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. James Jeng. Mr. Jeng, please begin your call.
Okay. This is James. Good afternoon, everybody. Welcome to Taiwan Mobile third 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 a result of new information, future events or otherwise, and 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. For the telecom service revenue and telecom EBITDA, we provide investor with our Y-o-Y changes on both a pre-IFRS and a reported basis. Despite the adoption of IFRS 15 starting this year, we think the pre-IFRS numbers better reflect our operating results and cash generation capabilities.
Year to third quarter, our pre-IFRS telecom service revenue declined 7% Y-o-Y, mainly due to the increased pickup of the TWD 499 SIM-only plan in May as well as the continuous drop in both domestic roaming and mobile MOUs. Aided by saving in handset subsidies and channel commission, our pre-IFRS telecom EBITDA for the first 3 quarters increased 3% Y-o-Y. Thus, we will generate a steady operating cash flow. Through further CapEx discipline, we also managed to grow our accumulated free cash flow by 7% Y-o-Y.
Okay, let's turn to next page. Let's move to our growth engine. In terms of growth engine, namely -- there are 2 parts: one is the video streaming as well as the fixed broadband; the other one will be enterprise business. For the video streaming business, we have been expanding our target customers from mobile user to fixed broadband users through our partnership with leading cable MSO. Aided by the cross-selling, we expand our monthly active user, MAU, number by 182% Y-o-Y in the third quarter. On top of the existing SVoD, SVoD stands for subscription video on demand, and the TVoD, mainly transactional video on demand, and the freemium business model we also start on AVOD, stands for advertising video on demand business model in the quarter, adding another source of revenue to our video streaming business.
For the fixed broadband business, our effective bundling through our fixed broadband subscriber base saw steady increase by 6% Y-o-Y. In third quarter, our fixed broadband penetration rate reached 39%. That is to say the remaining 61% of pay-TV customer suggests further growth potential for our fixed broadband business. The expanding fixed broadband subscriber base also paves the way to our video streaming services.
As to the enterprise business, there are some bright spots, mainly cloud, IoT and ICT business. In particular, revenue from cloud-related services grew more than 50% Y-o-Y in third quarter, not to mention 24% rise in the IoT revenue.
Okay, let's move to the momo operational highlights. In the third quarter, momo total revenue rose 22% Y-o-Y. The growth momentum came from the strength in the e-commerce revenue, which grew 29% Y-o-Y and make up 85% of momo's total revenue. In addition, momo's revenue generate through the mobile devices rose 49% Y-o-Y and climbed to 60.4% of e-commerce revenue. Year to September total revenue saw an increase of 27% Y-o-Y. Accumulate EBITDA grew 15% Y-o-Y to TWD 1.2 billion, ahead of the company forecast.
Okay. Let's turn to the financial part. I will pass to Rosie to continue the report.
Hi, good afternoon. Let's look at the performance by business served.
In the third quarter, consolidated revenue benefiting from our diversification decreased by 2% year-on-year with momo's revenue growth largely offsetting the declines in other businesses. While momo's operating costs went up due to its expanding business scale, reductions in mobile commission in handset subsidies kept our consolidated cost and expenses stable from a year ago. As a result, our pre-IFRS 15 EBITDA saw only a 3% year-on-year decline.
On the other hand, downward adjustment to third quarter EBITDA under IFRS, which had no cash flow impact, were enlarged by TWD 415 million from a year ago, due mainly to capitalized commission amortization. This caused the reported EBITDA to decline on a year-on-year basis in the quarter.
Now let's turn to the result summary. Year to September, our revenue was 4% lower than the company's expectations, mainly due to the TWD 499 unlimited offerings in the market. That said, through relentless efforts in cost and expense rationalization, both our operating and net income are on track to meet company guidance.
Separately, our year to third quarter reported net income, including handset bundle sales and the capitalization of commission accounting treatment, showed a 10% year-on-year decrease. As such, this reported net income decrease does not reflect our year-to-date 3% Y-o-Y increase in pre-IFRS telecom EBITDA and the 7% growth in free cash flow.
Now let's move on to balance sheet analysis. On the asset front, the major year-on-year change seen in the third quarter was the reduction in other current assets and the increase in concessions. The year-on-year drop in other current assets was because of the reductions in guarantee deposits this year, while the concession increase resulted from the spectrum acquisition of the 2.1 gig frequency band in the fourth quarter last year.
On the liability front. Our current liabilities decreased from a quarter ago due to the payment of the TWD 15 billion in cash dividends in the third quarter, leading to a quarter-on-quarter rise in current ratio.
On the financial ratios, net debt-to-EBITDA in the third quarter rose sequentially to pay dividends through bank borrowings, but the ratio remains similar to last year's level.
Also, our ROE at the end of third quarter still stood above 20%.
Now let's turn to cash flow analysis. In the third quarter, operating cash inflow remained stable compared to a year ago. Investing cash outflow decreased year-on-year, due mainly to having a higher CapEx 1 year ago and the TWD 1 billion deposit we made in the third quarter last year to the regulator related to the 1.8 and 2.1 gigahertz spectrum auctions in the fourth quarter of last year.
On the financing front, a total of TWD 7.7 billion in short-term borrowings was raised in this quarter to fund the TWD 16 billion cash dividend payment. Net-net, our accumulated free cash flow was TWD 15.8 billion, up 7% year-on-year, which translated into an annual free cash flow yield of 7%.
Now let me turn the presentation back to Jim for award recognition and key message.
Okay. The -- this page will list the recognition we have received in the third quarter of this year for your reference. As you can see in the first bullet, as was mentioned, we, Taiwan Mobile, were selected for the year 2018 Dow Jones Sustainability World Indices and ranked top 1 in the global telecoms. I think it's quite a good performance for this year.
And finally, to wrap up our presentation, this slide summarizes the 3 key message that I would like to deliver: First, a growing e-commerce business as well as cross-sell among telecom, contents and Internet services to stimulate higher spending per customer is our focus; secondly, the fast-growing momentum of the enterprise segment, including the IoT, cloud and ICT business, brings additional promise for the future telecom revenues; finally, again, rationalize costs and optimize the efficiency to ensure steady stream of cash flow remain our commitment.
Okay, this will conclude our presentation. Now I would like to open the floor for the Q&A section. Thank you.
[Operator Instructions] Our first question comes from Patrick of Nomura.
I have a question regarding your enterprise business. Do we have a raw breakdown of the cloud, IoT and ICT part of the business and maybe how much in aggregate these 3 account for your total business? And separately, how would you expect the rollout of 5G service to expedite the growth for the enterprise business?
Okay. For the detailed breakdown, the cloud business mainly is in the -- ITC-related mainly will be in the cloud value-added services for the enterprise sector, okay. And for the IoT, actually, the IoT, we grow quite well in the connected car business as well as the government sector for the metering business. And since this year, the government start the metering, for instance for the water, gas and electricity meter, so a lot of big tender coming out. And this year, we are pretty good in this sector. We're getting quite a lot of tender for this business. And ICT is then the -- is for the system integration for the enterprise part as well as the government sector. So these 3 sector, our personal view for the coming year, especially when the pre-5G start to booming up, I will expect the cloud business will be a fast-growing business as well as the IoT. And ICT really depends on the government, especially a huge government tender. For instance beginning of this year, Taiwan Mobile, along with 2 big partner, we won AI preference for the government for the -- I think it's the national computing center for the AI preference, and that will be finished by the end of this year. So if everything moves smoothly, the ICT revenue will be boom up in the fourth quarter for this project. So for the government -- since government are really very aggressive in the pre-5G business, so the -- a lot of business opportunity in the cloud, IoT and ICT, we expect will be quite a huge growth for the coming year. And the 5G auction we -- I think the government officially announced will be the spectrum auction will start in the, probably in the midyear 2020. And the good part is yesterday, we have the – it’s actually [ EM ] also have a meeting that claimed the 5G services will probably have only 2 or 3 license to release due to the spectrum limitation. And it allows the user -- allow the operator to form alliance to co-build or share the spectrum and the -- to share the network resources and that's good. The good part of this is to significantly reduce the 5G infrastructure investment. And meanwhile, since the 5G business is mainly in the beginning is the B2B business, so the government also will stimulate quite a lot of big tender for the government sector. So I think next year in the B2C business, like mobile connectivity, we'll remain probably -- we see them. However, in the enterprise and the government sector, I will expect there will be a good growth in this section, in the business sector. So I will expect the next year when -- our CapEx, our fixed or cloud infrastructure and the fixed line of CapEx will probably -- a major part of our CapEx. And that's my expectation. Okay.
So I would guess the total contribution from the enterprise slide, aggregating these 3 may be still below 10% of total revenue?
No, more than 10%. It's more than 10%. I don't have the exact figure with me, but the enterprise contribution is growing quite rapidly.
[Operator Instructions] Next question comes from Jack of SinoPac.
I have 2 questions. My first, though, question is we have just mentioned we will work with the government for enterprise business. Could you give us a view of the firstly, the core tower strength when we develop the enterprise business? And also we have mentioned we will work with the government like -- we work with the -- also we have mentioned we have -- a project will take off from the fourth quarter. Can we give us more color about that? And what will the TWM -- what kind of -- I mean what will TWM do in this project? This is the first question. And my second question is we have also seen the TWD 499 plan. And could you give us some more color about that? Will we sustain this kind of low tariff plan in the 2019?
Okay. In response to your first question, I think the tender we won is quite big. It's the -- we call AI preference. It's a GPU preference for the -- a media GPU. Mainly is we foresee the AI business in every sector, in the government sector, in the home, individual for the big lending, for the big data, we believe this is preference will be contribute quite a lot. And since it's a government preference, basically, the government already decided half of the capacity were reserved for the educational purpose. And the other half of the capacity will be allow Taiwan Mobile as well as our partner to release to the enterprise sector or the private sector for the business opportunity. So I think this is quite a new business, and I believe for the big lending, for the big data is also a very important preference for the future growth. So I think I'm pretty optimistic about this big data preference as well as the AI preference, the cloud preference. So this is what we will focus on for the next year, okay? And in terms of the TWD 499 tariff for the next year, hopefully, because I think all the operators suffer for this tariff trend, hopefully, we can learn something from this lesson. And I hope next year, this -- for this TWD 499 tariff will come to the end. But again, this is my wish.
Yes, just one final question. I'm just wondering, will -- it is because the result -- I mean the TWD 499 plan seems to come from some small peer. They have -- do this kind of stimulus, the tariff plan at the beginning. But also as you just mentioned, the big 3, the major 3 companies, these things also suffer from this kind of tariff plan. So is the scenario is -- what's the scenario? I mean the 2 small peers will also maybe still check in this kind of low tariff plan stretching to 2019 and that's...
Well, I think the plans is -- the low tariff, TWD 499 tariff plan is not start from the 2 small peers. Actually the 2 small peers, they offer much lower than this. They offer TWD 290, TWD 288, TWD 388 from day 1, and that doesn't affect any market. Is -- the TWD 499 start from the big one. I would not like to mention that. But before, the TWD 499 is operated before the line for the enterprise sector. But all of a sudden, when it come to the above the line and they will create this chaos. So hopefully, this will stop and come to the end next year. And we don't worry. To be fair to you, we don't worry about the 2 small operator that come with a low tariff plan because start -- from the day 1, they already started a very low tariff plans, even lower than TWD 499. But that doesn't change any competition landscaping.
Okay, I see. Just a follow-up question. Right now, how do we see -- how will we see the iPhone -- the new iPhone? Yes, because the new iPhone just has been introduced to the market, and do we see a very -- will we be optimistic for the selling of the iPhone in the fourth quarter, even in the first quarter 2019?
Well, the iPhone does help the operator to raise up their ARPU because most of the iPhone subscriber, they adapt to a higher tariff plan, for instance, above TWD 999 or TWD 1,399 that do help to raise the ARPU. However, the new iPhone, at this point, because it's still too early to say, right now, it's not as hot as we expected, okay. The sales remain steady, I would say, okay? S.o Since the XR, the supply in the beginning -- the first supply in the beginning is not sufficient enough, so it's a little bit slow in the market. But once the supply is sufficient, hopefully, they will boost up the sales for the iPhone XR. But now, from what I see, it's a little bit slow than I expect.
Our next question comes from Varun of Crédit Suisse.
First, I wanted to check on these government projects because it seems like now all 3 of you are talking about it. But that it's mainly what I meant was the enterprise project which are being driven by government. So I wanted to understand the market share dynamics, given if in a particular quarter on a year the government come out with an order of TWD 100, how much market share are you guys capturing versus your competition and especially against Chunghwa, which has a much better fixed-line network coverage? Or does it make a difference or not when you bid for these new projects from government? So a little bit more color on the government project from a market competition perspective and market share perspective will be helpful. That's number one. Number two, can you elaborate a little bit more on the monetization ability of the myVideo service? Is it currently given free with the broadband customer? Or are you charging for the mobile customer as well? I just wanted to understand how the monetization is happening on this myVideo service. And lastly, momo EBITDA margins slipped this quarter. Any color on that? Is it because of competition from Shopee? Or anything that will be helpful. The revenue growth was good, but the margin growth -- EBITDA growth was muted because of margin. So that will be helpful.
I will leave the third question to Rosie. So let me response to you the first 2 question. Let me answer the second question first, like regarding the monetization for the myVideo services. myVideo is really a successful product in TWM. It's not just myVideo service itself. Right now, we already have close to 5 million registration over there, and our MAU is close to 2.5 million. And the pay sub is the highest in this OTT market in Taiwan. Even the pay sub is even higher than IT, okay. So right now, if you look at this myVideo business alone as a value-added service, it's -- the revenue in terms of the profitability is already reached -- has actually outperformed and met our expectation, okay. And I think the main part is how to bundle this myVideo service into our fixed broadband business as well as the mobile broadband business. That's the key because the myVideo does increase the stickiness of the mobile broadband and also significantly increase the fixed broadband business. And in terms of the fixed broadband, since we have a cable, we have a set top box. And our uniqueness in this market is our myVideo is not only in the mobile devices. It's also in the home for our -- in the set-top box business. And we just find out -- realized that the customer from the household are more willing to pay for the content. So that's why our revenue and pay sub increased quite significant. And we were -- incorporate with our cable -- affiliate company cable to speed up this kind of bundled sale, bundled business in benefit for both party, okay. So in terms of monetization, I think we have proved extremely good in this product as well as the fixed broadband, okay. And in response to your first, it's a government project. I think in terms of the 5G, AI as well as the IoT, it's really a strategic target for the -- in the government side. I think the -- you might read from the newspaper, government claim that will be the main focus and the main strategic investment in the government side for the coming 2 or 3 years, okay. So not just the metering for the AI application as well as the IoT business. From what I see, the fourth quarter, we already see quite a lot of tender come out for the next year, okay. So this part, the IoT as well as AI preference and also the cloud business is booming. Cloud is not from the government side. Cloud business come from the enterprise, especially for the game preference, the financial preference and the direct broadcasting is very hot right now in Taiwan, in Asia area. So the cloud business is quite promising. And I personally will expect next year, we will have even higher growth rate than this year. So that's basically from my view how to see how these 3 business will perform next year.
On the momo's competition or their strategy for growth, if you look at the numbers year-to-date, their gross margin has now declined by roughly 0.8%. So their growth -- to grab more market share or to expand their market share, their strategy is to squeeze out those smaller players and also their competitor, major competitors by enlarging their market share at the expense of their margin. So that's being reflected in the numbers already. As to Shopee's impact, I think Shopee's impact is still not that visible at this stage because momo is very strong in their B2C business. So we believe their strategies will pay off in the long term.
The next question comes from Amber of Yuanta.
I have questions on the enterprise front. What are the margins like in the enterprise segment comparing to your aggregate margin? With the revenue of the business going higher now with, what you said, over 10% of the top line contribution, how should we look at the trend of these margins? Is it more like a growth trajectory or the other way?
Well, in terms of the margin, profit margin for the enterprise sector, it definitely is higher than the consumer side. As you can see, in the B2C business, right now, the competition is very keen and the margin is not as good as we expect. But in terms of the enterprise, since enterprise, we had to offer -- it's not a product. We have to offer a solution. For instance, I just mentioned the government sector, if you have IoT, it's not a product. So we have to build an ecosystem along with quite a lot of the strategic alliance or partner to offer a solution to the enterprise sector. I foresee -- as of today, TWM, that the enterprise -- the product or the solution margin is higher than B2C connectivity margin. So hopefully, next year, we can see this sector will contribute more, the enterprise segment will contribute more, not only in the revenue side but also in the EBITDA side.
Do you have other questions, Amber?
Yes. So the cloud trend of the margins, so you see this on the growing trajectory?
Yes.
[Operator Instructions] I see another question that comes from Jack of SinoPac.
I just have one question. Could you give us the -- what the -- about the CapEx plan in the 2018 and 2019, what are -- what will -- what -- I mean, the CapEx, how the amount in the -- and also the application.
Well, the 2018 CapEx has been disclosed in our guidance already. As to the 2019 CapEx, it will be disclosed in early next year. Well, probably February 1 after our board meeting.
[Operator Instructions] James, there's no further questions at this point in time. Thank you.
Okay. Thank you, everybody. And everybody, have a nice weekend. Okay, thank you.
Thank you.
Thank you for your participation. This concludes the conference.