Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
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Welcome, everyone, to Far EasTone's 2018 Third 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.farteastone.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 for attend Far EasTone's Third Quarter Results Conference Call. As usual, our President, Yvonne Li; CFO, Sherman Lee, all will be with us today.
And just a reminder, before starting Yvonne's brief presentation, please pay attention to our safe harbor statement. Thank you. And we can start.
Okay. Good afternoon all the investors, and thank you for joining our third quarter investor conference.
So I'll start with the mobile market update. So in the first 3 quarters -- we actually list all the past 4 years of the first to third quarter, the mobile top line. If you look at the trend, it's -- that the entire market, the trend is continued to trending down. I think it's mainly because of the low flat rate being introduced in May this year to the Taiwan market. The first 3 quarters, if you look at the year-on-year trend, it's only down by 4.3%. However, if you just look at the third quarter comparing to the third quarter last year, you're actually down by close to 10%. That the main reason is being that when the TWD 499 was introduced into the market, there is a onetime penalty that has been booked by all the operators. But in the third quarter, I think that relatively was flat more, I mean, the true picture of how the mobile revenue in the markets are trending, okay? So that's the situation that we would like to take this chance to update to all investors.
The next one -- next part, and I'll start to update the financial performances and operating performances for Far EasTone in third quarter. This year, the -- I think we are pretty glad that after all these years, the investments are driving the changes in the enterprise segment. We start to see that all this effort in the past starts to pay off. Our overall ICT business is growing like 44% on a year-to-date basis and cloud business 37%, security business 31%. So the entire ICT project contract amount comparing this year versus last year, we expect to grow 73% on a year-on-year basis. This means that we are not only getting more revenue, but also in terms of the size of the projects we are getting, it's bigger and bigger. So this definitely shows we have been relatively successful in transforming the entire enterprise segment from getting into more solution and ICT business. So that's the part.
The next page, we are also happy to report that after the very busy second quarter, we start to see our churn rate has been stabilizing. In fact, the churn rate in this quarter is back to the second quarter last year. So we are actually quite happy that we start to see the stabilization of the customer churn situation. Okay.
On the other hand, on the service revenue and the ARPU side, due to the TWD 499 impact, we do see that the top line mobile service revenue, either of the ARPU is trending down. If you look at the third quarter of this year, the overall ARPU is actually -- it's about TWD 60 less than the second quarter. So this is basically due to the TWD 499 impact to the market. Okay.
Next slide is about the financial performances. I think our profitability in terms of margin or absolute amount in the first 3 quarters is still quite stable. So even with the top line impact that we are continually doing a lot of the cost-efficient measures and trying to stabilize the EBITDA situation. And the net income, we are able to maintain at third quarter about TWD 2.6 billion level. Okay.
In terms of the guidance, okay, the third quarter, [ unfortunately ], we meet our guidance on the third quarter on the top line and on the bottom line. So this is mainly due to the mobile revenue continuing to trending down. But in terms of the first 3 quarters, we are slightly below the target. Okay.
On the consolidated balance sheet, the only thing I would like to say is that, though the top line is under some trend -- downward pressure, the overall the free cash flow still pretty strong. Year-to-date, the total free cash flow is close to TWD 15.5 billion. So I think with this, this certainly will help or will help a lot in terms of a stable dividend policy. So later on, we will touch upon that.
CapEx is also trending down. As we updated to all the investors early part of this year, we think, in terms of LTE investment, the peak will be in 2015 and it will be continue trending down. So this year, I think, originally, we announced to the board it's about TWD 8.5 billion, but it most likely will float at TWD 8 billion level for this year in terms of the CapEx spending. A lot of the investor has been asking us, in such a flat rate environment in Taiwan and people are using more and more on the data and whether our investment in the past on the network will be sufficient to sustain a good performances on the network in terms of customer satisfaction. So this is the most recent customer survey we have done, and we are also very happy to see that we -- this year, although it's not as much of the cash investment, we are pretty much doing all the optimization work on our network and our overall customer satisfaction on the network is continuing to trending up. So I think, hopefully, this will ease some of the concern from the investor that whether we need to spend more on the past CapEx. In fact, from what we look at this point of time, I think the CapEx level will not have a huge increase until the 5G is coming. Okay.
On the -- so the first, of course, continued there is some honors and achievements that the company continue to receive. Basically, we category into 3 parts. One is on continue on the service front and we are -- actually, we received many service excellence awards from local or even from abroad. Okay.
On the innovation and partnership, we have been engaged with blockchain -- carrier blockchain consortium, together with broadband, LG and many other operators, to actually join this partnership. And on the Vodafone and DOCOMO, even on the 5GAA, which is the 5G Automotive Association, we also joined with them for certain strategic collaboration topics. Okay.
Awards and recognition. I think while we continued to deliver our drive on the new solution and digital solution, but on the CSR part or even on the energy-saving part, we continue to perform quite well internationally and locally. Okay.
So my last page for this quarter's update is, on the core business, the low flat rate, I mean particularly on the mobile [ core ] connectivity business, the low flat rate or SIM-only plan continue to impact on the mobile ARPU and the connectivity revenue while
[Audio Gap]
solutions on the enterprise side continue to grow very nicely. So going forward, we'll continue to focus on those value-creation part on the consumer front. On the enterprise front, we'll continue to focus on the ICT growth, but at the same time, I think we'll go try to drive the cost efficiency more, which is continue to digitalize the internal processes. Okay.
I mentioned about the enterprise segment. So there is more and more strategic partnerships it's going to be introduced for the enterprise so they can ensure faster or either rapid growth in the segment. Okay.
On the digital transformation part, this is more internally that the culture change. We want to accelerate the business agility and efficiency and also to, at the same time, to enhance their customer experience. Okay.
So these are the 3 things that we continue to do. And of course, the last point, hopefully, that after this -- today's conference, I would like everybody to take away as Far EasTone continue to have a strong free cash flow, and we have reported to our board it's our commitment to sustain our dividend policy with more than 100% payout ratio.
So this will conclude our update for this quarter. So now we are open for questions.
[Operator Instructions] The first question is coming from Varun Ahuja from Crédit Suisse.
I just want to go back to mobile. I think it's obviously the Slide 4 shows how the dismal performance has been of mobile sector for the last few years yet we don't see any abatement in the competitive intensity. So just want to hear management view, how do you see for the next 2 years or so will the revenues will continue to decline? When can we see some growth in this sector? I understand that, obviously, you can't be 100% more -- free cash flow generation is decent, but eventually, there has to be some fundamental growth in this sector, which doesn't seem to be happening. So I just wanted to hear management view, when can we expect some growth in the space?
Okay. Okay. You -- in terms of the mobile segment in Taiwan, okay, let me separate into 2 parts. One is on the mobile connectivity revenue. Okay. So with this TWD 499 in, I mean, in from May, I can only say that, next year, on the mobile connectivity side, we'll still be quite challenged because this year is a half year impact, next year is a full year impact. However, I don't see that any of the big 3 is trying to really create another pricing war. So I think the situation should be greatly stabilized. That's on the mobile connectivity part. The second part is, I don't know for the others, but at least for Far EasTone, the mobile connectivity revenue is trending down on a long-term basis still is a global trend. This is not really something that's unique to Taiwan. So everybody is trying to do is to create additional revenue stream. So for Far EasTone, it's not only to do the mobile connectivity, but we add on those value [ caps ] or segmented offer, trying to create more revenue to compensate whatever the mobile connectivity revenue downward trend. So this is what we would do on the mobile sector. Then adding on to that is on the overall enterprise and ICT growth, this is -- majority of the revenue or service revenue is not really reflected in the mobile sector. A lot of that is being reflected in our overall company performances. So what we are seeing is that we have -- while we want to show everybody about this nice growth is we are, right now, confident after the past few years' investment that we start to see the things trending up quite quickly. So for next year, I would say, on the mobile connectivity side, we probably will continue to trending down. And -- but the value -- another digital service value we're adding up, and on top of that, there will be additional revenues from the ICT and enterprise growth. That's how I look at the top line market for the telecom sector next year.
What is the contribution of this ICT to total revenue right now?
It's about 17%.
Okay. And is it as profitable as mobile or less right now?
Sorry?
Profitability-wise, is it the margins in [ 40s ]? Or is it teens? Is it lower margin?
The ICT margin is different. It depends on whether you are using your own solution or not using your own solutions. But right now, I can only share with you, internally, we are looking at overall enterprise segment and the consumer segment. So the only thing I can share with you -- I probably cannot share with you very detailed numbers, but the only thing I can share you is, overall, enterprise EBITDA margin contribution and -- versus the consumer EBITDA margin contribution is pretty much the same. It's pretty much the same. So for us, if enterprise continues to grow nicely, it will certainly help us to sustain overall the impacts from the mobile service revenue.
That's very helpful. Just lastly from me. Enterprise, obviously, one of your competitor also did the presentation last week, highlighting the same story. I just want to understand now, all of you are now looking at enterprise segment given Chunghwa is a much better fixed line proposition. Are you guys competing for the same contract? How is it happening? Is it -- how does the competition in this landscape looks like now because all 3 of you are now looking at the same segment for growth and obviously it's a government contract, largely so. I just wanted to understand the competitive landscape on the enterprise side. And does having a good fixed line infrastructure benefit Chunghwa?
Far EasTone has a pretty good fixed line infrastructure. I mean, we have -- the only thing is we don't have the last mile to home. Okay. So in terms of the enterprise -- I mean, to getting the enterprise -- get into the enterprise business with the fixed line infrastructure, that's a part of our strength. And to be frank, in terms of getting the enterprise and then government projects, in the project bidding situation, most likely, we encounter Chunghwa Telecom or other IT vendors. For the other mobile operators in Taiwan, honestly, we seldom encounter them in those project biddings. So of course, Chunghwa Telecom will be our main competitor in terms -- in this telecom segment in terms of the enterprise growth. And I think, right now, we start grabbing markets from them. And also, I think, as you see, that the -- so called this timeline between the IT segment and the telecom segment becomes blur and blur. So when we get into the ICT front, we compete and we also collaborate with a lot of the top-notch IT vendors in Taiwan. That's where, and I think why, in the past year or so, that our ICT business can grow like this. So we have learned along the way. There are partners, there are competitors and this is the environment we are in.
The next question is coming from [indiscernible] from Nomura.
I would like to know what is the new business as a percentage of total revenue in 3Q? I remember in 2Q, it was around 9% and the target was 11.3%.
[indiscernible] , about 9.5%.
Yes. I mean, what is that contribution in 3Q? The new business or enterprise, how exactly are you categorizing that business?
The new revenue is about 9.5% of our total revenue in third quarter.
In third quarter?
Yes.
The ICT revenue you mentioned earlier is 17% of total revenue. Is this not included as a part of new business or enterprise because that's kind of conflicting?
It's included.
It's included?
Yes, it's included.
I'm sorry. I'm understanding wrong. So if ICT...
Yes.
So if ICT is contributing 17% to total revenue, I do not know how the entire new business category is just 9.5%. So is there something that I'm missing there?
No. It's the enterprise is representing 17% of the total revenue of Far EasTone and ICT is part of the things that driven on the growth on the total enterprise revenue. And the new business revenue represent 9.5% of our total revenue, and ICT is included in this new business revenue. Is that clear to you?
Okay. Yes, yes. Just one more question on 3Q within EBITDA. Is it fairly adjusted in 2017, like -- can I compare 3Q within 3Q '17 on pre-IFRS basis?
Oh, IFRS?
Yes.
Yes, just a minute.
9%.
Yes?
So far, even to third quarter, EBITDA, if you compare apples-to-apples at residual base, EBITDA actually dropped about 1%. However, EPS dropped 4%, mainly because of the tax rate difference.
[Operator Instructions] And next, we'll have [indiscernible] from Yuanta.
I wonder what's your confidence level of achieving your full year guidance of TWD 3.2 of EPS?
Okay. I think if you look at the third quarter numbers and we slightly missed that, I think in the fourth quarter we'll continue to work hard, but I think that the challenge is there. The challenge is there. But we are still working on it.
[Operator Instructions] And the next question is coming from Varun Ahuja from Crédit Suisse.
Yes, I just wanted to check on iPhone performance. How do you see new iPhone performance? Because that's -- that can be factor for you in terms of achieving the guidance or not if a lot of customers are moving up on the iPhone sales.
Okay.
Okay. Okay. So the iPhone performance did not -- does not do as well as last year. In terms of i XS last year, we sold 20,000 units. But this year so far we only sold 16,000. So I will say that the iPhone impact so far has been limited. And in terms of the people right now using -- when they take iPhone then sign up rate plans, for rate plan above TWD 999, last year, it is 92% with the iPhone take rate have rate plan more than TWD 999 and this year it is 95%.
And the next one is coming from [indiscernible], Nomura.
Just 2 questions, one on CapEx. So the CapEx trend is trending down, but any of this CapEx guided for 2018 or any one in 2019 expected to be on 5G or any kind of related apps because I saw that some kind of partnership between 5GAA is going on?
No, I just mentioned that CapEx is most likely will be close at TWD 8 billion for this year and -- versus our previous forecast about TWD 8.5 billion. So it's about -- slight savings on the CapEx. For next year, we do not see the CapEx level will be higher than this year. I think, the next wave of the CapEx increase most likely will be to the 5G time, but it really depends how the 5G is going to be released and how we're going to deploy to 5G network. It's still a bit early. But for next year, for sure, the CapEx level will not be higher than this year. Okay.
[Operator Instructions] And the next one is coming from Patrick Chen from Nomura.
Can I clarify the iPhone unit sales that Sherman mentioned, is it 20,000 versus 16,000 this year that was for which model?
That is for i XS.
i XS?
i XS, yes.
i XS altogether, I mean, including the XS and XS Max.
Yes.
Okay. And for this year, the subscriber with TWD 999 and above, the sign-up rate is 95%?
Right. Yes.
Yes.
95%, okay. Okay.
Okay. I just want to add on a bit more. This year, what we have observed in this market is the overall iPhone sales in the telecom operator channel is slightly less than last year. But overall, if you look at the customer that are taking up on the i XS in our portfolio, it's not really less than last year. So we do see that some of the customer, they are buying the handsets probably on the Internet because this year, in Taiwan, that this is the first time the iPhone has opening up the i XS, the initial sales to some of the e-commerce site. So this is a phenomena we have observed for this year. Okay.
And Patrick, you're still on the line. Do you have more questions for our hosts today?
No, I'm fine.
Okay. Thank you.
There are currently no questions. I'll pass the call back to Mr. Gary Lai. And Gary, please proceed.
Okay. Thank you, everyone, to attend our third quarter conference. See you next quarter. Thank you very much.
Thanks.
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.