Taiwan Mobile Co Ltd

TWSE:3045

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Taiwan Mobile conference call.

Mr. James Jeng, please begin your call now, and I'll be standing by. Thank you.

[James Jeng, executive]

Okay. Good afternoon. Welcome to Taiwan Mobile's fourth 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 for the company, markets or developments referred to in this presentation.

Okay. Let's start our business overview. For our business overview, I will start with the operating performance for our telecom business.

Overall, our telecom business in year 2017 stood out from the pack. Mobile service revenue generated by Taiwan Mobile's own subscribers, namely without domestic roaming revenue from other telcos, shows the smallest decline among the big 3 in year 2017. Our effective spectrum investment strategy allow us achieve a higher spectrum yield than our peers. Core telecom EBIT improved by 3.7% Y-o-Y, attributable to a 16% Y-o-Y increase in mobile value-added services and customer acquisition-related cost rationalization. Plus, we also benefit from the telecom D&A reduction in year 2017. Our EPS for year 2017 come in at NT$5.21.

Let's turn to the cable business. On the cable TV business, our basic TV subscriber base at the end of the fourth quarter last year stayed stable from last year, suggesting improving industry dynamics. The fast ramp-up of digital set-top box penetration led to a strong 7% -- 13% Y-o-Y rise in DTV subscriber number. With effective campaign and leading download speed, our cable broadband subscriber rose 6% Y-o-Y. To sustain cable broadband ARPU, the higher speed mix of broadband business further rose to 26%, up from 17% a year ago.

This paved the way for expanding our OTT video streaming services. If you look at the chart at the bottom right, you will see Taiwan Mobile's OTT subscriber from the cable TV user expand very fast, thanks to the successful integration of mobile OTT and cable TV platform. Since this service is not limited to our own cable subscriber, Taiwan Mobile targets to more than triple the subscriber number in year 2018.

The aforementioned fast rollout of digital set-top box caused our cable CapEx hikes in year 2017 and therefore will increase cable D&A in this year. However, the cable D&A is expected to drop significantly in the next 2 years due to the short depreciation period of our set-top box.

Let's turn to the next page. Let's see momo e-commerce business. The company continued gaining ground in the B2C e-commerce business. In the fourth quarter last year, momo's e-commerce business record a 41% Y-o-Y increase in revenue. And driven by a strong business momentum, e-commerce EBITDA showed a strong 32% Y-o-Y growth.

Of note, e-commerce already make up 83% of momo's fourth quarter revenue and continued to serve as the company growth engine. Also, momo's mobile commerce contribution further rose to 55% this quarter. There is a growing trend of consumers increasingly shopping on the mobile device or through mobile apps. Hence, the increasing contribution from the mobile commerce will help boost momo's growth momentum.

Let me turn the presentation over to Rosie for the financial overview section.

[Rosie Yu, executive]

Good afternoon. Let's look at the performance by business. We believe that the recurring numbers, excluding the domestic roaming business, better reflect our performance in 2017.

In 2017, our consolidated EBITDA remained resilient year-on-year, of which telecom EBITDA went up 1% year-on-year while momo's EBITDA surged 11% year-on-year on a recurring basis.

Now let's look at results summary. In the fourth quarter last year, total revenue beat our forecast on the back of higher-than-expected device sales and e-commerce revenue. Our operating costs and expenses also went up quarter-on-quarter due to the rise in revenue mentioned before, but the expense increase was partially offset by the decrease in handset subsidy and dealer commission.

Nonoperating expenses rose year-on-year and quarter-on-quarter in the fourth quarter last year because of our conservative approach of setting aside the litigation provision related to a pending lawsuit. All in all, our fourth quarter results, we missed our EPS guidance mainly because of the one-off litigation provision.

For the full year of last year, total revenue was 1% lower than our guidance mainly due to revenue shortfall from mobile device sales caused by weaker demand for high-end smartphone bundled plans. However, both e-commerce and mobile value-added service revenue came in ahead of our expectations. Aided by handset subsidies and dealer commission cuts as well as other expense rationalizations, both EBITDA and operating income, for the full year came in better than our guidance.

On the balance sheet. On the asset front, major quarter-on-quarter changes seen in the fourth quarter were the increases in inventory and concession, mainly due to momo's enlarged revenue scale and our acquisition of the 20-megahertz spectrum on the 2.1-gigahertz frequency band, respectively.

On the liability front, we increased short-term borrowings to finance the new spectrum payments we bought in the fourth quarter. Meanwhile, 2 issuances of corporate bonds will mature in tranches in the next 2 years, and current ratio fell to 57% at the end of the previous year.

For the 2 key financial ratios in 2017, our net debt to EBITDA in the fourth quarter was still at a healthy level of 1.6x while ROE stood at above 20%.

On the cash flow front, our 2017 operating cash inflow remained stable compared to a year ago. Investing cash outflow increased year-on-year mainly due to the TWD 8.6 billion payment in the 4G license fees but was partially offset by a lower cash CapEx compared to a year ago.

On the financing front, the company repaid TWD 2.9 billion in corporate bonds and TWD 2.4 billion of long-term bank loan. Meanwhile, the NT$7.9 billion of short-term borrowing was raised to finance our 4G license fees. As a result, our 2017 full year free cash flow maintained at a high level of TWD 20.5 billion, translating into a free cash flow yield of 7%.

Now let's -- let me turn this over back to Jeng for our 2018 guidance.

[James Jeng, executive]

For the year 2018 outlook, let's start with the telecom business. In view of the stable ARPU and subscriber number, telecom top line will be flat should the domestic roaming and mobile termination business be excluded. We forecast telecom EBITDA to edge down 3% Y-o-Y, all factors considered, including the IFRS 15 implementation, namely the capitalization of the dealer commission. That said, the core telecom EBITDA, which is adjusted for the same accounting treatment as a year ago and not including the domestic roaming business, is estimated to be flat in year 2018. The stable core telecom EBITDA target will be achieved through a stable top line performance and stringent expense discipline.

As to the other business. In year 2018, the combined EBITDA of the cable TV business and the momo will represent 15% of our total EBITDA. Their respective EBITDA growth rates are estimated to be 1% for cable TV business and 9% for momo e-commerce. D&A increase in mobile and cable TV business are expected.

Let's see the EPS. We expect a mere 1% drop in pretax earning in year 2018. EPS guidance of NT$5 is largely a negative function of the corporate tax rate hike from 17% to 20%.

In summary, with an expected stable core recurring EPS for year 2018 and over 10% Y-o-Y reduction in CapEx, we forecast an 8% increase in the year 2018 free cash flow from a year ago.

This morning, we had a board meeting, and the next page will show our event updates. For the board resolutions, Taiwan Mobile board approved a CapEx budget of TWD 7.4 billion for the year 2018 with the breakdown detail as shown in the slide. Telecom-related CapEx expect to remain stable while both momo and cable TV's are forecast to trend down.

Secondly, to keep a healthy capital structure, the board today approved the issuance of unsecured corporate straight bonds with a maximum value of NT$15 billion.

In addition, there are some new changes that will apply to us. First, starting in year 2018, the IFRS 15 has been implemented. The implication of TWM financial reporting this year will be capitalization of dealer commission over the contract period, which will increase our beginning balance of the retained earnings by NT$3.5 billion. Secondly, the corporate tax rate has been raised to 20% from 17% starting year 2018, which also applies to TWM.

The award and recognition, this page lists the award and recognition we have received in the recent quarter for your reference.

To wrap up our presentation, this slide summarizes the key message that I would like to deliver. Taiwan Mobile is confident in maintaining stable free cash flows, despite less than satisfactory industry dynamics. Plus, we are better positioned with stronger foothold in e-commerce and OTT services, not to mention advantage in 4G spectrum and infrastructure investment. Sustaining the long-term health of our business to deliver satisfactory return to our shareholder remains our main goal. This will conclude our presentation this afternoon. Now I would like to open the floor for the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first questions come from Neale Anderson from HSBC, Hong Kong.

[Neale Anderson, analyst]

The question relates to the less-than-satisfactory industry dynamics you mentioned on the final slide there. I assume that's mostly referring to mobile, your competitor yesterday mentioned the possibility of moving to tiered data pricing. Is that something you see is feasible given the flat rate has been standard for so long in Taiwan?

[James Jeng, executive]

Okay. Rosie, will you respond for this question?

[Rosie Yu, executive]

It's really up to Chunghwa. If they are willing to move to tiered rate plans, of course, we'll be benefited.

[Neale Anderson, analyst]

Right. So there's nothing that, do you feel Taiwan Mobile can do to bring about that change or a change?

[Rosie Yu, executive]

Well, this is a 3-player market, so you know we are pretty much facing this kind of head-on competition from our peers. And Chunghwa is the largest one; so, of course, we need to benchmark our rate plans against theirs, right?

[Neale Anderson, analyst]

Okay. Do you feel the outlook in the cable TV market is improving now?

[James Jeng, executive]

I think it's, the cable TV from my view will remain stable this year. I think the competition from the new entrants, right now are a little bit slowed down. So as you can see last year, year 2017, our Taiwan Mobile Cable TV business in terms of the cable subscriber, broadband and digital TV are kept in the front end of the competitors. So we expect the year 2018, the cable business will still remain strong in year 2018. Especially, we will more focus on the fixed-line broadband as well as digital TV, since the whole network was fully digitized last year.

[Operator]

And our next questions come from Mr. Jack Hsu from SinoPac Taiwan.

[Jack Hsu, analyst]

I have 3 questions. The first question, could you -- I just want to know for the fourth quarter, we had some loss in the -- we had some one-time loss. Could you disclose more details about that? And the second question is, could you give us the first quarter's guidance we -- right now, thank you for giving us the whole year. Could you give us the first quarter of 2018? And my third question is, what's our target for our 4G subscriber in the 2018?

[James Jeng, executive]

Okay. I think in terms of the litigation, I think we will appeal to the High Court. Based on our content from [indiscernible] we will put in the year 2017, right?

[Rosie Yu, executive]

Yes. We have provided the litigation provision.

[James Jeng, executive]

But again, we will appeal in the High Court. And secondly, what's the question -- question on the first quarter guidance?

[Jack Hsu, analyst]

Yes.

[Rosie Yu, executive]

You mean the quarterly guidance or --?

[Jack Hsu, analyst]

Yes, the first quarter.

[Rosie Yu, executive]

The first quarter, we're just -- okay, let me give you the numbers. Actually, we will announce afterwards publicly for the quarterly guidance. I'll give you the numbers later.

[James Jeng, executive]

Well, in terms of -- for your third question, in terms of the total mobile subscriber in the year 2018, we are more or less flat, we will be slightly up, about 0.7% increase, that will be about -- still remain the 7.3 million or so by the end of the year.

[Rosie Yu, executive]

All of the 3G subscribers will be migrated to 4G network. And to answer your questions for the quarterly EPS, in the first quarter it's estimated to be TWD 1.18, second quarter TWD 1.31, third quarter TWD 1.28, fourth quarter TWD 1.23.

[Operator]

And our next questions come from Mr. Patrick Chen from Nomura, Taiwan.

[Patrick Chen, analyst]

I assume your guidance is including the impact from the roaming, so could you shed some light on what would be the EPS trend excluding that roaming impact for the 2018?

[James Jeng, executive]

The roaming impact will be insignificant this year because this year will be based on -- NCC regulation will be the last year. This year, I assume all the traffic will be returned back to the 3G. So the roaming impact to our revenue or our EBITDA will be insignificant this year.

[Rosie Yu, executive]

To elaborate a little bit more on this issue, actually, we think the pretax profits will remain flattish should we exclude the roaming impact.

[Patrick Chen, analyst]

Okay. And you mentioned that you expect the ARPU trend to remain largely stable for 2018. But from a trajectory point of view, do you expect the, well, sequential movement to be more like trending upwards towards the back half of the year given that you are maybe seeing more uptake rate on the high-end rate plans due to this high-end smartphone launch?

[James Jeng, executive]

I would think so. I think based on our estimation, our postpaid ARPU will remain just about the same as last year. It will slightly drop. Mainly, it's due to the termination rate cut, okay? Because of this factor, so our ARPU will slightly drop less than 1% in terms of the ARPU. For the higher end, our percentage will still remain same as last year. For the subscriber higher end, TWD 1,000 will remain about 35% to 37%. So that's our forecast this year: still will remain about the same position in the higher end.

[Operator]

Our next questions come Ronny Zhu from UBS Taiwan.

[Ronny Zhu, analyst]

I had 2 questions. One is regarding -- just want to double check, you mentioned about the guidance, we're seeing the -- we're expecting the mobile business revenue and profit to remain flat. And that means that we are expecting our subscriber to not decline next year. And on the cable business side, my question is, so we've noticed that the EBITDA margin declined sharply in December last year. So can you elaborate more on what happened and how are we going to view the EBITDA margin trends on the cable business in 2018? And on the mobile business, it seems like the EBITDA margin is also declining. Should the trend also continue this year?

[James Jeng, executive]

Yes, I think in terms of subscriber number and also the tariff distribution, I think in terms of the mobile and also the tariff distribution. I think in terms of the mobile service revenue, year 2018 would decline slightly but it will be less than 1% from our Taiwan Mobile side, [indiscernible] due to the data revenue remaining flat. However, the voice revenue still would decline, we estimate about 10% to 15%. However, the value-added services, mainly the innovation services will be up from about 16% to 20%. So [ there my ] companies are a little bit above the voice, very minimal drop. So that would keep our mobile service revenue flat. And your second question, sorry, I missed your second, it's the cable business?

[Ronny Zhu, analyst]

Yes, I read on the monthly sheet, that's our EBITDA margin in December, it's 42% versus the full year average of 51%. I was just wondering what's happened and how we're going to view the trends in 2018?

[James Jeng, executive]

I feel that in the fourth quarter, we have come out for the shopping channel because the TV shopping right now in Taiwan, the whole industry is declining right now. Therefore, the channel leasing, the unit price dropped in the fourth quarter, we made adjustment, because most of the TV shopping, they are [indiscernible] strong competition with the e-commerce Internet shopping. So we have dropped the unit price channel leasing price and they adjust in the fourth quarter. I think that's the main reason.

[Ronny Zhu, analyst]

And how about 2018? Are we expecting to continue to decline?

[James Jeng, executive]

For 2018, I think we remain -- in terms of unit price channel, every channel leasing price will remain the same as fourth quarter last year. So that would not be further down.

[Ronny Zhu, analyst]

But the same sort has happened in last year, it's just the fourth quarter. So are we expecting the rate to be flat with last fourth quarter? So that means on a full year basis, we are expecting 2018 to be slightly declined or…

[James Jeng, executive]

Well, not necessary. I think in terms of the channel leasing revenue, yes it would drop. However, the fixed broadband business is coming up. And we are -- since the whole network is fully digitized, so we'll push, in year 2018, we'll push the 5 megabit per second high-speed fixed broadband and that would boost your fixed broadband income and also the bottom line up and they will compensate some of the leasing channel revenue drop.

[Ronny Zhu, analyst]

And how about the momo?

[James Jeng, executive]

Momo will show -- I think from the figure I have, I think it's very conservative. If you can see the year 2018 guidance, Taiwan Mobile, we will rather be conservative in the beginning. But we'll definitely not be pessimistic about the year 2018 but we will rather be more conservative in the beginning. We will see at the end of the year.

[Operator]

[Operator Instructions] And now a follow-up question is coming from Ronny Zhu from UBS Taiwan.

[Ronny Zhu, analyst]

Just a follow-up question. Is that -- governments are requiring us to migrate all our 3G subscribers to 4G. Do we have any comment on that? May that lead to our subscriber loss?

[James Jeng, executive]

I don't think so, I think by the -- yes, it's the NCC regulation, government side, we have to terminate all 3G service at the end of this year. However, the 3G network still remain in the network because the voice service still will fall back to the 3G network. So the 3G network -- even though the 3G service is terminated, the network still remain. However, we can use less spectrum for the 3G service. We used to have 50 megahertz for the 3G service including the voice plus data. But since the most -- all the 3G data service will move up or migrate to 4G, the only traffic remaining in 3G network is just the voice, because that's a circuit drawback. So we might just use -- instead of using 50 megahertz for 3G network, we will use only probably 5 megahertz and the rest of the 50 megahertz spectrum will be used in the 4G data services.

[Ronny Zhu, analyst]

And one more question. Is there any update on the 5G?

[James Jeng, executive]

Well, 5G, in year 2020, we start the commercial run. Right now, the government still -- we still try to persuade the government for this 5G spectrum, not to use the auction, because it's too frequent. I mean, we've just finished a 2.1G auction. And 2 years from now, we have another 5G auction. So hopefully, government would pick our advice. Probably the government will provide the 5G spectrum for most of the operators. But that's my wishful thinking.

[Ronny Zhu, analyst]

So just to clarify, so that means the spectrum allocation, no matter it's going to auction or not, but it will be decided in 2020?

[James Jeng, executive]

Basically, the 5G spectrum were located. I think that is determined, 3.4G to 3.6G. So that will be our 5G spectrum. For the first 5G spectrum will be located in this range, 3.4 to 3.6.

[Ronny Zhu, analyst]

But that's 200 megahertz, right?

[James Jeng, executive]

Yes.

[Operator]

[Operator Instructions] There seems to be no further question at this point in time, sir.

[James Jeng, executive]

Okay. Thank you very much.

[Operator]

We just have one follow-up question. Can we go ahead?

[James Jeng, executive]

Sure.

[Operator]

Mr. Jack Hsu from SinoPac, Taiwan.

[Jack Hsu, analyst]

Just 2 follow-up questions, sorry. Just one question is, we have mentioned the cable business, we may expect some competition, but we see the OTT subscriber, we will have a big growth in the 2018 when we estimate. So how do, are we to see the cable business in the 2018 because the subscriber will grow but I don't know, while the revenue will -- the potential were better than our estimation. This is the first question. And my second question is for our telecom business, do we see more peers price competition in the 2018 or the price competition will ease in the 2018?

[James Jeng, executive]

Well, let me respond to your second question. I think in this year, year 2018, in terms of the mobile tariff competition, I will expect will become mild because I think the big 3 also face the pressure from the -- the bottom line pressure. So, that's why the commission and the subsidy would be lower than last year. And that will turn the whole competition into a very stable and mild situation. So I would not expect a keen competition will come out -- will take place in the year 2018. More or less, just about the same as this year. In terms of the cable, you're talking about the OTT. Yes, I think the streaming video will become, from my own view, become the mainstream of the video services. Because of the full digitization and the speed of the fixed broadband were a significant rise in this year, For instance, it will rise to 100 megabit per second or even up to 5 megabit per second. So the streaming video will become -- play a even more key role in the video services. And Taiwan Mobile because our fixed broadband will be significantly improved this year or I would expect the OTT services will be a significant increase this year in terms of the subscriber number. And there would be additional revenue to the traditional cable media broadcasting business.

[Jack Hsu, analyst]

So a success story. Just 1 follow-up question, does OTT revenue include in our 2018 forecast?

[James Jeng, executive]

Well, we didn't calculate in our cable business, because right now I would say the business will pick up but in terms of the revenue portion in comparison through the whole operation, it's still insignificant, at the beginning stage. So we didn't come in the OTT service revenue in our cable business.

[Operator]

[Operator Instructions] We don't have any follow-up question now. Thank you.

[James Jeng, executive]

Okay. Thank you very much.

[Rosie Yu, executive]

Thank you.

[James Jeng, executive]

So, we will conclude today's conference call.

[Rosie Yu, executive]

Wish you all have a very happy Chinese New Year.

[James Jeng, executive]

Yes, Happy New Year.

[Operator]

Thank you very much. This concludes the conference.