Taiwan Mobile Co Ltd
TWSE:3045
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Taiwan Mobile Co Ltd
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Good afternoon, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Mr. Jamie Lin. Mr. Lin, please start your conference. Thank you.
Good afternoon. Welcome to Taiwan Mobile's First Quarter 2019 Investor Conference Call. My name is Jamie Lin. I was appointed as the President of Taiwan Mobile late January and joined the company on 1st of April after the retirement of James.
It is my utmost pleasure to be hosting this earnings call for the first time. Before I start our presentation, I'd like to direct your attention to our disclaimer page, which states the information contained in this presentation, including all forward-looking information, is subject to change without notice whether as a result of new information, future events or otherwise. And Taiwan Mobile Co., Ltd. undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation.
All right. Let's get things going. So for business overview, I would like to start with the operating performance of our telecom business. Please turn to the increase in free cash flow page.
Despite clear challenges we face in today's telecom market, Taiwan Mobile has delivered solid results via rigorous cost control, quick to market, unique offerings and successful diversification. I will go through them in more detail in the next few slides, but let's start with some key numbers for our telecom business.
Even with the adoption of IFRS 15 last year and IFRS 16 this year, we believe the pre-IFRS telecom service revenue and EBITDA better reflects our operating results and cash generation capabilities. So we're listing them here for your information.
In 1Q '19, our pre-IFRS telecom service revenue declined by 11% year-over-year, mainly due to the high base in 1Q '18 prior to the TWD 499 frenzy that started in May last year. Pre-IFRS EBITDA also showed similar trends. In spite of the y-o-y decline in pre-IFRS 16 operating cash flow with prudent CapEx management, we further increased our free cash flow to TWD 5.5 billion for the quarter.
Next, I want to cover versatility. To cope with a more challenging operating environment, we have taken various measures to reduce costs while finding new growth avenues. In the first quarter, we reduced reliance on third party by increasing mobile sign-ups via our own channel by 7% y-o-y. Our own channels include physical stores, telemarketing and online stores.
We also continued to offer more non-handset bundle options to differentiate from our peers. Our effort resulted in a 2 percentage points decrease in subscriber acquisition cost as a percentage of ARPU versus a year ago. And the postpaid churn rate also fell to a record low of 1.2%.
As to new growth avenues, demand for IoT connectivity remains strong with 26% year-over-year growth seen in 1Q. Other enterprise segments, such as ICT, cloud and Internet and data access, also saw combined revenue rising by 5% year-over-year.
Now let's turn to the diversification page. This summarizes the progress we've made with our diversification strategy. While our telecom business suffered a y-o-y decline in operating income, the combined operating income of cable TV and momo already accounted for 20% of total operating income in 1Q '19, up from 19% a year ago.
In spite of the revenue pressure on basic TV subscription, we are seeing resilience in our pay TV business, thanks to positive factors such as cross-selling to fixed broadband and digital TV as well as falling depreciation.
As for momo, being the largest B2C player in the market, we expect the upward trend to continue for years, given the low e-commerce penetration rate in Taiwan's retail market.
While the fast-growing low margin 3C electronics sales underpins the topline momentum for its B2C business, margins have improved y-o-y, thanks to better pricing strategy, economies of scale and operating leverage.
Now let's dig a little bit deeper into momo, our crown jewel's performance. In 1Q '19, momo's total revenue grew by 15% year-over-year on the back of strong momentum from B2C e-commerce division where average ticket size grew by 5% y-o-y and number of transactions grew by 14% y-o-y. The total EBITDA also grew by 17% on a pre-IFRS 16 basis, thanks to scale benefits and operating leverage.
Now let me turn the presentation over to our CFO, Rosie, for the financial overview section.
Hi, good afternoon. This is Rosie. Let's turn to the performance by business page.
In the first quarter, our consolidated revenue declined by only 1% year-on-year as momo's strong revenue growth largely offset the decline in telecom business. With the increasing SIM-only portion in our subscriber base, the operating expense savings and momo's strength did not compensate for the accumulated impact on revenue, resulting in a 9% decline in pre-IFRS 16 EBITDA.
On a reported basis, EBITDA grew by 3% due to the adoption of IFRS 16, which requires the capitalization of operating leases, resulting in lower operating costs but higher D&A and interest expenses.
Let's move to the results summary page. The combined operating income of cable TV and momo grew by 9% year-on-year, helping mitigate the year-on-year decline in telecom operating income in the first quarter of 2019.
Overall, operating income for all major businesses exceeded their guidance, thanks to the effective cost control and economies of scale in e-commerce business. Please refer to our IR website's conference section for a more detailed analysis.
Now let's turn to the balance sheet analysis. On the asset front, the year-on-year decrease in current asset was driven by lower receivables and contract assets as a result of rising appetite for SIM-only plans. For noncurrent assets, property & equipment and concession fell significantly year-on-year as a result of the termination of 3G service, while the inclusion of right-of-use assets in accordance with the IFRS 16 resulted in the slight increase in overall noncurrent assets.
On the liability front, our gross debt decreased nicely year-on-year as we paid down debt with healthy free cash flow. However, our total liabilities remained flat year-on-year due to the inclusion of lease liabilities in accordance with IFRS 16. This balances out the impact from the inclusion of the right-of-use assets we mentioned earlier on noncurrent assets.
In terms of financial ratios, our net debt to pre-IFRS 16 EBITDA improved to 1.3x, and our current ratio also rose to 73% versus 60% a year ago.
Now let's turn to cash flow analysis. Our operating cash inflow increased quarter-on-quarter and year-on-year in the first quarter. This is because of the adoption of IFRS 16. Leasing expenses previously had been under operating activities and was reclassified into repayment of principal and interests of lease liabilities under the financing activities.
On a pre-IFRS 16 basis, operating cash inflow declined year-on-year, mainly due to momo's money market fund redemption in the first quarter of 2018.
As for investing cash flow, the outflow in the first quarter was lower than a year ago due to lower CapEx.
In terms of financing activities, the net cash outflow was mainly caused by debt repayment on the back of healthy free cash flow. With CapEx falling by 27% year-on-year, free cash flow calculated, based on IFRS -- based on pre-IFRS 16 basis, reached TWD 5.45 billion, up 5% year-on-year, translating into a free cash flow yield of 7.2%.
Let me turn the presentation back over to Jamie for event updates and key message.
All right. Turn to the event updates page.
The board has proposed a dividend per share of TWD 5.6 today. Pending AGM approval, this will mark the sixth consecutive year of paying this dollar amount and implies a 113% payout ratio. Also listed here are the recognitions we received in the first quarter of 2019 for your reference.
Finally, to wrap up our presentation, this slide summarizes the key message that we would like to deliver. The group will strive to leverage our thriving ecosystem and accelerate our transformation into a regional enterprise by following the 5”G”+ guideline, with the first G being Gift, digital transformation based on in-house big data, user base and online-offline channel operations; followed by the second G, Group, more synergy with momo, AppWorks and other strategic partners; third G is Grit, long-term vision of an ecosystem beyond 5G; followed by fourth G, which is Green, environmental awareness and corporate sustainability; and the last G will be GSEA, Greater Southeast Asia, expanding footholds in Southeast Asia to become a regional enterprise.
With that, we would like to open the floor for the Q&A session.
[Operator Instructions] First question is Neale Anderson with HSBC.
Jamie, I had a query relating to your point five on the key message, so Greater Southeast Asia expansion. Could you elaborate a little bit more on that? What particular areas you're looking to expand in; what type of product? And if you can, which particular markets? That will be very helpful.
Awesome. Thank you, Neale. So let's take our subsidiary momo as an example, right? So momo is the #1 e-commerce player -- B2C e-commerce player in Taiwan. Now that they're very successful, they have embarked on sort of expanding their business model across Southeast Asia. Their first stop is Thailand, where they are having pretty good initial success, both on the TV shopping and online B2C shopping. And next up, they will look to replicate this model and this go-to-market strategy across other countries in Southeast Asia. So I think momo's initial success in expanding their business model into the region would be an example of our group's future sort of expansion strategies across the region. So going forward, you can expect us to bring our online services and non-telecom products and expand those offerings across Southeast Asian countries.
Okay. So this is primarily momo, is it? As opposed to -- I mean, you mentioned the other apps and services but, say, on the enterprise side, for instance, I think Chunghwa has talked more about going overseas there. Is that also a focus for Taiwan Mobile or is it more consumer?
Well, I'm only using momo as an example. So that is a sort of a case study of our online services and OTT business models expanding outside of Taiwan. And going forward, we're expecting many more of our online services and business models that we build here in Taiwan that would get to a place where we're very -- we feel that it's competitive across the region, and we will work on bringing them into the rest of Greater Southeast Asia and help them become regional champions.
Understood, okay. And the cost of that overseas expansion, is that reflected in the current CapEx and come full year guidance?
No, no.
No. So there'll be additional costs on top of that?
Yes, because we have to evaluate the opportunities and also the strategies first. So it's not yet included.
[Operator Instructions] Next question is from Gary Yu with Morgan Stanley.
I just have one question regarding 5G. What kind of timetable do we expect in terms of spectrum auction, service launch in Taiwan? And then a related question is that, is there any potential revenue opportunities that we are particularly more interested in when 5G comes?
So right now, based on the best of our knowledge, the administration is working to -- working towards having the bidding start towards the end of the year. And hopefully, their plan is to maybe have the auction concluded by the early of next year. So after that, it will be -- if we are successful in winning the auction bid, then it will be up to us to start building the 5G network and business model.
Right now, the business is done where most of the interest is -- are vertical type of business models where we work with industries such as manufacturing, medical, transportation and/or retail to bring vertically-integrated 5G type of solutions to the end customers and end-users. I hope that answers your question, Gary.
[Operator Instructions] Mr. Lin, there is no further questions. At this point in time -- sorry, we have one question from Amber Lee with Yuanta Securities.
I have one question on your EBIT contribution. Looks like in the first quarter, cable TV and momo contributed 23% of total EBIT. I know in the last quarter, you have guided a 21% of full year EBIT contribution from the 2 segments. It now appears that telecom business has been weaker than expected while cable TV and momo has been stronger. So are there upside to those numbers, the 21% contribution?
Well, momo has actually performed better than expected, right? I believe you've noticed. They have improved all of their margins, from gross margin to EBITDA margin to EBIT, down to after-tax. So that's the situation that we've observed for their first quarter results. For the first quarter -- based on the first quarter results, I think we have no need to revise our forecast for the whole year, but I believe momo will still outperform their targets.
I just want to add, we actually beat our EBIT estimate by 8%, so our telecom business is actually stronger than expected, not weaker than expected. It's momo that is doing better, much better than expected.
[Operator Instructions] Mr. Lin, we don't have any further questions at this point in time.
All right. Thank you, everyone. We'll see you next quarter.
Thank you.
Thank you for joining the conference. Thank you.