Asset sales on the cards as Spark cuts 2025 guidance

A strategic review of non-core assets is underway, and the telco has already decided to sell out of local towerco Connexa. It will also ramp up its ongoing cost-cutting programme.

Spark initially expected EBITDAI (that last 'I' pertains to net investment income) to be in the range of NZ$1.165 billion-NZ$1.220 billion, but now it expects it to land somewhere between NZ$1.120 billion and NZ$1.180 billion.

Putting those numbers into context, in fiscal 2024, Spark's EBITDAI came in at NZ$1.163 billion, which means it will have to pull out all the stops and hit the high end of its revised range if it wants to achieve any kind of earnings growth next year.

In order to hit its free cash flow guidance of NZ$400 million-NZ$440 million, Spark said it will reduce next year's capex to somewhere between NZ$415 million and NZ$435 million, from NZ$460 million-NZ$480 million.

Shareholders will also see their payout reduced to 25 cents per share from 27.5 cents per share.

"The board and management acknowledge that our current financial performance falls short of what is acceptable, and we understand the disappointment our shareholders will be feeling," said Spark chair Justine Smyth.

"The challenges we are facing are both cyclical and structural," she said. "Weak business investment and consumer spending continue to curtail growth and squeeze margins."

At its mobile division, Spark initially expected service revenue in 2025 to tick up by around 3% year-on-year, but it is now expected to remain largely flat. Consumer and SME postpaid connections are growing more slowly than forecast, and the prepaid operation is seeing sharper declines due to competition.

Reduced consumer spending has also resulted in lower ARPU at both the postpaid and prepaid businesses.

At its Enterprise and Government division – which is already in the midst of an overhaul due to intense price competition – Spark said connections are stable, but ARPU decline has accelerated due to the prevailing competitive environment.

Spark's IT division is also challenged. While the rate of revenue decline is stabilising (IT revenue fell 1.6% year-on-year in 2024 to NZ$692 million), margins have been hit by an accelerated shift between private and public cloud.

Spark is already taking measures to steady the ship.

"We are reviewing all non-core assets to determine if Spark remains the best owner, or if divestment or partnerships will deliver greater value to shareholders while further strengthening the balance sheet," Smyth said. "We have made the decision to divest our shareholding in mobile towers business Connexa, and while a transaction is not yet certain, the strong levels of interest we have received is reflective of the high quality of the Connexa business."

Smyth said Spark will provide an update on the review when it publishes interim figures next February, or sooner should there be any material developments.

Spark is also on the lookout for external sources of funding for its growing data centre business, Smyth said.

Further cost-cutting is also on the cards.

Under its SPK-26 strategy, Spark is on track to lower labour costs by NZ$50 million, and also hopes to reduce opex by NZ$30 million under its efficiency drive, called the 'Operate Programme'. Spark said it intends to expand the Operate Programme in hopes of achieving "materially higher" cost reductions over the course of fiscal 2025 and 2026.

"We recognise that we have a lot of work ahead of us to win back the confidence of our shareholders, and we are committed to that work," said Spark CEO Jolie Hodson.

Trying to inject a bit of optimism into an overwhelmingly downbeat announcement is no mean feat, but she gave it a good go.

"While we are navigating a subdued economic environment and increased competitive pricing pressure in the business market, the long-term value drivers of mobile remain," she said.

"Demand for data continues to grow, our brand health is strong, and we are focused on stimulating growth into the second half through pricing, new campaigns, and a new Endless plan line-up that will deliver our customers higher data allowances than ever before. When combined with easing monetary policy, we are confident these tailwinds will continue to support a strong and growing mobile business into the future."

Indeed, this guidance cut seems to signal more of a blip than a full-blown crisis, one caused primarily by the current malaise afflicting New Zealand's economy, rather than any strategic misstep.

Nonetheless, the pressure is on Spark's management to find a glimmer or two of light amid the gloom.