Taiwan Mobile Co Ltd
TWSE:3045
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Taiwan Mobile Co Ltd
Earnings Call Analysis
Q2-2024 Analysis
Taiwan Mobile Co Ltd
Taiwan Mobile had an impressive second quarter in 2024. Consolidated revenue reached $47.7 billion, mainly driven by a strong performance in its telecom sector which accounted for 43% of the overall revenue. The T Star merger played a significant role in this uptick. Even excluding the merger impact, revenue growth was commendable. Operating income hit a 7-year high, and EBITDA continued to exceed $10 billion for the second consecutive quarter, reflecting a robust increase year-over-year.
The mobile service segment was a standout performer, showcasing a 26% year-over-year increase fueled by the integration of 2 million Taiwan Star postpaid users and organic growth from the existing customer base. 5G technology upselling and favorable 4G pricing helped keep smartphone postpaid ARPU more than 6% higher year-over-year, with an additional monthly fee uplift of 47% for customers upgrading from 4G to 5G. The 5G penetration rate in the postpaid user base sat at 38%, or 40% including T Star users, indicating ample growth potential ahead.
The integration of Taiwan Star has been more efficient than anticipated, resulting in significant cost savings. Consolidated EBITDA surged by 20% year-over-year, exceeding the initial guidance of 11-13%. The merger synergies are ahead of schedule, particularly in base station consolidation. The faster integration led to substantial reductions in network and rental costs. Operating income climbed 11% year-over-year, driven by these enhanced synergies.
The broadband segment saw a moderate growth of 4% year-over-year. Robust cross-selling efforts and demand for faster internet connectivity contributed to this. Notably, subscriptions for higher speed plans (300 megabits or more) jumped by 46% over the same period last year. On the flip side, the e-commerce subsidiary, momo, had a modest 2% revenue increase. Despite facing a slower demand environment post-COVID, momo continued to see a rise in active users and orders.
Despite higher financing costs from increased borrowing due to the T Star merger, Taiwan Mobile's net profit grew by 8% year-over-year in the first half of 2024. The company also managed to bring net debt-to-EBITDA back to premerger levels at 1.7x. Shareholder dilution from new shares issued to T Star shareholders led to a flat EPS year-over-year. Cash earnings were up 17% thanks to the telecom division's solid EBITDA growth. Operating cash flow increased significantly by 39% year-over-year in the first half of 2024, despite a reduction in the Q2 2024 CapEx plan.
Taiwan Mobile's leadership and commitment to corporate governance continued to receive accolades. The company was honored in various categories in the Institutional Investor's 2024 Asia Executive Team ranking for two consecutive years, establishing itself as a leading telecom company in Taiwan. Furthermore, Taiwan Mobile has been ranked in the top 5% for corporate governance by the Taiwan Stock Exchange for a decade and remains a constituent of the Taiwan Sustainability Index for seven consecutive years.
Looking ahead, Taiwan Mobile is optimistic about unlocking the full potential of its merger synergies and introducing innovative products tailored to its diverse customer base. The T Star integration is expected to continue yielding cost-saving benefits, strengthening Taiwan Mobile’s position for sustained growth. With successful postmerger integration and strategic initiatives in place, Taiwan Mobile aims to accelerate its growth trajectory in the coming years.
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Good afternoon, ladies and gentlemen. Welcome to the Taiwan Mobile's conference call. And our Chairperson today is Mr. Jamie Lin. And Mr. Lin, please begin the call, and I'll be standing by for the question-and-answer session.
Thank you, moderator. Good afternoon, everyone. Welcome to Taiwan Mobile's Second Quarter 2024 Results Conference Call. As per usual, let's first read through the disclaimer.
Disclaimer. The information contained in this presentation, including all forward-looking information, is subject to change without notice, whether as a result of new information, further future events or otherwise. And Taiwan Mobile Company Limited or, hereafter, the company undertakes no obligation to update or revise the information contained in this presentation. No representation, warranty or undertaking, expressed or implied, is or will be given by the company as to the adequacy, accuracy, completeness and correctness of the information contained herein. Financial numbers in this document may include preliminary unaudited numbers and management accounts.
All right. Now let's start our presentation. Please turn to Page 4 for highlights of the quarter. As Taiwan Mobile merged with Taiwan Star on the 1st of last December, we are now 2 quarters into the integration process, and I'm happy to report that we are ahead of the game and doing much better than expected.
Our mobile service revenue came in strong again, growing at 26% Y-o-Y during the quarter, boosted by the addition of -- the addition and upselling of the 2 million Taiwan Star postpaid users as well as continued organic growth from our existing customer base. Meanwhile, momo posted a 2% revenue growth, albeit decelerated momentum, as Taiwan goes through a post-COVID leisure boom cycle. Our home broadband engine grew by 4% Y-o-Y on the back of effective cross-selling towards our mobile and Pay-TV customers.
In 2Q '24, consolidated EBITDA went up by 19% year-over-year, mainly driven by our mobile business. And thanks to the merger synergies from faster-than-expected integration, consolidated operating income increased by 11% Y-o-Y, reaching a 7-year high.
And before diving into the specifics of our mobile business, let me share some figures related to our merger synergies with you on Page 5. We're approximately 3 months ahead of our most optimistic project -- I'm sorry, we're approximately 3 months ahead of our most optimistic projection for base station consolidation. This has resulted in significant savings in our network costs and site rental expenses. Subsidies, direct store and personnel costs have also come in lower than our projections. So as a result, our telecom EBIT on a pro forma basis increased from approximately TWD 4 billion in first half of 2023 to TWD 6.23 billion in first half of 2024, reflecting an impressive 53% Y-o-Y growth.
At the beginning of the year, we guided a consolidated EBITDA growth of 11% to 13% Y-o-Y. And we are pleased to report that we have delivered a 20% growth in first half of 2024 on that regard. In absolute terms, our first half consolidated EBITDA came in at TWD 21 billion, setting a new record for the company.
Now let's take a closer look at our mobile business on the next page. The smartphone postpaid ARPU of our existing Taiwan Mobile users grew more than 6% Y-o-Y in 2Q '24, thanks to continued tailwind from our unique bundles, further 5G upselling and benign 4G pricing. In terms of contract renewals, monthly fee uplift was 47% for 5G to -- for 4G to 5G upgrade and 8% for overall, maintaining the healthy momentum seen in the previous quarters.
On a sequential basis, ARPU and mobile service revenue already started to edge higher as a result of our successful upselling efforts and strong revenue momentum in our gaming business. Postpaid monthly churn rate remained at only 0.7%, reflecting a rational competitive environment and effective promotion of our bundles. With 5G penetration in our smartphone postpaid user base currently at 38%, or 40% including T Star users, a long runway lies ahead for further ARPU and mobile service revenue upside.
Next, let's turn to Page 7 for updates on our e-commerce business. In 2Q '24, momo's revenue grew by 2% Y-o-Y, with healthy increases in active users and total numbers of orders. EBITDA margin fell slightly Y-o-Y, mainly due to a lower take rate in a slower demand environment. Other than our existing B2C 1P business, momo will also scale up 3P advertising and live commerce businesses in the coming quarters.
Next, let's take a look at our broadband business on the next page. Our broadband business continued to grow in 2Q '24, with the number of subscribers rising by 4% on the back of steady demand for faster connectivity and our bundles, which include cable TV, broadband, mobile and/or our unique OTT services, such as myVideo, Disney+, HBO GO and YouTube Premium. Broadband subs, including Double Play bundles users who are on speeds of 300 megabits or higher increased by 46% Y-o-Y during the quarter.
The Y-o-Y decline in overall CATV revenue was primarily caused by the discontinued content distribution deal with Disney as Disney exited its TV channel business in Taiwan earlier this year. Overall, EBITDA grew Y-o-Y, driven by broadband strength.
Now let me pass the virtual mic over to our CFO, George Chang, for a financial overview.
Thank you, Jamie. Good afternoon. Let's start with the performance by business. In the second quarter of 2024, consolidated revenue reached $47.7 billion. With the help of the T Star merger, telecom business contributed a majority of the Y-o-Y revenue growth and accounted for 43% of our consolidated revenue. Decent growth was also seen even if we strip out the merger impact.
As for profitability, consolidated EBITDA exceeded $10 billion for 2 quarters in a row and remain around the record level -- record-high level. The Y-o-Y increase of $1.7 billion was mainly driven by telecom while cable TV also delivered Y-o-Y growth.
Let's go to results summary. In addition to double-digit expansion in revenue and EBITDA, consolidated operating income rose by 11% Y-o-Y to a 7-year high in 2Q '24 as telecom EBIT growth accelerated to 17% Y-o-Y during the quarter. And once again, on a pro forma basis, we're taking T Star into consideration, the growth rate of EBIT versus last year is even much higher. Despite the larger non-op expenses due to higher financing costs, net profit grew by 8% Y-o-Y in first half '24. With the dilution from the new shares issued to T Star shareholders, first half '24 EPS was flattish Y-o-Y.
And let's move on to the balance sheet. Receivable and contract assets rose Y-o-Y, driven by the growth in postpaid subscribers, including T Star users and monthly fee contributions from our mobile bundle plans. PP&E and concessions also increased Y-o-Y, which was attributable to T Star's mobile equipment spectrum as well as momo's distribution center. Right-of-use assets saw another Q-on-Q decline, thanks to further consolidation of T Star's base station.
Gross debt went up Y-o-Y to $86.2 billion, owing to the borrowing inherited from T Star. However, we decreased Q-o-Q as we -- this has decreased Q-o-Q as we paid down some bank borrowings since the merger. Benefiting from the incremental EBITDA, net debt-to-EBITDA declined sequentially to 1.7x in Q2 '24. In fact, this is already back to the premerger levels in 2023.
Lastly, let's look at the cash flow on the next slide. In 2Q '24, cash earnings rose by 17% Y-o-Y on the back of solid growth in telecom EBITDA. Although operating cash flow fell significantly -- fell slightly Y-o-Y during the quarter due to the changes in working capital for the first half of the year, operating cash flow still increased by 39% Y-o-Y despite a decrease in our 2Q 2024 CapEx plan. An increase in first half '24 investing cash outflow reflected the payments associated with the network consolidation following the emerging momo logistics capacity expansion, financing cash outflow performance due to a high base of debt repayments and the timing difference in momo's dividend payment versus a year ago. Free cash flow calculated on a recurring pre-IFRS 16 basis was $4.5 billion in 2Q '24, translating into an annualized free cash flow yield of 5.5%.
Let me turn the presentation back to Jamie for event updates and key message.
Thank you, George. We're glad to share with you that on Page 15, Taiwan Mobile was, once again, recognized in the Institutional Investor's 2024 Asia Executive Team ranking. In the highly competitive overall Asia region, which includes much larger Chinese peers, we are honored to have placed first in Best CEO, Best CFO, Best ESG categories for 2 consecutive years. We're also the only telecom company from Taiwan to be recognized as the most honored company, and we've done this for 3 years in a row. In the rest of Asia, ex China region, Taiwan Mobile was voted the #1 telecom company for 3 competitive years while receiving first-place rankings in 5 categories.
I would like to take this chance to express our most sincere gratitude to our investors and covering analysts. We could not have achieved this without your trust and support, and we remain committed to further improvement. Thank you all. We truly appreciate every single one of your votes.
In terms of ESG recognitions, Taiwan Mobile was ranked in top 5% in the Corporate Governance Evaluation by Taiwan Stock Exchange for 10th consecutive year. We have been a constituent of the Taiwan Sustainability Index for 7 consecutive years and have won a total of 14 top prices in Global Views Magazine's 2024 ESG Awards, the most among our telecom peers.
And finally, on Page 16, to wrap up our presentation for today. Here's the key message we would like for you to take away with.
Key message. Taiwan Mobile delivered exceptional top line and EBITDA performance in our core telecom business during the first half of 2024, driven by robust organic growth and seamless postmerger integration. Building on this success, we are confident in our ability to unlock the full potential of the merger and introducing innovative products and services tailored to our broader customer base. Through this strategic approach, we will strive to further accelerate our growth trajectory in the years to come.
And with that, let's open the floor for questions. And if you are participating online, you're welcome to send your questions via the chat box. We will begin by addressing the telephone line questions before we move on to the web. So operator, please go ahead.
[Operator Instructions] Our first question is come from Neale Anderson with HSBC.
I'd like to ask about the point on Page 5. So the consolidated EBITDA, you're up 20% year-on-year relative to guidance of 11% to 13%. Could you give any more details on the breakdown of where that's coming from? I assume it's the quicker-than-expected synergies from the T Star merger. So if that's the case, you're bringing those forward. Does that change how you think about the next 18 months in terms of -- if you've realized those benefits faster than expected, is that going to be -- is that going to slow you down in the future? Or can you maintain a similar growth rate in EBITDA?
Thank you, Neale. I'm sorry, you were breaking up a little bit, the bottom half of your question. Would you mind repeat it again, maybe in a slower manner?
Yes, sure. So it relates to Page 5, 20% ahead of EBITDA -- or sorry, growth in EBITDA relative to the guidance of 11% to 13%. Can you give any more detail on the breakdown where you're ahead of schedule in terms of T Star integration and how that changes your thinking, if it does, about the next sort of year, 18 months, particularly with regards to the T Star integration?
Got it. Thank you, Neale. So I think the vast majority is coming from the fact that we're about 3 months ahead of the game in terms of integrating the base stations. And so for every base station we turn off from the T Star side, there's associated network costs, electricity costs, rental costs and everything that we can save. So when you're 1 month ahead of schedule, then you time that by the amount of base stations and the cost you can save per base station, then that's the extra savings you can generate from sort of good execution. So I think that's the majority.
And the other big one would be the subsidies -- save on the subsidies. So we realized that our -- the T Star subscribers are much more -- have a much better response to our unique bundles, which is better for us in terms of upselling users at a more sort of economical manner in terms of subsidy spending.
So I think those 2 are the 2 big ticket items, and we do foresee, sort of going forward as we further consolidate the network, the savings from the first one to continue to realize. And also, we do expect next year, we're going to be able to enjoy that saving for a full year.
In terms of subsidies, I think it's also quite recurring. So it turns out that the TST users are pretty -- the TST users like our unique bundles very much. And I don't think that's going away anytime soon. Thank you, Neale.
[Operator Instructions] So Mr. Lin, we don't have questions from the audio side at this point of time.
Okay. If that's the case, I want to thank everyone for joining us today at our Q2 results conference call. Again, I want to thank everyone for your support during the Institutional Investor's voting process. Really, really appreciate your recognition. Thank you again. Have a good afternoon, and we look forward to seeing you again at our next conference call.
Thank you. Thank you for your participation, and this concludes the conference. Thank you.