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.
Chairperson today is Mr. James Jeng.
James, please begin your call. And I'll be standing by for the Q&A session. Thank you.
Okay, thank you. This is James. Good afternoon, everybody. Welcome to Taiwan Mobile Fourth Quarter Investor Conference Call.
Before we start our presentation, I would like to direct your attention to our disclaimer page, which states that 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 provide 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.
For the business overview, I would like to start with the operating performance for our telecom business. As you can see in the [ view graph ], for the telecom service revenue and telecom EBITDA, we provide investors with y-o-y changes on both pre-IFRS and reported basis. Despite the adoption of IFRS 15 starting from year 2018, we believe the pre-IFRS number better reflect our operating result and cash-generation capabilities. In year 2018, our pre-IFRS telecom services revenue declined by 8% y-o-y mainly due to the higher take-up rate of SIM-only plans, softer demand for high-end smartphone and lower domestic roaming and voice revenues. However, thanks to the higher penalty income and lower expenses, our pre-IFRS telecom EBITDA for our full year -- for the year 2018 increased by 3% y-o-y.
With certain CapEx control, we further increased our free cash flow to TWD 21.3 billion.
Let's see the -- our growth engines. For the video streaming business, myVideo services, by teaming up with leading cable MSOs, we continue to expand our customer base from mobile users to fixed broadband users with bigger screen. In year 2018, aided by the richer video lineups, we increased customer stickiness by doubling our monthly active users, while the number of video view reached 4x that of the previous years. As a result, revenue from the video stream grew around 20% y-o-y. For the fixed broadband business, we saw a 6% y-o-y increase in the subscriber base. Thanks to the effective crossing sale -- cross-sell, with the fixed broadband penetration rate, our pay TV reached 40% in the fourth quarter year 2018. However, we believe that there is still room to grow. A large -- a larger fixed broadband subscriber base also bode well for our video streaming business in the future.
As to our enterprise business, ICT stood up with 94% y-o-y revenue increase, while cloud and IoT also grew steady. Our cooperation with Quanta and ASUSTeK to build a nation-level AI cloud platform was the key highlight for the ICT business in year 2018.
Let's move to the momo's operational highlights. In year 2018, momo total revenue grew by 26% y-o-y on the back of the strong momentum from B2C e-commerce division, where average ticket size grew by 8% y-o-y and number of transaction grew by 24% y-o-y. The total EBITDA also grew by 15% y-o-y.
Let me turn the presentation over to Rosie for the financial overview section.
Hi. Good afternoon.
Let's move on to performance by business.
In the fourth quarter last year, consolidated revenue decreased by 1% year-on-year, as momo's strong revenue growth largely offset the decline in telecom business. Pre-IFRS 15 EBITDA increased by 3% year-on-year, thanks to lower handset subsidies and channel commissions in the telecom business. For the full year of 2018, consolidated revenue grew by 1% year-on-year.
In addition to momo's strong growth, our mobile value-added services cloud, IoT and ICT services also grew steadily throughout the year. While pre-IFRS 15 EBITDA grew by 3% year-on-year, downward bundle sales adjustment to the reported financials, which had no cash flow impact, increased by TWD 2 billion year-on-year.
Let's move to the results summary page.
In the fourth quarter last year, strong showing from momo and lower nonoperating expenses resulted in a 27% year-on-year increase in net income. We missed our fourth quarter guidance due to lower-than-expected high-rate plans and high-end phone bundle sales, despite the pre-IFRS profit [ came in ] better than expected. For full year 2018, revenue was 4% lower than the company's expectations, which was a function of customers' shifting appetite to lower-tier rate plans. That said, through business diversification and rigorous cost and expense rationalization, both our operating and net income achieved the company's guidance, making Taiwan Mobile the only 1 amongst the big 3 telecom operators in Taiwan that achieved EPS guidance for 2018.
Now let's look at balance sheet analysis.
On the asset front, the y-o-y increase in current asset was driven by declines in receivable and contract assets as handset replacement cycle lengthened and demand for high-end smartphone wanes. The year-on-year decrease in other current assets was due to lower guarantee deposits in 2018. For noncurrent assets, concession and equipment values came off year-on-year, reflecting the end of 3G service, while the increase in other noncurrent assets was related to the adoption of dealer commission capitalization accounting treatment since the beginning of 2018. That's IFRS 15.
On the liability front, our gross debt decreased nicely year-on-year as we paid down debt with healthy free cash flow.
In terms of financial ratios, our net debt-to-EBITDA ratio improved to 1.4x, and our current ratio also rose to 69% versus 57% a year ago. ROE at the end of 2018 stood firmly above 20%.
Now let's look at cash flow analysis.
For the full year, the year-on-year decrease of operating cash inflow was mainly related to changes in accounts payable as a result of falling handset sales. As for investing cash flow, the year-on-year decrease in outflow was due to lower CapEx, higher license fee based in previous year and more cash released from guarantee deposits with the regulator. In terms of financing cash flow, the main outflow item in the fourth quarter last year was the repayment of the 7-year corporate bond. For the full year, we issue unsecured corporate bond of TWD 15 billion in April last year, which helped pay down short-term and long-term debts.
With CapEx falling by 13% year-on-year, full year 2018 free cash flow reached TWD 21.28 billion, up 4% year-on-year, translating into free cash flow yield of 7.3%.
Let me turn the presentation over to James for 2019 guidance and event updates.
Okay, let's look at the year 2019 guidance.
In terms of the 2019 outlook for the telecom business, in year 2019, narrowband IoT, cloud services, IDC business and OTT-related services will be on their upward trends. Mobile monthly fees in year 2019 are expected to be similar to the current level, while lower voice minutes of use and mobile interconnecting rate will weight (sic) [ weigh ] on the mobile ARPU.
Despite our efforts in mobile offering differentiation and customer acquisition cost reduction, we expect a 10% y-o-y decline in telecom EBIT due to -- mainly due to 3 factors. The first is a lower ARPU due to the 499 tariff frenzy; secondly, no 499 related penalty income in year 2019; and thirdly, no domestic roaming revenue in year 2019. For other business, the combined EBIT for our cable TV business and momo will represent 21% of our total EBIT in year 2019, with respect to EBIT growth rate of 10% for cable TV and 5% for momo.
Stable free cash flow generation is expected in year 2019, as saving in CapEx -- cash CapEx compensates for the decline in operating cash flow.
For the CapEx guidance. Out of total CapEx of TWD 6.4 billion planned for year 2019, we expect telecom CapEx to decline by 25% y-o-y; cable TV CapEx to increase by single-digit percentage point; and momo CapEx to halve, despite continued business expansion, due to the high base from year 2018 for its mega automate warehouse.
The next page show our events update. First, the board resolved to participate in establishing Line bank, an online-only bank, with investment amount of TWD 500 million for a 5% stake. Second, the recognitions we have received in the fourth quarter of year 2018, for your reference.
To wrap up our presentation, this slide summarized the key message that we would like to deliver.
With strong footholds in e-commerce and OTT services, plus leveraging expanding residential broadband user base on content bundling, Taiwan Mobile is better positioned than other telcos in Taiwan. The growing cloud, AIoT and ICT business, coupled with CapEx down trend, will support TWM's stable free cash flow generation capability and future growth.
Okay, this will conclude our presentation today. Now I would like to open the floor for the Q&A section.
[Operator Instructions] The first question comes from Patrick Chen of Nomura.
I have questions on the D&A guidance for 2019. It seems to be rising, let's say, from 2018 level. As I understand it, your CapEx has been declining for the past few years, so is this rise in D&A more related to the amortization or maybe the adoption of IFRS 16 to capitalize the [ rental ] expenses? And separately, could you also share some color on the non-op losses that's baked into the 2019 guidance?
Well, on your first question of the D&A guidance, it's the latter. It's IFRS -- it's after implementation of the IFRS 16. On your second question of nonoperating losses, it was because last year -- or sorry, in 2017, we provided TWD 790 million roughly accrued losses for the litigation with Far EasTone. So in 2019, we do not incur any such losses. And also because of some write-off losses incurred in the previous year. So that's the result.
Our next question come from Jack Hsu of SinoPac.
I have 2 questions. First question...
Can you speak louder?
Sorry. Could you -- can you hear clearly?
Right now it's okay, yes.
All right. I have 2 questions. First question, could you give us the number of your 4G subscribers at the end of 2018? And this is first question. And then my second question: Could you share us the -- or our -- share us your view about the 499 all you can eat? This had an impact. It seems negative impact for the operators in Taiwan, but is -- does it really affect a lot? Or still -- or there's any other things which impacted the operators -- the revenue or the profits?
Okay, in response to your second question, actually, 499 tariff does impact quite a lot for the mobile operators. I think the -- in year 2019, the figure seems bigger simply because the -- last year, the 499 tariff start from the June in year 2018. So -- of 2018, okay...
May.
In May, okay. So it only reflect -- the impact only reflect half of it in the year 2018, but this year will be reflect the whole year. And meanwhile, we expect the 499 frenzy, it probably would not be worse, but it seems to have continued. So in our projection, we have very conservative projection that the impact for the 499 probably will continue in this year, and so that will further lower our ARPU. And that's why, in the year 2019, our projection of the mobile revenue, we're kind of conservative. And the -- that reflect in the [ year 2000 ] result. And I didn't quite catch your first question. What's your first question?
4G subscriber number.
In terms of the 4G subscriber number, I think, for the year 2018, for the -- for all 5 operator, actually the SIM card penetration rate is rising. And the main reason is the 499 tariff. As well as, in the -- I think, in November 11, there is a network big sale. And one of our competitor come out with a [ 2 11 ] tariff, and a small operator come out with TWD 88. So that did increase the SIM penetration rate. So in terms of subscriber base in year 2018, it's 1% growth in the whole market.
Yes. So could you give us the number of the 4G subscriber? [ Is of ] around 8 million or...
No, no. It's around -- the whole market is around 29 million, I think.
[indiscernible].
Yes.
Whole market is 29 million. So the market share for first...
Yes. Which is 1% y-o-y growth.
Yes. So how...
Unfortunately, the ARPU is dropped. That's why the revenue dropped by [ segments, yes ].
Yes. But I mean, how many of the 4G subscribers at the end of the 2018 -- sorry. Because in -- do you mean the whole market is about 2.9 million and that -- but how many the subscribers for our -- for TWM? Sorry.
Do you have figure?
I don't know. 7.07...
No, no, no, include the -- including the prepaids, [ not on just on that ].
Just -- yes...
[indiscernible] mobile.
[Foreign Language]
Yes, yes, [indiscernible]. It's 7.28 million subs.
Okay, 7.28 million, okay. Got it.
[Foreign Language]
[indiscernible] and prepaid...
Our next question comes from Neale Anderson of HSBC.
Sorry. I was on mute. Two questions, please. So first one is on the telecom CapEx guidance for 25% reduction. I was wondering if you could share any details on the level of traffic growth you're seeing on your mobile network and how you reconcile that with the lower investment in 2019. Second question is about the investment in Line bank. Could you share a bit of your -- the rationale, the thinking behind that investment, please?
Okay. I think in the telecom, if the -- in terms of CapEx 25% decline y-o-y. And for the mobile traffic, we estimate there's the -- a 12% growth. So the CapEx for the mobile network or the -- let me see how much. It's TWD 4.1 billion for the mobile network, so -- which will contribute most of the CapEx. And secondly, for the Line bank synergy, maybe Rosie, can you...
While it will -- Line bank will provide the largest platform on the island, which are expected by everybody. And we believe there will be more and more applications that we could -- or business synergies that we can leverage from this platform.
[Operator Instructions] Next question comes from Varun of Crédit Suisse.
A few questions from me. Number one, can you provide clarity how much is APT right now contributing in terms of roaming revenue? My understanding was most of it is done in 2018, so how much -- is it still less than by 2019? Or I assume it should be 0, right? So any clarity on that will be helpful. Secondly, I want to go back to CapEx. If you look at your competitor, Chunghwa's CapEx guidance is always to increase, and they're investing a lot. Given that you're also looking at ICT and all these cloud initiatives to be a growth driver, it's surprising to see that your CapEx is coming down. So just want to know clarification because if you are looking to invest in these future technologies and your fixed line network infrastructure is much -- in my view, is less than Chunghwa, so it won't -- shouldn't you be investing on those front in preparation for 5G? So just want to hear how does the management think about these initiatives on ICT and CapEx. Number three, any update on the 5G auction and stuff? And when should we expect any increase in 5G CapEx? That will be helpful.
Okay. In response to your second question, it's the ICT CapEx. You're questioning we expected the cloud business and ICT revenue will grow. However, the CapEx is declined. Actually, in terms of IDC investment, the heavy investments really took place in year 2018 and -- '17 and '18. So for this year, the CapEx mainly is for the incremental revenue basis. So that doesn't mean the IDC business would not be significant because the most investment is -- took place in year 2017 and '18. And the third question is 5G. From NCC, as far as I know, the 5G spectrum auction would take place probably in the first -- end of first quarter of year 2020. So that means the CapEx for the 5G would not happen in year 2019. The most likely where the 5G -- or the network investment will start in -- probably in the third quarter or fourth quarter of year 2020. So that's why the year 2019 -- the CapEx will be -- would not be so much in the year 2018 but, in year 2019, for the spectrum auction as well as the network deployment, probably will increase. And for the first question, Rosie, can -- what's the...
Yes, APT's roaming revenue for 2019.
Well, basically according to the NCC regulation, the domestic roaming from APT revenue, I think, actually were stopped at the -- by the -- at the end of the year 2018. And they, NCC give APT a grace period for a month. So by the end of June -- not June, January, all their domestic roaming were reset to 0. Okay, that's...
In light of that, do you think your guidance is a lot more conservative of 10% decline given the roaming will be 0? And I assume not many of your customer converted to 499, but can you elaborate how many of your customer are in 499 plan as of now?
Well, yes, our guidance, we prefer to be more conservative in the beginning. And that's why we have, for the past few years, as you can notice, we normally give our guidance or projection very conservative and in the beginning because the -- for instance, for the year 2018, we didn't expect there is a 499 frenzy come out. And at the end of the day, TWM turned out to be the only one meet the guidance and because we tend to be more conservative. But hopefully, in year 2019, we will outperform our projection.
Okay. Lastly for me: The earnings, if you look at, has been on a declining trajectory for some time now. How should we think about it? Obviously '19 is a declining trend, but when do you think we can see some recovery in earnings? Your -- I know your ROEs are improving, but that is largely because you're paying dividends out of your reserves. But your -- the core earnings seems to be on a declining trajectory, so how should investor look about earnings over the next 3 to 5 years? Is there any view where you think you can have some recovery in earnings?
Well, Varun, you know we are very committal (sic) [committed] to a stable dividend policy. So even with declining earnings, I think we are still committal (sic) [committed], but of course, it's up to the board meetings in April this year. And you know that we do have ample reserves for us to top-up dividends if necessary.
The next question comes from Patrick of Nomura.
Just read from the news about these changes in leadership. And so to the extent that you'll be able to share, could you like share with us the board's thoughts behind this change?
Okay, thank you. Thank you. I think this morning, on the board, we appoint a new GM for the Taiwan Mobile. It's mainly due to myself already reached to age 65, which is the age for retirement. And according to the corporate policy, for the -- a top management which reach -- who reach to 65 has to retire from -- but once again, as our Chairman mentioned, I will still stay in the board. And in the group -- in the Fubon group, I will still serve the purpose of assisting the new GM; and also the -- for coordinate the Taiwan Mobile as well as our subsidiary, for instance, momo and Kbro business. So hopefully, I still can serve a little bit purpose, a little bit contribution to the group, but I appreciate for the past 5 years for the investor support. And we believe for -- the new appointment for the new GM is maybe a little bit shock for everybody because it's not -- the new GM is -- his name is [ Jimmy ]. He basically is in the venture capital and new business development in this industry. I think it's time since the mobile connectivity become monetized -- for monetized -- commodities to monetize. So we believe we should have a new start and a new mindset for the telco. And so hopefully, the new management and new management team will start with a new, I will say, called -- not evolution but revolution or a new service come out which were -- in the midterm will generate a new service or new service and as well as the new revenue. So that's what I can share with you.
We all look forward to the new innovations. And best wishes with your new endeavors.
Thank you. I appreciate.
And the next question come from Amber Lee of Yuanta.
I have one on momo. So you mentioned that momo will be representing 21% of your total EBIT this year. What is that number based on? I mean, on the margin side, what kind of EBITDA margins are we looking at for momo? Is it trending up, or is it kind of flattish?
Well, I think the -- you might misunderstood what we just say. The 21% is not just from momo. It's also from the cable side. And basically I will say, in terms of the EBITDA margin for the momo, I will say in year 2019, we're keep flat. However, as you can see, the top line will grow quite significant. And the -- for the momo, revenue projection is very conservative. It's very conservative. So in terms of EBITDA number, the percentage wise were keep flat, but in terms of the total EBITDA number, I personal believe, will be -- outperform what we project. And meanwhile, for the cable TV side, I think the EBIT will contribute quite a lot because the -- simply the depreciation for the set-top box is 2 years, is already complete. So for the year 2019, the depreciation for the cable sector was significant reduced. And then we'll generate more EBIT in year 2019. Did that answer your question?
Yes, yes, yes. Sure.
[Operator instructions] James -- oh, there is another question, comes from Jack of SinoPac.
Sorry, just only have 2, another question. My first question is so because we have -- right now we will have the 499 and all you can eat, [ the travel trend ], maybe we'll -- maybe in 2019 or 2020. So how will we -- to increase our profit or increase our cash in the following years? Because this kind of situation you've seen now will change. So how will we do to increase our -- the cash flow in the following years? This is the first question. And my second question is about, from now on, so before the 5G, so the CapEx is -- will -- the CapEx will be [ lowered and lowered ] until the start of the 5G?
Well, for your first question, is the tariff for -- the intent of the tariff 499 is quite significant in the top line. But once again, after 499 frenzy, you can find out the whole business style, the -- is changed because more and more subscriber will come into your store and buying just the SIM only. So I will say the subsidy or the subsidy -- handset subsidy as well as channel commission will significant reduce for the year 2018, and that would keep our EBITDA in a good shape. And meanwhile, since the SIM only with our handset subsidy subscriber were more and more, so I believe the virtual channel will become more and more important in year 2019 and for the future. That means, for your store, direct store, I think we -- also in year 2018 and '19, we will kind of control. And maybe we'll start to reduce the direct store, increase the capability in virtual channel. So that also reduced quite a lot of expenses. So the conclusion is, since 499, it reduced the top line but also significant reduced the expense and costs. And hopefully, that will compensate the loss of the ARPU, and we will generate a very stable EBITDA. That's your -- my question -- my answer to you. The second is the -- for the 5G CapEx investment, as I just mentioned, that it will not take place until probably third quarter or fourth quarter of year 2020, even we start to deploy the network. In a 5G business, from what I see now, mainly is in B2B2C business instead of B2C just like 2G, 3G or 4G. And that [ incurred ] the largest-scale deployment, very unlikely to happen in the initial stage of the 5G deployment because it's B2B. So we have a dedicate deployment for the dedicated customer. And the large-scale deployment for the 5G network will only take place when the B2C business funnel is justified. So that basically is from what I see, what I can see right now.
[Operator Instructions] James, we do not have other questions at this point in time.
Okay, thank you very much. And appreciate all the -- for the staff.
And the -- I wish everybody have a very good Chinese lunar year. And happy new year.
Yes, happy new -- Chinese new year.
Thank you for your participation. This conclude the conference. Have a great year.
Bye.
Okay. Thank you.
Bye-bye.
Thank you.