Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
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Welcome, everyone, to Far EasTone's 2018 First Quarter Earnings Conference Call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.fareastone.com.tw under the Investor Relations section.
And now I would like to introduce Mr. Gary Lai, the IR officer. Gary, you may begin.
Thank you, everyone, to attend Far EasTone's First Quarter 2018 Result Conference Call. Participants from FET, including our President, Yvonne Li; CFO, Sherman Lee. Before Yvonne's brief presentation, please pay attention to our first page disclaimer of our safe harbor statement, that's after Yvonne's presentation. Thank you.
Hello. Good afternoon everyone, and thank you for joining our first quarter results update. As usual, I'll start with the mobile market update in Taiwan. If you look at the slide on your right-hand side, that we continue to see this mobile subscriber consolidation, a phenomena in Taiwan. So in first quarter of this year, that you can see that the total number of subscribers, it continues to be down in the market.
On your left hand side which is continue to speed our ARPU trend, that we are also happy to report that Far EasTone continues to rank the highest among the Big 3, that we actually have the highest postpaid APRU in -- at the end of the first quarter. And although everyone is suffering from this soft consolidation, that Far EasTone has actually lost these subscribers in the first quarter among the Big 3.
The next page, I'll update on the first quarter operational performance, good things is our new business, it's on track. That our target is to grow the service new service revenue percentage from last year's 7.8% to 11.8% by end of this year and first quarter, we are on track to reach 92%, at the end of first quarter. Also, another good sign is, we do see that the postpaid churn rate started coming down from the peak, about 1.94% at the fourth quarter of last year and that the trend is continue to coming down.
In terms of financial performances, that our EBITDA margin is back to 31.4% and ARPU amount is also increasing. Although there is a part into the accounting change, but with -- that is accounting policy change that our EBITDA is actually maintained at a quite a flat level on a year-on-year basis. Net income, it's the same situation that if we exclude this tax rate impact, which is increased from 17% to 20% this year, that our net income is actually maintaining as of flat basis on a year-on-year basis. In terms of the consolidated financial results, on the first quarter, basically in every dimension, always on the top line to the bottom line repeat our public guidance in first quarter. For the balance sheet, continue to show a very strong free cash flow. We actually generated TWD 4.3 billion free cash flow for first quarter of this year. For the full year, this year, we forecast the full year cash -- free cash flow will be TWD 15 billion. So far we are on track to reach this annual target. On the net debt to EBITDA, [indiscernible] that you can see that the trend is continuing coming down, which also a reflection of our strong cash flow situation.
On the business update, I would particularly like to talk about the NB-IoT and IoT stories. In Taiwan, we actually forecast by end of this year, the total LPWA connection will reach 2.5 million and the Far EasTone has been the first one to deploy the national wide NB-IoT systems. Up to now, we have completed around 5,000 NB-IoT sites and we are on track to complete an island-wide coverage by end of May. We are the first one to obtain that the 3 million IoT numbers in Taiwan, and actually we think it's the first one to design or personalize IoT product on the consumer [indiscernible] of BoBee.
And we are going to launch the SmartHome services. We are the first one to launch a SmartHome service here in Taiwan, and we are the first one actually to provide a NB-IoT rate plan. In the market, also we have the first application case in Taiwan and it builds up around 60 partners for the NB-IoT ecosystem.
We are also in this quarter -- we have signed the first NB-IoT roaming contract with 3 in Hong Kong, which is the first NB-IoT roaming contract in Asia Pacific, okay. In terms of the real case that we have obtained on NB-IoT per se, we already obtained the smart streetlight application in Taiwan and also a smart parking solution in Taiwan, also on the electronic scooters and motorized vehicles. So there are many real case right now in the pipeline in terms of our NB-IoT. So for this part, we are very confident that we are leading our competitors and there are many cases right now in the pipeline for us to really deliver our services. So this is a bit of update on the NB-IoT part.
My last page is, aside from the key business highlights, I would also like to share with you some of the honors or recognitions that we received in first quarter. The first one, of course, is our [indiscernible] sectors and network. We are -- continue to be the #1 in the speed test result in Taiwan and this is the consecutive -- the third time that we receive this #1 position in terms of speed test in Taiwan. I just mentioned, that we are the first one to roll out the NB-IoT coverage and we have partnered with Microsoft Research Center of AI in Taiwan, that the focus will be to develop some of the vertical service application by leveraging this AI platform. We are also invited in the Barcelona MWC back in March to demonstrate this Air Quality showcases which has leveraged the global GSMA, their AI initiative to actually forecasting the air quality.
On the Corporate Governance and the transparency awards that we are also happy to share with you that we have won the FinanceAsia, the Best Company award and actually we received 5 awards, this time in March, and we also obtained the ISO Certificate on the Internal Logistic & Greenhouse Gas verification. On the corporate social responsibility, this is one of our very important continuous initiatives for the entire company, which is very much focused on the sustainability of the environment. I'll start with this first one, which we are -- has been like consecutive for like 4 years, that we ranked the Top 5 in Taiwan Stock Exchange, the Corporate Governance Evaluation. I think in Taiwan among all the listed companies, it's only 10 companies. It's compared to 10-year -- 4 years except the effect with Top 5, which does demonstrate our continuous efforts in the [indiscernible] Corporate Governance. We also launched a couple of very renounced CSR Award locally, which also demonstrated our continuous effort. It's trying to not only that continue to creating the shareholder value, but we also work with all our stakeholders to make this environment better and better.
So with this page, that concludes our first quarter results. In summary, that the first quarter result is performing up to our expectation and we are -- continue -- want to drive this result and hopefully that you will see that in the second quarter there are few that are very innovative initiatives that we are going to later introduce into the market.
Thank you, so much. Right now we are open for questions.
Yes, thank you, President Li. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And our first question is coming from Peter Milliken, Deutsche Bank.
Looking just in presentation, I actually feel a bit bad after your -- after what you said about IoT and that's a good starting point, I think, to jump up and talk about what's happening in the future. But right now, I'm more -- I mean, my questions are really about what's happening in the mobile side. And can you just give us an update on where we are with unlimited plans and what was the thinking behind the Line joint venture?
I think this is a very good question. I believe all other investor has this question. First on the unlimited data rate plans, I firmly believe this will be a short-term phenomenon among the Big 3 and we know very well that the Chunghwa Telecom actually initiated with this TWD 499 rate plans for the civil servants, for the government, for the military. So regionally, this is only record -- it's on the [indiscernible] the enterprise segment. But unfortunately, they don't have telecom in April, they put it on to the public and actually make it more public available. So on this and such as Taiwan Mobile, I don't think we have any choices. We have to at least compete with them. So we think this is a short-term phenomenon that at the end of April, that Chunghwa Telecom actually de-list this civil servant, military, whatever on the shelf. But they open another one, which is on the Internet. So I think this will be, again, that impacted the channels that regionally there is always a cheaper rate claims and additional channel on the all the regional stores. So I think right now we are kind of back to the original situation that from time to time or sometimes there will be more aggressive offerings on the digital channel but on the physical channel, people will try to be more behaved in terms of the physical channels, okay. So that's for the unlimited data rate plan. I don't think that Big 3 has any intention to initiate a price war in this very saturated market. So that's the first one. For the Line Mobile, this is another thing that when we work with Line, we think there is a value secured segment and that is worth to pursue. So we choose not to use [indiscernible] to do this because we think the some of the -- there is a group of customer after our customers are based that they are probably using Line as their main communication tool. They don't use a lot of the video streaming, they don't require a lot of the heavy data usage. So that's why we work with Line to design this rate plan. So this is actually the first rate plan structure in Taiwan to differentiate by the speed. So if you look at the speed, well, looking at it like 10 mega, 21 mega, so it's not up to the full speed. So you can understand that once when we launch this, we target specific segment. We don't think this will be a massive kind of a tick up in the market. So that's the 2 answers for your questions.
And the next question is coming from Patrick Chen from Nomura.
I have a quick one regarding the NB-IoT business. Could you like briefly talk about the related CapEx in order to reach the island-wide, say coverage and how is the profitability for this business right now? I suppose it may not be at the optimal level, but on a normalized basis, how would you describe the profitability for this business? And secondly, on the new business traction, of these different components including ICT, IoT, digital, which one would you say will be the biggest driver to get the percentage of total revenue from 8% to 12% this year? Which one would be the strongest driver? That's my 2 questions.
Regarding the NB-IoT coverage, the island-wide coverage, the total CapEx is around TWD $300 million. So it's not really a big amount and it's been fully incorporated into our CapEx forecast for this year. So that's for the NB-IoT coverage. Your second question is regarding the amount the NB-IoT business or ICT business, which has the biggest growth potentials. My answer is that in terms of the dollar amount, the value, I think the ICT definitely has a much, much higher value. Right now, for example, that -- I can share with you 1 number that last year, our average ICT cases per case is roughly like TWD 38 million to TWD 50 million per case, but this year in the first quarter, it's always -- it's really up to TWD 70 million per case. So in terms of the case size, I think ICT is much, much more bigger. But it requires certainly much better, the so-called SI capability and the project management capability. But in terms of IoT, the absolute amount per case may be very small, but the actual connection is getting more and more. And what we believe right now, IoT is just at a starting point. We firmly believe with 5G coming, IoT will be the key thing to drive the future growth. So we actually leverage this network and all these new cases, because right now more and more people understand that our competitors' capability to deploy this network and actually deploy the IoT related service the different kind of industry that actually came to us for their idea is whether I can leverage your IoT to do this or to do what. So we also feel that we are learning along the way, that together with our industry is to understand their particular vertical know-hows and also I think by learning this we gradually start to develop our own -- our capability by levering the data and the AI capability. So this is the thing that we are also very optimistic on the future IoT development. But coming back to your questions in terms of the value, I can bring [indiscernible] for example like the CEO of ICT, it's too much bigger than IoT business.
Maybe just 1 quick follow-up. What's the current utilization of that TWD 3 million IoT number that you append? And maybe some ballpark idea of the what kind of the profitability you are looking for the IoT, say services.
Our target by end of this year, that all of this TWD 3 million NB -- the IoT number, we are planning to reach TWD 1 million, and so far we are on track to that number. So that's the first thing. In terms of the IoT possibilities, I think we probably need to check the numbers which we put into our budget, and I will let our IR people to give you the feedback later on, is that okay? I don't have that number with me right now.
Thank you. Yes, that's more than okay. Thank you so much.
Next, we have Varun Ahuja from Credit Suisse for question.
I just want to go back to the competition again. I will give an example to a market closer to you. If you look at Hong Kong, they also launched these speed cap plans. I think if you look at in 3G, they launched as low as 384 Kbps plan and that plan still exist in the market, and obviously, there have been various variation, 21 Mbps. So these plans do kind of disrupt the market. So I just wanted to hear the management view. As you mentioned earlier, you don't expect to -- take up to be high, but certainly this 10 Mbps or 21 Mbps speed are good enough to do surfing, decent HD quality video streaming, so just wanted to hear your views in view of that, if you see a strong take-up of these plans, because TWD 299 unlimited, 21 Mbps whatever speed is pretty good in my view. That's one; number 2, I wanted to get a little bit clarity on the EBITDA decline post adoption of IFRS 15. My understanding is rather it should have helped you because you're matching handset revenue with the cost. Hence at the outset, I believe your EBITDA should have benefited from IFRS 15 adoption and now in your discussion with your team, I suggested that -- IR team suggested that, that would have been the case. So I'm just little bit surprised why your EBITDA is declining so much on IFRS 15 adoption. And lastly, if you can give me ARPU -- mobile ARPU will end based on IFRS 15 number, not on old accounting standard.
Okay. I will answer the first question and I think I'll let our CFO to answer about accounting policy change issues regarding the IFRS. Is your first question regarding the low flat rate thing? I think you are trying -- what your focusing is on our Line Mobile collaboration, is that correct?
Yes, speed issues.
Okay. So what we have seen now is in the Line Mobile collaboration that our customers, they are going for this very low speed, which is 10 megahertz, and you know that at 10 megahertz it's not really -- can do a lot of good video streaming. So essentially the result coming out is pretty much up to our expectation. There is a value secured segment and actually we think that age is a bit older than our current profile because Far EasTone actually, our major customer profile, it's more like a millennium, okay. So this is exactly the segments that we are looking at through the Line Mobile collaboration. So, so far, we are quite pleased internally with this collaboration results, okay. So that to answer your question. Regarding the EBITDA change or EBITDA flat situations for -- due to the accounting policy change, I think our CFO can answer your question in more detail.
Just want to go back to on that point. So if you're saying those customers, value seeker who are coming to your platform, are kind of older customer, or they were -- 10 Mbps is selling more. But, were these customers' earlier subscribing to in terms of data plans, were they not in data at all earlier, or is it -- or they are downgrading now? So how -- what is the profile on that part of it? At this point [indiscernible] they -- would they have gone to TWD 499 or much higher plan?
I don't know what would be their previous rate plan, because what we have seen for this rate plan is, majority is coming from [ porting ] into our base. So I believe some of them, they are using more voice-centric customers, they are using lines as their daily communications. I believe they are very low data rate plans subscriber in the past. I cannot know that why -- before they [indiscernible] and they are using what kind of rate plans. But I expect they are the low data users, otherwise they would not subscribe to this kind of rate plan. It would not just meet their expectation.
Okay.
Sorry, about them. Can you state your second question in more detail again, please?
Yes, so my expectation is with IFRS 15. You are taking a part of the service revenue from -- for the total revenue and matching it with the cost. Hence from handsets margin perspective, the impact on EBITDA should have been much lower because you're matching the handset cost with the revenue versus earlier wherein you were taking the cost upfront and then the handset revenue was coming in 24 months whatever the contract duration was. So I would have felt that at the outset, it seemed like EBITDA decline should not be that sharp enough that you're seeing in IFRS 15, so is there anything else that is going that I'm not able to understand?
Okay. Yes, my answer is that iPhone has a significant handset subsidy in the previous 2 years. And the subsidy level in recent years is much lower than previous. So the impact is that because of these high-low difference, so when the subsidies decline year from year, the IFRS will penalize our current year performance, okay, because many of the profits from previous years where we expect to be realized this year and next year, actually goes to return earnings, recognizing it in the beginning of this year. So those profits, you're still expecting, they should always -- already recognized in the return earnings, not in our EBITDA.
And Varun, in the beginning of this year, we need to carry or we need to realize all the existing contract costs, and that is a huge one.
So our return earnings in the beginning of this year increased by TWD 6 billion.
Sorry, I did not get the last part, you have to recognize what?
Sorry, the profit we -- because of accounting change already recognized in the beginning of this year, our return earnings in the beginning of this year increased by TWD 6 billion because of this accounting change. So those profits supposedly should reflect -- I mean, without any change should reflect in this year and next year's EBITDA, but not also reflecting in the return earnings increase in the beginning of this year. It's probably still there, but it's just goes directly inside into return earnings increase in the beginning of this year, TWD 6 billion.
Okay. Can you give me the ARPU figure based on IFRS 15?
Our ARPU is based on residual value, we haven't changed it.
If we look at the first page, we have shown you the ARPU number, which is --.
But those are based on residual value and just looking at around IFRS 15 number?
Correct.
Yes, it's still residual value for easy comparison and makes more sense because it's from customer. We don't care our accounting change.
My belief is that for -- from service revenue perspective, IFRS 15 number ARPU would be much better reflected because it takes away handset part and subsidy part. So it would be better comparative globally and also within how the service revenue is going to strike, the traction has been happening. Okay, anyways probably I will take it offline later. Thank you.
Yes, we will take those offline.
Yes.
[Operator Instructions] And next we have Jinjin Wang from UBS for questions.
I have 2 questions. One is, since the SIM card consolidation still continued in the first quarter, so I'm just wondering in your view, what might reverse the trend and probably when? And secondly is free cash flow, so I understand the revenue and also net profits impacted by the accounting policy change, but what's the impact on the free cash flow side and also are you confident given the CapEx trend? Free cash flow in this year 2018 should be still relatively stable or even slightly increased compared with last year?
Your first question regarding the consolidation of the SIM. I think the trend will probably continue because the consolidation of SIM will continue to see is --on the tablet side. So I think that part probably will still continue for a while. But if you look at the trend, it's slightly coming down. So I think you will see this trend at least by end of this year, that the consolidation of SIM will continue. The second question is regarding the free cash flow. I just -- I think beginning of this presentation, I already mentioned that this year our forecast of the free cash flow is about TWD 15 billion and we are pretty confident that we are on track to reach this free cash flow number. We don't go with whatever the CapEx that we have budgeted and so we don't see any risk in achieving this free cash flow target for this year.
We're now in Q&A session. [Operator Instructions] There are currently no questions, I'll pass the call back to Mr. Gary Lai. Gary, please proceed.
Thank you again, everyone to attend our First Quarter 2018 Results Conference Call. See you next quarter. Thank you very much. Bye-bye.
Thank you, ladies and gentlemen. We thank you for your participation in Far EasTone's conference. There will be a webcast replay within an hour. Please visit www.fareastone.com.tw under the Investor Relations section. You may now disconnect. Goodbye.