Far EasTone Telecommunications Co Ltd

TWSE:4904

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, everyone, to Far EasTone's 2020 Third 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. And Gary, please begin.

[Gary Lai, executive]

Good afternoon, and thank you, everyone, to attend Far EasTone's 2020 Third Quarter Results Conference Call. Our President Chee; and CFO, Sharon, both join the call with us today as usual.

Before our President Chee start her presentation, please pay attention to our first page safe harbor statement and the disclaimer.

And let me pass to Chee. Thank you.

[Chee Ching, executive]

Thank you, Gary. Good afternoon, everyone. Thank you for coming and to listen to our third quarter report. So in general, in terms of the mobile market in Taiwan, as we have seen over several quarters now, the market has been stable in terms of the total number of subscribers. And then on the other hand, for the mobile number portability customers, I mean, those customers that are available to shop around, the number has been decreasing. And that means the market is relatively cold, which is good for competition. That means it's not heated market.

But despite all that, Far EasTone continues to have our postpaid subscribers, we have been on an increasing mode for 9 quarters in a row now. So we are pleased with that. And then also the churn rate, we kept hitting the record low. And on the other hand, we remain the highest in the ARPU among our industry, okay, for TWD 698 for postpaid.

And then for our operational performance, we are glad to report, even though we are seeing the impact of COVID-19, we still reported a 17% year-over-year growth for the new economy. And in particular, some of the growth areas has recorded good growth for us. And for example, in the ICT area, we are seeing 31% of the year-over-year growth. And then IoT, which benefit from the big street light project that we have with a local government, so we are seeing 249% year-over-year growth. And then cloud service and also the mobile commerce and media sales also see double-digit growth.

Okay. And then in terms of the 5G, and everybody is very interested to learn more, since the launch, we have -- well, first of all, right now, we have built 2,700 base stations for 5G in the 3.5G spectrum. And we are following big data and AI recommended deployment strategy, so that we are not looking at a fast deployment or high number of base stations because we want to make sure we spend our capital very wisely. And then also, we are optimizing the network, end-to-end network, that is 4G plus 5G, as we build more 5G into the network, so that we don't impact the customers' experience. And then better yet, with 5G, the new customers that are on 5G, they should have a much better experience. So that has been our strategy. But then we are on target to reach our close to another 1,000 base stations by the end of the year.

Okay. In terms of our 5G adoption, it's going really strong. We are very pleased to see that in 97% of the 5G customers that are signed up, they signed up a rate plan that is greater than -- or that is TWD 999 program or above. And actually, half of it is for the TWD 1,399 and above.

And average monthly fee, therefore, for the new customers that we got and also for those who are up for renewed accounts, we see a continuous uplift effect on our monthly fees from these conversions.

And then as I mentioned earlier, we are really stressing on in terms of our deployment that we can optimize our network as we go. I think the strategy does work because it is reflected in our speed test results. As it was reported by Commercial Times just recently, the global 5G speed by OpenSignal for the -- based on October data, Taiwan is actually ranked #4 in [indiscernible] and then the average speed for the download is 211. And on the other hand, based on OpenSignal's data sources that we have for October, FET's average download speed actually reached 343. So I think we are doing very, very well there.

All right. And next is on the Far EasTone iPhone. iPhone launched on October 23. And for the first 10 days, the data we were looking at more than 60% of the iPhone seekers, they sign up for a rate plan TWD 1,399 and above. And altogether, for those that signed up for TWD 999 and above is about 98%. In other words, those that came in for the new iPhones, almost every one of them that signed up for TWD 999 and above rate plans. And it is -- this is versus 85% a year ago. And the most 2 popular models are the iPhone 12 Pro, the pacific blue, and then iPhone 12 in blue.

And with that, I'm going to pass this to Sharon to report to you the 3Q financial performance.

[Sharon Lin, executive]

Thank you, President Chee. Good afternoon, everyone. Let me go through the financial performance for the Q3.

For Q3, the total revenue is TWD 18.6 billion, slightly lower than Q2 due to the weakened sales and roaming service revenue as a result of the impact of the COVID-19 pandemic. Net income of Q3 is TWD 2.06 billion, which is impacted by the 5G spectrum amortization.

Moving to the next page. It shows our financial results complying with our guidance. The total revenue for Q3 was TWD 18.6 billion. The achievement rate is 86%. Major [indiscernible] less handset sales with [indiscernible] spending. Operating expense for Q3 is TWD 3.7 billion, which is 11% lower than our guidance. Q3 EBITDA is TWD 6.8 billion, slightly lower than our guidance due to lower revenue [indiscernible] sales and roaming services.

With lower funding costs and appreciation, Q3 net income is TWD 2.06 billion, which is 3.5% ahead our guidance. For the last 3 quarters, net income is TWD 6.5 billion. The achievement rate is 105%. Earnings per share for the 3 quarters is TWD 1.99.

[Chee Ching, executive]

And I think it warrants some further clarification for the relatively low achieve rate for third quarter because September usually is where we target to have iPhone launch. And iPhone users is a big part of our total user base. So with that, that caused some of this underachievement in the revenue.

[Sharon Lin, executive]

Please turn to the next page for Q3 key financial indicators. At the end of the Q3, the ending cash is TWD 4.1 billion. The total borrowing is about TWD 73 billion. Net debt is TWD 67.5 billion. Net debt to the EBITDA of 2.5 -- 2.43. Free cash flow for the year to September is TWD 13.9 billion. Cash CapEx is TWD 5.6 billion. Due to financing works shifted for full year, we expect TWD 10 billion for the full year cash CapEx will be maintained.

Let me turn the presentation to the President Chee for the business update.

[Chee Ching, executive]

Okay. Thank you, Sharon. Yes, as we had our Board meeting today, which approves our further cooperation with APT. And then I'm sure many of you are very interested in more of those details, so allow me to elaborate on that.

So the 2 conditions we have put out, that is, of course, everything is subject to the government agency -- the appropriate government agency approval before any of this can be realized. But then the plan of the cooperation is to have on 700 megahertz spectrum sharing. Both of us, APT, has right now like a 15 megahertz and for Far EasTone, we have 10. So we are looking to share that spectrum as well. That is in addition to the 3.5G for the 5G sharing. And then -- but then, of course, this is not currently the policy of the government or NCC. So that would wait for further change on the regulation part before we will take any action, but that is the plan for cooperation one that is allowed.

And then also, we could swap our 2.6G TDD spectrum with APT's 5 megahertz of 700 megahertz spectrum. And so the cost sharing of this 700 megahertz were based on the same kind of split rule that we reported in our last meeting for you guys when we announced our cooperation arrangement. So that is 2/9 and 7/9 split for APT and FET, respectively. And if the authority approves this 700 megahertz spectrum sharing earlier than the spectrum swap execution date, the spectrum swap agreement will be automatically terminated. So there is some time sequence there. And then the transaction is subject to approvals of relevant authorities' examination.

And here, we put out together our spectrum kind of a layout so that gives you some better ideas. As you can see, at the 700 area, FET is right between APT's 2 spectrum segments in the 700. So we are right in the middle of it. And then if we can share the spectrum, that will give both of us the 25 megahertz wide of the spectrum. And that sounds -- that is very useful and very efficient to improve our network performance, not only for the 4G and also the 5G when we reform it for indoor penetration. So this will be a very powerful spectrum bandwidth for adding to our already premium spectrum for 5G.

And then if that spectrum sharing is not available yet, and then we have 2,600 that we are currently not really utilizing, and we could do a trade for 5 megahertz of APT spectrum in 700. So that is either/or condition can help fulfill some more efficiency in sharing the spectrum.

All right. I'm sure you will have some questions later, then we'll wait then. And then the next, I'd like to just mention, we have several new consumer services that were introduced in the third quarter. And then -- so on the left-hand side, that's really a transformation of our telecom business model. As you know, in the telecom, there are probably 2 major ways when we talk about the competition. And one we call them the front door, one is the back door. So if you want to retain your customers once they get into your accounts, right, so you want to keep the door -- back door closed, and so they just won't leave, investor retention.

And on the other hand, you want to get out or you want more new customers to come in, and that's the GA usually what we are referring to. And then with the market has been pretty stable or pretty cold. So what we are changing here is using the power of the platform and then also the alliance. So instead of waiting for some interested customers that are non-FET customers that may come in or come by or stop by our stores once in a blue month, right, and then we aggressively go out there to meet our potential customers out there, whatever favorite shop they may be visiting or whatever favorite service they may have, and then we will provide -- we will offer our bundle service, and we provide some discounts. So they can actually -- just by applying for a new account or a new number with Far EasTone, sign up for one of our rate plan, and they get some subsidy for whatever other service they were going to buy or pay for otherwise.

So we have -- as we launched this just last week, and then we have already 50 vendors or partners that started with. So this was very popular. And actually, right after we launched this, and we have a new conference, we got a lot more interest from parties and inquiries. So we are very happy that many people see the potential with the platform-driven and alliance-driven a new way of doing the business. So we don't wait in our stores, but then we go out and meet our potential customers wherever they may be, okay? And that is the new business model. And it's online merged with off-line kind of platform.

And then the final thing, of course, there has to be some system work that need to be done, and that's what we have done in the past few months to get this ready and then launched in time. So we are pleased to announce and share that with you.

And on the right-hand side, that is the cloud gaming service, which we just launched the other day. This is one of the last highlights of the new 5G services. When we first started at a launch, we had 5G launch, we mentioned there are 6 highlights of new 5G services, and that includes the VR, the multiview, the 4K and 8K resolution and then also the home theater, and this gaming is the sixth and the last but not least. And we cooperated with Ubitus, which is -- which was a Thailand company, but then really got a lot of fame and success internationally. And then so -- and they are very innovative. So we are very happy with the cooperation opportunity with them. And we are looking to kind of get this cloud gaming business into -- or to become a new blue ocean. And this is not only adding to one of our consumer digital services, but then we also see its potential to grow even more in the future.

Okay. And on the enterprise side, one thing, in particular, I think we have done very well is we use the 5G to provide this telemedicine service. And that is not some just POC. It's actually already in works, right? It's already working. And we applied with Taitung government, local government and this is helping the far reach -- hard-to-reach suburb areas residents where the medical resources was just really scarce, right? So we are using the Internet or using our network to replace the road, otherwise they will have to travel in order to have access to sufficient or adequate medical resources.

And with this telemedicine, so we have set up a platform on the tablet so the doctors at the far end and then local health center and -- where the patient is or may be, and they can have some measures done locally and then those some images can be transmitted in real-time because of 5G, very low latency and big bandwidth. So all that can be transmitted in real-time. And the far-end doctors then can actually see it very closely just as if they were right there together.

And this helps tremendously because this kind of model has been trialed before with 4G. But then just because of the bandwidth limitation and also the latency limitation, so it just wasn't very good, not good enough for real practice. But then we are glad that we were the first to provide this service with our partners hospitals. And also, this was funded by the government as the initial program. And then we definitely see the success there and then also more of the local governments are reaching out to us. And so there are a couple more contracts in the work.

And then -- but then most importantly, aside from this is another new 5G application that we also see the benefit that we really can see that it's bringing to the community, especially to those underprivileged people. So we are glad that we are one of the first in Taiwan that is able to do that.

And there are some additional third quarter highlights that we like to share with you all. And we signed a MoU with Kaohsiung City government on the 5G smart city. The new mayor, Chen, has every ambition to make the city smarter. And then with the 5G smart city, so he has laid out his vision for it. And we are very happy and honored that he asked Far EasTone to be his partner to participate in this big project.

And then we also won several awards and then, for example, the 2020 Customer Service Excellence Award from Taiwan Contact Center Development Association; and then also the 2020 Enterprise Version Gold Award from Talent Quality-management System. And also, we have some CSR Climate Change Management Excellence award as well. So there are quite a few of some, and then they are not our KPI, but then it's just something I think we just continue to focus on our business, but then we get recognized, and we appreciate that, and we like to share those with you.

And then lastly, in terms of the fourth quarter focus for FET. Of course, we will continue with the steady 5G deployment, and we are still targeting 4,000 BTS before the end of the year. And then on the consumer side, we will accelerate the 5G adoption. Even though we are pleased with what we see now, of course, we definitely see we're ahead of our target. So by the end of the year, we have set a target for 300,000 subscribers or 5G subscribers. And then we are seeing we are ahead of the -- we should be able to achieve that before the end of the year, okay?

And then we will also promote those new services that we have provided since the launch and also just recently the gaming. And then we are going to have a soft launch on another new model. And as I mentioned earlier, for telecom, we really want to refocus our telecom business in terms of the GA, and then that is we -- you-shop-we-pay model. And then for then -- for the retention, we want to build a member economy with this mobile circle.

So this is to help us retain more customers and then even less churn. And then also, at the same time, provide more values for our customers, and then also looking to bigger contributions from our loyal customers as well. More details will be available in the first quarter or January. We plan to have a news release on that. But then in the fourth quarter, we are doing a soft launch.

And then on the enterprise business side, we want to continue to increase our participation in also these government projects and then increase our market share and presence in smart city and then smart manufacturing and smart telemedicine. And then we want to convert more of the private network POCs, the private network that is using 5G, by the way, to business.

And then we want to continue to drive down the operation costs. As you see, this year, we do have a revenue impact by the COVID-19. So it is very important that we continue to get more efficient in terms of our OpEx and also our CapEx. And that's why I was stressing on a very reliable, steady deployment strategy utilizing our AI machine learning to do the most smart deployment and not rushing or not trying to just add more number of patients. But then -- so we'll continue to drive down our costs.

And then we'll continue to improve our customer satisfaction and employee engagement as that's our customer-centric to our business. And this is what we are doing all this business for. So we'll continue to do better. Even though we have got quite a bit of work for it, but then we will continue to do better.

With that, I think we can entertain some questions. Gary?

[Gary Lai, executive]

Start Q&A session, please.

[Operator]

[Operator Instructions] The first question is coming from Peter Milliken, Deutsche Bank.

[Peter Milliken, analyst]

Look, it's good to see some better data coming out, some improving pricing seemingly on the iPhone. I'm just wondering though about whether the iPhone, the higher-spend iPhone plans are popular because you are subsidizing more? Would you say you're still as profitable on the new contract or more profitable on these new contracts than with the absent of them?

[Chee Ching, executive]

Yes. We are still profitable. And actually, I wouldn't say we have added more subsidy. It certainly is not more than what we have done in the past for the 4G. And I think we are very reasonable with the subsidy.

[Peter Milliken, analyst]

Okay. That's great. And then just in terms of like promotions, are you seeing more signs on the ground of less of the low-end promotions than previously? Or are they just as prevalent as they were, but we're just seeing people wanting to go on to iPhone 5G plans instead?

[Chee Ching, executive]

Okay. Peter, let me make sure I heard you clearly and correctly. Were you asking if the lower rate plan that we were not promoting? Was that your question about? Would you repeat it?

[Peter Milliken, analyst]

Yes, yes, yes. It's a mix of that. Yes.

[Chee Ching, executive]

Yes. Okay. Right. So with 5G, right, and then if you think about it, what 5G for most of the consumers, what they will feel the big difference right away is the speed, right? And then also the data, right? So the higher rate plan will give them like, for example, our TWD 999 per month data plan actually will give them 60 G of data usage per month. So for anyone that is going to utilize 5G for the speed and for the data that they may -- the data usage they may anticipate, then having a higher data plan is certainly what they would want.

So we don't really need to promote or push. It's just kind of like it makes sense, right? And then for the lower rates, that is -- I think I have to look at your target audience. So we don't really need to push hard one way or the other. It's just pretty natural because for those who would like to try 5G, they will want to have more data bandwidth. And then so the high rate plan actually fits them better. And our unlimited data plan is TWD 1,399. That is very good deal. I hope I answered your question?

[Operator]

And the next question is coming from Sara Wang of Morgan Stanley.

[Sara Wang, analyst]

I have 3 questions. So the first one is still on 5G. So we have mentioned a lot of new 5G customers signed up for over TWD 999 plans. So may I ask if you -- if we see some internal upgrade, what are their 4G plans before they upgrade? Say, how much is the ARPU lift after they migrate to 5G? And also since so far, still no killer application for 5G, so are you concerned that initially the 5G adoption momentum might be strong because high-end users are upgrading, but the upgrading cycle might be shorter or weaker than 4G? So this is my first question.

And then second question is on new economy business. So it seems on the slide you mentioned the growth was impacted by COVID-19. So for the first 3 quarters in 2020, is the growth in line with our expectations? And also, just a housekeeping question, how much revenue as a percentage of total revenue comes from this new economy business? This is my second question.

And then on my third question, so how is our CapEx guidance for this year or next year's outlook? So it seems Taiwan Mobile has raised their CapEx guidance twice this year. Do we see any pressure from this competition to raise our CapEx?

[Chee Ching, executive]

Okay. All right. Sara, I'll answer your last question first, okay? So in terms of the CapEx, right, for this year, no, we are not under any pressure. So as mentioned, we will continue with our steady deployment plan. We don't have any plans to add more capital for it. I think we are -- we used a very good strategy in our deployment. That's why if you see the -- in terms of number of base stations, we may not have the highest number deployed by now, but then you see we have -- we do have very, very good performance. [ Technical Difficulty] There is some more on the line. Sara, I don't know if you hear it.

[Sara Wang, analyst]

Yes. That's because of me. I will just mute myself.

[Chee Ching, executive]

Okay. Thank you. All right. That was for this year. And then as far as next year is concerned, we are not at a time to really release any information yet. That is still being worked, okay?

And then your number 2 question is regarding new economy. Yes, so for example, we were looking at up to the third quarter, it's a 17% growth. But then our own VOD target was 23%. So that is lower than our own VOD. That's why we -- before anybody knew about the pandemic, right, we were very optimistic and also aggressive in our target. So that was that.

And then the -- up to the third quarter, the total new economy revenue accounts for about 15% of our total revenue, okay?

And then your first question is about the uplift like for the 4G and all that. It's about 10% to 15% uplift, okay? There's a second part of your first question, but I now forgot. If you remember, you can repeat it for me, please.

[Sara Wang, analyst]

Yes. The second part of the question is just that it seems still no killer application for 5G. So are you concerned that while the initial 5G momentum might be strong because high-end users might want to upgrade to 5G, but do you think this momentum will be as the same as 4G or it might be weaker than 4G?

[Chee Ching, executive]

Well, I think because all these services just for the 5G is new, so these services will have better adoption as the time goes. And then there should be even newer services or applications become available. So I think the picture will get better. And then -- I think in a different -- on a different conference call, I have made some comparisons. When we deployed 4G in Taiwan, it was kind of behind a lot of the countries. So -- and at that time. So we had a really fast penetration or adoption in 4G. And then that got us into price competition very soon.

But then I think 5G is so new and it's new for the world. And then we compare it sort of speaking, we are lucky that we are not really impacted as much by the pandemic like the rest of the world. So the people are still warming up to 5G. And so I do see this will continue for a period of time. And then we'd like to see that. So this is like a slow warming up. But then even with what we have expected, like I said, we're actually seeing better outcome than we expected. So we like what we see. And then we like it a little bit slower, so we don't need to get into like a very fierce competition or price competition very soon.

And then I think also because the price that we have put out are really reasonable for what the consumer would get. So that's really a very good value for the consumers.

[Operator]

[Operator Instructions] Next, we have Ryan Jin of UBS.

[Ryan Jin, analyst]

This is Ryan Jin from UBS. I have a simple question on the 700 megahertz of spectrum sharing with APT. Can you tell me if it is for 5G services? And if so, can you tell us what's the expected CapEx savings from using 700 megahertz for 5G base stations?

[Chee Ching, executive]

Okay. So first of all, for the 700, when we do the 700 megahertz sharing, it will be used for both 5G and 4G. And then in terms of the capital savings because to do that, right, so there will be some upgrade needed on the current 4G 700 -- 4G base stations that we use for 700 megahertz. So all that capital that we would need, will then we will split the cost with APT. I don't have an exact number because that really depends on how many of the base stations we're going to upgrade the first year, the second year and all that. So I don't have an exact number for you.

[Ryan Jin, analyst]

Got it. So for the 4,000 base stations and for this year and then another thousands of base stations that's going to be deployed next year, it is safe to assume that those will be on 3.5 gigahertz?

[Chee Ching, executive]

Right. So let me correct you, though. It's 4,000 -- when I said 1,000, it's like there is 1,000 more that we will need to deploy by the end of the year. So we'll reach about 4,000 for the 3.5G spectrum, you're right. And then for the next year, right now, we are looking at about the same level of -- in terms of number of base stations. But then it really depends on how well the adoption goes, right? So we may accelerate, but then we'll wait a little more.

[Operator]

[Operator Instructions] The next question is coming from Sara Wang of Morgan Stanley.

[Sara Wang, analyst]

I have just 1 follow-up question on ICT as it's outgrowing the traditional telecom business. So just want to get more color on that. So for example, what's our view on our ICT business, say, with the COVID still going on? Do we see the growth to accelerate in next year or remain flat next year? So how should we view the kind of business as it's more like B2B business? It's hard to estimate whether we can deliver over target or ambitions.

[Chee Ching, executive]

Okay. So for the ICT, because of the 5G availability now, and then we do see more opportunities and as also more solutions that will become available for ICT, so I definitely see the growth opportunities gets better and bigger because of the 5G. Now how quickly and how much that we can gain in the first few quarters and all that, that need to be further forecast. But then I do see the growth just because of 5G.

Because, for example, a lot of those IoT applications. And even the telemedicine, as an example, I mentioned, it wasn't really quite there yet when it was tried with 4G. But then now with 5G, that was no longer an issue. And then actually, with our success with the telemedicine, we have doctors in the hospitals and nurses, when we can do 7G -- to -- that is a -- or that is tele operating. So people are wanting more and seeing the capability that 5G brings. And then also other applications in smart manufacturing, the factory like for Industry 4.0. So this automation, this additional cloud business, right? And then using the cloud computing into the full picture with 5G, you can do that. And then with the mobility introduced into your factory, then the factory become a lot more productive and become more flexibility. So I do see because of the 5G, that introduced much more applications and opportunities for growth. And that is growth for us, too.

[Sara Wang, analyst]

Got it. And then how is the margin for this business look like? So I think maybe several quarters ago, we have mentioned that EBITDA margin is like mid-teens, if I'm correct? So for example, for this year, are we seeing the margin expanding or remaining stable?

[Chee Ching, executive]

I would say it's about the same. And then with 5G, of course, there is additional layer of -- as part of the solution, right? So the layer above 5G private network, for example, if the client needs that's additional part of the solution kind of revenue that we didn't necessarily have before, but then this private network solutioning will add to it, but then not all IoT applications require private network.

[Operator]

[Operator Instructions] And there are currently no questions. I'll pass the call back to Mr. Gary Lai. Gary, please proceed.

[Gary Lai, executive]

Well, thank you, everyone, to attend our conference call. And see you next quarter. Thank you very much. Bye-bye.

[Chee Ching, executive]

Thank you. And if you do have any further questions, you can always contact us. Thank you.

[Gary Lai, executive]

Thank you.

[Sharon Lin, executive]

Thank you.

[Operator]

Thank you. And ladies and gentlemen, we thank you for your participation in Far EasTone 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.