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. Today with us we have Jamie. Please go ahead. Thank you.
Good afternoon, everyone. Welcome to Taiwan Mobile's First Quarter 2020 Investor Conference Call.
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., hereafter, the company 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, market or developments referred to in this presentation.
Now let's look at the business overview. I would like to start with the operational highlight of Q1 2020. First, I would like to point out 3 key highlights in our Q1 results. Point number one, while the telecom operating environment continue to be challenging, Taiwan Mobile managed to deliver outstanding results in Q1, posting EBIT growth across all of our businesses. Point number two, ahead of 5G commercial launch in 3Q, we are accelerating our infrastructure rollout and early bird sign-ups. And point number three, the boom of stay-at-home economy triggered by COVID-19 has boded well for our e-commerce business, momo, while increased demand for high-speed home broadband access has provided solid tailwind to our wireline business.
As a result of our upselling efforts through our Double Play bundles and 5G early bird plans, the average monthly tariffs of our new sign-ups for both bundled and SIM-only plans increased significantly in Q1. On the enterprise side, demand for IoT connectivity continued to be solid with 36% Y-o-Y increase in the quarter. The enterprise wireline business, which represents close to 10% of our telecom service revenue posted a healthy 4% Y-o-Y growth, of which cloud, ICT and IoT revenues grew by 36% Y-o-Y.
Next, let's turn to resilience in Pay-TV business page. So turning to our Pay-TV business. Once again, we fared better than other leading MSOs, posting a smaller loss in basic TV subscriptions and much higher broadband and DTV penetration, aided by our cross-selling efforts, especially through the Double Play products. The percentage of customers subscribing into speeds of 100 megabits and higher improved by 6 percentage points from a year ago.
On the financial side, with a 38% Y-o-Y decline in depreciation and amortization, EBIT saw a 10% Y-o-Y growth in the first quarter.
And last but not least, let's take a look at momo, our star business. In Q1, benefiting from stronger demand from stay-at-home economy, momo's B2C revenue grew by 35% Y-o-Y as people stocked up on essential items. Not only did the number of transactions per customer increased 14% Y-o-Y, momo also added 1 satellite warehouse in Q1, taking its total number of satellite warehouses to 15. That is 10 more than a year ago. It continued to take more pocket share from the brick-and-mortar retailers while widening its lead over its peers.
Despite rising logistics costs, momo's e-commerce business EBIT grew by 45% Y-o-Y, which is higher than its revenue growth, thanks to margin expansions. That helped momo set a significant milestone in our group, scoring #2 in bottom line contribution, outpacing Pay-TV 2 quarters in a row.
And finally, I would like to end my section of the presentation with this superior overall performance slide, which shows in Q1 Taiwan Mobile delivered the best results among our peers, posting Y-o-Y growth in revenue, EBIT and net income. Our guidance achievement ratio was also the best among the 3 major players.
Now with that, let me turn over the presentation to Rosie for our financial overview.
Hi. Good afternoon. Let's look at the performance by business on Page 10. In the first quarter, these businesses have proven to be resilient even in times of COVID-19 crisis. In the first quarter of 2020, our consolidated revenue grew by 7% year-on-year, mainly driven by momo's robust e-commerce revenue growth. While telecom and cable TV EBITDA declined year-on-year, at the EBIT level, both showed year-on-year growth as D&A continued to taper off. Therefore, all 3 major businesses saw year-on-year growth in EBIT, and the rate of growth accelerated to 6% versus previous quarter.
Let's move to results summary page. Overall, our operating income for all major businesses exceeded guidance in the first quarter. Nonoperating expenses came in lower than expected on account of lower interest expenses. As a result, net income exceeded our first quarter guidance by 12%.
Now let's look at the balance sheet. On the asset side, concession surged after making the payment for the 5G spectrum in February. On the liability front, to lock in long-term capital in a low interest rate environment, we completed the TWD 20 billion corporate bond issuance during the quarter with maturities ranging from 5 to 10 years at interest rates ranging from 0.64% to 0.72%. Accordingly, gross debt saw a year-on-year increase to TWD 67 billion in the second -- in the third quarter.
Despite taking more debt after the 5G spectrum auction, net debt-to-EBITDA only rose to 1.8x, while interest coverage further improved. As for shareholders' equity, the increase in paid-in capital and capital surplus is reflective of the conversion of our convertible bonds, which had an outstanding balance of only TWD 0.93 billion at the end of the first quarter.
Now let's look at the cash flow. In the first quarter, the year-on-year increase in operating cash flow was due mainly to the undersupply of iPhone 11 amidst the pandemic, which resulted in the decrease in mobile handset inventory. The quarter-on-quarter increase stemmed from higher outflows in the fourth quarter last year as momo's third quarter payables were delayed into fourth quarter. Investing cash outflow surged as we spent TWD 30.6 billion to acquire 5G spectrum.
On the financing front, to pay for the 5G license fee, TWD 24.09 billion was raised through short-term bank borrowings and corporate bond issuance. With CapEx falling year-on-year as we approach the tail end of 4G investment cycle, free cash flow, calculated with pre-IFRS 16 operating cash flow, excluding 5G licensing fees, reached TWD 6.6 billion, up 20% year-on-year.
Let me turn the presentation over to Jamie for event updates and key message.
Thanks, Rosie. So let's take a look at event update. With the lower visibility into the broader economic outlook, the Board has proposed to pay EPS of TWD 4.75, i.e., 70% of our 2019 free cash flow. That translates into around 4.4% dividend yield based on today's closing price, same level as a year ago.
Next, I'd like to turn to the awards and recognition page. This page summarizes the awards and recognitions we received during the quarter for your reference.
And finally, let's take a look at the key message page. To wrap our presentation, here is the key message that we would like for you to take away with. B2C e-commerce as well as subscription-based wireless, broadband and enterprise solutions are increasingly essential to everyday life under this new normal. As such, we are better poised for the extended stress on the economy caused by COVID-19.
Secondly, investing in critical areas like 5G, broadband and e-commerce remains our top priority as we accelerate growth and our transformation into a Tech+Telco group. At the same time, we will strive to resume FCF stability in a sound manner so that we can uphold our commitment to shareholders.
With that, I would like to open the floor up for Q&A session. Thank you.
[Operator Instructions] Our first question comes from James from UBS.
So my first question is around how you're looking to position the 5G products. So in Taiwan, most customers are accustomed to unlimited data plans in 4G. In 5G, how do you entice customers to pay a bit more for this new product?
And the second question just around the government subsidy fund, and that's -- looks like it's going to be about TWD 60 billion. When do you think that's going to be in place? And how do you think that's going to help small operators like ourselves?
Thank you, James. So in terms of positioning the 5G product, right now, it looks like there are sort of a consensus in the marketplace. So the big 3 players are all offering early bird packages at around TWD 1,400 tariffs. And right now, we're seeing pretty healthy early bird sign-ups from our customer base. So I think right now that's where the traction in the market is going. Hopefully, with 5G, ARPU erosion will happen a bit slower than 4G. Yes. So that's for your question number one.
For your question number two, there has been some sort of frameworks in terms of some of these subsidy funds. But so far, we haven't received any sort of confirmed details. So we'll need to get -- we will need to wait until things are more clear to be able to share that with you guys.
Our next question comes from Neale from HSBC.
Two questions, please. The first is on the mobile service revenue, just down 9% year-on-year or 7%, depending on the accounting standard. And I wondered if you had any better visibility for when that might start to stabilize.
And the second question is on the D&A. Obviously, you've been able to offset this impact for both Pay-TV and mobile with lower depreciation and amortization in the first quarter. Is that -- do you expect that to continue that lower D&A into the third quarter, and then we start to get some of the 5G costs coming through? Is that how you're thinking about it?
All right. So in terms of mobile service revenue decline, so in the recent quarters, we have been observing a stronger preference towards SIM-only plans from our customers that are renewing their contracts with us. We suspect that's due to this period leading to 5G. More customers are waiting to buy 5G phones instead of investing in 4G phones.
So we -- in this period, we are not -- we do not want -- we did not want to essentially force them to -- or use heavy subsidies to entice them to buy 4G phones and only in a few quarters for them to come back and complain to us that they really wanted a 5G phone. So that is why we're observing a larger-than-peers mobile service revenue decline. But if you look at our bottom line, we are actually doing much better than our peers. And yes, we're expecting it to stabilize within the next 2 quarters, especially when 5G rolls around. The people that are -- the customers that are waiting to upgrade to 5G phones will be then increasingly up for a phone bundle plan.
In terms of D&A, I'll let Rosie speak a little bit on it.
Well, D&A, actually, after the 5G launch, the D&A will go up inevitably, as you can imagine. So that will be a fact in the second half of this year.
Thank you, Neale.
[Operator Instructions] And our next question comes from Jack Hsu from SinoPac.
I have 2 questions. My first question is about, do we have any goal for our 5G subscribers in the end of 2020 into 2021? This is the first of the question.
And my second question is about -- right now, we see the fewer 5G phones in the market. So -- but it is -- I'm also convinced about if there is not enough 5G phones, the 5G environment cannot be built -- easily. So do we see any sign or will -- there are more 5G phones will be publicly in the second half of 2020?
Thank you, Jack. I think the goal for 5G subscribers, all we can say is we're aiming to increase our market share in the 5G market. But it really depends on the speed that the market adapt to this new technology. So right now, it's hard for us to comment exactly on the absolute number of 5G subscribers that we're targeting to acquire going forward.
The second question in terms of 5G phones. Based on what we're -- based on the information we're getting from the OEMs, it looks like there will be around 20 SKUs by the end of the year. So we suspect that enough of varieties for the end consumers that want to upgrade to 5G have great plans to choose from. And based on our understanding, there will be both high-end phones and mid- and low-end phones. So it'll have enough options to serve different segments of the market. I hope that answers your question.
Yes. Just one follow-up question. So what's the average, the price of the phone. Will be the average price be below the -- maybe below USD 500?
Based on our understanding, there will be products in sort of a $500 or less range. There will be also products in the $500 to $1,000 range. So -- and also, of course, the above $1,000 range. So really, there will be options for everybody.
And our next question comes from Billy Lee from Crédit Suisse.
I've got 3 questions. The first one is can you talk about your dividend policy. I notice the dividend is down for the first time in quite a while. So wondering what's going to be the dividend policy going forward. Is it based on free cash flow? Or is it going to be based on the earnings per share?
And the second question is about the 5G launch. Is it -- so far has the launch been affected by the COVID-19 outbreak? And how many 5G base stations are you going to build this year?
And the third question is, could you provide us an update on your cooperation strategy with potential partners like Taiwan Star and APT?
Okay, let me answer your dividend policy question first. Well, actually, this year is a very, very difficult year for the Board to make a decision on the dividend. Well, I think, as you all understand, the COVID-19 bring a lot of uncertainty, so just as Jamie mentioned, with lower visibility into the broader economic outlook, the Board has proposed to pay EPS of TWD 4.75. Looking forward, I have no answer for you because we are very committal to a stable dividend policy. But given current situations, we think it could be in the best interest of the shareholders to pay TWD 4.75 this year. But for the future, it's always decided by the Board every April. So I don't have a clear answer to you because if you look back, well, it's not the dividend -- the DPS may not only hinges on EPS or free cash flow. It depends, okay? So it's always decided by the Board every April.
All right. Thanks, Rosie. And in terms of 5G base station, right now, we're looking to build as aggressively, if not more aggressively, than all of our peers, leading into the early deployment of 5G. In terms of the exact number of base stations, it's sort of a strategic decision. So please forgive me for not being able to share the exact number of base stations.
In terms of collaboration with smaller players, all I can comment on is the industry is always talking -- we're always talking to each other in terms of what kind of collaboration we can have. Right now, nothing is set to stone yet. So please allow me to provide no comment for now. And whenever we have more solid progress, please be assured that I will share them with you.
Sure. Just a quick -- another of the ones I earlier raised about the impact of COVID-19 on the 5G launch schedule. Is it -- are you seeing any impact so far?
Right now, we're seeing no impacts. If anything, because of the slowdown of the COVID-19 -- the countries -- so essentially, the countries that are hit harder by COVID-19, that -- especially those that are in a lockdown, their 5G rollout activities have been slowed down. So if anything, that makes equipments more readily available for countries like Taiwan. So right now, I think things are neutral.
[Operator Instructions] Next, we have a follow-up question from Jack from SinoPac.
Just have 2 questions. My first question is about will the company will add more stores in Taiwan. And will that help for the development in the future for TWM? This is my first question.
My second question is about -- what about our tariff plans, the 5G in the 2020?
Thank you, Jack. So right now, if you look at telecom players, especially among the big 3, all of us are in the process of consolidating our stores. But if you look at Taiwan Mobile's number, we're actually reducing a lot less stores than our other big 3 peers. So essentially, we're stabilizing in terms of our store numbers.
Going forward, will we add more stores? Again, it really depends on 5G take-up speed and the need for some of the local -- for us to invest in some of the local, faster-growing markets. So right now, that's an option, but we haven't committed to any strategies yet.
In terms of 5G rate plan, like I communicated with James from UBS before, right now, it looks like the big 3 players have come to a consensus on rate plan around TWD 1,400. And we have been the first telecom company to offer that early bird product for people who are interested in 5G to sign up right now in the Taiwanese market, and we're seeing healthy, healthy sign-ups by our existing 4G customers. So we don't expect the actual 5G rate plan to be too far from the TWD 1,400 prevailed rate level by the market. But in terms of how fast the ARPU will erode, that is, right now, we'll need to observe.
[Operator Instructions]
All right. If we have no more questions, may I propose that we conclude today's investor conference. Thank you, everyone, for participating, and we look forward to talking to you again next quarter.
Thank you.
Thank you for joining today's call. You may now disconnect. Goodbye.
Thank you.