Taiwan Mobile Co Ltd
TWSE:3045
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Taiwan Mobile Co Ltd
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Good morning, good afternoon, ladies and gentlemen. Welcome to Taiwan Mobile conference call. Today's chairperson is Mr. James Jeng.
James, please begin your call, and I'll be standing by for the Q&A session. Thank you.
Okay. Good afternoon, welcome to Taiwan Mobile's second quarter investor conference call.
Before I start our presentation, I would 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 the result of new information, future events or otherwise. Taiwan Mobile 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.
Okay, for the business overview, I will start with the operating performance of our telecom business. Despite the adoption of IFRS 15 starting this year, we provide investors with our trends in telecom service revenue and telecom EBITDA on both pre-IFRS and reported basis. We believe the pre-IFRS numbers better reflect customers' contribution in our operating results in the telecom sector.
In second quarter, the big three operators all has a flash sale of the SIM-only TWD 499 unlimited rate plan. The subscribers' switch to the TWD 499 plan result in a higher penalty income in second quarter, allowing our telecom service revenue to see a moderate Y-o-Y decline. Thanks to our cost rationalizations and the onetime penalty income, our pre-IFRS telecom EBITDA surged 13% Y-o-Y, helping the company to sustain a healthy operating cash flow. This, coupled with CapEx decrease, increased our free cash flow by 7% in the first half.
In second quarter, the video streaming and the fixed broadband continued to see good growth momentum. For the video stream business, we have been expanding our target customer from mobile users to fixed broadband users through our partnership with leading cable MSOs. Through the combination of SVoD, TVoD and premiere business model, we grew our video monthly active user number by a very impressive 185% Y-o-Y in this quarter, pave the way of our new AVOD revenue model.
For the fixed broadband business, with competitive pricing and effective bundles, the fixed broadband subscriber number in second quarter maintained a healthy 6% growth. As of the end of second quarter, our fixed broadband penetration rate reached 39%. The expanding fixed broadband subscriber base provides new potential subscribers to our video streaming service.
Okay, let's turn to Page 6 view graph in the momo e-commerce. For the momo, the company report solid financial result in the second quarter. momo recorded a 25% Y-o-Y increase in total revenue, driven by the strong growth in the e-commerce. In particular, its revenues through mobile platform surged 57% Y-o-Y and account for 60% of our e-commerce revenue.
This June, total revenue reached TWD 19.8 billion, an increase of 30% Y-o-Y. Accumulated EBITDA reached TWD 869 million, growing 19% Y-o-Y, surpassing the company's forecast.
Let me turn the presentation over to Rosie for the financial overview section.
Good afternoon. Let me start by performance of each business. In the second quarter, our reported consolidated EBITDA grew 1% year-on-year, of which, telecom EBITDA stayed resilient year-on-year, while momo's EBITDA saw an increase of 3% year-on-year. Under the basis of pre-IFRS 15, our telecom EBITDA surged 13% year-on-year, thanks to our cost rationalizations and one-off penalty income related to the TWD 499 rate plan.
Now let's turn to the results summary. Our total revenue fell short of our expectations, mainly due to weaker demand for high-end handset bundles. Our cost and expenses decreased and EBITDA increased, mainly reflected the onetime penalty income from customers who broke the contracts and big savings on handset subsidies from customers' demand shifting from handset bundles to SIM-only plans. We beat our operating and net income guidance by 10% and 7%, respectively, on the back of the aforementioned reasons.
Year to June, accumulated operated income and net income both reached 54% of our full year target. Despite the 7% decline in net income, our operating cash flow and free cash flow all increased year-on-year in the first half of this year.
Now let's turn to the balance sheet analysis. On the asset front, the major year-on-year change seen in the second quarter was: Firstly, the decrease in contract assets attributable to the reversal of handset bundle sales following a rising demand for the SIM-only plan; and secondly, the increasing concessions resulting from the spectrum acquisition of the 2.1 gig frequency band in the fourth quarter last year.
On the liability front, we issued unsecured corporate trade bonds of TWD 15 billion in April, which allowed us to repay a total of TWD 21.6 billion debt, short-term and long-term combined.
In addition, shareholders' equity went down sequentially following AGM's approval for the dividend distribution. After the earnings distribution, we still have TWD 34 billion of excess reserves available to top up dividends in the future
On the financial ratios, net debt-to-EBITDA improved to 1.22x (sic) [ 1.23x ] as our gross debt balance decreased from a quarter ago. Also, our ROE stood high at above 20%.
Looking at our cash flow analysis. Our second quarter operating cash inflow fell year-on-year, mainly because of the reduction in handset payables and a temporary payment related to pending future court rulings. Our investing cash outflow decreased year-on-year, mainly due to a reduction in CapEx and the TWD 934 million in cash freed up as we took back more guaranteed deposits in the quarter and the proceeds from investment redemptions.
On the financing front, we had a cash outflow mainly resulting from debt repayments. Net-net, our free cash flow in the second quarter reached TWD 5.8 billion, up 7.2% year-on-year, which translates into an annual free cash flow yield of 7.3%.
Let me turn the presentation back over to James for event updates and key message.
Okay, let's see the final page, 15. This page lists the recognitions we have received in the second quarter of year 2018 for your reference.
Finally, to wrap up our presentation, this slide summarize the key message that I would like to deliver. I have 2 point: First, the TWD 499 unlimit SIM-only offering led to a customer spending pattern change in the second quarter, enhancing distribution efficiency, and continuous rationalization of customer retention and acquisition cost remain our area of focus.
Our significant progress in cloud and AI, artificial intelligence, and IoT business provides enterprise revenue growth potential. And a faster customer migration to unlimited 4G data also paved the way for our future revenue expansion in OTT-related services. Making all-out efforts to generate steady stream of cash flow and stringent cost control against a lower ARPU are our main aims.
Now I would like to open the floor for the Q&A section.
[Operator Instructions] The first question comes from Gary Yu of Morgan Stanley.
The first question is related to the flash sale on TWD 499 unlimited data plan. Could you share with us what kind of impact on, first of all, your one-off penalty? And then secondly, the potential reduction in the recurring revenue, where people taking up these lower-rate unlimited data? So that's my first question. My second question is, it appears that the market -- both the market and the company struggling to generate growth from the organic business because of the competition, but also because of the rate of reduction in pricing plan. Is there anything else other than continued cost control, CapEx reduction, that you can kind of further enhance the profitability or cash flow of the business? And just lastly, any viewed on how we should look at dividends going forward?
Okay. In response to your first question, I think the TWD 499 tariff plan first generates an impact in the top line, especially in the top line and the ARPU. However, we also see the upside as in the handset subsidy as well as the general commission have significant reduction in terms of the m-o-m, as I can see, has declined about more than 50% of the handset subsidy as well as the general commission. So it results in, of course, first is a one-off penalty income. So in terms of the bottom line, we didn't see a significant impact in this year, okay? So there's upside and there's a downside. And so overall, I would say the impact in the bottom line is significant. Okay, in response to your second question as the mobile business is becomes very competitive, especially the tariff plan is going down. But again, I think this cannot be worse than now, I mean, in the second quarter. In the third quarter, we can see the new iPhone coming up. And normally, or in the past year experience, that will bring up the ARPU as well, since the -- because there is a very interesting phenomenon we have found out in Taiwan Mobile, is that for the -- for those who apply TWD 499, mainly is from the Android handset, but very less from the Apple handset. So that becomes a very good phenomenon, and we are pretty optimistic about the fourth quarter when the new iPhone set come out and will resume the momentum of the growth of the ARPU as well as the whole revenue. So that's what I can see in -- with the fourth quarter. And meanwhile, in the Taiwan Mobile, we've been working on the enterprise sector for a long time, including the restructuring and create new business model. And I can foresee in the fourth -- starting from fourth quarter this year, especially the next year, we can see a significant progress in terms of the revenue as well as the EBITDA in the cloud business as well as the AI business. And meanwhile, in IoT business, I think next year, the government sector will have quite a large tender come out for a smart city project as well as for our own, is the smart home. So we can see the IoT business will also start to pick up in the first quarter next year. So overall, I was not -- I will see the mobile revenue will still remain resilient. However, in the fixed broadband as well as our value-added services and the enterprise sector, will have a significant growth as started from fourth quarter this year. And I will see that will probably generate some growth momentum for Taiwan Mobile. Well, the third question is the dividend part. I think I will pass to Rosie.
Yes, Gary. We will still be very committal to stable dividend policies.
Next question comes from Jack of SinoPac.
I have 2 question. My first question is we have mentioned we will have new growth -- we will get new growth momentum on the fourth quarter in this year, and the one is from the iPhone and iPhone sales, and the other is from enterprise. But I just -- I'm not sure about the iPhones sales because we -- when we released the TWD 499, this kind of the tariff plan and how many percentage of our customers has changed to this kind of tariff plan? And then how many of -- how many percentage of our customers haven't changed? And then this is my first question. And the second question is we -- about this enterprise growth. Is the enterprise growth is highly related with government plan? Or is that for other business from the individual company?
Okay, in response to your first question, as I just mentioned just now, the -- for Taiwan Mobile, in terms of the -- I cannot disclose this number, how many customer applied TWD 499. But the good sign is, in terms of the percentage, we have less iPhone subscriber subscribed in the TWD 499 tariff plan, and mainly it's because the iPhone subscriber, they are quite loyal to the iPhone handset. And we used to have an insurance plan for the iPhone as well as the big subsidy for the iPhone handset. So most of those customer, if they downgrade to a TWD 499 and still had to pay quite a lot of money without subsidy for the iPhone handset, probably would not pay off. So that probably one of the reason because the iPhone insurance plan in Taiwan Mobile is very successful, and those customer are very loyal to our program. So that's why I said the fourth quarter, we might have a chance to see more iPhone subscriber would choose the higher tariff plan, and that will boost our ARPU in the fourth quarter. Okay, that's your first question. The second question, yes. I think the -- especially in the IoT business, the smart city, yes, that will be driven by the government sector. And in the fourth quarter, we already see quite a lot the payment come out, especially in the gas or water and electric core for the smart city or smart metering, tender come out. And in the first quarter, an initial small tender in Taiwan Mobile did great -- a pretty good portion of this tender. So next year, in terms of the IoT smart city, I will see quite optimistic about this. However, for the cloud business, is all -- it's nothing to do with the government sector as well as the AI. It's all from the private sector. And the cloud business, since our cloud IDC, we are doing quite good in this year, in the first quarter and second quarter, mainly it's from the game industry and as well as for the private broadcasting industry and the -- some available at streaming, video streaming services. So our IDC business is running quite good. And I can see, in the third quarter or fourth quarter, we're even better. And that's why I will say the cloud business and AI business will be -- I will see, is quite good in the fourth quarter, yes. So that's my answer to your question.
And our next question comes from Varun of Crédit Suisse.
I've got several questions. First, on this -- I'm afraid I will go back to this TWD 499 plan. Given it has generated so much attention in the media and also impacted your performance. So are you guys happy with the competitive landscape in the market? It seems you're suggesting that TWD 499 plan has lower cost, so it has negligible impact. But definitely it's not an optimum pricing. So do you think there is scope for pricing to move up in the sector? There hasn't been any returns generated of the 4G investment incremental return, so as earnings has been declining post the rollout of 4G. So just wanted to understand whether you think mobile pricing has to go up for the earnings to start showing some improvement. That's number one. Number two is on this myVideo OTT thing. Are you guys currently generating any revenue from that? I just wanted to understand what is the pricing of this service, if you can detail. Number three, how do you see competitive landscape from the other 2 smaller players, especially Taiwan Star? It seems from the [indiscernible], they have been gaining consistently net adds, monthly net adds. So how do you -- they're kind of gaining some decent share in the market. How do you see them in the market competitive landscape? Number four, how do you perceive yourself on this IDC, various IoT initiative, to cloud, to AI, compared to what is a sizable fixed line investment? How do you compete with them on that? And especially also from the government initiatives, when you go ahead and compete for these projects, smart metering initiatives from the government, or any enterprise-related cloud and AI? And lastly, if you can, I know you've been saying that these AI, cloud initiatives are going to be growth driver, but my assumption is current contribution towards revenue or profitability is miniscule, even if this grows significantly over the next 2 to 3 years. Will they be able to arrest any decline in mobile service revenue which will come from competition?
Well, I think I will answer your first and the last question regarding the mobile revenue, related to your TWD 499 tariff plan. As I just mentioned, TWD 499 tariff plan does hurt the top line in terms of the revenue and ARPU as well, okay? So that's the fact. And however, as I mentioned, that the subsidy as well as the general commission also reduced quite a lot, so I would say the mobile revenue will remain for the future, in the third quarter or fourth quarter, will remain resilient or maybe slight down in terms of the revenue, mobile revenue. But in terms of the EBITDA this year, I don't see any significant impact. So in terms of we -- the projection, EPS this year, I'm quite confident with the EPS we can deliver this year. So that's one of it. And secondly, you are asking for the streaming. Yes, I think the mobile revenue, since it's mobile industry is very competitive, so we move our direction a little bit off the mobile, and we will more concentrate in the fixed broadband. We believe the fixed broadband in terms of the EBITDA margin and the revenue and all our video streaming business is a key factor, okay? And in fact, in the third quarter, as we show in the slide, our fixed broadband penetration rate reached to 39%, almost 40%, extremely high penetration rate for the -- and of course, in comparison to Chunghwa, you can see the cable industry, we have HFC network, which has a fiber, and our fiber node is on a push very close to the home or through a residential area with the coaxial cable which can deliver much higher bandwidth in comparison to the [indiscernible] of Chunghwa Telecom. So in a larger area, especially in the rural area, which we can deliver much higher bandwidth with very competitive pricing, we gained quite a lot of the monthly share in terms of the fixed broadband -- or monthly share. So we are confident in the second half this year as well as the next year in the fixed broadband, which bundle our video streaming as well as our cable business. I feel very confident on this business line. For the cloud business, of course, we already have a very good sense on the -- because there are lots of good customer, and in the fourth quarter, we will have more good customer which will commit to move to our IDC center. So I cannot disclose right now, but it's going to be a significant growth in IDC, in our IDC business line. And lastly is the Taiwan Star, I cannot really comment on it. But as I can see, for the -- since the TWD 499 started from May, I can see it hurt 3 big ones, but it also hurt the 2 small one as well. Since the tariff already go down to TWD 499 in terms of the growth -- the mobile speed and the coverage, which compare with their TWD 299 or TWD 199. And customer might have some choice instead of move to a lower, they will rather pick up the TWD 499 tariff. So from our figure, we can also see, of course, some of our customer moving from the higher tariff to the TWD 499. But also, we can see quite a larger portion of our customer moving from the lower tariff to TWD 499 as well, okay? So for the small operator, I can see it is also face a very keen competition as well because of the TWD 499, okay? That's basically my response to your questions.
Just, again, I want to go back. Are you happy with the TWD 499 plan? It is still available online. Do you think this is profitable for you? Or you want to -- in the longer term, want to increase pricing...
I think nobody happy about the TWD 499 tariff. As I mentioned, it hurt the whole industry, and not just the operator. I mean, it hurt the handset industry. It hurt the channel industry because most of the TWD 499 is a SIM-only tariff without bundling the handset. So as you can see, the handset vendor also suffer for this TWD 499. And I can see the most suffer probably is the channel because the SIM-only tariff without handset subsidy, and also, the channel commission reduced to almost 0 commission, almost. So it's going to be very tough for those small shop, handset shop in the channel. So I think TWD 499, it generate quite a lot of impact in this industry. I mean, if you go through the whole event chain, from the operator side, from the channel side, from the CPE, from the handset side, it does hurt. But I think that we, as the operator, we can see for another growth potential area. We still have a chance to pick up the bottom line.
Should we expect some improvement in pricing? Because I can see TWD 499 still available online. Is it still available? Any plans to withdraw it online? Anything?
Yes, I think since the TWD 499 is a flash sale, so I think 3 big one already realized the TWD 499 tariff does hurt, so we already stopped the TWD 499. So for the coming 1 or 2 years, for the TWD 499 impact will still remain. But after that, I think 2 years from now, I think the ARPU and the top line will also regain some momentum, growth momentum. So that's my hope, yes. And also as I mentioned, the fourth quarter this year, once the handset come out, start to launch to market, I hope that will also bring up the tariff plan to the TWD 999 and above.
[Operator Instructions] Another question comes from Jack of SinoPac.
So the first question is about -- could you give us the numbers about the onetime for the TWD 499 tariff plan effect? Because we see some somewhat high penalty in the onetime loss. So could you give us the -- these kind of numbers, the onetime effect numbers?
I think it's quite confidential. I do not have intention to disclose this number.
So could you inform us how much -- how many EPS affected by -- maybe give us a range, how many...
I don't think -- as I mentioned, this year, I don't see there is a big effect in the EPS. I think we're still confident in our -- the EPS we project this year.
Okay, so does that mean we will not change our -- the financial forecast?
No, no, not at all. I think we are confident.
Yes, And another question is what are our strategy for the following year? Because right now, the kind of the 4G, the TWD 499 plan, so many subscriber that have changed from 3G -- or even if they are the 4G subscriber, they also change their service plan. So what's our next -- our -- the strategy in the mobile subscribers?
As I just -- I think as I just mentioned, that the -- as the operator, since we are not just a mobile operator, we are also the fixed line operator as well as the cable operator and also the e-commerce, I think the -- as you can see, in Taiwan Mobile, it's quite a diversified company. We are -- actually, I can give you a number. Let's see. Our telecom revenue only contribute about 60%. It's already dropped to 60% of the whole revenue. So the impact on the mobile does not affect the whole revenue in terms of the top line or bottom line because we are doing quite good in the e-commerce in terms of top line and the EBITDA. And the cable, as I mentioned, even though the cable TV business does hurt a little bit, but the fixed broadband picked up quite quick, quite significant. And the EBITDA margin for the fixed broadband is extremely good. So for the next year, I still can see a pretty good potential of growth in the cable -- in the fixed broadband business as well as e-commerce business. And also the enterprise and the fixed line business, I still believe our -- next year, will be -- have a pretty good potential growth.
And just one question. What's our strategy for competition -- or for [indiscernible] Shopee with those [indiscernible] e-commerce?
Well, I think if you see the -- because the Shopee, okay, they never announce their financial report. They only announce their -- so all the information you can get from is from the media, okay? But if you see the momo as well as the PCHome from the first half report, you can see the momo, the performance is extremely good in comparison to all the peer competition. And I don't see Shopee at this point, okay, in terms of the financial results, will be any threat to the momo. I really don't think -- see the...
So believe that it would -- the future of the momo will positive, more positive than Shopee...
I would say yes. I can say I am quite sure because the -- I think the momo, from the -- they're not just the online, we also -- in the momo, we also have the TV shopping. And starting from this year, we see a significant growth in the top line, especially in the profitability of the TV shopping. It's doing very, very good. So for both the top line and bottom line of the momo, I'm very optimistic and very confident. So that will be our rising star in the Taiwan Mobile.
Yes, but what kind of the market -- I mean, what does the market has changed in the TV shopping? Because we see the decline, the TV shopping decline for many years, so many -- for many seasons, but...
Yes, I think the -- well, it's our strategy. We have a good strategy. And also, the channel leasing cost reduce as well, so that profitability grows quite well.
So will -- does any, the strategy change in the TV shopping, no? Just only, maybe, the market situation is better than before? Or...
I think the -- in terms of TV shopping, they've changed the product line and they are doing quite good.
So how do you see this kind of situation -- or will this good situation will -- until to the 2019? Or we just think maybe in the end of this year?
I see the momentum is growing. And it's not just a one-shot. I can see the long-term growth momentum there for the TV shopping.
So what kind of the product was a better sale in the TV shopping?
I cannot disclose this, this is very confidential information. But they are doing good.
Doing good. But is the 3 key components, like the AMD or the PC -- not that kind of...
No, no, I cannot disclose. I cannot disclose. But as you can see there, the TV business doing quite good.
[Operator Instructions] James and Rosie, there seem to be no more further questions at this point in time.
Okay. Thank you very much.
Thank you.
Thank you for your participation.
We conclude this conference call right now, and thank you, everybody. Thank you.
Thank you. This is the end of the conference. Goodbye.
Thank you. Bye-bye.