Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
Earnings Call Analysis
Q2-2024 Analysis
Far EasTone Telecommunications Co Ltd
Far EasTone enjoyed a remarkable second quarter in 2024, posting substantial growth across key financial metrics. The company recorded revenues of TWD 24.97 billion and an EBITDA of TWD 8.9 billion, both figures surpassing initial forecasts. Notably, net income soared to TWD 3.1 billion, a nine-year high for the same period, resulting in an EPS of TWD 0.86. The upward trajectory in revenue extended for 15 consecutive quarters, driven by both merger synergies and organic growth partnerships, notably in the smart ICT sector. For the first half of 2024, Far EasTone achieved revenues of TWD 50.7 billion, exceeding the initial target of TWD 49.96 billion.
The merger synergies played a critical role in propelling Far EasTone's performance beyond expectations. While the synergies were still being fully realized during the forecast period, their impact became evident in the higher EBITDA and net income figures. The company's strategic approach in selective engagement within the smart ICT domain also led to expanding margins. The second quarter showcased a historic EBITDA of TWD 8.94 billion, a 13% year-over-year growth attributed to both merger synergies and organic business margin improvements.
Far EasTone made significant strides in de-leveraging its balance sheet, reducing net debt from TWD 55.88 billion at the end of the previous year to TWD 45.23 billion. Simultaneously, cash flow remained robust at TWD 12.07 billion. The company’s CapEx aligned with the 2024 guidance of TWD 8.1 billion, with expenditures amounting to TWD 3.4 billion so far, ensuring continued investment in critical infrastructure, especially in 5G deployment which started showing significant positive rebounds since its launch in 2020.
Far EasTone's Telecom Core business, which includes mobile and fixed services, experienced robust growth. Following the merger, efforts to enhance ARPU showed promising results, with significant increases in customer uptake of digital services. Mobile service revenue grew year-over-year by 18.3%, while 5G penetration among postpaid customers surpassed 40%, marking a leading position in the industry. Fixed service revenue also depicted a strong uptick of 32% year-over-year, surpassing initial merger-related expectations.
The company reported steady growth in its new economy segment, evidenced by a 10% year-over-year revenue growth and a 22% margin boost. Their Microsoft licensing business experienced explosive growth with a 155% year-over-year revenue increase and a 311% rise in contract value. Furthermore, their two key subsidiaries, ISSDU (security services) and Nextlink (cloud services), showed substantial EBITDA contributions and growth rates. Nextlink is also preparing for a public listing, anticipated to occur by the end of 2024.
Far EasTone continued to drive towards sustainability and corporate excellence, being included in the Taiwan ESG Index for seven consecutive years and receiving several corporate governance accolades. They are recognized consistently as a top employer in Asia. Looking ahead, the company aims to accelerate its investment in digital services, leveraging opportunities in green energy and FinTech, and cultivating strategic alliances, such as with Vodafone and Microsoft, to maintain their technological edge and market leadership. With the merger successfully leveraging cost-saving synergies and driving organic growth, the future looks promising for Far EasTone.
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Welcome, everyone, to Far EasTone's 2024 Second 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, IR Officer. Gary, please begin.
Good afternoon, everyone. Thank you to attend Far EasTone Second Quarter 2024 Results Conference Call. Both President Chee; and CFO, Sharon joined the call with us today.
Before we start, please pay attention to our safe harbor statement in the first page of the deck. Let me pass to President Chee. Thank you.
Thank you, Gary. Good afternoon, everyone. So here, I'm reporting to you, we have a very good second quarter. So all of our KPIs have exceeded our own guidance. So the Board of Directors target -- and of course, it is -- the merger synergy, it certainly is working, and then we are seeing the results. And also, organically, FET also did very well.
So if we look at the revenue, it came to TWD 24.97 billion, almost TWD 25 billion, and the EBITDA is TWD 8.9 billion, and our net income, TWD 3.1 billion. That is a lot higher than our initial forecast. And then the EPS is TWD 0.86. So the net income actually is our like a 9-year record high for the same period.
So with that, and then our first half actually ended with TWD 50.7 billion revenue against our BOD target that was like a TWD 49.96 billion. And also, the EBITDA was TWD 17.83, and the net income comes to TWD 6.03 billion, and our initial forecast was for TWD 5.18 billion for the first half. And so that is definitely something we have done better. And this is partly due to some of the synergies from the merger that -- from the merger that we did not see the full extend when we did the forecast, so we are happily surprised.
And then also some of the organic growth, especially in the smart ICT areas, our margins have been expanding as we are very selective in terms of the projects that we want to be engaged in. So that is showing the results as well.
So as a result, the first half EPS, it comes to TWD 1.67 versus the TWD 1.44. I know a lot of you were kind of disappointed when we released the forecast. But as it turned out, we did better than we initially forecast. So it came to TWD 1.67, okay?
And our full year guidance for the net income is TWD 3.11 billion. So I think we are looking very good to hopefully beat that target. All right.
And some financial highlights, and then here, we give some quarterly view and a trending chart. So the revenue continues to grow, and it is now for the 15 consecutive quarters in a row. So we are seeing the revenue, the Y-o-Y growth.
We certainly wouldn't take this for granted because just a couple of years ago or 2, 3 years ago, this trend was definitely a downtrend. So since, if I may remind everyone, since we deployed the 5G in 2020 and then starting in the first quarter of 2021, we start seeing this revenue rebound, right? So the trend is starting going up and it has been like that. Very promising and encouraging.
On the EBITDA side, that is also doing very well. And in fact, our second quarter EBITDA, that is TWD 8.94 billion, it is a history record high for Far EasTone. Okay? And then the 13% Y-o-Y EBITDA growth is attributed not only to the merger synergy but also our better margins from our existing organic business growth, okay?
And then for the net income, the second quarter net income is TWD 3.11 billion. The EPS is TWD 0.86. So this is a 118% achievement of our second quarter guidance. And again, that was a 9th year record high for the same period. okay? And I believe our Y-o-Y growth rate is leading the industry at 12.3%. Okay?
Now some financial metrics for your reference. So our net debt has come down to TWD 45.23 billion. And at the end of last year, it was TWD 55.88 billion. So we continue to pay down our debt and then our cash flow also looks very healthy, and it is now at TWD 12.07 billion. Our cash-based CapEx is in line with our guidance for 2024, which is TWD 8.1 billion. And right now, we have spent about TWD 3.4 billion.
Now in terms of our Telecom Core business that includes not only the mobile, also the Fixed Service. So we see that when we first merged with some FET because of the dilution, because their user base is bigger but FET customers, rate plans are kind of lower than the average of Far EasTone. So of course, the ARPU at that time dropped. But then since then, we continue to improve that, as you can see from the chart.
We have now come to $707, and we maintain the lead in post-merger as well, okay? And our mobile service revenue is Y-o-Y 18.3%, roughly so because of the merger. And also, on the right-hand side, our 5G penetration for postpaid customers has already passed 40%. So it has come to 40.5%. And then that is also #1 in terms of penetration percentage.
And then the fixed service revenue, we also see a pleasant growth. And this is part of what I was saying for the synergy that we were expecting from the merger. The part on the fixed service was a little bit over -- underestimated when we were doing the forecast for this year.
So we definitely see this as expanded customer base for the fixed service that gives us some -- in our enterprise business, a bigger user base or client base for them to work on the upsell or cross-sell. So this is definitely an area for us to continue to improve and do better. So we started with a 32% Y-o-Y growth, okay?
For new economy, so we see a steady growth at 10% Y-o-Y. And also, as I mentioned, the margin also increased by 22%. And then we have this Microsoft license solution provider business that we were able to get the license from Microsoft and in the last year, so it has been a year now.
The business is on track, and we have seen some very good initial success. And then the revenue grew 155% Y-o-Y and also the contract value is up 300% (sic) [311% ] Y-o-Y, okay? And our 2 subsidiaries under the enterprise, one is ISSDU, and that is for the security service and the other is for cloud service, that's Nextlink. So both of them are doing very well, and they both had a significant EBITDA contribution and also the Y-o-Y growth, okay?
And our Nextlink is ready for listing. And then we have submitted application. And then we are expecting, hopefully, that it will be successfully listed by the end of the year, okay.
On the right-hand side, our -- some highlights for our new business. So as you can see, if you look at the pie, enterprise account for 54% of the new economy. So because the Smart ICT, quite a bit, we have quite a bit of success with the government contracts and government contracts tend to be bigger.
So the contract value is high. And then so the revenue growth pace faster than the consumer business because consumer business is more like a cumulative incremental. And then not like other enterprise, it's more like a big project driven, and so that could affect that. But then we are happy that both are growing anyway, okay?
So for the ICT, it's kind of the usual like the cloud business, the Smart ICT or our concentration. So they continue to grow and with both revenue and also margin in the note. So is the security service.
And then on the right-hand side, our friDay digital video service. And for 4 years in a row, that it is named the top 1 in terms of the paid subscribers' numbers. So we are happy to see that. And then they also continue to grow in both their revenue and also the margin. Okay?
In the handset insurance, in that area, it is a steady growth. So for the revenue and for the margin, it is Y-o-Y at a double digits, like at 12%. Okay?
Highlights. So some highlights for the enterprise business. So we have been focused on 4 areas for the new Smart ICT. As we were saying that we are -- we wanted to convert and then so concentrate a few areas so that we can be more selective, and we can also improve our margin. And then that's how we've been doing it, and then we see the result. So I think we are on the right track.
So the 4 areas are: the first one is Sustainable Smart City. And this is especially a lot of projects came from government, the central government or the local government. So we have seen quite a bit of opportunities from these areas. And it's all kind of ESG related. And then so including the charging stations and we do the maintenance system because basically, it's IoT right? And then so that is like an end-to-end kind of project that we would be responsible for.
And then so in the Digital Transformation area, now with a lot of companies are now very anxious about the Net Zero, right? So in order for them to really start doing the Net Zero kind of efforts and keep track of their carbon footprint, they needed to be digitized at first.
So this digital transformation and the Net Zero transformation kind of go hand-in-hand. So we see quite a bit of opportunity there for both kind of helping each other. And also with this Gen AI, Generative AI, and so there were a lot of the interest generated for Microsoft CoPilot products. And then that also helped us with our MSFT Microsoft LSP business.
And then we have -- and then for the cloud migration and then the cloud service, that is also one area that is we see the growth. And then some of the like ICT, I should say, IDC-related, the data center-related business, we have a very good pipeline. And we also see some confirmed deals as well, okay?
On the right-hand side is the Smart Healthcare. And this is one area that is like a slowly but surely kind of growing area because it is, of course, kind of a driven by the legislation regulation. And then that we have just the telemedicine regulation or 2.0, that was just effective on July 1.
So what we have been doing in the past for the rural areas, that underprivileged medically areas. But they are now -- those kind of telemedicine arrangement can be made to more scenarios, like a TYMLOS scenario that is, that are supported and also not only the hospitals, the big hospitals, but also the local hospitals and then even the clinics, they are urged by the government to go digital.
So to -- so we have seen the opportunity for help them to migrate to cloud. And also, we are actually working on a government-funded project to come up with this cloud hit. I should say there is some like a subsidy provided by the government, and we have -- we are the finalist to receive that, and we have already received some of that for us to develop this cloud hit because we already have very good platform.
And with the cloud hit, once it's completed, we can be connected with our cloud platform, and this will be reached out to a lot more clinics and local hospitals. So we see the widespread of use of this platform. And then, so that's why i said this is like a -- it has been slowly but surely growing area.
And then I think it was sooner than later, we should see this area to continue to grow. And then also we will see more coverage and even in the urban areas. And that's when we should see a bigger growth and factor, okay?
And the fourth area is our telecom-based SI. Of course, that's kind of our core business extension, and we have won a couple of contracts already. And though like I said, with government, the contract size also usually are on the bigger side, yes, so we are happy to see that our focus on these 4 areas continue to do well and then bring in a better margin for us. Okay?
Okay. And on the consumer side, we have the entertainment, the video -- friDay video area, as I mentioned before. And then so we also invested in some content and some movie, and then we see a good result as well.
And then for Loyalty, our Mobile Circle, the application, we already have like a 6 million downloads, exceeded 6 million and then it's a 2 million monthly active users. So this is a very good digital platform for us to reach to our users, and we also see the traffic led to the -- that arrived at this application.
We were very successful in leading them to our shopping or the other services that we provide. So it serves both as a loyalty program and also kind of like a asset to our other digital services and then provide additional traffic and monetization traffic for them. And also, this application, we won the 'Single A' rating in the market.
And then we have worked with Allot, which is an Israeli security company. And then so we provide organic network features that would actually screen the unsafe website that were on the blacklist. So this will block a lot of those attempts for our users, and we call this the Guardian Network.
And it has seen a very good growth in terms of the paid subscribers, and it has grew 46% in the first half. And we will see this continue to grow as we have been pushing for a more reliable and safer network. And then as the fraudulent cases now are so prevalent. So it is important that we take some initiatives to protect our users. And so this is at a really, really cheap cost that they need to pay, but it is a very critical service and also very helpful.
And then the last one is in the FinTech area. So we have invested in MaiCoin. It is Thailand's largest crypto trading platform and blockchain solution provider. So this is really to expand our footprint in FinTech. And then also more importantly, we have realized that a lot of young people now, they don't invest in stock but they invest in crypto coin. So this is going to help us to have more engagement with our younger generation. And then to our collaboration with MaiCoin, it can be several folds.
So in the short run, so there is some collaboration proposals that are -- we are discussing. So hopefully, very soon, we will have something that we can issue to our -- like a GA program like to get more young people to join Far EasTone. So we are looking forward to this collaboration and this investment.
And some major honors and recognitions, let's see here for your reference only. So as we are very big on environmental sustainability. So for 7 years in a row, we were included in the Taiwan ESG Index. And then also our cloud computing center, this TPKC was certified for ISO 46001 for the water efficiency.
And then -- so in terms of the corporate governance, we continue to get recognized by institutional investors. So we have won several awards there. In HR Asia, we won the "Best Companies to Work for in Asia. " We also get similar recognition in Taiwan for this Taiwan 104 that is the talent search job Bank.
And then also Taiwan Stock Exchange. It is the 10 years in a row that we were ranked at the top 5 for the corporate governance evaluation in Taiwan, and they were just like 8 companies in the entire Taiwan-listed companies that won the top 5 honors. And then for 10 years in a row, I don't know how many of them, but it's less than that. So it is certainly an honor that's worth mentioning.
Okay. So we have a couple of service-related awards as well, and I'll just list there for your reference. And in particular, the Best Customer Service in Taiwan. It's a 13-years in a row, and we are the only one company -- service company in Taiwan that won this award for 13 years in a row.
All right. For our second half priorities, for what we have been doing, I think it is working. So we will continue to do what we have done well. And then only we can do it faster and then also make a bigger impact.
So we will continue to do our telecom service, as I said. It's not only in the mobile and in the fixed area as well. We find that as our new golden nugget. And then the grow new economy business, our smart ICT solutions with expanded enterprise customer base now because of the merger. So we see more opportunities in for more sales there.
And then also, we will -- we are accelerating our investing in the digital services. So we actually have internal kind of a lean start-up program. And then especially with GenAI being so helpful. And it really -- I'm looking forward to a lot more applications that is GenAI or AI-enabled that may come out.
So we -- not only we will be the mobile provider that will carry these applications, but we -- organically, and we wanted to be able to provide some of those applications or features through our existing platform and applications.
So with that -- and then also, we have for the consumers that will continue to expand our presence in consumers' essential services. So that means, for example, just like the FinTech, right? So their wealth management. And also, we have the other areas.
So some of these services, we certainly won't start on scratch, but then it's through some co-create. And then also, in some cases, that will be through strategic investment into the company so that we can provide more -- a better suite of these essential services through our digital platform to our users.
And then it is very hard to get the green energy, the wind power or the solar power. So in the past, we have like, at by this time, we buy how much and how much. But then now, we see it's like the sooner the better because it's getting harder and harder. So that's what I mean here by accelerate the efforts to secure those green synergy -- energy.
And then we will continue to engage globally. And what was not listed here that is oversight is Vodafone. We have a very good alliance with Vodafone as well. So the global engagement, that definitely helps. And our partnership with Microsoft certainly keep us posted on the most advanced technology development.
And then along the LSP program, and then the other searches for information. Hand in hand with China Mobile, we actually attended MWC Shanghai 2 years in a row. So we -- it has a lot of good applications with 5G or with AI. They are eye opening, certainly give us many good ideas. So I see this kind of engagement very healthy and very helpful.
All right. Is that the last slide? Okay. With that, I finish my report, and we welcome your questions.
[Operator Instructions] First one is Neale Anderson, HSBC.
I have two questions, please. The first relates to the unexpected or unplanned synergies that you mentioned, I think you said that most of those were on the fixed line side, but could you clarify that? Give any more details on those.
The second one also relates to the merger. As I understand it, the network integration was much easier for you because you're sharing the same vendor. So a lot of that network integration could happen quite quickly. So my question is, is that now pretty much complete? How far do you think you're through that? How many more or how much more benefit can you realize on the network integration side?
Okay, sure. So the first question about the part that we did -- well, so I should say, we didn't expect as much. So that includes really, I would say, in two areas. So for fixed services, so the revenue and also the fixed service margin was pretty good. So we have in the second quarter -- even in the first quarter, we start seeing some of the fixed part revenue. Because when we were doing the budget, that was also the time we were doing the merger. So it was very chaotic.
And there are a lot of things, numbers that you go through. So there were some of these that we do not see in our initial assessment as through the budget. So then of course, they came out.
And then the other part is actually, we see the cross-sell. So quite a few APT customers, when they migrate to our service plan, and they will actually take on our digital services or added the services. And the takeout rate, the percent is even higher than our own FET customers.
So that was the pleasant surprise. Yes. So I think several things like that, that combined is not just one like in the fixed service. But then overall, that's that.
And then as I said, it's now -- we have also organically grow and done very well for our FET's organic business. So -- and then also with the expanded margins. So it all contributed to the better net income results.
And for your second question, network, yes. So we have -- for the mobile -- mobile stations and all that. We actually finished that early in January, but there is a lot of follow-up, right? So when we were able to switch and we can turn them off.
And at the time we turn those off and then we start saving the electricity, and then you have to go through the cleanup and all that, so you can return the site to the landlord. And then you can terminate release. And then, of course, that you have to negotiate with them. Sometimes the landlord, they don't want you to go. So there's some of that.
And then also, there are like 6,000 of them. So it doesn't take some time. But the end for that, we are almost complete as well. So we start seeing the -- once the lease is returned and then the expenses on that also terminated. But then because we -- it was kind of scattered, right?
So throughout the January or end of January and then throughout 4 months. So the savings we have realized in the first half is still a lot less than what we will see in the second half. So just an example, you probably want to ask the numbers. So roughly like if I said TWD 200 million in the first half and then it's another TWD 700 million that will be expected just for the network part in the second half.
And then -- but then that's just the mobile. So remember, APT does have the fixed assets. So there will be some consolidation there as well in some of the systems. So for that, we still continue to do. But then as far as the mobile network is concerned for the RAN, okay, the radio access network, that is completed.
And then the next one's we are almost done with the user migration and also as you may recall, the Fair Trade Committee asked us to wait until the end of next year for the -- so at that time, then for those that have the contracts that already expired, they will just need to move on to our service agreement.
And then so that is -- that will be a kind of like a cutoff date for us to -- and that will be a good day for us to really migrate the core from APT to retire it. So that is what we are working on now. So the -- in terms of network migration, we have like phases, the RAN migration that I just mentioned but also gave us the most -- quite a bit of consolidation synergy that was in the RAN, and we are done with that. 99%, 99%, okay.
[Operator Instructions] Okay then. There are currently no questions. I'll pass the call back to Mr. Gary Lai. Gary, please proceed.
Thank you again for everyone to attend our second quarter Results Conference Call. See you next quarter. Thank you.
Thank you. And you can always follow up with Gary and then Amy for more questions if you think of them later. Thank you.
Thank you. Bye-bye.
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. Thank you, and goodbye.