StarHub Ltd
SGX:CC3
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StarHub Ltd
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Joining us here now at our media center at StarHub Green as well as those who contacted us via the conference call and webcast. Before we go into the results proper, let me introduce the panelists to you. We have our CEO, Tan Tong Hai; CFO, Dennis Chia; CMO, Howie Lau; and our Chief of Enterprise Business Group, Chong Yoke Sin. Before we begin our presentation, I would like to remind all participants that we will conduct a question-and-answer session at the end of the presentation and we'll be taking questions from the floor here in StarHub Green followed by a conference call and then audiocast. [Operator Instructions] And let me now invite Tong Hai to share some highlights from this set of results. Tong Hai, please.
Thanks, Jeannie. Let's take a look at the overview of how we performed in the fourth quarter. If you take a look at the financials, total revenue increased 2%, service revenue increased 1%, and EBITDA margin is 16.9%. Net profit after tax was lower at $14 million. Now, across our unit [ result ] in terms of the churn rate, we have actually maintained a low churn rate of 0.9% for Pay TV and Broadband and we see strong revenue growth in our Enterprise Fixed.
Next, now here you can see the key financial highlights. If you take a look at the fourth quarter itself, total revenue is $649 million versus $635 million, so we have actually registered a growth in total revenue. We have also registered growth in service revenue of $572 million versus $567 million, a 1% growth. Now, if you look on a full year basis, the total revenue is relatively flat at about $2.4 million (sic) [ billion ] versus $2.397 billion and service revenue are lower by 1%, $2.197 million (sic) [ $2.197 billion ] versus $2.209 billion. Now this is within our guidance of around the same level as 2016 for service revenue. Now, if you look at our EBITDA margin, the fourth quarter our EBITDA margin is 16.9% and versus fourth quarter a year ago at 23.9%. On a full year basis, it's 27.9% versus 31.2%. Now, we have guided EBITDA margin of between 26% to 28%, so, this comes in at a higher end of what we guided of the 28% is 27.9%, pretty close to the range that we have guided.
For net profit after tax, fourth quarter, we have $14 million versus $54 million and on a full year basis, there is a drop of 27%. Now you note that versus 2016, we don't have the income grant. In 2016, we had income grant and also this year, we have higher subsidies and there are also additional provisions that Dennis will share with you later on as to why the net profit after tax in fourth quarter have dropped by 74%. So that one, I will leave it Dennis to cover more later on.
If you take a look at the percentage of CapEx to revenue, if you look at full year basis, we have guided 13% without spectrum, right. So if you take a look at the 12.3%, that includes the $69 million of spectrum that we paid out in 2017. So, without the spectrum payout, we will be at about 9.4%, way below what we have guided on 13%. Compared to a year ago, the 15.3% included a $80 million payout of the spectrum and without that there would be 12%. So, I think if you look at the CapEx, we have actually managed our CapEx payment pretty well. Net debt to trailing 12 months EBITDA ratio is around the same level 1.03x versus 1.02x.
Next chart, if you take a look at the fourth quarter results and if you take a look at mobile services, there is a drop of close to $10.9 million; Pay TV, a drop of $7 million; Broadband relatively flat; and the strong growth in Enterprise Fixed of $22.4 million increase have actually led to a growth in total service revenue. So this is the first time in -- you can see that the fourth quarter, the growth in the enterprise segment actually have helped to mitigate the drop in Mobile, Pay TV and Broadband, but if you look at on a full year basis, take a look at the total service revenue, there's still a drop of $12.6 million, which means that the Enterprise Fixed on a whole year basis cannot mitigate for the drop in Mobile, Pay TV and Broadband services.
Later on, Yoke Sin will share a bit more about the Enterprise Fixed business [ I referred ] to articulate more about, where the strong growth is coming from, but I'm pretty happy to see that at least for this quarter, the growth in Enterprise Fixed have actually helped to mitigate the drop in the other line of business. Now for this year, also, if you look at our Sales of Equipment, we have more Sales of Equipment because of the handsets launch especially the iconic launch of some of the handsets leading to a growth in total revenue. So you can see that there's actually growth in total revenue that is inclusive of the Sales of Equipment.
Next, so this one shows you the revenue mix and you can see that in fourth quarter, Enterprise Fixed is now 20% of our total revenue, right, and Mobile is 46.4%. So, actually Enterprise Fixed has became the second strongest revenue contributor. Pay TV is about 13.4% and Sales of Equipment was higher this year at 11.9%. Versus a year ago, you can see the -- actually the strong growth in Enterprise Fixed 20% versus 18.2%, right and Pay TV actually had dropped from 14.5% to 13.4 % and Broadband relatively around the same level of 8.3% versus 8.9%. What I would say is that in terms of our strategy to grow Enterprise, you can see that the revenue contribution of Enterprise actually have accelerated and grow in terms of contribution to our overall revenue. Now with this, I will hand over -- the time over to Dennis to cover the financial highlights.
Thanks very much, Tong Hai and good evening, everyone. I'm now on Slide #10 on the EBITDA and as I go through charts -- Slides #10 to 13, I will also be articulating the underlying numbers as well, which -- in first the numbers with -- without the adjustments that were made in the last quarter of 2017. So as far as EBITDA is concerned, we report an EBITDA of $97 million in fourth quarter of '17 or 16.9% versus $136 million or 23.9% a year ago. If you look at the underlying EBITDA, we would have generated EBITDA of $108 million in the fourth quarter versus $120 million a year ago, which translates into 18.9% versus 21.2%. For the full year, we reported EBITDA of $614 million or 27.9% versus $690 million reported a year ago or 31.2%. The underlying EBITDA for the full year would have been $610 million or 27.7% EBITDA margin versus $658 million or 29.8%.
The movements in EBITDA trending for the fourth quarter and for the full year were a result of the following: first, the lower income grant that we have received during the course of 2017 versus 2016; the second factor being the increase in cost of services being the variable cost paid to the -- with respect of the NGN for migration to fiber; third, the increase in subsidies in respect of the handsets that we have sold. These are now offset by savings in operating expenses as we continue to include a cost management regime throughout and look for cost efficiency opportunities throughout 2017.
Moving on to Slide #11 on the cost of sales, the underlying cost of sales had increased from $310 million to $339 million for the fourth quarter of '17 versus '16. For the full year, the underlying cost of sales have increased from $995 million to $1.053 billion. The components of the cost of the sales were as follows: the cost of equipment has gone up corresponding with increase in handset revenues or equipment revenues that we had reported in our revenue line. The cost of services, which have also increased as a result of the NGN payments and the additional cost of sales, cost of services in respect of the higher Enterprise Fixed services that we have recorded in terms of revenues. These were offset by reductions in traffic costs in relation to the reduction in international and domestic volumes.
Moving on to Slide #12 on the other operating expenses, the underlying operating expenses for the fourth quarter has reduced from $267 million a year ago to $265 million in the fourth quarter of 2017. For the full year, it has reduced from $1.026 billion to $1.008 billion. The key movements in our other operating expenses buckets are as follows: one, we have recorded reductions in operating lease costs; second, we have also recorded savings in marketing and promotion costs as we look at rationalization opportunities; third, reduction in staff costs as we look at rationalizing the organization and running the organization more efficiently and on a leaner basis. We have increased our depreciation expenses in relation to the relatively higher capital expenditures that we have recorded in prior years, which translates into higher depreciation recorded in the current year.
Moving on to the net profit after tax, we have recorded a net profit after tax of $14 million in the current quarter versus $54 million a year ago. The underlying net profit after tax generated in the fourth quarter would have been $23 million versus $41 million a year ago. If you look at the full year, we've reported a net profit after tax -- the underlying net profit after tax would have been $247 million versus $305 a year ago. We reported a net profit after tax of $250 million versus $241 million -- $341 million, thank you. This translates into $0.143 on a EPS basis. The reduction in the net profit is a result of the lower EBITDA as well as higher depreciation and last year in 2016, we also had a fair value one-time investment gain from our investment in mm2.
Our underlying or effective tax rate remain at about 17%. Looking at capital expenditures, we have a capital expenditure of $95 million in the fourth quarter '17 versus [ $136 million ] a year ago. For the full year, $296 million versus $367 million. The full year payment of $296 million includes a payment of $69 million for spectrum. Backing that off, our effective cash capital payments as a percentage of total revenue would have been 9.4%. The $367 million includes $80 million spectrum payment last year. Backing that off, our capital payments as a ratio of total revenue would have been 12%.
In the fourth quarter of '17, moving on to Slide 15 on the free cash flow, we have a negative cash generator in the fourth quarter as well as in the fourth quarter last year as a result of the relatively lower EBITDA as well as relatively higher capital payments. For the full year, we have a free cash flow generator of $221 million or $0.127 per share versus $184 million last year or $0.106 per share. With that, I hand the floor over to our Chief Marketing Officer, Mr. Howie Lau.
Hey, thanks a lot Dennis. Good evening, everyone. I'll take you through the highlights for the 3 sections of Mobile, TV as well as Broadband. So if you jump to Page 17 on Mobile. The total customer base year-on-year has been stable. We've seen a base increase of 18,000 for our prepaid customer and the postpaid ARPU decreased $2 to $68. So let me go through the details to give you a bit more color.
So if you go to Page 18, on a year-to-year level, the total number of mobile customer base remains stable at 2.3 million. On a prepaid basis -- on a postpaid basis, you see that quarter 4 last year we had [ 1.387 versus the quarter 4 this year of 1.367 ], which looks like a decline of 19,000. However, if we exclude the one-time reduction of the 23k of inactive legacy data-only lines in quarter 3, we registered a 4k year-on-year increase in terms of the postpaid lines. Similarly, we've seen an increase also on the year-on-year for the prepaid line.
Jumping to Page 19 on the churn rate. Churn rate for full year in 2017 closed at 1.0% compared to 0.9% full year for 2016. There is a slight increase from quarter 3, '17 to quarter 4, '17 from 1.0% to 1.1%. In terms of revenue, 2017 we closed the revenue at $1.196 billion compared to the previous year of $1.214 billion, largely contributed by lower usage as well as lower IDD. In a quarter-to-quarter basis, quarter 3 was $297 million and quarter 4, we closed slightly higher at $301 million. The total percentage of postpaid customers on tier data plan in quarter 4 closed at [ 70.8% ] compared to a year ago of 67.5% and the percentage of customers who have exceeded their data plan for quarter 4 was 35.2% versus a year ago of 30.3%. However, this is slightly lower than quarter 3 this year where we saw 38% that exceeded their data plan. The average data per customer is now at 4.6. We continue to see an increase. Last quarter was 4.5 and a year ago was 3.5.
Moving to mobile ARPU. From a ARPU standpoint on the year-on-year compared for prepaid, we closed 2017 at $15 compared to $16 contributed by IDD as well as voice. On a postpaid, we see us closing at $68 compared to $70 last year and this is a combination of a higher mix of SIM-only take-up as well as voice and IDD.
So with that, let me jump to the Pay TV summary on Page #23. Pay TV overall revenue decreased 7%, ARPU remained relatively flat with a slight decrease of $1 to $50 and the total customer base decreased by 40,000. At the next page, you'll see that in quarter 4, we closed at about 458,000 subs, which is a quarter-to-quarter decline of about 9k. In this particular space, we continue, as we've mentioned in previous earnings to see challenges across piracy as well as alternative viewing means. Just a bit of color, when we talk about piracy, we refer to both the illegal set-top boxes as well as streaming sites that allows you to watch our content for free. In terms of churn, the churn remained stable at 1.0% for full year basis and 0.9% from a quarter-to-quarter basis.
Chart #25, in terms of revenue we closed at $348.9 million compared to $377 million. This is a result of the lower sub base that we've seen. On a quarter-to-quarter, from quarter 3 to quarter 4, we registered a slightly higher revenue. This is largely contributed by increase in ad sales. As you would know, we do not include the ad sales revenue into the ARPU computation. So you'll find that on a full year level, ARPU remained stable at 51%. However, from quarter 3 to quarter 4, we saw a slight decrease from $51 to $50.
Next, let me jump to Broadband on Page #27. Broadband overall revenue is stable as mentioned earlier by Tong Hai. ARPU is stable at $37. On a year-on-year compare, the customer base has decreased by 6,000.
On Page 28, in terms of the total base, quarter 4 we closed at 467,000 subs compared to a quarter ago, which is a slight increase of 1,000, but compared to a year ago in quarter 4, 2016 we had 473,000. Of this, there's about 381,000 that are fiber subs. In terms of churn, the churn is stable at 1.0% on a year-to-year basis and on a quarter-to-quarter, a slight decrease of 0.9%.
Page #29 on revenue, revenue we closed the full year at $214 million compared to $216.8 million the year before and on the quarter-to-quarter compare, quarter 3 we were at $53.2 million versus $54.2 million in quarter 4. The ARPU remains stable at $37, both on a quarter-on-quarter as well as on year-on-year despite the very competitive market in the broadband space. So with that, let me pass to Dr. Chong to take us through the Enterprise Fixed.
Thank you, Howie. I will explain the Enterprise Fixed business, which comprises of Data & Internet services as well as the Voice services and the slides can be found on Page 32 and 33. Enterprise Fixed service revenue grew by [ 21% or $22.4 million ] in the fourth Q of 2017 compared to the same period in 2016 and 9.2% or $36.9 million year-on-year. Of the 21% growth quarter-on-quarter, 6% was attributed to the newly acquired Accel company. Similarly, on a year-on-year comparison, Accel contributed 3% of the 9.2% growth year-on-year. The higher revenues from Data & Internet services was partially offset by a decrease in revenue from Voice services. And Data & Internet service revenues increased by $23.9 million in the fourth Q of 2017 compared with fourth Q of 2016. And if you compare it on a year-on-year basis, this revenue grew by $43.6 million. This growth was primarily driven by higher revenues from our managed services business, analytics and the recent network and cybersecurity wins including revenues also from the newly added Accel company. So Voice service revenue decreased by [ 11.3% ] in the fourth Q of 2017 and 12.5% for the full year respectively. The reduction was mainly due to lower domestic and international traffic usage. So over to you, Tong Hai.
Thanks, Yoke Sin. With this, I would like to provide the 2018 outlook. For service revenue, we expect it to be 1% to 3% lower year-on-year. For EBITDA margin on service revenue to be between 24% to 26%. This is based on the [ old ] accounting standard, the before Singapore Financial Reporting Standard SFRS 15 adoption. You know that in Singapore, it's mandatory from -- with effect of 1st January to adopt the SFRS 15 standard. So if you look at it, based on the new reporting standards, our EBITDA margin is expected to increase by another 4% to 6%.
Now CapEx, we expect cash CapEx to be about 11% of total revenue. Now this excludes the spectrum that we need to pay in 2018. And for dividend, we are proposing a final dividend of $0.04 per ordinary share for financial year 2017. We intend to pay a quarterly cash dividend of $0.04 per ordinary share for financial year 2018. With this, I'll hand the session back to Jeannie to handle the Q&A session.
Thank you, Tong Hai. Before we begin the question-and-answer session, a gentle reminder again that we'll take the questions from the floor here first before opening up to the rest on the call. [Operator Instructions] Now, okay we have Piyush from HSBC.
Several questions, firstly, on the guidance, could you help in explaining guidance on a like-to-like basis if there were no changes in the standards, like what would have been the like-to-like service revenue guidance? Does this include impact of D'Crypt acquisition? If yes, then what is the organic growth guidance for service revenue? Secondly, does your EBITDA margin guidance for next year include any one-off provisions like we have seen this year? Thirdly, we have seen several acquisitions in the enterprise space lately, could you throw light on what are your long-term aspirations in terms of acquisitions and what is the threshold which you look at in terms of payback period on any inorganic growth? And lastly, if you can share what's the growth in order book for the enterprise segment, because we are seeing robust growth, so what should we expect going forward? So if you can just share some color?
Dennis, would you want to address that question.
So as Tong Hai had articulated, and thanks Piyush for the questions. As Tong Hai had articulated, the guidance that we provided of the service revenue at the level of [ about 1% to 3% ] lower than what we reported in 2017 levels of $2.197 billion, that's our full-year '17 service revenue, is on the current basis, meaning the basis that we've reported revenues in 2017. That's the same basis without the new accounting standards with -- and actually resulted in a different level of service revenue that we would be reporting from 2018 onwards. As a listed company, we will be required to report and adopt those standards for revenue -- for customer contracts reporting this year. So to reiterate the 1% to 3% is on the current basis, it has also included the assumption of the consolidation of D'Crypt, which we had announced to the market, the completion of the 65% acquisition of D'Crypt from 26th January, so we would effectively have about 11 months of consolidation impact on D'Crypt. Without the D'Crypt impact, you would be looking at about 2% to 4% decline in service revenue. So that would be the impact of D'Crypt approximately as a guidance. EBITDA margins were guided at 24% to 26%. This is also a margin guidance on the current basis of what we reported for 2017. So that's the same basis. As Tong Hai had indicated, with the impact of SFRS(I) 15, we would be expecting to report EBITDA margins of an uplift of 4% to 6% on service revenues because the denominator would be the service revenue which would be lower and that's why it translates into EBITDA margin. The key thing to note is that the cash flow trends of the company will not change. So fundamentally, the cash flow trends do not change, it is just the reported numbers that will change. Your third question on whether the guidance for the EBITDA margins will include any one-off provisions adjustments, there are no material adjustments of provisions that are being assumed in the guidance that have been given to you. Your other question [ on -- inorganic and returns ], we continue to look for opportunities, for inorganic opportunities as we have done in 2017, and these will be for generating or adjacencies to our core business and to look for synergies through the rest of the business to expand our capabilities and our product and services portfolio. There is no real fixed payback period on ROI target. Naturally, these are internal targets that we will not reveal to the market, but suffice to say that we do have a robust evaluation process for ensuring a proper return from both the main generating -- revenue-generating activities of the target as well as synergies that we can expect for the rest of our business. I'll pass it to Dr. Chong for the question on the order books.
We maintain a healthy order book based primarily on the aim to actually increase the recurrent revenues, so that is why we actually focus a lot on our managed services, where that would include managed networks, managed security and data centers as well. So while that remains our focus, we also look at the upper layer of the managed services including applications. So we are actually expanding that [ raft ], so that we can provide a fuller spectrum of services for our already available telco clients. So that's actually the enterprise strategy. So the enterprise strategy is as you predicated on 3 fronts. One is actually hubbing of our existing solutions involving all the telco family of solutions and cybersecurity and analytics and on top of that, right, we are expanding our slew of our digital platform solutions into the various vertical [Technical Difficulty] of government, banking, hotels, and et cetera, and healthcare for example. So that remains our strategy and our road map for actually acquiring capabilities and solutions for the market. And that actually will also dovetail into how our inorganic growth actually pans out.
Right, we now move over to those on the call. Luis from Maybank Kim Eng.
Thanks for hosting the call. I have 3 questions. The first was for clarification. For the exceptional provisions for staff cost and operating leases, the net impact was [indiscernible] the differential between underlying profit and reported profit. Second question is regarding traffic expenses in the quarter down quite substantially Q-on-Q and year-over-year. Should we be looking at that for -- annualizing that for the coming year or if you are looking at it on a full-year basis? Third question is regarding Enterprise Fixed revenues in the fourth quarter, is this a sustainable and [ growing level ] you'll be looking at or is there some lumpiness in the quarter?
Hi, Luis, this is Dennis. I will take your question -- your first 2 questions. Firstly on the provisions that were made in the fourth quarter '17. One of the provisions was in relation to staff cost in terms of retention incentives, in recognition of the business challenges ahead facing us as a company as well as the sector. The other provision was a one-off provision for -- in respect of an operating lease in relation to our cable network. So this is a one-off provision that we have taken in the fourth quarter. If you look at the trending of traffic expenses, there were also adjustments made in the fourth quarter of 2017 to that bucket. So the more indicative number that you should be looking at is actually the full year trend for traffic expenses.
Just want to have additional color. The total provisions for [indiscernible]?
No, we have outlined that in the MD&A and in the MD&A, you will see that the provision for staff incentives are approximating [ about ] $20 million. In relation to the one-off provision for the operating lease, it is about $8 million.
[ And the number for Enterprise Fixed for ] -- the fourth quarter and whether that is actually sustainable, I think the fourth quarter results actually for Enterprise Fixed comes from 2 components: one is, we mentioned about Accel, the other one is our organic growth actually. So the organic growth factor as we mentioned earlier, right, we actually aim to have as much recurrent revenue as possible and because of that and the order books, right, we aim to actually maintain this level of fourth quarter revenues, right, understanding that, yes, in the SI business or System Integration business there is lumpiness, right, because of the long tail and also the long -- kind of relatively longer gestation period, but it is actually the way we actually do our hubbing strategy by combining different services together so that we can actually provide a more recurrent and continuing services. So that's the strategy to aim to actually maintain the quarter-on-quarter growth.
Right. Next, we have Sri.
First question on D'Crypt. The agreement which you disclosed, I mean, there is a performance payout there. How do you intend to account for that? Will that show up in the CY '18 accounts? Secondly, you mentioned in your guidance that excluding -- the D'Crypt has about a 1% to 2% impact on the overall guidance for FY '18. I don't recollect the D'Crypt revenue line. I think you had disclosed it in your initial release, but it seems that you are expecting a fairly significant decline in your underlying organic business. Now since Yoke Sin is saying Enterprise is sustainable, that probably suggests a fairly large decline in either Mobile or Pay TV. So it will be helpful if we can get a sense of what's happened there? Additionally, for the fourth quarter, the service revenue fall seems larger than what we have seen from your peers. So what's your outlook on that? I'll come back for more questions, but these 2, if you can help.
Yes, so if you look at the guidance of the service revenue as to why the drop in the 1% to 3%, that is taking into consideration the growth in the enterprise space. We do note that, take for example, if you look at our TV business, there is of course, you noted that because of the alternative viewing, as far as the piracy and orders, we take that into consideration that we will still face headwind. In the mobile space, you can see that there will be more MVNOs coming up. Recently there was this announcement related to another new MVNO. And of course, that's prior to the entry of the TPG. So we expect that there will be more competition in the mobile space. Same with the broadband, the broadband space is highly competitive, but we do expect that the new players may also come into this space. So taking that into consideration, we expect that the other line of business will be affected, but you can notice that what I've shown you in fourth quarter is our aim is to accelerate the growth in the Enterprise, to mitigate the drop in this other line of business and taking overall into consideration, we guided a 1% to 3% drop in terms of compare. Like this year, if you compare on a year-on-year basis, [ there is already a drop of 1% ] which is actually around the same level. So we are guiding 1% to 3%.
Your question on the accounting for D'Crypt, so given that we've completed the 65% -- or first phase acquisition of D'Crypt on the 65%, we will therefore be accounting for the purchase price that was -- that's payable for that. So in respect of that, you would have accounting impacts of purchase price allocation which will then result in goodwill and certain other intangibles in respect of customer relationships and customer contracts. So all those numbers will then start showing up in our balance sheet that we will report in quarter 1 of this year. So we did not -- when we announced the acquisition, we did not allude to the amount of revenue that D'Crypt is generating for competitive reasons. So you can therefore infer based on the -- my response to the question from Piyush on the guidance, on the expected contribution of revenue from D'Crypt in our numbers for 2018.
Right, there is a question from Annabeth, a reporter from SPH on the webcast. Her question is, what is your war chest like for more cybersecurity acquisition and do you have any in the pipeline? Yoke Sin, do you want to answer, what is your war chest like for more cybersecurity acquisition and do you have any in the pipeline?
Well, the cybersecurity acquisition of Accel as well as D'Crypt which is a security encryption chip allows us to actually already have an end-to-end service and what we intend to do is actually as we say, right, to provide the full spectrum of cybersecurity for our clients and whether we actually engage in inorganic acquisition would very much depend on the value, right, of the whole -- I mean, of the exercise and whether it actually is accretive to us, but really at the end of the day, it is about whether the whole solution actually fits with our road map. We actually partner also cybersecurity companies as partners and to provide the slew of solutions and sometimes we acquire in order to have a fuller -- a fuller part -- make that a fuller part of the family because it is very substantial. So really, again, that depends on the road map and the value of the acquisition, but we are open.
I just want to add that when we do our M&A, we look at more -- at capabilities, how does it enhance our capabilities. So if you look at Accel, it provides end-to-end -- the solutioning part, because start-up on our own, we have our own cyber threat monitoring capability. As a telco, we have run our own security operation center, but when our customer wants us to go on-site to help them to solve the problem, this is where Accel can come in. D'Crypt provides very advanced cryptography technology. Now this is very useful in Internet of Things when you want to allow machine to talk to machines and all those, then the cryptography technology comes in and I think these are [ easiest of ways ] enhance our capabilities. Of course, this would add on to our revenue, but our top priority have always been how does it enhance our overall capabilities in our acquisition consideration.
Right, with that we go over to Arthur from Citi.
3 questions please. Firstly, how did your margin compare between your enterprise and [ consumer usage ]. Just wondering as your mix changes over time, how your blended margins will trend? Second question I had is with regard to your NGN-related expenses, which is under your cost of sales, was this jump an accrual issue or are you actually seeing increased fiber migration and what percent of your subs are now on fiber? Last question I had is with regards to your [indiscernible] entering the market. Why should telcos be actually [ tying up MVNOs because the impact used to be diluted in revenues anyway ]?
You should ask my 2 competitors since they have re-launched the MVNO order. Okay. Dennis, you want to talk about the margin [ rate case ]?
In the enterprise bucket or the segment that we report called Enterprise Fixed, the Enterprise Fixed is largely consisting, as Yoke Sin had articulated, of ICT revenues, the Data & Internet revenues, the Voice revenues, the leased circuits, the MPLS, the managed services, the managed cloud hosting and so forth. Now all the revenues in relation to the connectivity from mobile and broadband to our commercial customers as well as TV to our customers -- commercial customers are reported in the respective product segments respectively. So all Mobile revenues in respect of corporate customers are included in the Mobile line. Similarly for hotels, where we provide TV, it's also on the -- in the TV segment. And then for Broadband, for the commercial purposes, it's reported in the Broadband segment respectively, okay. So now as the range of services increase, obviously the mix of margins will also increase, will also change accordingly. Nonetheless, as a company, we've always said that we managed the company for margin and we do not focus on revenues alone so that there is a huge focus on margin generation as well. In relation to corporate customers versus consumers in each of the lines of Mobile, Pay TV and Broadband respectively, there's no material differences in the margins to corporate and consumers at this juncture, okay. The second question in relation to cost of services. In the cost of services line, in relation to the question, Arthur, that you posed on fiber, there are 3 main components of costs of services. One is the fiber cost that we pay in relation to the number of customers we have on fiber. As you migrate more customers to fiber, there is a variable cost in relation to the NGN payments. The second big component currently in the cost of services is actually your Enterprise services that I was sharing earlier that's in relation to the Enterprise revenues that we record in the Enterprise Fixed line, and third big component is your content costs, which we have actually accelerated amortization of these content costs as a result of the subscriber trends that we are seeing. So that is the main cause of the increase in that component that you're seeing. There is a slight increase in the NGN payments as we have more customers on fiber. Today, obviously, most of our customers are already on fiber as far as the Broadband is concerned, and in terms of -- obviously, we are now migrating or accelerating the migration to IPTV on the fiber TV part.
Howie, you want to address the question on fiber and [ of course, MVNOs ]?
The simple one is the fiber percentage [ about 78% ] of our entire base. I think the MVNO one-- what we can share right now is that we're talking -- we talk to multiple parties in terms of MVNO relationships and our focus is to work with MVNOs that can help -- work together with us to serve customer segments better because there would be some customer segments that perhaps through an MVNO we can serve them better. So our priority is to make sure that there is alignment and their quality, MVNOs that can go out and say, I can do this better and serve this segment is better than perhaps StarHub could directly.
So the MVNO is basically, in terms of the business model, is like a wholesale, your wholesale, your mobile service is through them and they take the wholesale and they put their own brand. So in terms of margin-wise, it will be lower, but I think they can grow it and target a particular segment of customers better, then I think it makes sense to have the MVNO in our strategy as part of the overall mobile strategy.
Just to clarify on the second point [indiscernible], should we then view the first quarter trends to be the standard going forward?
Sorry, Arthur, what was the question? Should we use what going forward?
The [ first ] quarter trends and the cost of sales basically, you mentioned the front-end amortization expenses [indiscernible] number of customers migrating to NGN. Should we then view the fourth quarter elevated cost to be the standard going forward?
Okay, so if you look at what we have mentioned regarding how we run our business or each line of business as we're managing for margins, so as you see the decline in the TV revenues that we've recorded in FY '17 and what we've actually guided for FY '18 in each of our lines of business, you will be seeing us looking at rationalizing the cost in relation to each of these lines of business correspondingly. So therefore, you can expect probably a relatively lower acceleration of cost of content as we go forward in line with the reductions of TV revenues. So each of these components, we don't break them up necessarily for obvious reasons as we -- and so Howie said we've got [ 78% ] of our fiber customers or rather our broadband customers already on fiber. So depending on how much more, we migrate over time, then there will be variable cost increases accordingly.
Right, do we have any questions from the floor? Okay, Piyush again.
Staying on this topic of MVNO on Mobile, so in 2017, which customer segments are we seeing impact of the existing MVNOs in the market? And with so many MVNO launches probably expected during this year, would there be any kind of LAN spaces or customer segments which would be left for TPG to actually tap on when they will actually come in, in 2019? Secondly, are you seeing any impact of unlimited mobile data plan which was launched 4 months, 5 months back by Singtel? And lastly, is there any development on the network sharing arrangement with M1?
Okay, Howie?
Okay, I think the easy one to answer is I can't comment on what TPG would think, but obviously, you will see that predominant MVNOs that have come in have been very focused on low price and high data. That's one space that seems to be -- everyone congregating on. I think the unlimited plans that are now available in the market, StarHub has launched our own unlimited weekend data and the plan so far has been very well received because I think it's quite clear that all of us as customers see data as one of the key consideration. So the current reception by the customer has been good, but obviously, it's important for us to keep monitoring because the competitive landscape will change. We are focused on 3 things: one, is to make sure that the network quality is there; #2, there is a good range of attractive plans for customers to choose from, and third, hubbing. Why is network important because there's no new customers in Singapore. All of us are very seasoned network mobile users. So the ability to have a good network is going to be very important. I think you've heard earlier this year, we announced that we're the first telco to announce the tripling of the upload speed to 150 mbps. This is important because we're not just consumption of data, we also upload a lot of stuff to Facebook, Instagram and other. Later part of this year, we'll also be launching 1 gigabit coverage to high traffic areas as well. So network quality is very important. Second is that the variety of plans that is available because different customers will want different type of plans. So we have the SIM Only plan, SIM Only non-contract plan, we have high data plan, low data plan, different varieties starting as low as $15 and that is hubbing because a lot of customers do value the convenience and the value of having multiple services hubbed together. So we'll continue to focus on that and the TPG related one as they start to get ready, we will obviously monitor the customers' response.
Just want to add on your question on the MVNOs with regards to [ flattened out ] in 2017, we saw mostly focusing on the geographies which are those that [indiscernible] that appeals to the digital generation, which is currently the main focus. Of course, you can see MVNOs focusing on migrant workers, on different countries, and also there will be different segments just to give you some view or colors about this MVNO. So each one of them will be focusing on that particular segment and I think we will be, of course also talking to these MVNOs to see which segment we can serve better than [ ours ], certainly, we'll work with them. With regards to the [indiscernible] question and the impact on the unlimited data plan by our competitor, I think you will notice that we are not so aggressive. We launched our weekend unlimited [indiscernible]. So far, we noticed in the fourth quarter, we registered growth in our postpaid, which means that the reception to our weekend unlimited is still good because it was based on the consumption behavior, most of the time in weekdays, you can use WiFi in the office, in our home. I think that appeals to weekend where you actually have [ no ] peace of mind, you can use data at ease. So that [ at least for now ] is still good and I think we are happy that the pick up is good. With regards to your last question on the network sharing M1, it's still ongoing. In fact, we have now extended our collaboration to not just in building coverage but also massive [ memory ] sharing and you know that in a collaboration it takes time, but the good thing is that we have expanded our collaboration [indiscernible] and we'll be looking at more areas where we can share this.
[indiscernible] our CapEx guidance is excluding -- of course, if it comes in, it will help us. As I said, we look -- it actually progressed from very last level to MOU sharing and we hope to get into a deeper sharing [indiscernible]. I think when we have visibility, we will share [indiscernible].
Right, let's move over to Gopa from Nomura. You're on the line.
The 24% to 26% EBITDA margin guidance dropped from 28% in FY '17 also due to -- is it just because of more device subsidies and content cross or due to higher mix of enterprise revenue? That's question #1. Second is, is it possible to give some indication of your expectation for service revenue in Mobile for 2018? Are you expecting a decline here or sales revenue in [indiscernible]? Lastly, a follow up on the fiber migration, would do you expect the fiber migration to pick up or do you think that the current penetration is sort of stable, so does that mean that the [indiscernible]?
Maybe let me just take the fiber one first. I think the fiber from a pickup standpoint, I think we will still continue to see customers being interested in the higher speeds because 1 gigabit is almost like default in the market today. So obviously, there is different value proposition whether you use cable or fiber, but we do expect that customers would continue to want higher speed as part of their consumption package.
Yes, so that would translate to higher cost of services.
Yes.
So we expect to continue to migrate cable subs, cable broadband to fiber broadband. With regards to your service revenue asking about guidance about the Mobile service revenue and I actually shared with you that due to the fact that we are introducing this simple new plan, that has a dilutive effect on the subscription and also because we are giving out more data and all those, so that was [indiscernible] you notice this quarter, we have less SS data charges than last quarter, right. So in view of that, we do note that the Mobile service revenue will also drop, okay.
There is one more question on the margins. So we've guided 24% to 26%. So if you look at the guidance for the margin, the reason why we've guided lower margin as compared to what we reported in 2017 of 28% or 27.9%, it's a function of a number of things, right. So if you look at our traditional businesses, whether it's Mobile, TV or Broadbrand, you are looking at near-term competitive challenges in those spaces. So while we continue to look for opportunities to optimize margins in each of those product segments, we do expect near-term challenges to be something that we'll face and therefore we've modeled it accordingly and taken that into consideration. We have also some inflationary impacts on our operating expenses although that's not terribly material, but there are some impacts due to that and there are slight movements in our subsidy levels as well that we will also consider, but the main issue really is the immediate challenges that we face on the competitive landscape in our lines of businesses.
Just to follow-up, I'm not sure if you shared this before earlier in the call, so did you clarify on the Enterprise margins versus your group margins or Mobile margins?
No, I think what we've guided earlier is that while we report the Enterprise customers who subscribe to the mobile services in the Mobile segment, we currently do not see material differences between the corporate customers. The margins that we generate from corporate customers who subscribed for Mobile and the consumers like the man on the street from a margin perspective. That's the current trend that we are seeing.
Thank you, Gopa. Next, we have [ Trinity from Bizedge ].
Anyway, I just want to know if you have any -- will you be sharing your updates or plans about the incoming CEO?
Well, of course, this will be my final session in addressing you and I'm so happy to see you all face to face. The search for my successor is still ongoing. I would say it's progressing well, but at this moment, we are not ready to share more and you can notice that I'm still running full steam handling this press conference and you should also see me in our AGM on April 19 because my last day at StarHub is end April. So in the meanwhile, I think things are still going on full steam while we wait for the announcement of my successor.
Next, we have Foong from CIMB Malaysia on the call.
3 questions from me. Firstly, looking at the Pay TV business, the ARPU is holding up at $2 level for quite some time, but it [ fell in the quarter, the fourth quarter ]. what growth is and how should we expect this to trend in the coming quarters? My second question regarding your CapEx guidance of 11%, that's a bit higher than what you spent in 2017. Could you provide color as to what is going to drive that upwards? And my third question, based on your guidance for revenue, EBITDA margin, and CapEx, what does that translate into in terms of the range for your free cash flow per share? And I note that your dividend per share guidance has already issues, but how we you think about dividends over the longer run in relation to free cash flow generation?
This is Howie. Let me just take your question on the Pay TV first. I think for Pay TV, as we shared in the previous earnings, our primary focus is on a couple of things: one is making sure that we continue to focus on the margin and this means combining our data to understand what customers are using it and using it as a basis to pick and rationalize the right type of content. It's obviously important for us to continue our focus on the high ARPU customers because these are the ones that we watch the bulk of the content that they subscribe to. So that's part of the reasons why we've been able to maintain our ARPU. And as mentioned earlier we don't count the ad sales into the ARPU. So those fluctuations in ad sales do not contribute to ARPU computation. We're not able to give a full view in terms of what we think the trend would be, but you would note that our focus will continue to be on making sure that the margins in the TV business, the rationalizing the content in view of what the customers would be able to value and to be able to pay for.
Hi Foong, this is Dennis, and on your question on the CapEx guidance that we've given of 11% payment to total revenue, we ended the year at about 10% in 2017. If you look historically, we have always guided the CapEx payments at 13%. So prior to 2017 for at least the 5 years prior to that, we were recording CapEx payments and guiding and recording payments of about 13%. So at 11% it really is a slight timing difference in terms of payments that we have to make in relation to commitments that we've already entered into prior to 2017 or the commencement of 2018 and this is a level that we continue to look at maintaining overview at time. Your other question on dividend, we have guided to $0.16 dividend, $0.04 per quarter this year. And again, we have adopted a basis of looking at the medium-term free cash flow generation trends of the company taking into account the current business conditions and information that we have on the competitive landscapes in modeling it out. In addition to all the other efficiency management efforts that we've been instituting within the company and the group up-to-date, we've taken that all into consideration in considering our cash flow trends based on information that we have at this juncture.
If I can just follow up on the last question, so you mean to say that you have looked forward a couple of years and as long as the outcomes are [indiscernible] you think that [ $0.16 ] is going to be sustainable. Is that the right way to think about it?
No, I would not -- the no does not mean that I'm saying it's not sustainable, right. The no means that we are looking at current information and then modeling it out based on the medium-term cash flow generation capabilities of the company. As we've seen in the sector in 2016, '17 particularly last 2 years or 3 years, the competitive landscapes have changed significantly. So while the mobile operators some years ago had all our versions of the unlimited plans, perhaps in the 2009, 2010 era, we all discontinued that and then as we all now launched versions of those plans again. TPG is going to start business and this is a known fact either sometime they have to comply with the rollout of the infrastructure by year-end, and therefore, will start their business in the foreseeable future. So with all these trends in mind, we will be watching and looking at what the competitive landscape is going to be and the changes in these landscapes. So we are therefore basing our financial models based on current information, current pricing levels and the expected changes based on what we know.
In addition, remember we only guide for this year, okay. Sri again from Deutsche Bank.
Can I go back to D'Crypt because it's a very large outlier? I think this is the first time we are getting an opportunity to get a feedback from you in detail. It's almost -- I mean, there are runouts, but it's [ $122 million ] which is a large number relative to your free cash flow which is about $200 million. That would suggest a fairly large revenue and EBITDA expectation over the next 3 years to 4 years. Could you throw some light as to how the business would [ evolve ] because I have gone through in detail your release on that? First question is, it looks like you bundled as a part of larger enterprise offering, so how do you think about the revenue from that? Secondly, [ totally ] it's a hardware category where things change quite significantly, so is there a risk of that technology itself being obsolete or being -- or it can be [indiscernible] competition in which case it becomes quite challenging. So give some -- your view on how you thought about the acquisition being very healthy? And given the material, I think it's important if we can get a feedback on that. My -- second question I had is how many -- what percentage of your Pay TV subscribers are on fiber -- on IPTV, I'm sorry. And how quickly can we get them, in the sense, how soon does the cable subscribers kind of come off and it seems, that's a big drain. In the same context, content cost as you've highlighted has been challenging and you are managing it. Is there a model where you can follow the OTT apps, which kind of have a subscriber linked content cost payment to one of their content owners. Can you move to that in which case foreign subscribers should not have a larger impact? So that's my third question. Finally, if you had [indiscernible], if you can -- you as a company have significant insight into your customer base. It's hard for us to believe that there are [ consolidation in a market which is not growing ]. Most MVNOs seem to fall back on pricing as a [indiscernible] but frankly, no one has advanced any different behavior. I understand that you can create a subscriber base which is more as you said digital in nature, why doesn't [indiscernible] at least externally for us to understand that. And there are telcos which in some markets have become more successful in which we are getting a fully digital customer base for themselves. So it will be very helpful to get your thoughts on these 2 aspects.
Let me touch on those few that relates on my side first. I think on the content cost, absolutely, I think what we are always aspiring to work towards is a model where we are able to price based on subscribers. However, there is different models out in the market and it takes 2 hands to shake, so there will be situations where the content partners would prefer a certain model, we would prefer a certain model and we would then have to negotiate to work out an arrangement that makes sense for both of us. So it's always something we work towards, but it's something that we will work very closely with all content partners to find a suitable model. The percentage of Pay TV customers for fiber, we don't share the breakdown. Today, we allow our Pay TV customers to still continue on the different platforms. Some of our Pay TV customers are also on competitive fiber. So what's important is that we currently -- while we will give our customers the option to move to fiber, some of the customers still prefer to keep what they have, but over time, obviously, we will encourage them to transit. Your MVNO question is a very interesting one, I think it's something that -- because as we haven't announced our plans yet, from our direction, we feel that we should be appointing MVNOs who can complement us, who can help us serve certain markets better and I understand what you mean, Singapore is only 25-kilometer by 45, there's only 5.5 million of us, how different are we and that's why we are taking the time to make that we work with the right MVNOs that will help us drive an overall incremental. So [ they help us ] to go into details as to who are we going to appoint and what segment, but that's the direction we are heading towards.
In a market where there are many MVNOs, what would happen because [indiscernible] all with the same proposition. Obviously, it's that the consumer in the end, they get confused and where will they go to? They will still go back to the trusted brand which is back to those brands that they can trust. You notice that we've been investing a lot of network structure and we think that ultimately this matters, it's not just the pricing, it's also the service aspect that will matter. So at this matters, [indiscernible] MVNOs, there's also plans that [ we use ] MVNOs will fight with MVNOs and also we support MVNOs and that then come to the market. I think we are protected by the wholesale rate and so it's actually -- today, actually in the capital space we do that also. In the fixed, we actually move [ our ] fixed services to partners too. So likewise the mobile space is something that [indiscernible]. The partner says that there will be increasingly a lot of players and in the end customers in my view will still go back to the trusted brand. Now, how we have mentioned about content cost and I agree that [ the only thing that's ] existing relationship with a vendor content providers, [ we also have the OTT ] and this is where we are working up for transition. Our [indiscernible] that in my view is what customer wants on demand services, but the cost piece is the part where we will have to take time to control, but you notice that we actually have capital costs, I would say -- a relatively flat although, but we have accelerated the content cost depreciation and since we have adopted what we call amortization because we adopted a more conservative stand. Knowing the trending of the Pay TV in regards to the cable network, we think that provision even more people responses and all this, so there is no surprises. I think your question to ask would be in view of the -- and if you see what's happening in the Pay TV, what are you doing. I think we have to also make necessary provision and I would say that's how we run the business. So content cost wise, [ actually they kept it relatively flat or low ], but because we also accelerate depreciation and amortization, so as a result, you can see the cost of services going up, but going forward, in view of anything [indiscernible] in the sense of looking at viewership and in the viewership [ suite, we will not pay for that content ].
Yoke Sin, would you like to address D'Crypt?
Yes, about the D'Crypt acquisition, I think there are 2 points I'd like to make about it. One is it fits exactly with our road map where we can actually now play perhaps more majorly in the transportation and the government sector. So I'm not at liberty to actually reveal the government sector projects but really, it does have a recurrent stream of income, but aside from that is the fact that we will work with D'Crypt to actually have more or create more derivative products and solutions that will actually complement our slew of solution in the IoT and the security space. So for me, I mean I do see good potential in that. So, really it actually complements the entire suite of solution that we have and we will be actually bringing that out even to the commercial space as well and overseas potentially.
So basically, the acquisition will support our plans to go after the Smart Nation Initiative. I think [ that's how ] you probably about Smart Nation and also what have we got to participate in this partnership. So cryptography is very key for IoT. If you talk about Internet of Things, how you ensure the data are transmitted in the red signal. I think this is a proven technology that we have invested in and we believe that this will be key to help us move to the Smart Nation especially the transportation segment.
With that, let's go back to the call. Roshan from Bank of America Merrill Lynch.
First one on postpaid ARPU, just curious your ARPU trend seemed to have declined quarter-on-quarter, which is different from your peers, which seemed to have benefited from seasonality, higher roaming and all that. Can you just help us understand why that was the case? The next question was what is the penetration of SIM Only subs? Second question -- I can come back to the question after the first one.
Roshan, this is Howie. The postpaid ARPU quarter-on-quarter decline, we basically see 3 factors: one is contributed by the higher tick up of the SIM Only plans because for example, the SIM Only plans, we have typically half the price of our subscription-based plans. Obviously, the other 2 factors would be IDD as well as voice. So those are the ones that contributed to the ARPU decline. I think the SIM Only plans today on a overall level still as a small percentage, is still below 10%, but at the same time, we do see that increasingly more customers are looking at it.
Roshan, does that answer your question?
Yes. On the Enterprise Fixed, what has been the growth for the overall segment in this year? Who were the key drivers, is it government, is it SME, is it corporate? And you have mentioned a few verticals, is it cybersecurity, transportation, healthcare, so what are the verticals as well where you're seeing [ transcend ] growth?
In terms of enterprise growth, we actually, as we mentioned, we actually have 3-pronged strategy. So we actually use our solutions basically to even grow, even the mobile space, right, as well as the fixed lines. So that space, in terms of the vertical, we anticipate government as a growth area for us. The second is in banking. Third is in the retail and the hospitality space. Hospitality means, well hotel and also the hospitals and et cetera. So, that is actually the key area of growth and we actually try to as much as we say, increase the spend of services in those vertical spaces. So all the way from connectivity right through to vertical solutions.
What was the overall growth of enterprise market and how has your share evolved over the last say, 1 year to 2 years?
Well, we aim right, to actually expand the space as far as possible, right. So in terms of growth and all that, I think we remain actually guided by the market demand and basically, I mean we are actually growing quite aggressively in that space so that we can actually meet the demands. I think, first and foremost is actually the clients' propensity for the solutions that we have. So, really a lot of it depends on the demand of the market.
So last question from Rama, Rama boy from Daiwa.
Hi, I'll be very quick. Just a few follow-up questions. Number one is with regards to Accel's contribution, could you outline what was it's contribution in 2017 to the fixed line revenue? Number 2 is the traffic expenses, you alluded to the fact that 4Q17 was not normalized level. Could you talk about what is the magnitude and the sources of one-offs incurred in fourth quarter? And on the postpaid side, again, just following up on Roshan's line of questioning, your subscriber is also a little bit below postpaid, on postpaid basically versus M1. Wondering was there any competitive activity in fact in fourth quarter or is it the SIM Only plans that have impacted the whole thing?
Rama, this is Dennis. The Accel's contribution as Yoke Sin had actually articulated in her summary of the Enterprise Fixed revenues, we started consolidating Accel from the date we acquired them in July of 2017. So for the half year, the contribution of revenues were approximately [ $13 million ] for FY '17 for the half year. The other question in traffic expenses and what would be a normalized level, we made some adjustments in fourth quarter in respect of certain balances due -- from and to our partners. The right number that you should be looking at is really the entire year's numbers in terms of the FY numbers for an average, that would kind of even up the impact of that specific adjustment that was made in Q4.
On the postpaid sub I think if you look at the quarter-to-quarter, we registered a increase of about 6k. I think the plans that we have launched so far have been well received. However, we do note that the excess percentage of data plan has declined slightly quarter-on-quarter because the percentage of customer and tiered plan that has exceeded the tiered plan is now at about 35% as compared to 38% a quarter ago. So I think what we are obviously monitoring is to make sure that as the tick up continues whether the impact to Accel's data would be something that will continue so that we can adjust the plans accordingly.
And I think you need to note that one subspace or so would include the [indiscernible] line which is the MVNO. So, if we include that MVNO subs number, of course, it will show much higher growth rate. [ Ours is ] just purely our own postpaid subs.
Right. Ladies and gentlemen, we've come to the end of this results briefing session here at StarHub. On behalf of the StarHub management team, we would like to thank all of you for joining us and we look forward to meeting you on a one-on-one basis. Have a good evening and have a prosperous 2018.
Thank you.