‘Lost faith?’

“The share price reaction today clearly is a reflection of shareholders being disappointed with with the results, and potentially an indication that shareholders have lost a bit of faith in current management and boards ability to turn it around,” Forsyth Barr analyst Aaron Ibbotson told the Herald.

“It was a weak result across the board. There’s not really any redeeming features.”

He added,”Cash generation was very weak. The big surprise was that operating expenses basically hadn’t come down at all relative to last year and relative to how they guided.

“They retained their target but it’s very heavily weighted to the second half of the year. That remains to be seen. It’s ambitious. But the half reported was very disappointing … At some point the dividend will have to be addressed.”

Light at the end of the tunnel?

“Looking at the past 12 months, we’ve seen challenges in consumer spending but also in business we haven’t seen any rebound. While we’ve seen some monetary easing, with various reductions in the OCR, we haven’t really seen that flow through yet into a change in spending behaviour,” Hodson said.

“We’re not really seeing any shift in that for the half ahead [the second half of the financial year, ending June 30]. If monetary easing continues, there are some early indicators around business confidence. But if you look at economic indicators, they’re still largely very flat.”

One bright spot for investors was that Spark reaffirmed its revised full-year dividend guidance of 25 cents a share. The board had confidence because about $310 million from the sale of Spark’s remaining 17% stake in Connexa (the company that took over its cell towers) would be received in the second half.

But Hodson added, “We will be looking at our capital management strategy later in the year and as we go into FY26 we’ll look at the dividend policy as well.”

78% fall in profit, another warning

Spark reported a 78% fall in net profit to $35 million in the first half of its 2025 financial year and reduced its full-year operating earnings guidance — but maintained its revised full-year dividend guidance.

Shares — already down 42% over the past year after two forecast downgrades — were down 21.3% to $2.32 early afternoon trading The shares closed at $2.93 yesterday giving the company a market capitalisation of $5.4 billion but that fell to $4.2b this morning in the wake of the result.

A cost-cutting drive is set to intensify, implying more job cuts.

Reported Ebitdai (earnings before interest tax, depreciation, amortisation and net investment income) declined 20.9% to $419m.

‘Scale and pace of deterioration substantial’

“When we updated the market in October, we outlined that we were experiencing one of the longest and deepest recessionary periods in recent history. Since that time, we have seen no improvement in these conditions,” chairwoman Justine Smyth said.

“The scale and pace of deterioration in trading conditions we have experienced over the last year has been substantial.”

Spark reduced its full-year Ebitdai guidance from a $1.12 — $1.18 billion band to $1.04 — $1.10b, below analysts’ (already reduced) expectations (FY24 Ebitdai was $1.16b).

The key reasons for the downgrade were “further deterioration in the performance of Spark’s enterprise and government division, which has been impacted by spending cuts and mobile fleet reductions across Government and businesses, changes in product mix, and aggressive price competition in mobile”.

A 12.5 cent a share dividend was declared, a 1c decrease on the same period last year. But its full-year dividend guidance was maintained at 25 cents a share (as per the telco’s revised guidance issued in October, when it reduced its dividend forecast from 27.5 cents).

Reported revenue declined 1.9% to $1.99 billion, “driven by the performance of mobile, IT services, and the continued decline of legacy voice, and partially offset by growth in mobile devices, cloud, data”.

There was weakness across the board, bar the telco’s data centre business, where revenue increased — albeit off a small base — by $13.6m to $25m.

Broadband revenue declined 2.3% to $302m “as cost-of-living pressures saw customers trade down to lower priced plans”.

Price competition was also blamed.

Mobile service revenue declined 3.7% to $491m, “driven predominantly by shrinking mobile fleets following customers’ headcount reductions and price competition in the enterprise and Government division,” Spark said in a market filing.

Free cash flow increased 67% to $77m.

Capex fell $12m to $252m.

Net debt at December 31 increased by $297m to $2.74.b but was expected to improve in the near term with the sale of the remaining Connexa stake. On a conference call, chief financial officer Stewart Taylor pointed to cash outflows associated with capex programmes and the dividend.

No news on $1b data centre raise

Spark said at its full-year result last August that it was exploring options to raise up to $1b to fund data centre expansion over the next five to seven years.

“Progress has been made towards the establishment of a capital partnership to accelerate growth,” Spark said in its investor presentation.

“We have a process under way and we’ve had a lot of expression of interest in that. We’ll update you further when we can,” Hodson said on the analyst conference call.

“The DC [data centre] partnership is all around accelerating the opportunity that exists in a market that’s growing substantially,” she later told the Herald.

The telco reiterated its goal to increase its data centre capacity from today’s 22 megawatts to 140MW, in part through a server farm at a surf park planned for Dairy Flat north of Auckland (where the idea is that heat from the planned data centre will warm a wave pool). Hodson said data centres would be a major contributor to future growth.

There has been a flurry of activity in the sector over the past 12 months, including One NZ owner and 50% CDC Data Centres stakeholder Infratil raising $1b for data centre expansion through a June share placement, and Spark’s some-partner Microsoft completing its giant “hyper-scale” data centre in Auckland’s Westgate — which its local financial filings revealed cost just over $1b – in December.

More aggressive cost-cutting, more job losses

A “significantly expanded cost-cutting programme” was now on track to deliver $80m — $100m in labour and operating expenditure costs “in-year”, “funded by a non-recurring transformation charge of $45m – $50m”, with $29m reported in the first half result.

Additional cuts of $20m — $30m in labour and op-ex were seen next year, then ongoing annual savings of $110m – $140m by FY27.

Last August, Spark said it would cut $50m from its labour costs in 2025, implying it would cut about 10% of its workforce. That target had been “exceeded”, the company said today.

“We are responding to the challenges we are experiencing in the short-term, in a way that also builds a stronger, more competitive business over the longer term,” Hodson said.

How the opposition is faring

Rivals have also referenced the economic downturn, but have so far been holding up better than Spark — with the proviso that they’ve yet to reveal numbers for the unexpectedly sustained downturn during the first half of FY25.

In November last year, privately-held 2degrees reported full-year revenue that rose 7% to $1.34b, and Ebitda (earnings before interest, taxes, depreciation and amortization) that increased 16% to $339m for the year to June, excluding one-off cell tower sale proceeds. Its adjusted net loss shrank from the prior year’s $38m to $3.1m.

Analysts say 2degrees, now owned by an Australian joint venture controlled by the deep-pocketed Macquarie Group and Aware Super, has pushing out of its traditional consumer base and into Government and enterprise contracts. An example is 2degrees recently teaming with Palo Alto Networks to win a six-year contract to supply telecommunications, security and network services to 95% of our 2500 schools through to 2031, displacing incumbents Spark and Fortinet.

Infratil reported the same month that One NZ — in which it now holds a 100% stake — had seen Ebitdaf (Earnings before interest and taxation, depreciation and amortisation and fair value adjustments) increase 9% to $304m for the six months to September as operating costs fell by $14m. It maintained for-year operating earnings guidance for the telco of $580m to $620m.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.