half of '24. We are focused on retaining connection share through proactive re-signing and competitive bids to enable future organic growth.

We are balancing this with mitigating ARPU impacts from aggressive competitive pricing through targeted product bundling and enhanced service offerings to deliver more for our customers. With mobile core to our growth aspirations, we continue to allocate capital accordingly.

45% of capex was invested in our mobile network, which is supporting product innovations such as our new data caps and our network quality with Spark awarded the number 1 mobile network for coverage and reliability by Open Signal in September 2024. We will further expand coverage in early -- in 2026 off the back of a new partnership we have entered into with another U.S. based satellite provider to offer customers satellite to mobile services.

We now move to Slide 8. Broadband revenue declined 2.3% to $302 million as connections reduced and price competition intensified and cost of living pressures saw customers trade down to lower price plans. Overall, we saw a

0.7 percentage point reduction in connection share. As many of you are aware, that's a mature and more commoditised market with consistently lower levels of overall market growth.

Within that context, our strategy remains focused on continuing to offer our customers a range of broadband products, improving margins by passing through the fiber company cost increases and expanding the addressable market for wireless broadband as our 5G rollout continues and capacity and speeds increase. Wireless broadband continued to grow and makes up approximately 32% of our broadband base.

Total IT revenues declined 1.5% to $336 million, while IT products grew 1.1% to $264 million off the back of strong growth in public cloud. This change in mix contributed to a 10% margin reduction. Reduced IT services project activity across government and businesses saw revenues declined 10% to $72 million, while high-tech revenues grew 17% to $41 million as IoT connections increased 25% to over $2.2 million.

We turn now to Slide 9 and our second strategic focus area of simplifying our portfolio. This includes our review of non-core assets to further strengthen our balance sheet and product simplification to support our focus on our telco core. As we shared in December, we have reached agreement to sell the remaining 17% of our stake in mobile towers business Connexa to CDPQ.

We now expect around $310 million of proceeds and a gain on sale of around $66 million in reported EBITDAI. All regulatory approvals required have now been received and we expect completion in Q3. We're continuing to progress our broader review to identify further opportunities to realise value in the medium-term.

In Enterprise and Government, our operating model transformation has been completed with our subsidiaries now fully integrated into Spark. This paves the way for further product rationalisation and legacy product migrations to simplify our business and improve customer experience.

Also reviewing where we focused on the IT services market based on the evolving demand and margin profiles we're experiencing. Finally, we've agreed to the sale of Digital Island, excluding its mobile business, which we will retain. Beyond mobile, Digital Island provides collaboration and cloud contact center services to small and medium business and this divestment will further support focus on our telco core in Enterprise and Government.

I'm now going to speak to our third focus, which is transforming our cost base, outlined across Slides 10 to 12. In October, we shared that we're on track to deliver our $50 million net labour cost reduction and we will continue to make progress towards our net opex target of $30 million.

We also shared our intention to expand the SPK-26 Operate Programme to deliver more transformative change across the business, which will deliver higher benefits over a multi-year period. Today, we share the details of that expanded programme. And that programme has not been approached with just a simplistic cost out focus alone, we have instead taken the time to redesign how we operate while delivering greater efficiency and more for our customers.

Our operating model focused in FY '24 and the first half of FY '25 for changes across several areas of our business and included the transformation of our Enterprise and Government division. As a result of these changes, approximately 900 people have left our business over this 12-month period. It is never easy to make changes that impact our people and we don't do so lightly. But to deliver a leaner, more competitive business, we have made tough but necessary choices that will set Spark up for the future.

Transforming our cost base does not start and end with our operating model, but also how we run our technology and our networks. Alongside labour, IT and network costs, they make up the largest proportion of our cost base. When we look at peers in global markets, many have moved to new models for technology delivery that leverage strategic partnerships.

So our intention is to establish several partnerships across IT, cloud and networks to access the global scale, capability and innovation these partners bring and accelerate our existing strategic focus on AI and automation to deliver

better customer outcomes at lower costs. This is expected to deliver an overall cost efficiency of around 20%.

We will protect and enhance Spark's competitive advantage by retaining overall strategic decision-making, critical operations, intellectual property and systems. We're in the final stages of agreeing an IT infrastructure and services partnership, which will deliver accelerated automation and efficiencies and a material reduction in annualised IT costs.

We're also pleased to announce a new strategic partnership with Microsoft that will improve our overall cloud economics. Finally, we have a Heads of Agreement in place to explore network operations partnership that will enable us to accelerate AI and automation, deliver greater efficiency and enable access to global capability and innovation. We expect to be able to share further detail on this partnership in coming months.

When we combine our focus on our operating model and our technology delivery model, we will deliver a transformation of our cost base that will not only support profitability during the short-term economic pressures, but create a stronger, more competitive business that can continue to compete and win in the future. This includes a net labor and opex cost reduction of $80 million to $100 million in FY '25, which increases to $90 million to $110 million on an annualised basis by the end of the financial year.

This will be funded by a non-recurring transformation charge of $45 million to $50 million in FY '25 with $29 million recognised in the first half. Additional annualised benefits of $20 million to $30 million commenced from FY '26 to FY '27, meaning the overall expanded program is forecast to deliver $110 million to $140 million of annualised benefits by FY '27.

Our fourth focus area is long-term value creation for our shareholders through our data center strategy. During the half, Spark's data center revenue increased 13.6% to $25 million as billing of our 22 megawatts of capacity increased. Our developments, as outlined on Slide 14, are progressing to plan with land settlements for our new North Shore site targeted for early '26. We remain committed to building out our 118 megawatt development pipeline. And we are continuing to target an IRR of around 10% to 15%.

latest iPhone release in September 2024 being a significant contributor in that respect. Broadband and voice revenues decreased 2% and 17% respectively.

The downside in broadband reflected a decline in connections as competition intensified in this market. The voice revenue decline is consistent with the long- term trend. On the plus side, both high-tech and data center revenues continue to increase year-on-year as we see IoT connection growth in the high-tech space and the benefit of the increased capacity in our data center businesses.

Now in terms of operating expenses, there was an overall 3.1% increase in H1 '25 versus H1 '24. An increase in cost is not the outcome we were looking for, but there are some important drivers that are worth drilling into on this. Of the total costs we incurred, net labor costs were $8 million lower at $271 million for the half year. This reflects the partial benefit of a number of changes made to the operating model that Jolie has already spoken to with an expectation that there will be a much bigger improvement in net labor costs in the second half and into future years as the full annualised benefit of reduced headcount and the new technology delivery model flow through.

Higher product costs reflected a change in the mix of products sold and the shift from private to public cloud services plus higher overall IT costs. Other operating costs were up 14% year-on-year, predominantly due to increases in software license costs and the timing of rebates from some suppliers that were present in the H1 '24 results.

Network support costs were 30% higher than the comparable period due to supply cost inflation and the investment in our expanding mobile network. The transformation of our technology delivery model and the establishment of strategic partnerships in this area will enable us to significantly improve these cost positions in the future.

Now moving to the EBITDAI line. The combination of lower revenues and higher costs led to the 3.7 percentage point decline in our EBITDAI margin and the $82 million reduction in EBITDAI versus H1 '24. Below this line, financing costs increased as a reflection of the higher net debt. The effective interest rate on this dropped from 5.9% to 5.7%.

Depreciation and amortisation was up 20%. This reflects the intensive capital program that had been undertaken in the last couple of years with investment in growth assets like data centers and 5G. Finally, you'll see that although tax expense reduced by $38 million, the effective tax rate has increased by 5.6 percentage points. This reflected a few one-off non-deductible items, which while not significantly large in their own right, were significant relative to the amount of our pre-tax earnings.

Now I'm going to move on to Slide 19 and capital expenditure. And you can see from the profile of our capex spend that in the most recent 6-month period, both maintenance and growth capex were lower than the comparable period in H1 '24. Now this reflects an intentional intervention to align spend in the current operating environment and with our strategic priorities. Across Spark, the main focus of our capital spend program remains investment in digital infrastructure and the mobile network to support the performance of our key business units, in particular, mobile.

Growth capex is also centered around the development of our data centers business. And this has been less than in recent periods as we go through the process of securing a capital partner to co-invest alongside us. Guidance for total capex spend in FY '25 remains at around $415 million to $435 million, which means that the second half of the year will need to be around $160 million to $180 million, a significant reduction on the second half of last year, even taking into account the usual seasonality in capital spend.

Now on to Slide 20, which shows our free cash flow. The discipline around capital and expenditure and management of working capital has led to an improvement in the last 6 months versus the same period a year ago. Free cash flow of $77 million was $31 million or 67% higher than the comparable period, even though the EBITDAI available for cash flow was $85 million. You can see the key drivers of the improvement were lower maintenance capex spend and the $23 million less of cash tax and the payments for leases.

In terms of free cash flow, including growth capex and working capital, the year- on-year change is even bigger. Bottom-line free cash flow was $163 million better than H1 '24, although it should be noted here that within the release of