Far EasTone Telecommunications Co Ltd
TWSE:4904
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
77
93.7
|
| Price Target |
|
We'll email you a reminder when the closing price reaches TWD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Far EasTone Telecommunications Co Ltd
You don't have any saved screeners yet
Welcome, everyone, to Far EasTone's 2018 Second 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, everybody, to attend Far EasTone's second quarter results conference call.
Today, as usual, we have our President, Yvonne Li; CFO, Sherman Lee, both here with us. After Yvonne's brief presentation, we will have a Q&A session.
So before Yvonne's presentation, please pay attention to our safe harbor statement.
Thank you very much. Let's begin.
Okay. Thank you, and good afternoon, everyone, and thank you for joining our second quarter conference. So as usual, I'll start with the mobile market update in Taiwan.
If you look at the chart, that in the first half of this year, the entire mobile market revenue is continued to coming down. But the downward trend, the pace is slightly lower than the previous half year. I think the main reason, which later on we will touch upon, is due to this TWD 499 programs. So that the penalty revenue has actually reached a record high, I mean, in May-June time. So that's the entire revenue, it's not dropping as fast as before.
The same situation coming from the TWD 499 is, if you look at the first half of 2018, the total SIM numbers in this market after being down for consecutive 4 years, it's the first time we saw that it's coming back a little bit, which means that this TWD 499 also created some of [ dual SIM ] situation again. So that very quickly update about the entire mobile market situation in first half of this year.
Next, I will move on to the Far EasTone's operational performances. We are happy to report that we have been saying that the Far EasTone has invested a lot into the digital services and enterprise ICT-related services. So we are now started seeing this paying off. So in the first half of this year, our entire new business is growing on track. So it's, right now, representing 9.3% of our total revenue. I think we are on track to reach our annual forecast to reach 11.8% by end of this year.
Among all this new business revenue, the enterprise ICT currently is the key growth driver. So on a year-on-year basis, we have seen this category growing 37%, which gives us pretty nice growth in this enterprise ICT segment.
In terms of our financial performances. We continue to generate very stable profitability. The EBITDA margin is coming back in the second quarter. Of course, that is part of the reason due to this onetime penalty revenue. It's quite a nice EBITDA. And the net income is also coming back on consecutive like 2 quarters that this net income number is also coming back.
On the consolidated financials, we have achieved EBITDA managing all the way from the top line to the bottom line for our first financial guidance. If you look at the numbers that the top line is slightly above our guidance by 2% and the EPS is about 1% above of our original guidance.
Balance sheet continues to be very, very strong. As a matter of fact, if you look at net debt-to-EBITDA ratio, right now, it's down to 6.6% and the free cash flow is slightly above $10 billion. So essentially, I think the entire business is on a very healthy trend that the free cash flow continue to be pretty strong. And this free cash flow, of course, is kind of giving everyone a confidence level that a stable dividend policy there is no problem.
On the business update. Of course, aside from the operational performances, Far EasTone continue that, on the network side, we are the first one to roll out [IMY] NB-IoT coverage. In this NB-IoT, we do see this business pipeline is growing. And also, on this so-called Small Cell Forum Awards for our self-organizing network it's also getting the recognition from the local organization.
Okay. On the corporate governance side, Far EasTone has always been paying a lot of attention on the corporate governance and CSR-related activities. We're constantly being recognized by the global associations.
Okay. On the service front, we are also very happy that we continue to winning different kind of recognition from different kind of associations. So this is the area that not only we want to continue to sustain our leadership in the network performances, but also every touch points that we engage with the customer we want to ensure we continue to optimize our service levels.
So with this, I'll come into my last page, which is the highlight for this quarter. I know a lot of the investors, you are worried or concerned about this TWD 499 impact. I will say that the TWD 499 does have some impact on the connectivity revenues. However, because of this onetime penalty and the subsidy savings, right now we really haven't seen the real impact on the first half on the financials.
In the second half of this year, we do see there will be some pressure on the top line while we are continuing to focus on value creation and cost efficiency to maintain in our bottom line guidance. Okay.
On the ICT part, we have demonstrated a very nice growth and we will continue to drive the growth in this category and we are quite confident in this category we will continue to grow.
We just mentioned about our leadership in the customer experience front, and I think, still, telecom industry is all about serving our customer right. So we will continue to sustain our leadership in the network side and also omnichannel service delivery front.
The last point I would like to all of you to take away from this conference is this company continue to generate very strong free cash flow, and we are committed to sustain our dividend policy with more than 100% payout ratio.
So with this, that concludes my updates to all of you in this quarter. We are now open for questions.
Thank you, President Li. [Operator Instructions] And the first question is coming from Neale Anderson of HSBC.
Two questions, please. Firstly, on the enterprise ICT revenue growth, can you give us any more detail on what exactly were the component parts of that? Where is Far EasTone doing well? And how do you feel you're different from your competitors in that area? And secondly, on the TWD 499 plan and the implications of that, is -- I guess, Far EasTone needs to be in the market. How aggressive are you? Are you looking to withdraw from that if others do so? Or what's your thinking around that?
Okay. Your first question's regarding the ICT front, and our major growth this year is in 3 categories. One, of course, is on the government side. Our government projects growth essentially is more than 50% year-on-year basis this year. The second one is more on the security. On the security front, this year, our growth is also more than 50%. And the third area is more on the cloud side. So on the cloud right now we have quite a bit of growth in terms of both on the hybrid cloud or either on the public cloud-related businesses. So all the 3 are the major areas for the ICT growth for this year. Your second question is regarding the TWD 499, whether we will continue in this market. Okay, I don't really see that the big 3 will continue to have this so-called big scale of the TWD 499 program, I mean, this year. But as you know, right now, that right now this TWD 499 is somehow available on the digital store of all the big 3 operators. So I will say, essentially, this TWD 499 will be continued in the market. But after June, after the TWD 499 program is off officially from all the physical stores, what we have seen is that the market is coming back, although not completely coming back to before the TWD 499, but I think it's gradually coming back. What we have really looked at right now is the connectivity revenue per se, probably that the growth will not be like before. So we are trying to do, and I think we are quite physically to do is to cross-selling those personalized value-added service to create more value. Of course, because of this low-rate plan, the subsidies and the commissions, we're also seeing great savings on that part. So all in all, I think for the TWD 499, we just -- the post TWD 499 market is only like 2 months only, so we just need to continue to monitor the real market impact. But so far, I think this post situation is quite manageable.
Okay. So the revenue impact of that, assuming no big change, it will be a steady negative impact from the next 2 years, I guess, is that right? Is this sort of the potential drag from that tariff?
No, I think the connectivity revenue itself is certainly the TWD 499 will have the impact because that's still, if you look at the TWD 499 on the renewal front still have pretty much customer is migrating down during that period. So certainly, I think it will put pressure on the top line. What I'm saying is this part of the top line pressure will be compensated by the personalized value creation and the profitability impact will certainly be totally compensated by the cost measures change. So that -- what I'm saying that is there may be some top line pressure going forward, but I think overall in terms of profitability front, the impact so far is quite manageable.
[Operator Instructions] And next we'll have Varun Ahuja from Credit Suisse.
I just want to go back to mobile pricing. It's been almost 12 to 18 months that we had some improvements wherein you got some TWD 399 plans and there have been a lot of aggressive competition. Some stuff keeps on happening, earlier it was TWD 699 plan, now this TWD 499 plan and every time, 6 to 9 months back, there were stories like you were pushing -- you're getting more customer on TWD 999-plus plan. But it doesn't seem to translate into numbers. Sometimes -- something keeps on happening. So over the next 12 to 18 months, do you see any chance of mobile pricing improving in the sector? If you look at -- your profitability has been falling, right, so how do you plan to -- I do understand you saying enterprise and all those story, but it will take time. But over the next 2 to 3 years, is there any way you can see growth in your net profit and hence ability to pay more dividend from the profitability perspective? That's my number one question. And number two, how big do you think these -- I know you mentioned it will be 11% by this year, but meaningfully, over the next 2 to 3 years, how big do you think these new businesses can reach?
Okay. Varun, thanks for your question. On the profitability front, I already said that I personally don't see that going forward the dividend policy will be impacted. So that this is still our confidence level that it will impact the future dividend. Why is that? Although I see that this telecom connectivity revenue, I keep on saying that, it may have a downward pressure in the next 1 or 2 years, that's why we have seen that the rate plan mix has been changed. However, connectivity revenue is not the only service revenue that the telecom industry will generate. So we'll continue to have all this so-called of personalized value-added service like insurance, like the digital service. On the enterprise front, we are [ finite you can ] see all this nice growth. Essentially, all this ICT part, the gross margin is not too bad. We are looking at 20% to 25% of the gross margin on all this ICT front. So we're quite confident with the future growth of all this enterprise-related revenues. We haven't really reported the residual value numbers. For Far EasTone alone, what we have seen in the first half of this year versus the same period of last year, our EBITDA on this apples-to-apples basis is growing like 3.2% and the EPS is growing 1.8%. So on this basis, well, I'm confident with the future outlook. Your second question is regarding all this new business. I think, I hope I covered that in my previous answer that all this new business, it will just continue to grow. And particularly, we are very optimistic about the cloud and the IoT business going forward. In the IoT business, although still not, I would say, a great revenue, but if you look at its pipeline, right now, the pipeline is more than like a double-digit numbers pipeline is always close to 3-digit pipeline in the enterprise pocket. So we are pretty much optimistic of the future growth. And if you look at the cloud market in Taiwan, essentially we are looking that in the next 2 years that the entire market is going to double the growth. So we're just continuing to expand the manpower in this area to grab the business opportunity.
Okay. I just want to go back, if you look at 6, 9 months ago, the whole story the telcos were pushing around and saying that we're looking to focus on more higher-end customers, get higher-end ARPU plans, so you think now over the next 2 years, that story is gone? You are just happy that given the current market pricing with way more competition, some other plans will come in? So the connectivity revenue will continue to decline and all of you are now focused on IoT, the value-added services, is this the next 2-year story in your view that's going to play out in the sector?
I think the rate plan mix will change like, for example, like the high-end part, right now, we would see that the high-end part is more focusing on the iPhone users. And iPhone users, we still believe that those iPhone users will continue to be the iPhone users. So from that part, I don't really see on the iPhone user part there will be a significant change on the rate plan part. But on the other hand, due to this TWD 499, some of the user already know they are probably taking on the TWD 999 or TWD 699 or part of them taking on TWD 1,399, they migrate down to the TWD 499. So essentially, you will see this connectivity revenue portfolio there will be some changes. So certainly, I think in terms of total revenue proportion, connectivity revenue will represent less of a percentage of our total service revenue versus the new revenue part will continue to grow. I think this is a pretty much in line with our strategy communication to all the investors that in the next 3 years that enterprise itself is going to represent more than 25% of the total portfolio and the digital service is going to reach like 10%. So this, I think, is in line with our original strategic direction. And when I look at the global telecom market, it's also pretty much in line with the overall market trend. The connectivity part will represent less and less of the total service portfolio. But still, it's a bread and butter of core revenues. Of course, I think all the operators, even for Far EasTone, will try to grab whatever opportunity to sell a higher-rate plan, particularly if it comes with the right bundle of the device.
[Operator Instructions] And the next question is coming from Neale Anderson from HSBC.
Just one more for me. On the Internet of Things, you mentioned you've expanded the network coverage. Could you give us any more information about how you see that revenue developing over the next several years? I imagine sort of starting quite small, slow and steady. But any particular vertical segments or revenue expectations you can share on the IoT side, that would be great.
Okay. On the NB-IoT side, the entire revenue front, I think we do have the number. I don't quite recall. Can we? Just a minute. Neale, yes. Sorry, we don't have this NB-IoT numbers with us now. But later on I will ask Gary or [ Amy ] to give you the numbers, all right?
Great. And any comment on the outlook? If you don't have the numbers, how you expect that to trend over the next several years?
Sorry, say that again?
How you expect the IoT business to develop over the next several years. Any particular focus in terms of customers or clients?
So NB-IoT all its connectivity growth, what we are looking at, let me see the numbers, is by end of this year that our target is going to reach close to -- where is the number? Okay. So for total revenue for this year, we were close to $300 million. So we are on track to look at this number, to achieve this number by end of this year. So that's -- and in terms of the total connections, I think it will be more than -- above 300,000 connections. So that's for the NB-IoT for this year.
Okay. And is that government or enterprise? A mix of both? Any particular focus?
The focus will be more on the government relating to parking related, the cases. [Foreign Language] Yes, okay. So it's the government parking, okay, and also on the manufacturing side there is like we are also working with like our group like the textile business and also cement business here, some NB-IoT-related cases that we are -- keep on working together with. But I would say majority is coming from the government parking, the government lens side light, the len light.
[Foreign Language]
The street light, street lens and that's another big part and also on the police and the fire department. The fourth area is the smart building. So all these are the major pipelines for the NB-IoT cases in the second half of the year and probably a year forward.
Great. So 1 follow-up on the balance sheet question. The cash and cash equivalents, just something about that TWD 10 billion year-on-year. Is that just a timing effect? Or is there anything else to point out there?
Let me see. Just a moment. This -- if you are looking at the consolidated financial results comparing to the first quarter?
Yes.
The TWD 10 billion cash?
Yes.
Yes, this is majorly coming from the -- this is one -- one is coming from our operational result, another is coming from the bond we issued. So that's the total cash, yes.
[Operator Instructions] There are currently no questions. I'll pass the call back to Mr. Gary Lai. Gary, please proceed.
Okay. Thank you, everybody who attend our second quarter results conference call. See you next quarter. Thank you very much. Bye-bye.
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.