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 2023 First Quarter Earnings Conference Call. [Operator Instructions]
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, please begin.
Good afternoon, everyone. Thank you to attend Far EasTone First Quarter 2023 Results Conference Call. Both President, Chee; and CFO, Sharon, joined the call with us today. Before -- Just a reminder, before Chee's presentation, please kindly pay attention to the first page, safe harbor statement.
Let me pass to Chee. Thank you.
Thank you, Gary. Good afternoon. And first of all, thank you for accommodating our schedule, and we have this kind of late IR call, but thank you for joining.
So first, I'd like to report how we did in the first quarter. As you already have seen in the slide that we actually exceeded our guidance targets in the first quarter, and it was quite a strong year -- first quarter. And then our total revenue came to TWD 22.3 billion, and then it is 1.8% Y-o-Y growth. And also, our EBITDA, net income, they have a pretty impressive growth as well Y-o-Y. And in terms of achievement rate, and it's all beyond 100%. Next.
All right. And then, if we look at a few details. So if you look at the trend, so this total revenue has turned positive Y-o-Y for 10 quarters in a row now. And in particular, for this quarter, it is driven by steady 5G customer upgrade. That has been the case since we deployed 5G in like a 2020, and then also because the post-pandemic recovery. Taiwan has opened -- reopened the border. So we start seeing more roaming and prepaid revenue coming in. Okay.
And then the EBITDA, we broke another new record. It is the highest since the fourth quarter 2018 and then came to TWD 7.9 billion. This 5% year-over-year EBITDA growth came to -- was due to the improved service revenue margins, which always has a better margin. And then in terms of the net income, so we have created TWD 2.75 billion of net income in the first quarter, and our EPS came to TWD 0.85. It is reaching a 6-year high for the same period. And then also the Y-o-Y growth rate is 18.4%. And if we excluded its one-time gains in the first quarter, that still is like a 12.2%, and I understand that is the highest in the industry.
All right. And then some financial metrics for your information. As you can see, both our net debt and the net debt-to-EBITDA multiple are improving. So the net debt now is at TWD 47.99 billion, and the ratio, net debt-to-EBITDA multiple has come down to 1.54.
And our free cash flow continues to be very healthy. As of fourth quarter last year, that accumulative cash flow was at TWD 19 billion, and for the first quarter alone, we have TWD 5.1 billion. And then cash-based CapEx, it is still following our guidance, and it is TWD 1.78 billion for the first quarter.
All right. So for our mobile core business side, we have to thank 5G because it keeps the momentum going. As you can see, our mobile service revenue continues to grow, and this quarter it is 3.3% Y-o-Y growth. And then our postpaid customers' penetration for 5G has exceeded 34% already.
And also, our mobile postpaid ARPU continued to grow, and then again, this quarter, it is 3.1% Y-o-Y growth. And also, the churn rate. Postpaid churn rate has come down to our record low. It's even below 0.9%. So it's 0.86%. That is our history record low, I believe. Okay.
Okay. And on the new economy side, so we have put our new economy still as our growing engine. And then this year, we put a particular focus on improving the enterprise new business, the margin, so -- and we have achieved that. And then overall, the new economy margin has improved 2 percentage points.
And then also, the ICT continues to grow and then our ICT margin grows 11% Y-o-Y as well. And our 2 subsidiaries, this -- one is the ISSDU for security service and then also our Prime EcoPower subsidiary for the green energy and both are turning positive and then making positive contribution.
Also, our SI Project revenue continues to grow really, really well and then with the 27% Y-o-Y growth. And then now for the new business on the consumer side, right, so Consumer IoT showing a good double-digit growth. And then both Media Service and e-commerce are growing at 8% Y-o-Y.
And some highlights for our first quarter Enterprise business. So we have -- we're still seeing a strong demand for Enterprise ICT. And so it continues to be driving our revenue growth on the enterprise side. And we have some major wins, included Energy Management. And one thing I do want to mention because, even though the economy is still kind of uncertain at a macro level, but then because of the demand for ESG and then the efforts for ESG by industry or by enterprise are increasing.
So as -- Far EasTone has been focusing on the Smart ICT for quite some years as we focused on IoT, artificial intelligence and Big Data, and we continue to build or create more Green & Smart ICT solutions and applications, and we definitely see the benefit paying off. So this is also driving the growing demand in the ICT area based on our EMS, energy management system platform.
So for example, we have a few cases that we won in the first quarter in this area, including the Energy Management for the Power Plant Meter Monitoring. And this is in cooperation with my subsidiary, Prime EcoPower. So we have that kind of established skill base there to support these business.
And then on the right-hand side, we have some Smart City application for Hualien County, and that cooperation has continued for quite some years. So our Smart City area is also driving the ICT growth as well.
And we have done the 5G Network Slicing for live broadcasting at New Taipei City Marathon. This is the second live slicing application we have implemented. This one is one event. So once the event was over, then it was finished. But then the one that we did for Kaohsiung city in -- for the police department, for the patrol car -- smart patrol car, that still continues and seeing more expansion to that.
And also, we have -- we are providing the infrastructure for the company that is providing -- that is responsible for the tax return and also distributing the $6,000 tax rebate for everyone in Taiwan -- every citizen in Taiwan. And then that application actually has done pretty well. Then we heard no complaints about the distribution of the money.
And on the consumer side, we have friDay video. The paying subscribers hit the record high and also increased 10% just in the first quarter. It is driven by very popular content and we have selected such as the Taxi Driver and the #1 drama in Korea. And then also, we continue to invest in more exclusive content. And also, we are engaged with producing the local movies going forward. Okay.
And also, FET launched Secure Network Service. This is really -- it has been pretty bad in terms of the fraud, right? So we see a lot of fraud messages. It first was fraud calls, right? And then we have used AI to screen out a lot of that, and then we even won award for that. But then recent years, or recent months, right, so the fraud became like using the messages and then they send out these links that were unsafe. So we actually have launched a SecureNet Service in November last year.
And then so far, we already have more than 30,000 -- 300,000 users already signed up, and then they are protected by us screening these unsafe website links anywhere they may receive. They may receive it in the text, they may receive in line messages or in Facebook, in any link that they hit and that it will be first compared against the database where we have worked with the Israeli security company that -- they have a database that is updated real time for all these fishy websites. So that is like additional protection we are providing to our users who signed up for the service, and it has received very good response from the users so far. Okay.
And our Mobile Circle application also attained the highest Customer Reward Satisfaction Score by the third-party in industry, and we just have that result, and this is surveyed in 2022. So this is one area where we want to continue to improve our engagement with the users, and Mobile Circle is definitely our approach to our users. And also, it is our digital channel that we want to continue to grow and then to help us to complete more sale transactions on our digital channels. Okay.
And last but not least, friDay Shopping, [ and ] we have been working on the AI model, so the new AI business model. So it's a B2B2C kind of model, and then that would improve the customer experience and also it has widened or broadened our merchants and also the merchandise sources by pooling these together.
And then we actually also have deployed this ChatGPT within the -- this friDay Shopping app. It is quite interesting. But then it is kind of one of the fancy things these days. And then we already are using a generative kind of AI engine for creating all these websites. So adding this on top of it just another work. But then our team actually has done that. Of course, we need to continue to improve that to optimize the performance.
And then just some more awards that we have received in the first quarter. And then the reason why I -- we need to schedule this until 5:00 [ a.m. ] because I was in the award reception ceremony just now, and we received a few more ESG-related recognition. Okay. And this is just for your information. And for those that -- some of those required the -- both from the analysts and if you have voted for us, and we thank you for your support. And for those that you haven't, and we hope we'll get your report -- get your support in the future. Okay.
All right. And then on the Merger update. So yesterday, we had made announcement in terms of the -- extending the Merger contract. So this was the second time we extended because the original contract was set at December 31 last year as the contract expiration date. And I have to say at the time when we do that, we kind of just like followed what our peers were doing. So we cannot use the same time frame, although we thought that was very aggressive, knowing we have these independent committees to go through.
But then we did receive the NCC approval in January, right? So we resubmitted our application to FTC. I say we submitted because last year, we actually submitted to FTC almost at the same time after we submitted to NCC. But then because of the spectrum -- excessive spectrum issue, my peer has kind of experience and then had a hard time with.
So the applications were returned and then after the issue was settled with NCC, then we resubmit. So we kind of did that too. So this is like a resubmission. And we've been in very close contact with the staff at FTC. So they have asked for a lot of information, like for years of promotions, for example, like that. So we are doing our best to provide them this information.
And I believe it has come to really converge to -- at a certain level that they think this should be almost ready to submit for the committee to review. So we are hoping very soon we will receive a notice that they have officially accepted our application. All that work since January or February after the New Year, I remember. So it was kind of prep work by the staff. So the contract on the other hand expired on April 30.
So we needed to extend it, and extend it to June 30, and it is our expectation, and we anticipate that -- and hopefully, we will get a positive closure and response from the FTC before the end of June. And then, so once we receive the approval, all the merger-related work can start. We can start consolidating our network, and we can start -- of course, our finance department will be very busy just to combine these financial statements and certify them and then submit for stock exchange committee to review.
But then also in terms of the employee arrangement, right, and our HR will be working on that as well. So once we receive the FTC approval, we can start all that without any delay. And then even though it may take a few months for the stock exchange -- Taiwan stock exchange to complete our following process, and then before we can have the effective merger -- the merger effective date, but then that really would not stop us or slow us down from doing the actual work that is required, especially to realize our synergy, especially on the network consolidation side. And then we still are looking to have the merger effective date somewhere in the fourth quarter. So that is for your update.
So for the second quarter and going forward, even though it is -- because it is already made -- So I'm already thinking about second half, even though this is first quarter kind of update, but we are already 2 months into the second quarter. So I'm looking at second quarter and going forward.
So our priorities remain pretty much the same. So we will keep growing our 5G adoption, and it has been growing in a very steady way. So we want to continue and keep the momentum going. And then we will continue to grow our Green & Smart ICT business because we do see the demand because of the ESG awareness and then the C-Band, that will be implemented in October with EU, certainly is impacting all of our manufacturers that do export.
So we still will see a lot of demand in this area. So for the solutions we have in this area is a very good fit. So this is where we will continue to grow. And also, we will grow our consumers' engagement. And then we want to also grow our ARPU, even though we already have the best ARPU in the industry, but we want to continue to improve that with value-added digital services such as the network feature I mentioned just now.
And also, we will accelerate the Merger planning and prep work because it is really close now. And then so, we will start consolidating our network right after we received FTC Merger approval. And of course, there are all other conditions to be met, but this is the plan. And we are going to have our Annual Shareholders Meeting on May 31. So that is by coming in like 3 weeks or so.
Okay. With that, I conclude my presentation for you today, and then we now welcome your questions.
[Operator Instructions] And our first question is coming from Neale Anderson of HSBC.
I have a couple of questions, please. The first one relates to the 5G business. And I'm wondering if you can give us a bit more detail on the ARPU change from customers migrating from 4G to 5G, whether that's still consistent with what you were seeing last year? And where do you think that can extend through 2023? Perhaps I'll start with that one.
So you're talking about, like in terms of the uplift related?
Yes. Exactly, yes.
Okay. Yes. We are actually seeing about the same and it is -- that's why even though in some media, they have reported previously, like -- kind of like saying that Taiwan's 5G penetration wasn't good. We are actually very pleased with what we see, yes. And then it's definitely helping with our ARPU lift in our revenue and our margins. So it is still doing just as well as we see last year.
The other one relates to the new business. I had a couple of queries on that. I think at the start of the year, you mentioned that you were inclined to be a bit more cautious about cloud services and data centers. I just wanted to get an update whether you still feel that's correct and appropriate, whether you're seeing that play out in the market?
And the other one relates to the sort of allocation of capital here. Obviously, you've got a wide range of different businesses, both in the consumer and the enterprise side. So given that you've now built some scale and repeat business in these areas, and you mentioned the EMS in particular, what are the areas that are most appealing in terms of, I think, return on capital? It's quite -- because they're obviously very different businesses. Margins and capital invested or required will be quite different. But where are you seeing the best prospects from a return standpoint?
So on the first question about cloud and IDC, so cloud in particular, we have like 2 areas. So I have a subsidiary, Nextlink. It has grown very fast in the past few years. And then I think last year, it was like a 40-some-percent, right? So it was like on a very high growth. So that is where I wanted to kind of scale back a little bit. And then so -- because -- especially some of the customers that use cloud are in the Bitcoin kind of business.
And then last year with the stock market and all that, so it was a little bit scary. So we wanted to kind of de-risk, manage the risk. And then -- so this is one area. And because they are still relatively small, so this is why I ask them to very carefully evaluate the credit. And then so how -- and then kind of like a -- spread the customers instead of having some big customers. So that is all like the customer mix and all that. So I'd like them to manage that. And then that's why I wasn't asking them to continue at the same growth pace like they have in the past. I think they are at a nice revenue level.
And now I want them to make sure, especially with the very kind of still fluctuating economics or stock market per se. So we want to be more cautious there. And then -- but on the other hand, right, so in Far EasTone, in our Enterprise business unit, we have this digital transformation service. So a lot of these digital transformation cases will require helping the enterprise to move their current IT infrastructure or upgrade their IT infrastructure and move them to cloud. So that itself is not just a resale of a cloud capacity, but it is really a service. It's a managed service.
So that requires the expertise in IT infrastructure and in the cloud management. And then we have signed this strategic MOU with Microsoft, and we also became their LSP -- one of their few LSPs in Taiwan. So we are promoting the Azure-based cloud solutions in -- as part of our digital transformation. And we do see that part will continue to grow. But then it's not only the cloud piece, it's the whole solution that will grow. So there are 2 aspects of a cloud. From a cloud resale perspective, it helps the revenue to boost really fast.
And I want that to kind of like a -- scale back a little bit, and then -- but on the other hand, the growth that we see with the real cloud service and usage that we manage, the service, and that is for the digital transformation, that is the part that I do see the revenue growth in this area, and it will continue for the year to come as well. Okay. And then IDC, it is more kind of a choice of the ESG. So I have -- we have the new TPKC, that is a green -- like a green building. And then we have reserved some IDC capacity.
So I was telling my team, once we fill the capacity, and then that is it. I'm not going to spend more capital to increase my IDC capacity to -- in other words, I'm not going to grow this IDC business beyond that. And this is more from the ESG kind of consideration. Okay. And I think that is the right thing to do. Okay.
And in terms of the capital, still most of our -- the majority of our CapEx is network related. And then for the new business solutions that we are looking at -- So I have the IT team. So it's more like a software capitalization. So it's not like the network CapEx with a lot of software license and equipment purchase and all that. And then compared to network-related CapEx, what we would need for the new business solutions are really, really, really small.
Yes. And then we have made some investments, right, into content production business. So I think we announced it in -- we reported in the November IR call last year. So we had a joint venture with other some companies in the business -- entertainment business. So those are like from the investment perspective. So CapEx wise, I think for the new solutions, they all will have good return.
And I think, especially when we hit -- because it's software-based, so once you have more cases and the reuse, you reuse the solutions or only a certain extent of customization because we are a platform module-based software. And then so, we do see it more as we sell more and then the return, we just get better and better. Okay. And I hope that answered your question, Neale?
Yes. Just one final quick, if I may. Just to clarify the FTC approval. So as I understand it -- correct me if I'm wrong, you can start the RAN consolidation. So that would reduce your network costs potentially as soon as you get that approval. What then is the significance of the official merger effective day? That's sometime later, is it? Or am I getting that the wrong way around?
So that is when we will officially -- like officially the APT will be finished, right? So -- and then so -- then you will -- the consumers will no longer see the APT.
I see. It's a legal entity.
Right. It's a legal entity. You're right. Yes. And also, in terms of our financial statement filing, right, from the merger date -- effective date onwards, right, that will be already combined with whatever I will receive from APT. So that is really more on the financial aspect of it and also because APT as a legal entity will be finished by then.
But you can still start booking some cost savings before then or not?
No. We will -- because the...
You'll start the work, but you won't be able to book it in reported figures?
Right. And that will really complicate the matter because they will be really focused on what they have on hand. And all this work wouldn't finish until several months, right? So when the merger effective date, the -- we -- our estimate is about 4 months after the FTC approval is received. But then the ongoing consolidation work will go beyond 4 months. And also because of the RAN consolidation it's one network. So I can't just like, okay, you turn on some of them.
And then -- while the others, you work the rest of it. No. So you really have to finish all the consolidation and turn them all on as one network at the same time. So that is also why -- that is when we consider the RAN network is completed, the consolidation is completed. So from an accounting perspective, that is also when the work is done. So if -- any benefit of cost savings and all that will be booked after that. Does that help?
Yes.
[Operator Instructions] And next, we have Peter Milliken of Deutsche Bank for questions.
Nice results. Look, my question is also about the merger. The last thing I remember was you talking about $3 billion in EBITDA savings in year 1 following the merger. Is that still a number we should be thinking about?
Yes, that is still the case.
And APT lost TWD 5.4 billion last year. So I guess that means you're underwater in year 1, which is fine. Do you have any longer-term views on synergies beyond year 1?
Not at this point. But then -- so when we agreed to the merger and before that, we, of course, did the DD, right? So what we saw last year from APT wasn't anything we were -- we did not expect. Let me put it that way. So yes.
Just a normal [ incident ]...
Unfortunately, right. Yes. But then it is hard. That's why we wanted -- we hope that the government officials can really speed up because while they taking their time to evaluate and collect the data and all that, but then the small companies, they are suffering, right? It is hard to keep the morale up and then also keep the sales up. That is hard. And then when people are not certain, I think that really didn't help.
But then as far as Far EasTone is concerned, we continue to do well, and we stay focused. And then we have team preparing for what would be required for the merger. But then on the other hand, people don't lose focus on what we have, right, in our own current business. That's why we can still post good results. But it's harder for the small company. So we'd like to see it through as soon as possible.
[Operator Instructions] And next question is coming from Sara Wang of UBS.
So my question is regarding first quarter, say, EBITDA or net profit growth. It seems the growth rate is actually quite good compared to our previous full year guidance. So if you put the APT merger aside, do we see outside risk to our full year guidance?
So, well, we need to be compliant with our regulation here and all that. So our guidance that we posted really was only for the first half. And then, of course, you could see our first quarter already outperformed our own guidance, right? And then our second quarter, so far, so good. And so we really can't go beyond that, but then -- and also depending on when the merger will be approved by FTC. So we will update our forecast probably in our third quarter IR or we probably would do it like quarter-by-quarter. But then we cannot do that right now.
And it looks like my -- yes, I think our first quarter is already very good. And second quarter, so far so good. So we should have a strong first half finish. Yes.
And then, given the new economy business is contributing -- like revenue contribution is increasing. So will there be any change in the seasonality or pattern of quarterly performance?
Well, actually, to the contrary, so last year in first quarter, we had EMS project which was a $1 billion project, and we booked $300 million revenue in the first quarter. So it was kind of a high base. And then so, if you talk about the seasonality, it really wasn't seasonality. It really was influenced by the individual projects.
And some of them, especially if this is the project we got -- we win from the government and the amount could be very large. So in this case, when you look at Y-o-Y, it seems oh, you were not as good as last quarter, but it was really skewed by the individual project. And we still expect the ICTs to grow almost like 10% this year.
So it is -- but then of course, you cannot complain when the project's too big, right. So we like them to be all in good sizes in like a spread evenly, but that just usually is not the case. But I wouldn't call it a seasonality when it comes to ICT. It really is the individual project when we win them, when we get them and then how long it takes to finish.
So that's kind of -- that's why in the ICT business some quarters, you see, okay, it's really good and some, if they have a little delay and you can change that picture. So that is still something we are trying to get a better pattern there. But so far, the ICT projects are very exciting, but then they come in all kinds of shapes and forms.
[Operator Instructions]
Yes. I understand this is a -- kind of a late call for this afternoon. But my IR team stands by. So if there are any questions even after the call is finished, then I'm sure they will be more than happy to answer for you.
There are currently no questions at the moment. And now I pass the call back to Mr. Gary Lai. And Gary, please proceed.
Thank you again, everyone, to attend our first quarter results conference call. See you next quarter. Thank you.
Yes. Thanks again for joining this late call. Thank you for your support. Goodbye.
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.