Spark says it will cut $50 million, or 10%, from its labour costs this financial year – a move that puts potentially hundreds of jobs on the line in an ongoing restructure. The savings include
Hundreds of jobs affected as Spark aims to cut $50 million in labour costs
![Chris Keall](https://s3.amazonaws.com/arc-authors/nzme/9c36db5b-77f8-41e1-8b20-0f64c76f7992.jpg)
Spark chief executive Jolie Hodson. Photo / Jason Oxenham
On an adjusted basis, revenue was down 1.2% to $3.861b, net profit fell 21% to $342m and earnings before interest expense, tax, share-based payments, defined benefit expense, depreciation, amortisation and impairment (ebitdai) dropped 2.5% to a below-forecast $1.163m.
An unusual miss
“While this was not unexpected per se, the result was a bit weaker than what we and most had anticipated,” Nikko Asset Management portfolio manager Michael De Cesare said.
“Spark have a long history of meeting the earnings guidance they provide to the market,” De Cesare said.
“Unusually, for FY2024, having provided their first-half result in February, they subsequently updated the market in May, reducing their earnings guidance range by almost 4% [from $1.215-1.260b to $1.170-1.210b] on weaker economic conditions and softer demand from the public sector, especially in their IT Service Management business.”
“While the downgraded range so late in the financial year was surprising, the shock was that Spark still delivered FY2024 earnings below the bottom end of this updated earnings range.”
Jarden analyst Arie Dekker noted a decline in free cash flow – and nothwithstanding Spark’s newly revealed ambition to raise up to $1b for data centre expansion, in the second half spending actually slowed down on that front on a “stretched balance sheet” as free cash flow deteriorated.
Labour, opex cuts
Despite incremental rounds of restructuring, including cuts to marketing and other departments in March, Spark’s FY2024 labour costs actually climbed slightly to $512m from $511m the year before.
“We could not adapt our cost base quickly enough as the market turned,” chairwoman Justine Smyth said in Spark’s market filing on Friday.
Capital expenditure is also being cut in the new financial year (which started on July 1), from $513m in FY2024 to between $460m and $480m.
Cutting $50m from its labour costs will take Spark’s bill down to $462m – a 9.7% fall. It is understood that Spark’s cloud specialist CCL is one of the hardest hit units.
The telco has 5291 staff, according to its annual report published Friday.
A straight 9.7% reduction would mean 513 layoffs.
But a Spark spokeswoman said it wasn’t that simple. Many of those now being assessed are in the telco’s Government and enterprise business, where salaries are higher – meaning proportionately fewer roles would be affected to reach the $50m target.
And chief executive Jolie Hodson told the Herald the FY2025 savings would partly come from cost-cutting that had already taken place.
The $50m target implies a similar number of roles could be lost before the restructure wraps up.
“We haven’t translated that to headcount yet. We’re still in the middle of changes right now and we never make those decisions lightly,” Hodson said.
“It’s been a tough year. We’re disappointed,” Hodson added. “We’re focused on returning to growth through mobile, data centres and stabilising costs in 2025.”
“We’ve seen some movement in terms of the OCR [official cash rate] and that does put money in people’s pockets, but for the start of the financial year it will still be tough.”
Spark’s total IT revenue fell 1.6% to $692m in FY2024, driven by a $29m (14.9%) decline in IT services.
Hodson wouldn’t comment on Government cuts and delays that have hit various IT upgrades. She said the slowdown in Government and corporate IT services spending was “cyclical”.
Mobile strength
Jarden analyst Arie Dekker noted data centre spending slowed down in the second half of the year but, on the positive side, mobile services revenue grew 3.1% to top $1b for the first time – with another 3% forecast for FY2025.
Yet Jarden also noted mobile growth was slower than FY2023′s 8.5%, and at $1.01b was shy of its target of $1.03b.
Broadband revenue fell 2.1% to $613m as connections fell by 12,000 to 687,000.
Return to profit growth forecast
In terms of the bottom line, it will be slightly less tough than FY2024.
The telco is picking ebitda will rise from the adjusted $1.163b reported for FY2024 to between $1.165b and $1.122b in FY2025.
Spark said its dividend will stay at 27.5 cents per share (cps) in FY2025 – a win for dividend-focused shareholders in that Jarden had been picking a possible cut.
Dekker was disappointed it wasn’t cut. His firm had been emphasising stability as Spark looks to fund data centre expansion.
“On capital management, we are pleased with an ongoing commitment to [a credit rating of] ‘A-’ but view the decision to hold the dividend against very weak cash flow cover as questionable.”
Holding the dividend at 27.5cps would mean paying out around $500m, Dekker said, when free cash flow came in at $330m in FY2024 vs $489m in FY2023.
Data centres a bright spot
Spark’s data centre revenue grew 54.2% to $37m in FY2024, with Spark’s Takanini campus expansion completed on time and on budget and new revenue streams coming online. The growth was strong, but not as strong as the $40m Jarden had been picking.
Hodson noted Spark’s planned “surf lagoon” data centre in Dairy Flat – which gained resource consent in the final days of FY2024 – would be a source of future growth. Stage one will feature a 10-megawatt (MW) data centre. Expansion to 40MW is planned (putting it toe-to-toe with CDC and the Big Tech players), with an investment partner possible.
But, for now, not bright enough
In an adjacent sector, Spark’s “high-tech” revenue grew 21.5% to $79m, with IoT (Internet of Things) revenues up 53.3% and over two million devices now connected to the telco’s IoT networks.
“This was not enough to offset subdued demand in other areas, and we could not adapt our cost base quickly enough as the market turned,” Smyth said in Spark’s market filing.
Heart of the Mattr?
Dekker said Spark would need to manage a close to 10% reduction in labour costs “without impacting core businesses”.
He already had a debatably non-core target in mind.
Jarden had been looking for more details on Spark’s online verification business Mattr now that it was five years into its operation. And if those details were not good, it was time for the telco to “show discipline”, as it had when it shuttered Lightbox and Spark Sport.
The telco did not. Hodson said Mattr was not yet making a “material contribution” to Spark’s revenue, and its numbers would not be broken out until it reached that level.
However, she did talk up the business unit, saying it continues “to help solve problems for consumers, businesses and Government”.
$1b for data centres, funding options explored
Smyth said a potential hybrid capital notes issuance would help fund its growth investments in the near term. “We will also explore other equity funding options such as capital partnerships.”
Spark also said it planned to spend $1b on data centre expansion over the next five to seven years – although a relatively modest slice of that, $70m to $90m, in FY2025.
“The provision of data centre solutions is a lucrative business when done well and Spark has some credibility and experience in this space,” Nikko’s De Cesare said.
“If the NZ industry grows as forecast and Spark executes well, then this could become a valuable business with passage of time.
S&P rating ‘squeezed’
The decline in free cash flow saw the telco end FY2024 with $1.64b in debt or 2.1x ebitda – framed as a “temporary” departure from the 1.7x ebitdai ratio target for its A- credit rating, which would be addressed by the planned cost-cutting.
“The weaker-than-expected earnings and higher debt levels further squeeze our ratings on the company,” S&P Global said in a note.
“Our rating on Spark (A-/Stable/A-2) incorporates our expectation that the company’s prompt action will see credit metrics revert to appropriate levels for the rating by the end of fiscal 2025, despite deteriorating operating conditions.
“We believe Spark is committed to protecting the ‘A-’ rating and will take necessary actions to achieve this.”
It would be challenging for the telco to juggle the needs of debt and equity holders as it sought to expand its investment in data centres, S&P said.
More generally, the ratings agency added, “The importance of mobile is increasing in light of the weak outlook for the enterprise and Government segments. Spark’s IT services face weaker demand due to a pullback in discretionary spending by customers and an acceleration in structural headwinds. We consider IT services to be a highly competitive space that exposes Spark to well-capitalised, non-traditional rivals.”
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.