A render of how Aventuur Auckland Surf Park will fit into the Dairy Flat landscape.
Spark used its first-half result to underline its data centre ambitions.
If everything falls into place, the telco will increase its capacity by five times and go toe-to-toe with the local operations of CDC, the fast-growing data centre business in which One NZ owner Infratil has a half-share. Its CDC stake, valued at more than $4 billion, has emerged as a profit centre and Infratil’s largest single asset.
Chief executive Jolie Hodson said a 10-megawatt expansion to Spark’s Takanini data centre came online in August last year and started generating revenue during the half, which the CEO said drove an 18.5 per cent increase to $38 million in data centre revenue - hyper-growth, albeit off a modest base, that was a standout in the telco’s numbers for the six months to December 31.
With the Takanini upgrade, plus a smaller upgrade to its Aotea facility, Spark now has increased its total data centre capacity to a chunky 22MW (data centres are classed by the amount of megawatts they consume at peak capacity).
But that could be just the beginning. Projects are in the pipeline that could take that to 92MW - which would put Spark on a roughly equal footing to the local operations of CDC.
For starters, Spark is now drawing up plans to add another 5MW of capacity at Takanini, with construction slated for the second half of FY2025.
Spark has also entered a conditional agreement to purchase land in Auckland’s northwest to build a 10MW data centre.
The land was within an “existing development”, Hodson said.
It will be separate from the giant, 5.8ha server farm being constructed by data centre builder and operator DCI in Albany, a collab expected to host Amazon, Microsoft and other tech giants.
In fact, it will be somewhat further north, in Dairy Flat on the city’s rural fringe (a rep for Spark confirmed the location - spied by locals - although in Spark’s investor presentation it’s described as “Albany”). It’s part of the 43ha master-planned development in Dairy Flat being developed by Aventuur, which numbers Sir John Kirwan as a project partner.
Spark bought a 4ha superlot in the Dairy Flat development, for an undisclosed price.
So far, the Aventuur development is best known for a proposed surf park, including a man-made lagoon, wave pool, and 7ha solar farm. The projects sound disparate, but a Spark spokeswoman revealed they’ll work together.
“The plan is for the waste heat from the data centre to be used to warm the surf lagoon that Aventuur have announced,” she said.
“The development also includes a solar farm planned for the site, which would provide the data centre with a portion of its energy needs. So, it’s quite a unique proposition, but still going through resource consents at this stage. We will have more to share as we further progress our planning in the coming months.”
The Dairy Flat data centre will have an option to add another 30MW of capacity.
The Takanini and Aotea upgrades were part of Spark’s existing budget. How will the potential push to 92MW be funded?
“We’ll consider appropriate funding models or partnerships for this investment as we progress those opportunities,” Hodson said.
“Overall, we’re targeting returns of 9 to 10 per cent over time as utilisation scales.”
Hodson said she was unphased by the fact Microsoft, Amazon Web Services and others are building their first local “hyper-scale” data centres - also in Auckland’s northwest - as many organisations shift from “private cloud” to “public cloud” set-ups.
In various contexts, Spark will be a partner or customer of the big tech firms - and in others, it will be selling them services, Hodson said. AWS and Microsoft’s facilities will require a truckload of bandwidth from Spark (and its peers).
More broadly, Hodson added that, “If you stand back, what drives all this is great growth in data with AI and digital transformation as more businesses move to the cloud. And that’s not going to go away.”
The fact that the Takanini upgrade hit 88 per cent utilisation from the get-go, immediately pouring millions of profit into Spark, underline’s the CEO’s thesis and explains the board’s enthusiasm for signing off on new construction.
Earlier today, Spark reported an adjusted net profit fell 4.8 per cent to $157m for the first half of its FY2024 financial year, but adjusted Ebitdai (earnings before interest, tax, depreciation, amortisation and impairment) was up and the telco reaffirmed its full-year earnings and dividend guidance.
Shares were up 1 per cent to $5.13 in early trading. Jarden analyst Arie Dekker called it an “in-line result with no surprises - [with] mobile doing all the work”.
Numbers for the first half of FY2023 were inflated by the sale of 70 per cent of Spark’s cell tower network to a Canadian investment fund for $911m.
Without adjusting for that windfall, net profit was down 81.8 per cent.
“NPAT [net profit] is further adjusted for the tax effect of the net gain on sale of the TowerCo transaction and the Spark Sport provision [a previously flagged $52m] totalling $168m,” Spark said.
In July last year, Spark offloaded the bulk of its sports streaming operation to TVNZ, with the telco pledging to pay the tab for rights through to 2028.
Similarly, Ebitdai fell 49.1 per cent to $530m, but was up 3.9 per cent on an adjusted basis.
And while revenue fell 22 per cent to $530m, it was up 3.9 per cent after stripping out last year’s tower proceeds.
A first-half dividend of 13.5 cents per share was declared and Spark reaffirmed its full-year dividend target of 27.5cps.
As analysts expected, mobile was the strong point, with mobile services revenue up 6.3 per cent to $510m.
Average revenue per customer per month (Arpu) increased by 55c (ahead of the analysts’ pick of 22c) over H1 2023 to $30.66.
On a conference call, CFO Stefan Knight put the increase down to “strong demand for data and the impact of price increases”. Roaming revenue had rebounded to 107 per cent of pre-pandemic levels.
Ahead of the earnings, in what proved to be a prescient comment, Jarden’s Dekker said top-tier mobile customers were now getting more data for less from the three mobile players - but customers further down the food chain had been hit by price increases and stingier data. Or, as he put it in more technical and diplomatic language:
“We have observed strong market discipline in the data allowances and pricing of entry-level and medium-level post-paid plans where prices have held or are increasing against very small increases in data allowances.”
Broadband revenue was down 1.3 per cent to $309m. Spark said the number of its broadband customers on fixed-wireless plans, which are higher-margin because they cut Chorus out of the loop, increased from the year-ago 29 per cent to 31 per cent.
Spark said cloud had returned to growth but total IT services revenue was flat at $345m. Under that headline number, data centre revenue was up 38.5 per cent to $18m, while “high-tech”, including the telco’s internet of things (IoT) and AI operations, was up 12.9 per cent to $35m, and digital health - a standout performer last year - was down 8.7 per cent to $42m “primarily due to lower public sector demand”.
On an analyst conference call, Hodson said the fall could be pinned, in part, on uncertainty. “Like you have in any country, when you go through an election, you expect to see that reserve; a bit of a pause.” Government agencies have paused some projects while they wait for the new Government to detail its plans. Knight said IT services had been the division most exposed to the economic downturn.
Net debt increased from $798m in H12023 to $1.56b as tower sale proceeds were returned to shareholders and Spark invested in data centres and stand-alone 5G.
The telco’s wage bill was up 4 per cent, pinned on pay rises in a tight (if now loosening) labour market. But Hodson said between simplification, “digitising customer journeys” and AI measures, the company was still on track to achieve its target of $40m to $60m cost-saving target for the full year.
Spark shares closed on Tuesday at $5.08.
The stock is up 1.6 per cent over the past 12 months.
Ahead of today’s results, Morningstar had a three-star rating and a $4.90 fair valuation estimate.
Jarden had a neutral rating and a 12-month target of $4.95.
And Forsyth Barr had a neutral rating and a target price of $5.30.
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.
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