Far EasTone Telecommunications Co Ltd

TWSE:4904

Earnings Call Transcript 2019-Q1

[Operator]

Welcome, everyone, to Far EasTone's 2019 First Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after the conference has 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, please begin.

[Gary Lai, executive]

Good afternoon, everyone. Thank you for attending Far EasTone's First Quarter 2019 Results Conference Call. Both our President, Chee; and CFO, Sherman, are with us today.

Before our management presentation, please pay attention to the disclaimer page for our safe harbor statement. And with that, please, Chee, begin.

[Chee Ching, executive]

Okay. Good afternoon, everyone, and thank you for joining us. I would like to present to you our overall performance, and then Sherman will give you some details on the financial side. And I have to say, we were very happy. We were off to a good start. So let's look at the mobile market in Taiwan first.

This is no news to you, I'm sure, that the Taiwan Mobile revenue continued to decline. If you look at year-over-year, the first quarter '19 compared to the first quarter '18, that's about almost 10% decline. However, there is a silver lining to this. So if you look at on the right-hand side, the chart, right, and then we look at it quarter-by-quarter, and you can see that we would like to believe that the declines seem to have stabilized. So for 2 quarters in a row, right, we were dropping by $1 billion. And then so that is about a 2.6% drop quarter-over-quarter. So we would like to interpret it as the decline has stabilized or has slowed down, which is a good news for us.

Okay. On the far east side, for our FET side, we'd like to report that our postpaid subscriptions continue to increase. This is good because we were anticipating declining in this area as well. But then for several quarters in a row, we actually are increasing.

And then on the other hand, for the postpaid churn, that is something we have been very closely monitoring and managing. It is -- it continues to go down, and then we now reached our all-time low at 1.46%.

And on the right-hand side, it is talking about our customer satisfaction. As you can see from the chart, right, the line continues to go up. So we do have happy customers that we serve.

Okay. If we go to the next slide. So we've been talking about the new economy is our focus and we want to grow the revenue in this area. So we would like to show you just briefly for the ICT revenue growth for the year-over-year and then we see a 38% increase from last year. And then in terms of the contract amount, knowing this is not realized revenue yet, but then this does show the momentum, right, because of what's in the pipeline that is already committed. And then we are looking at 2 -- almost a 200% increase. That means it's tripled what we had a year ago in the first quarter.

And then on the digital service revenue side, that is more towards the consumer. And then we are showing a 15% growth as well, which is all good news, and I have to say, I cannot complain.

With that, I'm going to give you Sherman to provide the details on the financials for you. Sherman?

[Sherman Lee, executive]

Okay. Yes. So let's go to the financials. And on the left-hand side, the total revenue of Far EasTone in the first quarter, we have $20.8 billion, which is basically flat if you compare with first quarter of last year. It slightly dropped by 1%, and I think that is because of strong growth of our new economy revenue.

And the OpEx side, we have very stringent control. So as you can see, that our OpEx ratio in the first quarter is 17.3%, which is pretty low compared with previous quarters. And -- but on the right-hand side, our ARPU continued to decline, to go along with the industry trend, but we will foresee this to go -- to become more stable in the coming months.

Next page. Okay. So this shows and demonstrates our EBITDA performance. And you can see that on the first quarter this year, our EBITDA on a pre-IFRS 16 basis is $6.55 billion. That is 31.5%. And that matched the first quarter last year. And so I would say that right now, because of spending control and all the efforts we are taking, right now, we are back to stable earnings performance. And also, for net income in the first quarter this year, we achieved TWD 2.23 billion after tax.

And the next page shows our performance against our guidance. The total revenue, we overshot above the target. We have $20.8 billion, which is 6% higher than our guidance. EBITDA is 2% higher than our guidance and then on net income and EPS, at 4% higher than our guidance. And so the first quarter EPS is $0.68 per share.

And the next page shows our financial -- show our balance sheet. You can see that now we have a very strong balance sheet. Our cash on hand increased, and this would increase from $4.2 billion to $6.4 billion. And then our net debt reduced from $23.9 billion to $18.6 billion. And our shareholders' equity, of course, increased by $2.3 billion.

Our net debt ratio to EBITDA reduced from 0.9x to 0.7x. And our free cash flow in the first quarter is $5.7 billion. But I have to remind you that our inventory reduced in first quarter by $1.5 billion. That contributed a lot to the free cash flow on pre-IFRS spending. And so far, we consider our cash flow actually confirm -- conform with our guidance, so our internal projections.

That concludes our first quarter financial performance update.

[Gary Lai, executive]

Now back to Chee.

[Chee Ching, executive]

All right. I'd like to share with you all about some of our 1Q or first quarter highlights. And then for those that are in Taiwan, you may have watched some of our TVC commercials, that is our brand refresh campaign, and we have launched it in March and finished it in April. We have received a lot of viewing -- viewership, and we got very good, very positive responses. And it is an effort to let the consumers know or the consumers in Taiwan in general, so the consumer and enterprise actually, that Far EasTone is transforming from what is used to be a traditional telecom, to a telecom-plus, that we are into the digital services and also, the IoT, AIoT, the advanced enterprise solutions domain. And then so the video helped to depict that. And we were pleased with the results we've seen so far.

And then we also launched our first 5G new radio trial site, and we actually did that at the Smart City Summit. That was in March. And then we also demoed a 8-K video using 5G and in how we set up there.

And in terms of the continuous effort on the transformation side. For channel, we have launched our first combo store with Louisa Coffee. This is actually our first store, and this is our effort to make our store more versatile and then so we can attract more traffic into the store. And then this is our first launch, and then we will have more in the months to come.

And in the digital services area, that is on the consumer side, we actually have launched quite a few things, such as the mini-smart speaker, our CIoT device. And then we have the friDay Photo-Book, and also, we are relaunching our friDay shopping prime membership. This is to reenergize our visual services that we have offered in the past. And then we continue to show -- we continue to see a very good momentum with our ICT business. Actually, in the first quarter, we were awarded a very big contract that involves like integrating a big system for a big insurance company. And so that was a big win. And then we also

[Audio Gap]

the first green energy station with our CPC, China Petroleum Company, and that was our deliverable in the IoT in the green energy area.

And then we also delivered our energy management system, the software, for Tainun Shalun Smart Industrial Park. And why I would show it as a highlight, because this was internally developed by our transformation office. As you know, that we've been focusing on improving or adding more strength to our own internal software development capability, the core capability on the advanced technologies, like big data, artificial intelligence and IoT. So this is an illustration of the result, a quick result from the efforts.

And then also, we have been given award, and we name a few here and that is also relevant to this audience. And thanks to your support, we've been awarded the Asia's Best CFO and then also we won the Best Investor Relations Company. And thanks to all of you for your support.

And then last, but not least, I need to highlight it, although we wouldn't consider it totally positive, but that's not under our control. That is, the NCC has moved up the 5G spectrum auction target date. It was going to be June next year, but then they have decided to move it up. And it's targeted before the end of the year, that the auction will start, and actually, in August, they will start receiving the applications. So we definitely are looking at a much shortened time frame to work on it.

So with that, our second quarter focus, we will gear up for 5G. And this will involve our work for -- to prepare for the spectrum auction and also our network. You have to upgrade -- or we have to upgrade our core network in order for that to support the nonstand-alone 5G deployment. So that is already ongoing with my team.

And then also, we are working with our BUs, both on the consumer and the enterprise side for business development and then looking at the new scenarios and then doing the field base, NB-IoT. And we are actively planning on that.

And then we need to continue to accelerate our core capability's development for transformation and new economy such as like, I mentioned just now, the EMS, the energy management system, that was the result of our continuous effort in this area. And then we will continue to grow our new economy business, and then we will drive the FEG, that's the Far Eastern Group, that is what is Far EasTone's product, right, this conglomerate. And we'll continue to drive the synergy there because there is definitely a lot of opportunity for us on the enterprise side to work with our group. There are like 200-some companies that there are lots of opportunities for us to help them to upgrade their existing ICT-related capabilities, and that is definitely a very good boost here for our enterprise business area.

And then on the digital services, on the consumer side, as I mentioned earlier, we would like to reenergize, right, in our digital services. So we have very focused efforts going on right now to help improve the business outcome there.

Okay. And then we will continue to protect our telecom business, the core. And as some of the data shown earlier, like we -- even though the anticipation was the subscribers may decline, but then we actually were reverting that, right? We have been showing the continued increase in that regard. So that data is definitely a good thing.

And then we will continue to improve our channel efficiency. We are still executing on our consolidation and improvement plans for our one channel. And then some of the consolidation will definitely yield to good efficiency and some good savings. And then also, we will continue to drive down our op costs and also optimize our investments. We wanted to be really, really lean, and then so while improving the revenue is, in itself, a lot of effort, and then we are also now overlooking any opportunity to drive down our costs.

Okay. With that, then I think we finished our presentation and then we'll welcome your questions.

[Operator]

[Operator Instructions] And our first question is coming from Gary Yu of Morgan Stanley.

[Gary Yu, analyst]

I have a couple of questions regarding Far EasTone's Far East strategy. First of all, you mentioned about one standalone and the need to upgrade core network. Has the company already decided to go for not spending on the rollout of the 5G network? And if that's the case, what exactly do you need to do on the core network in order to be able to provide on standalone service? And then a related question to that is do they have any estimate on what kind of CapEx you need on both the new radio equipment and also to upgrade out the core network? And the second question I have is given the current competitive pressure on 4G ARPU, how confident we are as a company that we can kind of have a decent return on investment for the 5G CapEx? And in terms of revenue opportunity, where do we see the incremental revenue coming from for both the consumer market and also the enterprise market? And lastly, a question on spectrum. Does Far EasTone have any preference in terms of spectrum and mix between node, mix and high-frequency band, including mid-band and then a little bit of mix?

[Chee Ching, executive]

All right. That's 3 sets of questions. I'll answer the first set first. So you were asking about the nonstand-alone architecture. Yes, in order to -- well, first of all, because the time frame now has been shortened, right, so in order for us to deploy according to the given time frame, the quickest way to do that would be a nonstand-alone architecture. So that is given.

And then you were asking then what kind of efforts would it involve, such as upgrade the core. So for the core network, in order for it to work with the new radio on the 5G side, there is software that need to be upgraded. And then our core network is with Ericsson, so we are working -- we've been working with Ericsson on some of the testing and all that, and then that is ongoing. So -- and then we have a plan and then about like how many in size and where are the core network sites that we are going to upgrade first. So that is ongoing.

The cost on this is relatively small, if you are asking about the cost. And there is some upgrade on the capacity, on the transport, that would need to be planned out as well. But still, those costs, if you compare to the anticipated spectrum, and then those are not as significant. I can tell you that.

But then in terms of the exact numbers and all that, that is still being worked out by my network department and the finance department. So I don't have any specific levers to share with you at this point.

As to your second question, that is about the 5G, the ARPU and the 4G. Okay. So as you know, I think in 2014, that's where the telcos in Taiwan launched 4G, right? And then the license went for 15 years. So we are still only like 5 years or 4 years into the license. We still have like 11 years -- 11 more years in terms of amortization, right, over the capital spending and all that. And so that's 4G. And then we already see all this tight competition from the consumer side. So that is not a pretty picture.

Now how do I foresee what is going to happen with 5G? I think that's a million-dollar question. And then so on one hand, even our government wanted to introduce 5G as fast as possible, we certainly are not now in the first 2, right, in the world, which is really not a bad thing. And then so we already have like AT&T, Verizon in the States, and then also Korea, we have the SKT, right? So we can look at how they are doing.

And then so we are hopefully going to learn some lessons from them. But then if you ask me now, I would say I would count on more revenue from the enterprise side because we could see the advanced applications in the IoT areas that could take advantage of -- or benefit from 5G more so than the consumers because, right now, our consumer -- or a consumer is already very well-served by the 4G, the penetration that the 5 telcos have collectively provided. Even any of us alone, it has a pretty good victory -- I should say, not all 5. The victory all have very good coverage alone, right, to serve

[Audio Gap]

And then so right now, there are really not a single tailored application that is available yet anywhere that would drive the need for 5G on the consumer side.

And also, it will require the device, right, and also, the handset device. So the handset device is still just starting, so the price is high. So how willing are the consumers going to upgrade their handset device just for 5G, where they don't see anything much different or where they already are very unhappy with what they get for the service. So would they want to pay a lot more for that before some applications are available or justifiable, I doubt that, and I think it will take some time.

So hopefully, by the time we deploy the network, let's say, by the end of next year and then that's another 1.5 years right now, and then you never know, right? The software doesn't take long to be deployed, but then the question is where will some people just have that creative idea and then just bring up some great new applications or new need for the consumers. So we are hopeful something would happen, and then by the end of next year, when we deploy the network, hopefully, there are more lessons learned from the other telcos that -- in the rest of the world that will help us more smartly make our investments to our network.

But one thing I would say, given where we are right now, our deployment strategy will be very cautious, right? So we are not in any rush to quickly cover the whole island, fully penetrated like what we have with 4G, that's because it's only like 3 years. So I think 5G, we will -- we'll be cautious in terms of our investments, and then we will be closely watching and learning from the other telcos that are ahead of us.

Okay. So I do not see the ARPU to increase because of 5G in the next couple of years, but then that is not because I don't have hope. But then I could tell you, I see more would come from the enterprise side at first and that will be also our focus to begin with.

Okay. Okay. The third question, on spectrum. I think you were asking me if we had a preference on the mid-band or a high band, which is the 20G, right, versus the 3.5G. So -- and I think this is why you can't just have either. You will need both, right? So we will definitely have presence in both ends. We will need both. Does that answer your question?

[Operator]

[Operator Instructions] There are currently no questions, and I'll pass the call back to Mr. Gary Lai. Gary, please proceed.

[Gary Lai, executive]

This is Gary. We already had all the questions for everybody. So that concludes this quarter, and see you next quarter. Thank you very much. Thank you. Bye-bye.

[Sherman Lee, executive]

Thank you.

[Chee Ching, executive]

Thank you.

[Operator]

Thank you. 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.