StarHub Ltd

SGX:CC3

Earnings Call Transcript 2020-Q2

[Amelia Lee, executive]

Good morning, ladies and gentlemen. Thank you for joining us this morning for StarHub's 2Q and First Half 2020 Results Update Call.

With me this morning, we have our Chief Executive, Peter K.; CFO, Dennis Chia; Head of Enterprise, Charlie Chan; Head of Consumer, Johan Buse; and our CTO, Chong Siew Loong. Our senior management will bring us through a quick presentation on results highlights and 5G plans before we open the floor to questions.

Peter, over to you, please.

[Peter Kaliaropoulos, executive]

Thank you, Amelia, and a very good morning, ladies and gentlemen, and thank you for your interest in our results this quarter.

We will focus the presentation on 3 themes: the results and highlights for quarter 2 and the first half, then we'll share with you some of the preparation and the investment for 5G, and then we'll offer you guidance and an outlook for the rest of the year.

Allow me to cover some of the material in the presentation, although I will not go slide by slide. If we reflect back in quarter 2 and the first half, our fundamental priorities and our focus for the business has been, first of all, to safeguard the health and the interest of our employees and customers. Secondly, to support the community. Thirdly, to adjust the way we serve and support our customers from direct ways via now online sales and service capability. And fourthly, to retain a high level of customer service.

Our trading results for the second quarter, which is fully impacted by COVID-19 and the circuit breaker and the global travel restrictions, has been challenging. Our Mobile business has been affected mostly by lack of roaming, lack of IDD, lack of prepaid customers through lack of tourism and ongoing competition by SIM only.

If you look at the Pay TV, again, year-on-year, we're showing lower revenues, resulting from the migration and the lower customer base when we migrated from cable to fiber. But the good news there is that quarter 1 versus quarter 2, we're seeing stability in Pay TV revenues and stability in our customer base.

Similar strength for our Broadband business. Again, year-on-year, there were a lot of promotional initiatives for Broadband, which has dropped the revenue year-on-year. But if you look at quarter 1 versus quarter 2 this financial year, we're seeing stability in revenue and stability in customers.

Our Enterprise Business, again, year-on-year, it showed higher results, predominantly coming through the growth in our cybersecurity revenues, growth in our Internet services and growth in some of the domestic circuits that we're providing customers. And that's been offsetting some of the low revenues we're seeing in managed services and voice revenues.

Our managed services business, especially in quarter 2, is affected because we are seeing lower projects coming to completion. And what we're also seeing is delayed customer spend in new projects and also delayed tenders. So the managed services business will continue to be challenged.

At the same time, in quarter 2, if you look at our results, we've applied the ongoing disciplined approach to expense management, OpEx and cash flow management. And certainly, we've recorded a very healthy growth in free cash flow. And also the cash and cash equivalent balances in the bank was about $480 million at the end of quarter 2. And that has helped us also have a better net debt to EBITDA ratio of 1.3x.

Despite the challenging operating conditions for quarter 2, we continue to advance the transformation agenda. And some of the highlights there includes the IT transformation has progressed with PCCW. We entered the relationship, and that will accelerate the digitalization of our business. We continue to invest in growth and diversity through our investment in Strateq, which we completed on 30th of July. And also, we continue to invest in the growth and retention of the customer base in Singapore via 5G investment, which we announced again last month.

Having said this, I will now ask Dennis, our CFO, to offer you some more details on the financial results for quarter 2 and the first half. Dennis, over to you, please.

[Choon Hwee Chia, executive]

Thanks, Peter. Good morning to everyone. I'm now on Slide 6, and I'll just call out some of the key highlights of our second quarter results and our first half results.

Our service revenue for the quarter was $376 million versus $442 million a year ago. This is primarily the result of declines that we experienced in the Mobile and TV lines of business primarily. In the Mobile space, we've seen actually a decline in roaming revenues due to travel restrictions that we have seen flow through all the way in the second quarter of this year. There's also been a decline in terms of the prepaid customer base because of the tourist footfall as well as the foreign worker segment as well. ARPUs for Mobile were $30 at the end of quarter 2. And for prepaid, it's $10. Noteworthy is the fact that our churn rate have also come down during this period as well to 0.8%. You see average data usage at about 10 gigabytes per month.

If we move on to the operating expenses. We are looking at a decrease in operating expenses, $418 million versus $495 million. And the cost of sales element are in tandem with the reductions in revenues that we've actually booked. But in terms of discretionary operating expenses, we've also seen significant savings in almost all lines of expenses, including marketing and promotion, repair and maintenance, operating leases and also savings from the cable-to-fiber migration cost that we incurred last year that we do not incur this year as well.

For EBITDA, we came in at $129 million this year, a slight decrease from $146 million a year ago. Our service EBITDA margins are stable at 31.5%. Our net profit for the quarter is $37.3 million, and that is a slight decline from $39.5 million a year ago. However, we do want to point out that this includes approximately $15.7 million of Jobs Support Scheme that we received from the government during the quarter, and that was also recorded during the quarter. Free cash flow for the quarter was $155 million, and that translates to $0.089 per share. For the first half, it's $274.6 million, and that translates to $0.158 per share.

I'll skip through all the remaining slides as we have already pointed some of the key highlights. I'll move on to Slide #12 just to point out that we continue on the transformation and cost optimization initiatives. And we're now happy to report that we are at approximately 75% of the greater than $210 million target that we advised the market about 1.5 years ago. So we are midway into the journey. And the key elements of these transformation savings includes in the workforce optimization area, other areas of discretionary expenses and in the TV content space in terms of the renewals of content and conversion, and more importantly, conversion of the cost model from fixed cost model to a variable cost model.

The profit highlights I've gone through, and I'm now on Slide 14 and call out some of the balance sheet. And the fact that because of the high cash that we generated in the quarter and the first half, our net debt to EBITDA stands at 1.29x at the end of Q2. We've also refinanced all the short-term loans that were repayable in the second half of this year. And we've got additional liquidity that we've secured in terms of committed facilities of about $300 million. We do expect to pay for spectrum, for the 3.5 gigahertz C-band, which is for the purposes of the 5G stand-alone network and the millimeter wave indoor coverage that we expect to roll out.

With that, I'll pass the floor over to our Chief Technology Officer, Siew Loong, to take us through the following slides on 5G. Siew Loong?

[Siew Chong, executive]

Thank you, Dennis. Good morning, everyone.

I'm now just going to the Slide 16. Basically, Slide 16 gives a quick overview about the 5G rollout. I think we're happy to be obtaining the 5G award from IMDA. And together with our JVCo partner, we will commence the 5G rollout at the later part of this year. We expect commercial launch of the 5G stand-alone network in 2021. And by end of 2022, we will expect at least half of Singapore will be covered by the new radio network and achieve the nationwide coverage in 5 years' time.

I will move on to Slide 17 to give a bit more details on the shared network. It will be the first shared active radio network in Singapore. The JV company or the JVCo will share the 3.5 gigahertz base station, both for indoor and outdoor, the radio spectrum, the antenna as well as the transmission backhaul. Both companies will maintain our own core network, service platform and billing system. And having our own core network enables service innovation and differentiation and thus promoting competition.

On the 5G network, it will be based on the 3GPP Release 16 stand-alone architecture that support not only the mobile broadband services. It can also take on low latency services, massive machine type communication, network slicing, edge computing and many other new services that we're able to carry over the new network. It will also seamlessly work with the current 3G/4G network, ensuring service continuity for current voice, data and messaging services while the new network is being introduced.

I will move on to Slide 18. Basically, this slide shows a little bit more of the network collaboration structure. The JVCo is equally shared on a 50-50 ownership, jointly owning the spectrum and the radio equipment. And the radio capacity is being wholesaled back to both parent companies. Both MNO will build the stand-alone core network with our respective own 3G and 4G network offering full service to our consumer, enterprise and mobile virtual network operator. So with this JV structure, we will continue to innovate and evolve, bringing in new services to the market.

I will now hand the slide back to Dennis, who will talk a little bit more about the JVCo funding as well as cost-sharing model. Dennis?

[Choon Hwee Chia, executive]

Thanks, Siew Loong.

I'm on Slide 19. And just to point out that this joint venture company will be a stand-alone special purpose vehicle. We expect to fund it 85% by debt and 15% by equity. All operating expenses and capital expenditure and profits are to be split 50-50, and there will be an independent management for this joint venture company. I just also want to point out that we do not expect to consolidate this joint venture, and we will be doing an equity accounting from an accounting perspective.

On Slide 20, to note is the fact that we are continuing to look for capital expenditure efficiencies on the legacy network, primarily the 3G and 4G, to fund the 5G deployment. We expect the deployment costs, including the spectrum costs and the requirements accepted by and stipulated by IMDA, to be approximately $200 million over a 5-year period. This includes the share of the capital expenditure that we would incur in the joint venture of 50%. Any other features that we bolt on to the 5G infrastructure will be on a business case basis and driven by return on investment.

With that, on 5G devices, I'll pass the floor to our Chief of Consumer, Johan, to talk about the devices. Johan?

[Johan Hendrik Buse, executive]

Thank you, Dennis. So good morning, everyone.

So we are very much looking forward to the new ecosystem, 5G. On Slide 21, you can see actually the predictions, which have been issued by various institutions around the global growth and also Singapore expected growth in terms of 5G handset shipments. And we can already see actually the first hero devices coming into the market, which brings us to Slide 22 where we display our focus areas on 5G.

And for consumer, and later on I will hand over to Charlie for the business side, we have 3 focus areas at this point in time. First of all, it is about mobile cloud gaming, which is offering a completely new experience. We did actually last December a demo in our lobby, and it is amazing to see what 5G delivered in terms of improvements on latency. The second is AR/VR, where we plan to bring VR gaming and also a suite of content in that space. And the third one which we're exploring is fixed wireless access, which could be a niche service in Singapore, offering a very plug-and-play, instant, high-speed Internet connection for consumers.

On that note, I'll hand over to Charlie to elaborate a little bit on the business use cases. Charlie, over to you.

[Charlie Chan, executive]

Thank you, Johan. Good morning, everyone.

We are excited about the possibilities of 5G in the enterprise space when you look at the massively machine in, machine out capabilities that we will have, the potential for the IoT industry, for the full potential that we see now in the various conversations we're having in the marketplace. Driven by the capability of artificial intelligence, we see that clients will be in a position to take advantage of 5G and create new solutions that will help them leapfrog the industries that they are in.

I now point you to some of the examples on Page 23. It is about helping customers understand the ecosystem. In essence, no one can do 5G or realize 5G capabilities in and of themselves, will require a whole village, so to speak. On that front, we have been working closely in the innovation arena with institutions like NUS and NYP, setting up our Apex Centre, as an example. We've also engaged with the industry through the GSMA Roundtable as well as the Chamber of Commerce for the Americans on the topic of network security in the 5G space. Johan talked about the showcase that we shared with the industry and also with consumers. And that is a portent, as I said, of things to come. We want to continue to drive those engagements with our clients as we develop the potential use cases.

Right now, I'd like to hand you back to Peter, who will talk about the next couple of areas. Peter, over to you.

[Peter Kaliaropoulos, executive]

Thank you, Charlie.

Just before we get off to the 5G, allow me to share with you 3 observations which apply to us in 5G. First of all, as the gentleman explained, we're trying a new business model of sharing infrastructure to basically get the right return of investment and also provide services quicker. So that's a different business model to whatever has happened in the industry before. Second initiative about 5G is the pleasant surprise that we got from the competitiveness of the bids from the various technology vendors. You will see the amount of investment we're putting aside. And only a few months ago before the formal bidding process started, the estimates were much higher for 5G infrastructure. And thirdly, we're also pleasantly surprised because of both handset availability and the handset cost. So the entry phase of 5G is better than what we expected.

If I now reflect in terms of guidance and outlook for the rest of this year. On Slide 25, we highlighted the previous guidance we had given earlier in the year which was suspended and a current update. The impact of COVID on our Mobile business, roaming, IDD, international travelers coming in and out of Singapore will continue to impact us, and we expect to continue to see some positive revenue contribution from the cybersecurity business. But when we analyze the performance of the company, especially under almost 4 months of full COVID impact, we now expect a 10% to 12% reduction in service revenues compared to 2019.

Our service EBITDA margins, although the first half we reported higher margins, our guidance stays the same as previously, 27% to 29%, because we do have some operational expenditure in the second half, more marketing activity, additional R&M. So that will bring us back to about 27% to 29%.

Also, if you look in terms of the CapEx commitment that we gave you previously, the 6% to 7%, again, no material difference. We do believe we will finish the year with 6% to 8% of total revenue, and that excludes, of course, the 5G investment that we are making. And the cash payment would be more in 2021 and also any other one-off costs like spectrum for the 700 megahertz, which brings us to a dividend per share and approach. And let me again say that we continue to be committed to a dividend policy as we've announced it before. And that is to pay at least 80% of our net profit attributable to our shareholders and excluding any adjustments, one-off adjustments, either positive or negative. And we're committed to paying this on a semiannual basis.

So taking into account everything that has happened to us in the last 6 months and the outlook, we are now announcing that we are declaring an interim dividend of $0.025 per share. Also, going forward, taking into account the COVID impact on our business and some of the operational expenditure, disciplined approach we're taking to cash flow and to our overall expenditure, we do believe that the trend will continue on the revenue side and margins, as we explained, and we do expect to declare a final dividend for the year equal or higher to the interim dividend of $0.025.

So that brings us to the conclusion of the presentation and on the very last slide, Slide 26. It is some of the directional approach we're taking that we continue to try and optimize the return from our assets. We continue with trying to transform the business, whether it's the retailing side, whether it's the digital side of the business. We continue to search for growth because in Singapore that's the #1 challenge we have, growth, especially in some market segments. There is saturation and there is less, lower amounts of customers participating in the market. So growth to us is important, and we expect to continue looking for opportunities to invest in local or regional operations. And that, of course, brings us to trying to continue to diversify the business, both geographically and in terms of products and capabilities. And of course, Dennis and the team have done a tremendous job, and we've got that track record that we're being very prudent in the way we allocate capital and the risk management behind the business to ensure that we do produce dividends and we produce the right cash for our shareholders.

So that brings us to the end of the formal presentations. We're happy to take questions from yourselves at this point in time. Thank you.

[Amelia Lee, executive]

Thank you, Peter. We now open the floor to Q&A. [Operator Instructions]. Let's now take the first question from Arthur.

[Arthur Pineda, analyst]

Several questions, please. Firstly, if I can just get some clarification on the accounting treatment for the JV entity and investment just to double check this. So all of the debt incurred by the SPV will be held off-balance sheet as well and the only thing to be booked on StarHub's books will be the proportionate equity expenses. Is that correct? Second question I had is with regard to, again, on 5G. Just to clarify the $200 million CapEx over the 5-year period. Does this pertain only to StarHub's share of the JV or is that for the entire entity? And does that include the spectrum as well? Next question would be on the job grants. How much more do you expect to see for the second half of this year and is this included in the service margin guidance that you have for the full year?

[Peter Kaliaropoulos, executive]

Thank you, Arthur. Great questions for Dennis.

[Choon Hwee Chia, executive]

Okay. And I'll attempt to answer your questions. To your first question on the accounting treatment, the answer is yes. The debts, the assets and the liabilities of the JV will be off-balance sheet. As a result, we will only account for 50% of the bottom line in terms of the share of profit or loss from an associate company. And that's how it's going to be booked in our P&L going forward. Your second question...

[Arthur Pineda, analyst]

Dennis, can I just clarify? The revenues will be booked -- 5G revenues, however, will be booked on the StarHub level, right?

[Choon Hwee Chia, executive]

Yes. Absolutely, because the 5G revenue or anything that we roll out in terms of our business cases or use cases for 5G is deployed by the mobile network operator, ourselves. So we are still competing. We are only sharing the infrastructure. We're not sharing the revenues here. Okay?

[Arthur Pineda, analyst]

Got it.

[Choon Hwee Chia, executive]

To your second question on the $200 million CapEx. Now this includes the share of the JV CapEx that we expect to incur. And as Siew Loong has explained, what is in the joint venture is the radio network and the shared spectrum. So it does include the spectrum cost as well. What is not included in the joint venture are the core elements like the core network, the transmission fiber backhaul, security and the billing. Those will be on the StarHub side on a stand-alone basis. So those will be recorded in the StarHub book.

[Arthur Pineda, analyst]

Sorry, Dennis. Just to clarify, the $200 million is your proportionate share or that's the CapEx of the JV entity?

[Choon Hwee Chia, executive]

So no. The $200 million is the share, the 50% share in the JV, plus the CapEx that we have to incur on our own network. So the portion that's attributable to the JV will not be recorded in our balance sheet, but we are giving you an assessment of the total expenditure that we expect to incur to roll out and deploy the initial rollout.

[Arthur Pineda, analyst]

Got it.

[Choon Hwee Chia, executive]

Okay. And finally, your last question on the Jobs Support Scheme. As I've explained in the second quarter, we've recorded about $16 million, $15.7 million to be exact, in the second quarter. We expect to record another $12 million based on the grants that the government has announced, based on the 4 rounds of budget that they have announced. So the $12 million, and this is included in the service EBITDA margin guidance that we have given.

[Amelia Lee, executive]

Let's now take the next question from Foong.

[Choong Chen Foong, analyst]

A couple of questions from me. Firstly, on the 5G CapEx, right? You mentioned that it does not include the investment on your side for the core network. So can you sort of give us an idea as to how much that might cost? And also for the $200 million share of the JVCo's CapEx, can you sort of guide us as to how that might be spread over the next 5 years? Second question on the -- you also mentioned IT transformation. Just wanted to understand when will that be completed and do you have an estimate for the CapEx for that program? And post IT transformation, what sort of benefits can we expect to achieve? And then my third question, on the dividend payout policy, as I understand, it is a payout on the normalized net profit. So I just wanted to understand whether when you say normalized net profit, like does that include the job credit scheme?

[Peter Kaliaropoulos, executive]

Dennis, I think you're going to be busy this morning.

[Choon Hwee Chia, executive]

Okay. Foong, I'll answer your 3 questions. Just to be clear, the $200 million that we have indicated as the cost for deploying the initial rollout includes both our 50% share of the radio network that sits in the joint venture company and the core network that sits outside of the joint venture company. So that is sitting in StarHub, and the $200 million number that we have guided include both elements. So 50% of the radio as well as 100% of the core that belongs entirely to StarHub. So I hope that's now clear. So it includes all the elements and it also includes 50% of the share of the spectrum cost as well. Does that answer your question, Foong?

[Choong Chen Foong, analyst]

Yes. It does. And it actually looks like quite a very -- I mean, it looks like quite a low number. So just to clarify, right, the $200 million, is there a split between what you're going to be putting into the JVCo and what is the amount for the core network?

[Choon Hwee Chia, executive]

Yes, of course, we know what the split is, but for confidentiality reasons and for reasons of commercial negotiations with our vendors, we are not going to actually provide the split. But I think, suffice to say, that when you do see us incurring these expenditures and what we actually record as capital commitments on the StarHub side, and bearing in mind to Arthur's question -- in response to Arthur's question earlier, all the capital commitments on the JV side will not be incurred and they actually will be recorded off-balance sheet. So you'll see that split at a point in time. But for reasons of commercial sensitivities, we will not provide the split at this juncture.

[Choong Chen Foong, analyst]

Okay. Got it.

[Choon Hwee Chia, executive]

Okay. Your second question, Foong, on the IT transformation. This IT transformation is taking into account what we would have done on StarHub to transform our business and our own business model. So there will be capital expenditure that we would have otherwise incurred on our own to digitally transform our business. So there is no expected incremental costs associated with this partnership with PCCW that we have entered into. So this is something that we're rolling out the next 18 to 24 months. And the CapEx trajectory is not expected to increase as a result of this because this will be part of what we would have otherwise incurred on the StarHub side. So we do believe that working with a partner will get us the results and the outcomes better. I hope that's clear as well.

[Choong Chen Foong, analyst]

Yes. Dennis, just to go back to the 5G question as well, right? Just on the $200 million, how would that be spread out over the next 5 years?

[Choon Hwee Chia, executive]

Okay. The $200 million commitment is going to be front-loaded. So there's a bunch of it that will be incurred in the second half of this year and a bunch of it that will be incurred in 2021. And then the rest of it will taper off in the following years because bear in mind that this is a stand-alone deployment on the 3.5 gigahertz C-band spectrum only, right? So at the moment, this is only for the deployment on the one spectrum band. So it will be front-loaded in FY '20 in the second half and FY '21, and some of the remainder will be spread out in the next 3 years to achieve the 95% coverage that is required by IMDA in the next 5 years.

[Choong Chen Foong, analyst]

Okay. Noted on that now.

[Choon Hwee Chia, executive]

Okay. Your final question on the dividend. Is this normalized excluding the Jobs Support Scheme? So we have taken into account the fact that the Jobs Support Scheme is a one-off nonrecurring item. As guided in our dividend policy, we are paying at least 80% of our net profit after tax, excluding one-off nonrecurring items, whether positive or negative.

[Amelia Lee, executive]

[Operator Instructions] Let's now take the next question from Annabeth.

[Annabeth Leow;The Business Times;Journalist]

It's Annabeth here from The Business Times. So I have a few questions, some pertaining to the COVID outlook. I was wondering whether you have anything to share in terms of, say, COVID in-store closures or any changes to the retail and consumer side as a result of COVID. Any adjustments to the strategy given the lack of roaming and so forth? Also, could you share a little bit more about provisions for potential bad credit if either consumer or enterprise customers are able, for whatever reason owing to the outbreak, to make timely payment? Is that something that you are factoring in? Then I noticed also on your outlook statement that the group has said, despite a slowdown in activity for Enterprise Business, enterprises are still expected to continue investing in network infrastructure and cloud, which could mitigate pricing erosion. Can you give a little bit more color on the outlook on the enterprise front because we hear a lot about cyber, but on the more traditional enterprise services also maybe share what you expect there.

And then 2 more things. You've mentioned your debt headroom in the slide, supposed to be ample and comfortable. Could you give some color on that, especially with the CapEx that's coming up with 5G and potentially any other CapEx that's on your radar? And lastly, are there any asset sales in the works planned or necessary? Could you share on that as well?

[Peter Kaliaropoulos, executive]

Thank you, Annabeth, 5 questions. Let me take some of them and my colleagues will assist in a couple of the others.

Look, the COVID impact on our business certainly forces all of us to rethink how we provide service to customers. On the retailing side, in our industry, there has been a global trend. Fewer customers go to retail shops, specifically because the products and services and the handsets are fairly well-known after so many years of predominance of the mobile industry. So there's a big shift to online, and our strategy is exactly that. We're boosting our capability to provide online sales and service through online, on the web, but also chatbots and the call center. So we expect that to continue because that's the customer's preference. Of course, it doesn't mean that we're going to have 0 retailing capability. It's a matter of finding the right balance between physical retailing activity with customers versus online digital ways to support customers.

In terms of bad credit, potentially, yes, in our forward-looking estimates, we have allowed potential bad credit situation with customers, with small business customers, and we factored that into our calculations. Investing in enterprise services, I'll ask Charlie in a minute to elaborate. Our Enterprise Business is made up predominantly of traditional connectivity as well as managed network solutions. Everything is shifting to cloud, including our 5G services. There'll be a lot of, what we call, mobile edge computing, and that capability is going to go into the cloud, not in the traditional arrangement we have today. So you will see more investments in digital services for Enterprise Business. And in a few minutes, as I said, Charlie can elaborate.

In terms of net debt to EBITDA, yes, we're managing that carefully. As Dennis mentioned earlier, we expect to start paying for some of the 5G investment upfront. Typically, first couple of years, you pay the great majority. We have given commitments to roll out certain coverage across Singapore within 2 years and then 95% coverage by year 5. So the core and mostly half of the radio access network will all be done within the first 12 months. So it's front-loaded. And in terms of affordability and cash, that is in place, and we don't have major concerns on that.

Asset sales. We're not planning to have any asset sales. At this stage, it's quite the opposite. As we're trying to find growth and diversify our business, we're looking for companies that have capability, some adjacent products and services. And hopefully, through the investment we make in them, we're able to scale them up.

So I'll ask Charlie to offer some more comments about the enterprises, the more traditional side, not the cybersecurity. And maybe, Dennis, you want to complement some of the comments on net debt and bad debt provisions. Charlie?

[Charlie Chan, executive]

Thank you, Peter. I think what you have seen in second quarter is an indication of the growth that we find from clients. Primarily, we saw immediately how customers in the -- with the arrival of COVID catering to remote working. That's driven up Internet consumption. That's driven up their connectivity to their core capabilities within their data centers because of e-commerce demand.

What we observe also is that digitalization is picking up momentum with COVID as the unexpected catalyst. And as a result, StarHub are able to work with our clients using 5G and its unique attributes of ultra-low latency and network slicing and orchestration to develop potential solutions that would help them, as I mentioned before, leapfrog the competition. As Peter said, the traditional phase is our focus and in terms of getting our clients to the next level of performance through the investments that we're making. Dennis, over to you for the other aspect.

[Choon Hwee Chia, executive]

Thanks, Charlie. Just to supplement, Annabeth, the responses provided by Peter. On the provision for doubtful debt, we had a provisioning policy to take a certain percentage of debt that are aged beyond a certain level in our books, whether for the consumers or our enterprise customers. So we do take a general provision. We do take on top of the general provision a specific provision for doubtful debt if we determine that certain debt or specific debts will not be collectible. All of those provision policies have been completely adopted as per normal accounting practice and consistently in our books as at the end of quarter 2. And we have taken in the forecast of the trends that we're seeing into the guidance for the second half of the year as well.

Just to supplement the point about the debt headroom. We are a net debt to EBITDA at about 1.29x. And because of the working capital improvement that we've actually realized in the first half of the year, this gives us additional debt headroom in case we identify additional growth opportunities down the road. Because the 5G CapEx that we advised, the market is fairly affordable relative to some of the savings that we will have on the legacy network, so 3G and 4G, we therefore expect our debt headroom to be maintained for future growth opportunities.

[Annabeth Leow;The Business Times;Journalist]

Actually, I realize, if you don't mind, I just have one follow-up because you were talking about the provisions and so forth. Is there any update on the outcome of the investigation into the service outage for Internet earlier this year? And are there any penalties expected? Has that been taken into your internal forecast?

[Peter Kaliaropoulos, executive]

Annabeth, if I may, yes, we expect in the coming weeks to hear formally from IMDA in terms of the conclusion of their investigation and potentially finding against us. We have taken into our books of provision for a potential fine, and we believe that is certainly included in the forward-looking estimate. So we're only probably a few weeks away from IMDA announcing their deliberations and their decision against us.

Again, I have to say publicly, we did apologize to our customers, and we are very, very sorry that we've put them through this inconvenience for 5.5 hours. We did offer a rebate of effectively 20% of their monthly payment. And again, we put in place new procedures to try and avoid and minimize the same event happening ever again. We are very, very sorry, and we will accept the full decision of IMDA, which we expect will be announced shortly.

[Choon Hwee Chia, executive]

Annabeth, I just want to supplement to say that the provision for the rebates that we have offered to our customers, that 20% rebate that Peter mentioned, as well as the potential penalty from IMDA, has all been recorded in our book in the second quarter. So there are no further provisions to be made because that's been fully accounted for.

[Amelia Lee, executive]

Let's take the next question from Paul.

[Paul Chew, analyst]

Can you hear me? Sorry.

[Amelia Lee, executive]

Yes. We can hear you clearly on the phone.

[Paul Chew, analyst]

Okay. Just a couple of questions, if I could. The first one is, could you elaborate more on the minority interest, the losses? Have the cybersecurity losses widened? Just wanted to clarify. Then secondly, on 5G, I just wondered if you can just share whatever color you could just on ARPUs. Just what will happen to ARPUs when 5G if launched? I guess if I'm an existing customer, how would you kind of nudge me up in terms of ARPU? And just related to 5G, I was just looking at the Slide #20. I just wonder, what is this minimal CapEx line? Is that the kind of CapEx that you can hit right now? I just couldn't really follow on that Slide 20 on CapEx. And my last question, sorry, so many. The cable-to-fiber migration that you mentioned, any indication on the cost savings? And likewise, when you mentioned more variability in the cost for Pay TV, how do we kind of ascertain the kind of cost savings that you're enjoying?

[Peter Kaliaropoulos, executive]

Okay. Paul, lots of questions. Let me try and answer a few and as always, Dennis will provide some more detail on some of the numbers.

First of all, yes, in terms of cybersecurity, we had our first strong quarter from cybersecurity in terms of revenues and bottom line results because, again, it coincided with the government finishing the year at the end of March and a number of major projects were finalized. Second quarter was a bit subdued, and the results were, it showed low revenue and a loss at EBITDA level and NPAT level. But again, we expect ongoing growth from cybersecurity, and we're still saying that we're investing in R&D, in capabilities and regionalizing the business for future growth.

In terms of 5G ARPUs, basically, right around the world, there hasn't been a tremendous uplift between 4G and 5G if you talk about basic connectivity. However, without giving too many details because of commercial confidentiality, as Johan mentioned earlier, 5G does not involve only a new handset and some faster connectivity. There will be services offered together with 5G, cloud gaming, augmented reality and virtual reality and so on. So potentially, if careful bundling is applied, we are able to shift the ARPU a little bit higher from what it is today, and that's the intention. So we do expect a small -- we're not sharing the details right now. But through the bundling, we expect slightly higher ARPUs and of course, better customer retention.

In terms of the CapEx for the $200 million, as we said, if tomorrow, we want to go out and just provide 5G connectivity to anybody, tomorrow being when we launched the service, middle of next year, that cost of $200 million is, as Dennis said, whatever contribution we need to make into the JV, plus our own core network, plus the cost of spectrum. So to provide, if I can use the word, vanilla flavor 5G service to our consumers, that's the $200 million required in terms of networking CapEx.

Now the Enterprise segment will be characterized by different use cases for 5G. It may involve some 800-millimeter wave capability. It may involve some data analytics, together with connectivity and a managed service. So that investment, it will be done use case by use case. And we're doing business cases for that. And we will invest more for specific use cases, but predominantly for the consumer customer base to be able to use 5G, the $200 million will suffice and it will be any additional investment driven by specific use cases on a business case basis.

Cable-to-fiber migration, there are some savings, I think, predominantly in the depreciation. And Dennis will give you some more detail behind that. But we're not, again, giving the specific numbers, but we were paying wholesale rates to Singtel for a number of years, a significant amount of money in terms of lit and cable capacity, which was a fixed cost, irrespective of the number of customers. And we have now gone to NLT, which is a variable cost driven by the number of customers. And basically, the bundling of that gives us an accretive margin, whilst previously what we were paying for wholesale, it was not the right deal for us.

Finally, about Pay TV. Again, Johan and the team has done a great job transforming our Pay TV business from just a pure linear model that our customers then enjoy with a very poor customer experience interface. What we're doing is over the last 2 years, especially, we've taken a lot of the fixed cost, and we're refusing to sign deals with content providers that have fixed cost only. So what we are doing is we're changing it to variable cost and with a very small amount of fixed component. And also, we are now curating potential OTT, and you've seen our announcement in the marketplace with Netflix. So we migrated the business model as the full priority is reduce the overall cost and make the overall cost driven by the number of service and provide a better customer experience through a new technical platform. And we've made some announcements, and whoever is using our new TV services will enjoy a much better customer experience. So I hope I've covered the 5 questions you've asked us. Dennis, I'm not sure if you wish to offer any more granularity on some of the cable-to-fiber migration savings and anything else on cybersecurity numbers.

[Choon Hwee Chia, executive]

Yes. Thanks, Peter. Paul, I'll just provide you with some additional clarifications to your questions. Specifically, on Slide 20, if you look at the bars, we have indicated that our network expenditure in FY 2018 is $202 million, $175 million in FY 2019. And the intent of the bar is to show you the 4G and the 5G commitment that we forecast to incur in 2020, right? And therefore, it's still within ballpark numbers that we used to incur on an annual basis. And that's the intent of Slide 20.

The cable-to-fiber migration costs, there were a whole bunch of costs that we incurred, primarily to facilitate the migration of our customers to primarily the fiber TV. And there were a bunch of promotional costs that we actually had to also offer our customers to incentivize them and motivate them to move to the fiber as well. So those costs were incurred and all the way in 2019. And since the migration has now been completed, those costs are no longer going to be incurred. And also, as Peter mentioned, we used to lease the network, the HFC network from Singtel, and that was on a fixed cost model that we had to pay a certain sum on an annual basis. That agreement ended at the end of 2019 as well and there's no further fixed cost payable in respect of that network. We have also fully depreciated that network at the end of 2019 as well.

Finally, on your question on cybersecurity. Typically, in the first quarter of the year, which is the government financial year-end, which ends on 31st March, if you look at the cybersecurity revenues, it's proportionately higher in the first quarter. And therefore, the margins that flow through as a result of the relatively higher revenues are also higher in absolute terms. And therefore, in the second quarter, it tends to be slower because it's the start of the new financial year for our government. And this is a trend that's consistent with prior years as well. The cybersecurity business is still continuing to invest in capability building and is still in the phase of buildup at this juncture as well.

[Amelia Lee, executive]

We'll now take the last question from Varun.

[Varun Ahuja, analyst]

I have also several questions. First on the revenue side, Enterprise Business, especially on the managed services, can we get a little bit more clarity because this is one of the businesses which we expect to be a lot more resilient in this tough time, maybe potentially grow a little bit, but seems to be a little bit weak. So can we get a bit more clarity on the nature of the business? How much is project-driven? How much is on a reoccurring annuity base? And similarly, on the cybersecurity side, how much of the revenues are project-driven and more, how much are annuity side? So some color. And how should we expect the growth in this segment on the managed services and cybersecurity?

Number two, on the IT transformation side, is there any OpEx also involved? I understand that there may be some CapEx, but is there any operating expenses involved because of your engagement with PCCW Solutions?

Number three, on the fixed, you mentioned on one of the products that you're looking to launch with 5G is fixed wireless access. And specifically, I heard the word consumer. Understanding is Singapore is very well penetrated with fiber, so fixed wireless access may not be great, just wanted to understand your thought process. Is it for some niche consumer segment that you're looking at or is there some niche enterprise SME segment that you're looking to launch this fixed wireless access, that will be target segment? That's number three. I think that's all that I have right now.

[Peter Kaliaropoulos, executive]

Thank you, Varun. Good questions. Let me talk a little bit about the last question first, fixed wireless access. It is not a major strategic thrust from us in the consumer market. But even in high-density residential areas, FWA in some other countries that has been rolled out appears to be working. So yes, we see it more of a niche offering, and we will explore the commercial aspects of it because although there's a lot of fiber available, customers might have a choice. And for us, of course, the economics will work to be more superior if we go FWA to a customer, assuming we can deliver the same quality of service, the same reliability and at the right price point because we don't have to buy fiber from NLT. So commercially, we're very driven to find those niches. And even within the landscape of Singapore, we believe some of those niches do exist, and there will be quite a bit of work underway from consumer and technology to make sure that we can capture those niches because the margins for us would be very, very superior.

In terms of the Enterprise revenues, as I mentioned in my opening comment, what we're seeing is a slowdown of major projects by corporate and by government, and we're seeing delays in tenders, in issuing new tenders. Of course, we captured all that in our guidance going forward, but it is a fact. I think that traditional businesses, data services and voice services typically are affected by price erosion. Corporates sign up 1- or 2- or 3-year contracts. And then when they come up for renewal, what we're seeing predominantly is not a loss of a customer base, but we're seeing revised pricing to retain the customer. So the enterprise for traditional services is suffering more from that type of pressure, but they're annuity revenues for the majority of the business.

The managed services, the one-off projects, that's the one that goes to tender. They are lower-margin projects, and we are seeing a slowdown on that.

Cybersecurity is different because there's a consultancy tied to our cybersecurity business. There is delivery part. And then there is a managed services, monitoring and consulting. So again, in cybersecurity, we provide all 3 services. The consultancy part, it is not the minority of revenues. It is the ongoing managed services that will provide annuity revenues. We don't provide the breakdown of what is the annuity revenue and what is the one-off projects, but both our traditional services and cybersecurity services, the focus is to obtain managed services contracts and sign up long-term contracts for connectivity.

And last comment before I ask Dennis to comment a little bit on the IT transformation OpEx. I forgot to mention that with the fixed wireless access, it is also applicable to SMB. We can't serve SMB by 5G because we don't have our own fiber access to SMB. So it's a complementary service. And again, we're pursuing that. So Dennis, you probably want to provide some granularity about the IT transformation OpEx.

[Choon Hwee Chia, executive]

Okay, Peter. On the IT OpEx, as shared earlier, in terms of the IT CapEx, the operating expenses, there will be. So the short answer to your question is, there are OpEx involved in the transformation as well. However, just like the CapEx, we would have otherwise incurred the operating expenses ourselves if we would have done it as StarHub. So we believe that this partnership is something that we can actually accelerate the outcome faster in the next 18 to 24 months as we embark on this journey. So we do not anticipate increases in the IT CapEx or IT OpEx as a result of these initiatives. In fact, actually, we are seeing savings through this collaboration.

[Amelia Lee, executive]

That's all the time we have today. Thank you, everybody, for joining us this morning. As always, please feel free to reach out to us if you have further questions. Until our next update call, stay safe and have a great day ahead. Bye, everybody.

[Peter Kaliaropoulos, executive]

Thank you, everyone. Stay safe.

[Choon Hwee Chia, executive]

Bye. Thank you.

[Johan Hendrik Buse, executive]

Bye-bye.