Taiwan Mobile Co Ltd

TWSE:3045

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, good afternoon, and welcome to Taiwan Mobile Conference Call. The Chairperson today is Mr. Jamie Lin. Mr. Lin, please begin your call, and I'll be standing by for the Q&A session. Thank you.

[Zhichen Lin, executive]

Thank you very much. Good afternoon, everybody. Welcome to Taiwan Mobile's Fourth Quarter 2020 Investor Conference Call.

Before I start our presentation, I would like to direct you to -- draw 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, further events or otherwise. And Taiwan Mobile Co., Ltd., 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 let's turn to business overview. I will start with operational highlights for 2020. So on Page 4, let's look back at 2020. Our mobile business in the second half took the lead in 5G infrastructure buildout, which resulted in a significantly better 5G coverage than our peers. That, coupled with the release of attractive 5G smart devices, including Samsung Note 20 and iPhone 12 lines, served as tailwinds and kicked off the revenue turnaround of the business.

By the end of 2020, we successfully signed up more than 465,000 5G users, representing a 6.4% overall and an 8% postpaid penetration, both of which led the industry. More importantly, our postpaid smartphone monthly fee has recorded sequential growth since September 2020.

Our momo e-commerce business, on the other hand, continue to post robust momentum, both on the top and on the bottom line, as we increased our market share following continued investment in industry-leading logistic infrastructure and leverage our group's resources, such as direct store, pickup and cross-selling to mobile customers.

2020 net income came in ahead of management guidance by 1%. Headwinds from 5G-related D&A and plunged roaming business due to travel restrictions amid COVID-19 were more than offset by SG&A savings and momo's better-than-expected contribution.

Let's turn to Slide 5 for a closer look at our telecom business. Increasing 5G handset options, coupled with the popularity of 5G unlimited data plans, starting at $1,399, spurred the faster-than-expected 5G adoption and provided solid upselling momentum for our mobile business.

In the fourth quarter, close to 90% of our 5G sign-ups opted for $999 plus plans, while over 80% of customers who signed up for iPhone's 12 series bundles opted for $1,399 plus plans. As a result, monthly fee lift for our -- for users upgrading to 5G reached 24% since launch, hence, the aforementioned sequential improvement in our postpaid smartphone monthly fees.

Furthermore, our Double Play bundle, which is unlimited mobile data plus high-speed home broadband, continues to be a major attraction for subscribers in the fourth quarter, with 24% new sign-ups opting for 500 megabits plus home broadband services.

Our efforts in customer retention via differentiating bundle plans have paid off, evidenced by our falling postpaid churn rates in the past few years. With our strategy to lock in high-ARPU customers into longer bundle contracts, we expect the churn rate to remain at low levels going forward.

Now let's turn to Page 6 for an update on our cable TV business. In the fourth quarter of 2020, we continue to fare better than our MSO peers in the Y-o-Y trends of basic TV subscriptions and broadband service penetration. Supported by the growth in TV content aggregation revenue and accelerating broadband momentum, CATV revenue went up by 5% Y-o-Y in the fourth quarter.

Meanwhile, demand for faster home speed -- home broadband access, including Double Play packages, continue to swell, lifting cable broadband-related revenue by 11% Y-o-Y. Coupled with Y-o-Y decline in D&A, EBIT grew 5% in the quarter.

Last but not least, let's take a look at our growth engine, momo, on Slide #7. As the e-commerce leader in Taiwan, momo continued to grab market share from both online peers and off-line retailers and delivered smashing results during the Double 11 shopping festival. For the full year, the total number of orders surged by 36%.

Logistics remain a key focal area for momo, in addition to ongoing expansion of the in-house delivery fleet, which already accounted for 11% of its last-mile delivery. 3 more satellite warehouses were added in the fourth quarter. This takes the total number of satellite warehouses to 22, 8 more than a year ago, further increasing our lead in infrastructure capabilities.

As a result of increasing scale and operating leverage, momo's 2020 e-commerce EBITDA margin improved meaningfully from 2019, resulting in a 5 -- 55% boost in absolute EBITDA numbers. Payment processing fee as a percentage of revenue also dropped, as its private label credit card already accounted for 27% of its B2C sales in the fourth quarter.

Now let me turn the presentation over to Rosie for a financial overview.

[Rosie Yu, executive]

Hi. Good afternoon. Let's start with performance by business. In the fourth quarter of last year, our consolidated revenue grew 13% on a year-on-year basis, mainly driven by momo's robust e-commerce business. Mobile service revenue saw a sequential recovery, which helped narrow telecom revenue year-on-year decline to 1% in the quarter.

Also, our telecom business recorded year-on-year drop, mainly due to higher subsidies from upselling strategies and longer handset bundle contracts, plummeting roaming business due to travel restrictions and 5G spectrum amortization.

For our cable synergies -- for our cable TV business, although fourth quarter EBIT still rose by 5%, the year-on-year decline in D&A further narrowed in the quarter with investments in broadband and set-top box.

momo continues on its growth trajectory in the fourth quarter, propelled by its seasonally and structurally strong e-commerce business, posting a 30% surge in revenue and further expanding its EBIT by 42% in the quarter.

Now let's move to the results summary. In 2020, consolidated revenue was roughly in line with our forecast, supported by our robust e-commerce business. Despite less operating income in the fourth quarter, our full year operating income beat the forecast, thanks to SG&A savings and momo's contribution. Combined EBIT contribution from momo and cable TV reached 28% of our full year consolidated operating income.

For the year 2020, nonoperating expenses were significantly below company projections, due mainly to lower-than-expected financing costs, along with higher-than-expected dividend income from investees. Net income reached 101% of our full year 2020 guidance.

Let's move on to balance sheet analysis. On the asset front, PP&E rose year-on-year and quarter-on-quarter on the back of the 5G network rollout and land purchase of momo's southern distribution center. The acquisition of 5G spectrum in the first quarter of 2020 resulted in the year-on-year surge in concession.

On the liability front, the healthy operating cash flow generated in the quarter helped us to reduce bank borrowings. The year-on-year rise in net debt to EBITDA was associated with the incremental debt we took on for 5G spectrum acquisition.

As for shareholders' equity, the year-on-year and quarter-on-quarter changes in paid-in capital and capital surplus were insignificant, as the majority of our convertible bonds had already been converted.

Lastly, let's look at the cash flow analysis on the next slide. The year-on-year surge in fourth quarter operating cash inflow was attributable mainly to a low base from a year ago, as third quarter '19 -- 2019 payables, such as iPhone 11, inventory, merchandise and tax were postponed to the fourth quarter due to the typhoon holiday.

Other than 5G-related CapEx, the main investing activity in the fourth quarter was the sale of Taiwan High Speed Rail shares. The year-on-year rise in cash CapEx reflects our 5G infrastructure rollout, having built around 6,000 base stations by the end of 2020. The difference versus our CapEx guidance will be paid in 2021.

Our full year 2020 free cash flow calculated with pre-IFRS 16 operating cash flow was TWD 16.2 billion, translating into a free cash flow yield of 5.8%.

Okay. Let me turn the presentation back to Jamie for event update and key metrics.

[Zhichen Lin, executive]

Okay. Let's look at Page #14. This page summarizes the awards and recognitions we received during the quarter for your reference.

Now then let me walk you through our 2021 guidance on Slide #15. So in 2021, we expect consolidated revenue growth to accelerate to 12% to 15%, up from 6.8% in 2020, lifted by our momo and mobile businesses.

To ensure growth, we will be investing in mobile subscriber acquisition and retention, focusing on longer-term contracts to lock in ARPU and prevent future churn, along with adding premium cable broadband subscribers. As a result of these investments, we expect combined EBITDA to be flat to slightly down in 2021. Separately, we expect the government's 5G-related subsidies to offset part of our rising 5G D&A, but the benefits will not be significant until 2022.

For 2021 CapEx, a total of TWD 11.8 billion was approved by the Board, of which telecom CapEx is to be halved compared to 2020 as we are ahead of the pack in terms of the number of 5G stations running at 3.5 gigahertz frequency band. Cable TV CapEx is to increase to facilitate cable broadband business growth. And momo CapEx is to rise due to the construction of its new south distribution center.

Finally, let's turn to Page 16. To wrap up our presentation, here is the key message we would like for you to take away. With momo firing on all cylinders and mobile ARPU seeing an uplift from better 5G coverage and more compelling bundles, accelerating top line growth will be our #1 priority in 2021. We believe that this will translate into greater shareholder value in the long term.

With that, I would like to open the floor up for Q&A session.

[Operator]

[Operator Instructions] Now we have a question that comes from Mr. Hsu of SinoPac.

[Jack Hsu, analyst]

And I have 2 questions. My first question is about the expense. Because now we -- with that situation, we need to recall the A32, this handset. Could you give us some color about how many -- I mean about that expense, what we recall? And will it affect it? Or how does this recall affect the income statement in the 2020 -- 2021? If that is also -- if that include in our guidance for the 2021? This is my first question.

[Zhichen Lin, executive]

Thank you for the question. So with A32, the recall has been progressing better than we expected and with most customers opting for a pure software update. And on top of that, the -- around 10% of the customers who are opting for a phone upgrade, most of them are opting for a retention contract with us, with our supplier paying for the additional subsidy. So right now, we are expecting the impact to our income statement to be neutral.

[Rosie Yu, executive]

0.

[Jack Hsu, analyst]

Why 0?

[Rosie Yu, executive]

Yes, meaning that our supplier will reimburse us for all the claims or the costs associated with the recall.

[Jack Hsu, analyst]

Yes. Okay. Yes. Okay, my second question is about -- do we have any target for our 5G subscribers in the -- at the end of 2021? And could you give us about -- do we have any figures about our 5G base station around Taiwan? Do we have any target at the end of 2021? And how many of your base stations has been deployed in -- at the end of 2020?

[Zhichen Lin, executive]

Sure. So in terms of 5G user target, we're observing around the 1% to 1.5% penetration per month pace. And right now, we don't expect that to change course throughout the rest of the year.

In terms of the 5G base stations, like Rosie said, we already built close to 5 -- 6,000 3.5 gigahertz, high-speed 5G base stations, and we're leading the pack in terms of that deployment. So we don't expect -- we will be building methodically this year.

[Jack Hsu, analyst]

And so can we expect that the coverage in Taiwan, with the coverage well above 80% maybe at the end of the next year?

[Zhichen Lin, executive]

Next year. So right now, we expect -- yes?

[Jack Hsu, analyst]

Yes. Sorry. Please.

[Zhichen Lin, executive]

So right now, we're expecting by the end of this year to be covering close to 70% of the traffic.

[Operator]

Our next question comes from Neale of HSBC.

[Neale Anderson, analyst]

Two questions, please. The first one relates to the telecom business, if you could give us any more color on the specific moving parts. So I see you're guiding for revenues up 4% to 6% year-on-year, and you say your postpaid trend is improving since September. So is -- what's the split this year, say, between in pre and postpaid? And are you expecting more equipment revenue?

And then in terms of the segment EBIT, is it correct to say that there will be quite a big incremental increase in D&A from your 5G investment in the 5G spectrum? Is that where you expect to drag down the telecom EBIT in '21? And that's my first question.

The second one relates to the broader company guidance. And I don't think you're putting out EBIT or net income guidance. I was wondering why that was.

[Zhichen Lin, executive]

So let me clarify. The first question you're asking are postpaid in terms of percentage of revenue?

[Neale Anderson, analyst]

Well, just to get your sense of which way the different moving parts are going in the telecom business. So it seems that you should get quite a good positive effect from 5G adoption through this year, and you said that's already coming through in postpaid. But I guess it sounds like that's going to be offset at the EBIT line by higher D&A. So I was just hoping for more color around that, whether I've got the right understanding.

[Zhichen Lin, executive]

All right. So in terms of the 4 point -- 4% to 6% growth with our telecom business, so it's partly contributed by our ARPU growth and postpaid growth and partly contributed by our handset with the expectation that handset sales will grow. So the percentage of customers opting for a handset bundle will be higher. Yes, the D&A will be a headwind to our bottom line. And the reason why we're only giving a guidance is because we're following the international practice.

[Neale Anderson, analyst]

Okay. Understood. Could I ask how you expect telecom -- no, sorry. That's fine. Okay.

[Operator]

[Operator Instructions] Another question comes from Billy of Crédit Suisse.

[Billy Lee, analyst]

I've got 2 questions here. The first question is just on the number side. Could you confirm -- I didn't get it just now. What is the 5G penetration right now?

And then the second question is, I also want to get more color from you regarding the ARPU uplift. What was the average ARPU uplift when 4G customers upgrade to a 5G contract? And I -- yes, I just want to get a better understanding.

[Zhichen Lin, executive]

Sure, I can repeat that. So by the end of 2020, our 5G penetration amongst all customers would be 6.4% and amongst postpaid users would be 8%. And when a user upgrades to 5G, the monthly fee lift is, on average, 24% since launch until the end of 2020.

[Operator]

And our next question comes from Mr. Hsu of SinoPac.

[Jack Hsu, analyst]

I have 2 questions. My first question is about -- we have just mentioned the ARPU will grow in 2021. Congratulations. And I'd be interested, how will the ARPU grow in the 2021? Is that almost from the 5G caravan launch? Or are there any other reasons for the growth of the ARPU in 2021?

[Zhichen Lin, executive]

Thank you. So yes, one of the main driver -- main drivers will be customers upgrading to 5G. And like I said, it will produce a 24% monthly fee increase when they do that. On top of that, we're also expecting some of our tech businesses to produce meaningful contribution.

So for example, our game publishing business in which we work with world-class game developers like Riot to publish their popular title League of Legends: Wild Rift, which already garnered 2 point -- almost 2.5 million monthly active users since the first month. On top of that, our other tech business, such as our direct carrier billing, is expected to grow healthily in 2021.

[Jack Hsu, analyst]

And just one follow-up question is about -- we have just talked about game, the game business. So can you give us about how many of our revenue related with the game? Do we have any of these figures?

[Zhichen Lin, executive]

I'm sorry. At this point, we will not be disclosing that figure.

[Jack Hsu, analyst]

Okay. Is it -- but we say it is small now, but this business will grow the last -- in the following year, following maybe 2 or even 3 years?

[Zhichen Lin, executive]

Yes. Compared with our mobile business, the revenue contribution percentage is not huge. But it's -- well, it will produce a healthy growth momentum for us.

[Jack Hsu, analyst]

Okay. I see. But will that kind of business -- I mean the volatility of this kind of business is large or not? Because I'm not quite familiar with this kind of business.

[Zhichen Lin, executive]

So in terms of the -- when we talk about like -- when we look at the game industry, there are games that are a sure lift. There are also games that has -- have a really long shelf life. So the game that we're publishing with Riot is the mobile version of the League of Legends game. And the League of Legends game has been in the market for over a decade, and it's still one of the most popular e-sports games in the world. So we're expecting the Wild Rift version, the mobile version, to be a relatively long shelf life product.

[Jack Hsu, analyst]

Okay. I see. It's very good business and hoping it will grow a lot. And my second...

[Zhichen Lin, executive]

Thank you.

[Jack Hsu, analyst]

You're welcome. And my second question is about ARPU growth. Could you give -- do we have any target for the ARPU growth? How better is the mobile or the CATV? Do we have any targets for the ARPU at the end of 2021?

[Zhichen Lin, executive]

Yes, internally, we have very aggressive targets. But unfortunately, we are not disclosing related measures publicly at this point.

[Jack Hsu, analyst]

I see. But will that grow maybe above 10% at least at the end of 2021?

[Zhichen Lin, executive]

I think by that time, we'll take a look. I think in our presentation, we have some clues, right? So we're saying 5G penetration will be 1% to 1.5% per month. And then right now, the users upgrading to 5G would produce 24% ARPU lift. So I think that's enough clues to make a model around it.

[Operator]

And our next question comes from [ Kaf ] of Fidelity.

[Unknown Analyst]

Just quickly on your margin guidance, EBITDA guidance. Could you help me understand what is the primary reason for EBITDA margin deterioration? Because you're expecting a pretty healthy top line growth, right, but you're expecting EBITDA to be flattish almost. So is that because of 5G because you're going to have to lead more tower sites and each base station will consume more electricity? Is that the primary reason or it's something else?

[Zhichen Lin, executive]

Thank you for the question. So I think there are 2 drivers behind it. Number one, if you look at the numbers that we're giving, you can guess that a big portion of the growth would be produced by our e-commerce business, which naturally has a lower EBITDA margin versus our mobile business.

And then on our mobile side, yes, we're going to drive revenue growth through a longer contract and higher ARPU bundle products, which would mean that we will need to put down a higher subsidy right now and reap the benefit 2, 3 years down the road. So -- and that will also help us minimize our churn. So we're essentially, this year, we're essentially investing for the future. That is why we're not expecting our EBITDA margin to grow as fast as our top line. But we think that the investment will produce the best longer-term shareholder value.

[Unknown Analyst]

Okay. And then my next question is, I guess your management recently mentioned in a newspaper interview, I guess, that -- so Taiwan Mobile is seeking to create Amazon of Southeast Asia or Asia, right, in the next 10 to 15 years. So I'd like to better understand what your ambitions about this would be. I mean would you like to invest by as a [ tenant ] though? Or would you like to make it happen to maybe momo because then, obviously, momo has the best e-commerce expecting in Taiwan? Or how should I understand your investment for the Southeast Asian expansion in terms of e-commerce going forward?

[Zhichen Lin, executive]

Yes. Right now, momo is our -- spearheading our Southeast Asia expansion. They are -- they have set up a pretty strong foothold in Thailand, and they are implementing measures there to accelerate their growth in that market. And then next, momo will be looking for partners in other major Southeast Asia economies to enter into their B2C e-commerce industries. And right now, if you look at Southeast Asia, they're still in the early days of e-commerce penetration. So like we talked about in previous conference calls, the economy usually starts from a C2C model. And as the e-commerce markets mature, then there will be a transition into the B2C model.

And momo, having an expertise in B2C, they're waiting for the right timing to enter into these markets, like Indonesia, Vietnam or Philippines, with the right partners. And that is our sort of Southeast Asia expansion strategy #1. And then somewhere in the near future, we'll have other tech business models that will be at the right timing for them to be expanded also following momo's footsteps across Southeast Asia. And when we are doing that, we'll have more information this year.

[Unknown Analyst]

Okay. That's very interesting. And then related to your tech ambition, do you have any plan to sort of launch or, if you already have any, to enhance your e-wallet strategy? Because one of your competitors, maybe like something like Shopee has been putting a lot of effort to increase e-wallet, I mean, in Taiwan maybe or in Southeast Asia, right? And I understand that e-commerce -- sorry, credit card penetration in Taiwan is pretty high, so people are not really underspent. But would you like to sort of put more efforts to enhance your ambition in the e-wallet? Or it's not your focus anymore?

[Zhichen Lin, executive]

So we don't think of operating a wallet as the best strategy in terms of serving people's payment needs. We think that users would have different types of payment needs under different scenarios that we want to be there to solve some of them if it makes sense both for us and for the customers.

So if you look at our direct carrier billing business, it's amongst the largest in Taiwan. And it's essentially solving many of our customers' needs to buy virtual items off Google Play and off App Store when they don't have the proper instruments to pay for them. And it's grown to a pretty significant size. On top of that, we also have the peer-to-peer payment functionalities that we have implemented in our M+ Messenger.

In terms of payment volume, it's also one of the top players in the market. We don't advertise that, but it solves a very specific need for people, and people are using it. And every month, it's growing. So these are 2 examples of us doing things to solve users' payment needs at the right scenario. Going forward, we're going to implement a few more of these. But we -- so far, we don't foresee ourselves running an e-wallet per se.

[Unknown Analyst]

Okay. That's very helpful. And maybe, if I may, last question is, how would you describe the current competitive environment for 5G? Is it stable? Or do you think differently?

[Zhichen Lin, executive]

Thank you. Right now, I would say the 5G competition landscape is less cutthroat than 4G, and it's probably partly because of the high entry barrier. So the fact that spectrums were auctioned off at such a high price and also the base stations unit prices are higher than 4G, it gives the players less incentive to act irrationally.

[Operator]

Another question comes from Ryan of UBS.

[Ryan Jin, analyst]

This is Ryan Jin from UBS. So my first question is on the 5G ARPU uplift of 24% that you guided. I know that you have just elaborated some of these factors that are leading to the ARPU growth. But do you foresee this 24% being maintained in the coming quarters? I do think that it is kind of higher than what has been previously guided by other peers. I think it was around 10% to 15%. So how should we think about the 24% going into the next few quarters?

And my second question is on the partnership with momo. I know there may be some opportunity areas for Taiwan Mobile to build a private 5G network in momo's warehouses and satellite warehouses. Can we get some updates on that?

[Zhichen Lin, executive]

All right. Thank you for the question. So in terms of the staying power of the 24% ARPU lift, we -- it's hard to say at this point because, yes, the early adopters would be most interested in signing up for a higher rate plan, but they will also be coming off from a relatively higher rate plan. So over time, as 5G penetrates through the consumer base, you would have people coming off a lower and lower average ARPU. So yes, the absolute number of their new ARPU might be lower than early adopters, but I'm not sure if the percentage difference will be that much different. So we're just essentially saying maybe that 24% will remain, but it's absolute numbers that are moving downwards.

And then in terms of the momo 5G private network partnership, it's been progressing steadily. When we have more progress, more -- we have more milestones that we hit, we will be sharing them.

[Operator]

Another follow-up question comes from Billy of Crédit Suisse.

[Billy Lee, analyst]

May I check, are we having guidance for earnings or EPS and dividend this year? I noticed there isn't an EPS or earnings guidance as we have last year. So just wondering if we have that number. And also, what's the outlook for dividend payout?

[Rosie Yu, executive]

Well, we don't have guidance to EPS anymore to follow international practice, just as Jamie mentioned. And on DPS, it will be decided by the Board every April. So I have nothing to share with you. But as you all know that we are very committed to a very stable dividend policy.

[Operator]

[Operator Instructions] Jamie and Rosie, there's another question, comes from [ Kaf ] of Fidelity.

[Unknown Analyst]

Sorry, another question. Just a technical question. How do you account for government subsidies going forward? I mean will that be subtracted from your -- yes, so I just want to better understand how government subsidies will affect your financial statement, especially on P&L, because it's going to affect -- it may affect depreciation expenses, et cetera, et cetera.

[Rosie Yu, executive]

Well, it will be booked in our revenues, in other operating income as part of our -- well, anyway, other operating income, for sure.

[Unknown Analyst]

Okay. So you will invest, right? So you will do CapEx, and then you will just recognize depreciation from that investment? And separately, you just book government subsidies in the P&L? That's how it works?

[Zhichen Lin, executive]

Yes. The government subsidies will be booked into other operating income. And you can think of it as a deduction item to the D&A.

[Unknown Analyst]

Okay. Okay. That's very helpful. And then maybe my last question is, how do you think about network sharing with other operators going forward? And obviously, now employees then tied up with APT. And do you think it makes sense to do network sharing with someone else? Or are you happy with the current situation?

[Zhichen Lin, executive]

In the long run, we think, yes, it will make economic sense to do network sharing with the right partners. Right now, we're not engaged in any of such discussion. And we're pretty happy with how things are going so far. Like I said, we led the pack in terms of 3.5 gigahertz high-speed 5G rollout, and we're also leading in terms of 5G penetration. So the fact that we can move rather quickly, right now, I think it's also beneficiary in the beginning of the rollout.

[Operator]

[Operator Instructions] There comes Mr. Hsu has another question from SinoPac.

[Jack Hsu, analyst]

I have one question. Because we just give the whole year guidance, could we -- could you give us some -- we are -- the quarter guidance, maybe the first quarter or the first half of the year's revenue guidance?

[Rosie Yu, executive]

We don't do quarterly guidance now.

[Operator]

[Operator Instructions] Jamie and Rosie, there seems to be no other questions online.

[Zhichen Lin, executive]

Okay. If that's the case, thanks for tuning in. Happy New Year. We wish you have a very good full year during this bull market, and we'll speak to you at our next conference.

[Rosie Yu, executive]

Thank you.

[Zhichen Lin, executive]

Thank you.

[Operator]

Thank you for your participation. This concludes the conference. Goodbye.

[Zhichen Lin, executive]

Bye.