Taiwan Mobile Co Ltd
TWSE:3045
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Taiwan Mobile Co Ltd
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Good morning. Good afternoon. Welcome to Taiwan Mobile Conference Call. Chairperson today is Mr. Jamie Lin. Jamie, please begin your call and I will be standing by for the Q&A session. Thank you.
Hey, good afternoon, ladies and gentlemen. Welcome to Taiwan Mobile's Second Quarter 2020 Investor Conference Call.
Before we start, 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 a result of new information, future events or otherwise, and Taiwan Mobile Company Limited, 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, markets or developments referred to in this presentation. All right.
Now next, let's turn to business overview. I would like to start with operational highlights for the second quarter. Please turn to Page 4.
During the quarter, the telecom industry as a whole faced slight headwinds due to the lack of new premium phones being introduced to the market, customers' anticipation for more 5G phones to be unveiled and, to a lesser extent, impact on international roaming revenue caused by COVID travel restrictions.
On the other hand, our 5G infrastructure build-out continued smoothly and, as a result, we were one of the first Taiwanese carriers to launch commercial 5G services successively, at midnight on July 1.
I want to take a moment to thank all of our telecom business team members. They worked relentlessly and cohesively for months to make it happen. Kudos to all of them.
As for momo, it once again delivered a stellar quarter, as online shopping continue to thrive in this new normal. Overall, our net income arrived 4% ahead of our second quarter guidance. On a pre-IFRS basis, net income remained flat Y-o-Y in the quarter. It's also worth mentioning that operating cash flow stabilized as well.
Now let's turn to Page 5 for a closer look at our telecom business. In the second quarter, our Double Play, or in Chinese, [Foreign Language], mobile plus home broadband bundle continued to gain traction, providing healthy lift to our ARPU mix. On the enterprise side, demand for IoT connectivity remained solid, yielding 40% Y-o-Y increase in the quarter. The enterprise fixed services, which accounted for close to 10% of our telecom service revenue, posted a healthy 6% Y-o-Y growth. At the same time, cloud, ICT and IoT revenues grew by 35% Y-o-Y
Now let's turn to Page 6 for an update on our cable TV business. During the second quarter, we continued to fare better than our MSO peers in terms of decline in basic TV subscriptions and higher broadband and DTV penetration. As customers demand faster broadband speeds, the percentage of our subscribers using 100 megabits and higher plans grew by 6 percentage points from a year ago.
On the financial side, with 33% decline -- Y-o-Y decline in depreciation and amortization, EBIT -- I'm sorry, with 33% Y-o-Y decline in depreciation and amortization, EBIT posted a 7% Y-o-Y increase in the second quarter.
Last but not least, let's take a look at our growth engine, momo, on Slide 7. Despite a traditionally slower second quarter, momo's e-commerce business continued to outgrow its peers and delivered strong results. Not only did the total number of transactions jumped by close to 40% Y-o-Y, average ticket size also edged higher, with its private label credit card serving as a tailwind. On the logistics side, momo further added 2 satellite warehouses in the second quarter, taking its total number of satellite warehouses to 17, which is 9 more than a year ago. Coupled with its build-out of in-house delivery fleet, momo continues to cut short delivery time, and that in turn helps momo further widen its moat. At the same time, thanks to increasing scale and operating leverage, momo's e-commerce EBIT searched by 50% Y-o-Y in the second quarter.
Now let me turn the presentation to -- over to Rosie for a financial overview.
Hi. Good afternoon. Let's start with performance by business on Page 9. In the second quarter of this year, our consolidated revenue once again grew on a Y-o-Y basis, mainly driven by momo, which accounted for more than half of the company's consolidated revenue for the first time. Telecom revenue and EBIT, on the other hand, recorded steeper year-on-year decline than the previous quarter, mainly due to soft handset bundled sales.
While cable TV EBITDA declined year-on-year in second quarter, mainly attributable to competition in basic TV business, its EBIT rose by 7% year-on-year, which was a function of the falling depreciation set-top
boxes.
So let's move to results summary on Page 10. In the second quarter, the 16% year-on-year increase in the combined operating income of cable TV and momo helped mitigate the slide in telecom operating income. If we strip out the IFR bundle sales adjustment swing factors, second quarter net income remained stable year-on-year.
In the second half -- in the first half of this year, while total revenue was slightly behind, the muted telecom performance was offset by lower selling expenses and momo's operating leverage at the operating income level. Overall, operating income for all major businesses achieved management expectations. Non-operating expenses tracked well below expectations, on account of higher-than-expected equity income, disposal gains realized by momo and lower-than-expected financing costs.
Now let's move to our balance sheet analysis on Page 11. On the asset side, the year-on-year surge in concession resulted from the acquisition of 5G spectrum in the first quarter of this year has begun amortization since the commercial launch on July 1, 2020. On the liability front, gross debt dropped to TWD 62 billion at the end of the second quarter, following TWD 5 billion repayment of short-term borrowings. Net debt-to-EBITDA also declined sequentially to 1.68x in the second quarter.
As for shareholders' equity, the quarter-on-quarter decline in the second quarter was a result of AGM's approval to pay dividends.
Lastly, let's look at cash flow analysis on Page 12. In the second quarter, the year-on-year increase in operating cash flow was a result of momo's rising payables. On a sequential basis, operating cash flow fell as we paid 2019 corporate taxes in the second quarter. As for investing cash outflow, apart from CapEx, the main activity in second quarter was the sale of Taiwan High Speed Rail shares. 75 million shares remain to be disposed of as of the end of second quarter.
On the financing front, net cash outflow mainly came from debt repayment and cash dividend payments to momo's minority shareholders in second quarter. The rise in cash CapEx was due to the expansion of momo's logistics capabilities. Second quarter free cash flow calculated with pre-IFRS 16 operating cash flow reached TWD 4.6 billion, translating into an annualized free cash flow yield of 5.9%.
Let me turn the presentation back to Jamie for event updates and key message.
Thank you, Rosie. So let's turn to Page 14. As mentioned earlier, Taiwan Mobile launched commercial 5G services on July 1. This page also summarizes the awards and recognitions we received during the quarter, for your reference.
And finally, to wrap up our presentation, here's the key message we would like for you to take away. Taiwan's big three mobile operators have entered the new era with restrained pricing and a consensus on 5G unlimited data plans, starting from NT 1,399 a month. As 5G iPhone and the likes arrive alongside continuous network build out, we expect 5G service adoption to accelerate, and hence, increase bundled sales of high-end phones for our telecom business. At the same time, we expect momo to continue to thrive in this new normal, and its investments into logistics should give it increasing advantage over its peers.
With that, I would like to now open the floor up for Q&A. Thank you.
[Operator Instructions] And we now have the first question come Neale of HSBC.
Rosie and Jamie, just a question on momo, if I may. You mentioned the cash CapEx is up because of investment in distribution, I think, on fulfillment. Can you give any more color and comments about how that might look over the next couple of years, given the demand you're seeing at the moment? And also anything else on the competitive environment relating to momo?
Cash Capex, actually for momo is, well, is there already. And they expect to have greater plans for logistics expansion down the road. So cash CapEx may be increasing for momo.
Thank you, Rosie. So in terms of competitive landscape, like we expressed during our presentation, we think momo is right now in a virtuous circle. So as they invest into shortening their delivery time and their logistics network, it's going to lend to their competitive advantage over its peers. So we continue to see momo performing better than the sector as a whole.
Got it. And, Rosie, just on the investment in the Capex, would you characterize that as sort of fairly lumpy, so big investments in distribution and fulfillment centers and then a period of stability? Or is it more like a stable capital intensity relating to this part of the business?
I think they have their plans. And currently, we probably wouldn't be able to comment because they have their plans and if depending -- if they have a more concrete plan, they will bring it up for Board approval. So currently, in our guidance, it's already reflected what they have for this year. So that's currently what we have for the moment.
For the longer term, I think we expect momo to continue to invest into logistics because that will continue to provide them with long-term competitive advantage over their peers, like we said.
[Operator Instructions] And we have another question come from Amber of Yuanta.
2 questions here. As your peers shared with us their current 5G adoption progress and their target for 5G penetration, just wondering if Taiwan Mobile has similar information they can share with us. And secondly, I also want to have an update on your CapEx outlook for the mobile business for the coming years.
Thank you. So in terms of 5G adoption and -- 5G adoption progress, I think it's still early in the game. So we prefer to address the question somewhere down the road. In terms of our target, we have expressed that we aim to convert more than half of our subscriber base to 5G in a window of 3 years. In terms of CapEx outlook, I'll let Rosie speak to it.
Well for the CapEx for the coming years, we will share with you being -- well being the first -- well after the first Board meetings every year, so currently, we -- I think we'll just stick to our guidance.
[Operator Instructions] Another question comes from Jack of SinoPac.
[Foreign Language] I have a few questions. My first question is for...
I am Sorry, Jack...
Jack, can you get closer to the microphone? We are having some difficulties hearing you.
Okay. Is that clear?
A little bit better.
Okay. I will just move a bit closer.
So my first question is about our strategy about Double Play. So, do you think as you saw impact on our revenue. But we also see our competitors [ Formosa, ] Chunghwa or the Far EasTone also adopt a particular -- a similar strategy. So what's our view on their strategy and how will we -- our review on their strategy?
Thank you, Jack. So I think Double Play, like we said, it's been providing a healthy tailwind to our ARPU mix. And in terms of other telecom companies trying to offer similar programs, we're very happy to see that. I think it's going to be good for us and our peers. So I think it's good for the industry as a whole. So we have no problem with our peers trying to put together similar programs.
Well this kind of -- So when they do the similar -- when they try to do a similar strategies, will the company -- will we -- will their new strategy will have a negative impact for the TWM?
Well -- so right now, if you look at the industry as a whole, churn rate is at historical low for everybody. So I think for most of us, it's mainly how we serve our existing customer base better and offer them the products they wanted and -- so that we can increase our ARPU.
So we -- I think our Double Play is mostly for our existing customers. And if Chunghwa or FET would like to offer similar programs to their existing customers, I think it's -- we're totally happy to see that. I would like to see that -- we'd like to have an industry that is growing and strong and vibrant. So it's good for everybody.
Okay. And my second question is about -- could you give us -- about -- some color about our 5G base stations deployment plan? Yes, so Chunghwa say they will try to deploy almost 4,000 5G base stations maybe around the end of 2020. So what's the target for TWM?
So I think right now, the big three all have similar plans for the rest of the year. And, yes. And I think most of the numbers have been published. So we have nothing more to add on that front.
Okay. Just one follow up question. About the handset. The handset sales is very low -- was low in the first half of 2020. So will the handset sales will -- I mean, will the handset sales recover in the second half of 2020? Or we need to hope the recovery will happen in the 2021?
Thank you. So like we said in our takeaway, we see it going through a process of accelerating as more and more appealing 5G phones are being introduced to the market. So it's not going to be an overnight thing, but we do expect things to heat up over time.
Another question comes from James of UBS.
So I just want to get a bit more detail about the Double Play strategy. So can I just get an understanding of what proportion of your customers are currently on the Double Play and what the margin is for the Double Play business? Is it a higher-margin compared to the existing business? And then also, I'm trying to get understanding of what the churn rate is for Double Play customers versus a single product customer. And then how does that translate into potential savings on sales and marketing?
Thank you, James. So right now, we're still in the early phase of introducing Double Play to the market. So we prefer not to talk about the percentage of our customer base that's on the plan. In terms of sort of the ARPU that it generates, like we said, it's providing healthy tailwind to the ARPU mix. And then in terms of -- I'm sorry, what's your last question?
And then -- and so -- is it accretive to margin? Is that business accretive to margin or is it dilutive to margin? Are you discounting more on average overall?
I would say it's accretive overall.
Okay. And then how do we -- do you have any data on churn rates for Double Play customers versus Quadruple-Play customers?
So we have only been offering this product to our customer base for a little bit over -- actually, a little bit over a year. So -- and then most of the contracts are 24 months-plus contracts. So it's still too early to talk about the churn rate.
[Operator Instructions] Another question comes from Billy of Crédit Suisse.
[Technical Difficulty]
Thank you, Billy. As of now, I think we have nothing to share. When we have any exciting news, you'll be sure to hear about us on the media.
Another follow-up question comes from Jack of SinoPac.
I have another question. The question is about -- so we have seen our financial results in the first half. So it seems also about the recovery -- also the -- [ our target ]. So will we change our new forecast in 2020?
Thank you, Jack. I think we have no plans to change anything as of now. So right now, the plan is to stick to our guidance.
[Operator Instructions] Another question comes from [ Caz ] of Fidelity.
I just have quick 2 questions. The first one is, could you give me a little more clarity about the IFRS 16 adjusted -- bundled adjustment? I guess I know that pushed down your accounting earnings, right? So I guess it doesn't affect the cash flow at all. But if you could just give me more clarity, what exactly happened over there? That would be great.
Yes, sir, that's your first question. Do you have a second question?
Second question, how do you see the competitive environment for 5G? I mean, given the fact the Taiwan Star is sort of pushing at 6 99 when you get [ plans ], which is about 50% discount to big three pricing, right? So how do you see the competitive environment in the 5G era? That's my last question.
Thank you, Kurt. I'll let Rosie talk a little bit about IFRS.
Yes. On the IFRS 16, as the handset sales declined, the adjusted increments in our overall revenue will also go down. So that's the impact.
Okay. Just to make sure. So on cash basis, are you guys making profit from handset sales or are you making a net loss, on a cash basis?
On a cash basis, during the contract period, I think we are still making a profit.
I mean if you include monthly tariff, of course, you have to be making profit, right? But if we only look at your handset sales, are you making profit? When you sell one handset, are you making profit or are you making loss?
Are you talking about bundled sales or just handset sales?
About the bundle plan.
Bundle plans. So, no, not at the beginning. During the contract period, we are making a profit out of the service.
Out of the service. Okay. That's fine.
So under IFRS 16, when you sell handsets under a bundle plan, you initially book a loss in P&L, and then later, you make profit from monthly tariffs. that's how it currently works?
No.
No?
Kurt, you amortize. So essentially, we subsidize handsets in the bundled sale situation and the subsidy under IFRS will be amortized over the length of the contract.
Yes. Yes. And then...
Yes, go ahead.
Yes. So I guess I sort of understand the basics of IFRS 16, right? So my question is, I mean, your competitors should be conducting the same accounting standard, right?
Yes.
And then you are the only 1 who actually books a profit -- accounting profit decline in the second quarter. So -- and it looks like it's because of the IFRS 16 bundled adjustment, right, because that's clearly stated at the very top of your -- the financial statement. So I'd like to better understand, what is really going on?
Well I think Far EasTone also experienced a decline in the revenues in the second quarter. And we are also the one that's suffering from fewer handsets sold during the period.
Okay. So overall, when you sell handset on a stand-alone basis, you are making profit, right? Then because of COVID-19, handset sales overall declined a lot, therefore, that had a negative impact on your earnings, is that correct understanding?
Partially so, partially no. Because we are entering the 5G era. So the -- most of the subscribers are probably sidelined to wait for the launch of 5G and also waiting for handsets to -- waiting for 5G handsets to be put on the market. So the overall handsets sold in the first half declined a lot.
And did that have a negative impact on your P&L or a positive impact on your P&L?
Negatively.
Negatively, right. Okay. Okay. That's fine. And, yes, and then maybe let's move on to the second question, 5G competitive environment?
Yes. So in terms of 5G competitive environment, we see the big three being able to offer sort of a high-quality wide coverage, good reception, 5G networks. In terms of smaller players, if they don't engage into network sharing with the bigger players, we do not expect them in a short run without a lot of fundraising, being able to offer the network at the same quality. So because of the quality difference, they would have to price the service differently. And they would have to convince the market that a partial 5G service is what they want. So maybe there will be a percentage of the market that would want a service from that type of network. But we see the vast majority of users would prefer the high-quality 5G network, that the big three are offering. And the big three, like we said, have come to a very restrained sort of consensus on pricing. So that's what the competitive landscape is right now. Of course, nobody knows how it's going to turn out to be a few months from now. So we'll continue to navigate methodically and carefully.
[Operator Instructions] Now Jack has another follow-up question.
My question is about our cable TV. And we see the Q-o-Q and Y-o-Y, the cable cable TV business also grew steadily. So could you give us your -- some color for the cable TV business in the second half of the year?
So, Jack, are you referring to our EBIT growing for our cable TV business?
Yes, cable TV, sorry, my [ thought ] maybe in past 3 years. Yes, it's correct. Cable TV. Cable TV will saw few points in the second half of 2020?
Jack, we traditionally don't give our guidance to specific subsidiary or business units. So I don't think there's much we can say about the outlook of the cable business in the second half of 2020.
Okay. So -- but will the cable TV business grow in the second half of 2020?
There are a few factors, right? So it depends on -- if there are new entrants into the marketplace, so there's always a risk of that. And the second factor would be our ability to sign up more customers, especially in terms of broadband and DTV penetration and our Double Play product is actually providing tailwind to that. So it's hard to gauge between these 2 forces what the end result will be for the second half of 2020. So you'll -- I'm sorry, but you'll have to wait for our next conference call to hear how things turn out in the next quarter -- or in this quarter?
I see. So about the Double Play strategy. So they will conclude -- they will combine the mobile phone and the cable TV. So the timing -- the Double Play synergy has a very good development in the future. And does that also mean the cable TV revenue will also grow in the future?
So we see a -- we see the Double Play as a win-win situation for both our mobile business and our cable business. So our mobile business, in terms of 5G, we all know that the indoor coverage for 5G is more challenging. So the ability to bundle home broadband helps the mobile business provide a seamless coverage at home for our customers. On the other hand, yes, our cable TV business is also looking to grow its broadband penetration. So with Double Play, it also helps our cable TV business grow its broadband penetration. So we see Double Play as sort of this product that provides win-win for both of our businesses.
[Operator Instructions] Jamie and Rosie, there seems to be no other questions online. Do you have other comments?
No. Thank you, everyone. Thanks for joining us this afternoon. We look forward to speaking to you again next quarter. Have a good evening.
Thank you.
Thank you. Thank you for your participation. This concludes the conference then. Goodbye.