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 2019 Third Quarter Earnings Conference Call. [Operator Instructions] Please visit www.fareastone.com.tw under the Investor Relations section. And now I'd like to introduce Mr. Gary Lai, the IR Officer. And Gary, please begin.
Good afternoon, everyone. Welcome to participate Far EasTone Third Quarter 2019 Results Conference Call. Both our President Chee and CFO Sherman are here on the call with us today. Before starting our President Chee's brief presentation, please pay attention to our safe harbor statement in the first page.
Let me pass to Chee, please.
Okay. Good afternoon, everyone. Thank you for coming. I would just quickly go over our third quarter operational performance, and let's start with the mobile market in Taiwan.
As you could tell from the chart we shared here, on the left-hand side, it is the market mobile revenue. It is not to anybody's surprise that it is still declining. However, the silver lining is that revenue decline did improve. So it is slowing down. So compared to year-over-year, for the third quarter, now, we are looking at minus 5.1% versus 15.6% last quarter and then the quarters before. So that is a good thing. And then on the right-hand side, we show the mobiles number portability, so which indicates assurance, right, the customers that traverse between the carriers. And as you can tell, the numbers have come down and then stabilized. So in terms of the competition amount, the MP -- in the MP category, in particular, it is cooling down, which is healthier as far as we are concerned. Okay?
And in terms of Far EasTone's operational performance, if you look at our postpaid subscriptions, it has been continued to grow, and then actually, it's like 5 quarters in a row. And this is very good performance. I think that Far EasTone team has done a great job as we -- when we were looking at this last year and then we were forecasting at best, this will be kind of staying flat, if not decreasing slightly, but then it is against that what we have expected, it is definitely doing really, really well there. And in terms of the postpaid churn, it has been going down, and then it kind of stays flat at 1.4-ish percentage, which is also very good.
And that is in the telecom area. And then when it comes to our new economy, especially in our enterprise sector, you can see from the 4 circles, these are the kind of signature services our enterprise business unit has offered to our clients and has been our focus of the business for the last 2 years. And on the cloud service revenue side, you see the increase is like more than 5x. Of course, this did -- this does include our acquisition of Nextlink, and then it reflected the addition of the revenue from that subsidiary. However, even with that, the growth, including the growth of the subsidiary is -- they are impressive.
And for the IoT revenue and it is almost 2x, right, 200% of what we have year-over-year. And then the security revenue, I remember, I think probably the first investor call I had with you, and the number on the security was about 43% increase. And then now we are looking at 65% year-over-year. Okay?
And then in terms of the SI, the ICT project, in general, that are outside of these particular services we just mentioned, the revenue growth there is also 64%. So it is -- we have very high expectation for this area, and we do consider new economy as our growth engine. And then these areas are performing very well as we expected. Okay?
Now in terms of how we are doing in achieving our Board of Directors' target. This chart just gives you a brief kind of a glance, right? So when it comes to the total revenue, we are -- for the third quarter, we are meeting our Board's expectation. We achieved the target. And then on the EPS side, it is 103%. Okay?
And with that, I'm going to have Sherman, our CFO, to share more financial details with you all. Thank you.
Good afternoon. So the EBITDA and EBITDA margin for the third quarter is $7.191 billion and the margin is 33.6%. However, I want to remind you that this is based on IFRS 16, which treat rental and other lease contracts as assets. So if we really want to compare against last year on apple-to-apple basis, so-called pre IFRS 16, then the EBITDA margin will be 29.3% for the third quarter, which is better than third and fourth quarter last year but worse than the second quarter last year. The net income for this year for third quarter is stabilized. It is at $2.195 billion. So you can see that actually, the 3 quarters this year, the net income has been pretty stable, around $2.2 billion plus and minus. So we've been running at a stable pace.
Next page. If we look at the consolidated financial result, the first column is the result for the third quarter this year. The total revenue is $21.4 billion. Against the guidance, we have 100% achievement rate. For the first 3 quarters this year, the total revenue is $62.65 billion, which is 3% higher than the guidance. And for operating expense, the first quarter is $3.657 billion, which is lower than the guidance by 6%. But the 9 months of this year, the total operating expense is $10.938 billion, which is 4% lower than the guidance. The EBITDA, which is IFRS 16, is $7.191 billion, 100% achievement rate, and therefore, 3 quarters is $22.06 billion, which is 2% higher than the guidance. And the net income for the third quarter is $2.195 billion, 3% higher than guidance. And the 3 quarters together is $6.6 billion, which is 4% higher than the guidance. So the EPS for third quarter is $0.67. For the first 9 months, it is $2.03.
The next page, talking about the balance sheet and some other cash flow. So the cash on hand at the end of third quarter is $5.16 billion, which is lower than the second quarter because the dividend payout of $12 billion during the third quarter. And the total borrowing, the net debt increased from $19 billion at the end of second quarter to $27 billion to the third quarter because of the dividend payout. And shareholders' equity, right now we stand at $68.44 billion. And net debt to EBITDA is 1.08x EBITDA, which is within the normal range of variation. And the free cash flow for year-to-date is $10.8 billion, but there's a footnote. At the end of September, the last booking day of September, which actually -- there was a typhoon and so there was $1.8 billion payable, including tax and some other payable didn't happen. And that makes the free cash flow inflated by $1.8 billion, but that $1.8 billion will be paid in the fourth quarter. And the cash-based CapEx for the 3 quarters together is $4.296 billion. And EPS, as we said, is $2.03.
That concludes my financial update. So I will turn this back to Chee.
Okay. Just a few management highlights what we have accomplished in the third quarter. In particular, these are some awards that we were -- we have received a recognition -- we have received, which reflect the Far EasTone team's accomplishments in general. For example, we have been very focusing on the customer satisfaction, customer service. So I'm happy to report that we actually won the 2019 Customer Service Excellence Award from Taiwan Contact Center Development Association, which is a big award, and we consider this as one of the primary award that indicates the service level. So that is a great honor.
And then we were also honored as the best telecom operator against the scammers, and we actually received a recognition from Criminal Investigation Bureau. And because we use big data and AI machine learning, to actually help capture the fraud cases, the fraudulent calls and then the callers. So that was something we kind of pay back to our community, our society on this side. And then when it comes to innovation, as you all know, we have been focusing on software development and then also our capabilities in big data, AI and IoT.
And then we -- when we created a transformation office last year, we have a team that is focusing on these technology-related applications development and all that. And the team received the Red Hat APAC Innovation Award for the digital transformation in the DevOps model that we have implemented. And then also we created some application enablement platform, which you call CAT, the Connect All Things for our IoT applications, which is already monetized, and we have commercial services put on the platform. And then we also cooperated with Taipei City and then started -- created some Taiwan's first proof-of-business, POB, field experiment center for 5G. And this is where the -- we already have 35 companies that came in that includes government agencies and device makers, PC makers, you name them, quite a few manufacturers in the different domains that will use the 5G connectivity. And then so a lot of testing and experiments are going on in the lab. And then so far, we already have 35 companies that came in.
And then we also launched the first Online Collapse and Turbidity Forecast System in Taiwan. And then this is one of the IoT applications we collaborated with our partners and for our government agency. And then also -- and we are happy to report that we were awarded the Most Outstanding Company in Taiwan in the telecom service sector by Asiamoney. And then we also -- this is the first time we were incepted by Dow Jones Sustainability, and we actually entered a world index, which is really a great achievement. And then we have several CSR recognitions, and this is just something we continue to do, and then we take it really seriously that this is our corporate responsibility, social responsibility for our community. So we'll continue to do that.
And as far as our fourth quarter focus is concerned, as all would know, right, and then this is -- the 5G auction is heated up. So very soon we're going to have -- the auction starts on the 10th of December. And next week, we're going to have interview with our NCC, so they can just -- that is a prerequisite for those qualified bidders, right? This is one step closer to the bidding. So we will have that next week. And then so we have been preparing for the 5G deployment. A lot of the network upgrade and all that is ongoing and site surveys and all that. So that is something we will continue to focus on. And then also in the new economy area, with 5G or not, this is -- this has been our focus, but then 5G will also help boost the business in that area as well. So we will continue our focus in those areas as well.
And then with 5G -- and actually, when we started the IoT business, we already see the need -- the critical needs for having the good partners and then having a ecosystem. So we will continue to expand and strengthen our cross-field, cross-industry partnership. And also of course, we will continue to drive down operations costs, especially when growing revenue is really, really hard on the mobile service sector. So driving the cost down with AI, with automation, is something we will continue to do internally.
And last but not least, we will continue to improve our employees as well as the customer satisfaction. So we always say customer first, but then employees are our biggest customers, ourselves. So we will need to take care our people. So this is something we'll continue to improve and do better.
Okay. With that, I think we are ready for Q&A. Gary, back to you.
We'll start Q&A session, please.
[Operator Instructions] And the first question is coming from Gary Yu of Morgan Stanley.
I just have one question on some early outlook in 2020. Given the potential impact from early 5G adoptions and also there's some early signs of stabilization in the mobile competition in recent months, should we expect the mobile revenue to return to positive growth when we go into 2020?
We -- well, so with 5G, we do expect, like, the price uplift. But then, as you know, the adoption will take time. And then the loss on the revenue, mobile revenue, by 4.99% is huge. So we do not expect, even though we are hopeful, but then I definitely would not expect this is something that will turn around in the year. But then maybe 3 to 4 years, we'll see the positive turn. But then, in the meantime, it will improve the situation. But then to see a real -- to turn it around totally, I think it should take 3 to 4 years, given 5G is still kind of relatively new and then the services that will mature and then that will be well received by the public, that will take some time to warm up.
Next question is coming from Billy Lee of Crédit Suisse.
I have one question. In the new business, so Chunghwa talked about intensifying competition in the new business side in the earnings call last week. Just wondering, like, on your side, do you see that happening? And could you also talk about the general margin profile of this new business?
Okay. All right. Yes, we did see that statement made by our peer, Chunghwa. And I have to say, I think, we probably were guilty to that. So while they are saying there's competition and then -- there is definitely competition. As you know, Chunghwa, historically, was government-owned. So in the government sector, they do have the -- almost like an incumbent advantage. So for us, it was fierce competition. But then we did win a few cases. So that's what I saw. And then -- but then, as you know, they -- I consider them the incumbents. So for Far EasTone to make more progress, we just have to do better, and we have to work even harder. Okay?
Now in terms of margin, this -- the margin is okay, but then I would like -- because at the beginning, it's just especially with competition like Chunghwa, it's almost like a force that's not be able to be very choosy. We cannot really do the pick and choose, right? So any time we have an opportunity, we like to grab it. And then this is how we can increase our market share and our influence, right, our position. But then I think, after a year or 2, the team has really done very well, right, even Chunghwa feels some competition. And then so I think in the year going forward, I would like our team to be more selective. And then so we can have the margin, we can improve the margin more and then with more efficient efforts, I guess, the effectiveness can even increase. But then for -- while we have it because we always have our criteria for what kind of cases we will work on. So it is okay, but then I always like it better. There's no best; it's only better.
Right. But do you have a rough number on the margins? I just want to have a rough concept.
Let me see. Let me check with my -- sorry, I didn't really get the latest number on that?
Yes. I mean the general rule is that we won't do any project lower than 10%. So our average range will be a range from 10% to 15% on these kind of projects.
Right. So it varies. And then -- and also as you know, we have had some huge cases, and we are talking about billions of the revenue amount. So -- and that's where you need to bend the rule a little bit. But then, in general, what Sherman just said, that's about right.
[Operator Instructions] And the next question we have Amber Lee of Yuanta.
I have a question about the new economy business. So overall, in third quarter, what is the growth rate in this business on Y-o-Y basis? And also management mentioned that Far EasTone took some shares from Chunghwa and which category is that can be seen in the slides?
Well, I actually -- which slide are we referring to, the one I have in the 4 circles? So I think a high percentage of our ICT business, right, last year, that includes some IoT security as well. So it came from -- a big part of it came from the government sector. So government sector definitely is where we will meet Chunghwa as one of the bidders, right? So that definitely is one area. And the other area, big and small, I don't really have all those data in front of us. But then I think it's safe to say in this government sector, where Chunghwa used to be the provider, and now they start to meet some competition, including Far EasTone.
Our overall new economy growth 17% year-on-year on a year-to-date, this year.
Okay. Then what about sales percentage in third quarter or YTD basis?
Last quarter number. Right now, it's up at 12% over the total revenue.
So it's on track to the annual target?
Yes.
[Operator Instructions] And the next question is coming from Saileela of HSBC.
Yes. I would like to ask you about the contribution of new economy services to the overall service revenues? Sorry, I didn't get that part earlier.
I'm sorry, could you repeat that and slow down a little bit?
Yes. What is the contribution of new economy services to the total service revenue?
That's the answer we just gave. It's about 12% right now, year-to-date.
Yes, 12%. Okay. Got it.
And the next question is coming from Billy Lee of Crédit Suisse.
It's Billy, again. I have 2 more questions. The first one is on CapEx guidance. I noticed you earlier gave a guidance.
Billy, would you speak up a little bit? You came in really soft, and it's a little bit hard to hear.
Sure, sure. Yes, earlier I noticed that you gave a CapEx guidance of $8 billion. So wondering, given that now 9-month, year-to-date, you're spending only $4.3 billion. Are you still maintaining the guidance on CapEx? That's first question.
Yes. We're still within the CapEx spending by the end of this year.
And I think there was a delay of the TPKC team on the construction.
Yes. Right. Yes, there's some delay of the CapEx spending, but I think we're going to catch up on the fourth quarter.
Okay. Got it. And then another question is on the impact of the launch of iPhone 11. I'm wondering like how does it impact? What do you see the impact of that launch on your service revenue bundling effect?
Okay. So the iPhone has done very well, the iPhone 11. So it definitely helped us with the service, the number of subscribers that we were able to add or renew. So it was all very positive. And then also from a subsidy perspective, this actually -- this time, it wasn't cut really deep because of our competitors. So I think it was a pretty healthy promotion, and then it has done very well.
[Operator Instructions] And the next one is coming from Amber Lee of Yuanta.
Just wanted to follow up on the CapEx question. Last quarter, I think, we didn't really have a lot of color on the CapEx outlook. How about -- do you have more visibility on the CapEx for next year or going forward, especially regarding the investment of 5G infrastructure?
Yes. So if you're asking -- we will disclose more of that information in our next call, I think, yes, if you request because, of course -- because 5G is going to be a major CapEx driver. So we certainly will be happy to share that. And this year, it's more like a business as usual, just plus some TPKC construction, right? So then next year, yes, sure. Certainly.
[Operator Instructions] There are currently no questions. And I'll pass the call back to Mr. Gary Lai. Gary, please proceed.
So thank you, everybody, again, to attend our quarterly conference call. See you next quarter. Thank you very much. Bye-bye.
Yes, we'll see you next year. Okay.
Thank you. And 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.