Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
Earnings Call Analysis
Q3-2024 Analysis
Far EasTone Telecommunications Co Ltd
Far EasTone's (FET) third quarter earnings report highlights a revenue achievement rate of 96%, indicating a slight shortfall from their guidance. This downturn primarily stems from a reduced target for handset-only sales due to unexpected declines in iPhone prices. The corporate strategy wisely prioritized maintaining reasonable margins over hastily pursuing lower-price sales, allowing them to post an EBITDA growth of 12.7% year-over-year, equating to TWD 9.1 billion—an all-time record for the company.
FET's merger with APT has proceeded even better than anticipated, achieving TWD 3 billion in EBITDA synergies nine months after the merger—significantly ahead of their goal to reach this milestone within a year. The growth is evident in their year-to-date EBITDA, which displayed a significant increase to TWD 26.93 billion from TWD 23.93 billion the previous year. This upswing is also reflected in their earnings per share (EPS), reaching TWD 2.55, which is 14% higher than the guidance provided earlier.
The net income reached TWD 3.16 billion, translating to an EPS of TWD 0.88, which surpasses targets by over 9% and marks an 8-year high for the quarter. Notably, the year-over-year growth rate for net income stands at 11.7%, indicating a robust performance trend that the company has maintained for two consecutive quarters. The improved margins reinforce FET's healthy financial positioning.
FET continues to maintain a strong balance sheet, evidenced by a reduction in net debt from TWD 55.8 billion to TWD 49 billion, with a corresponding decrease in the debt-to-EBITDA ratio from 1.74x to 1.54x. This bolstered financial health reassures investors about the company's ability to manage its obligations effectively.
FET registered an 18% growth in mobile service revenue during the first three quarters, benefiting from consistent postpaid 5G service upgrades. As the market leader in 5G penetration, FET currently holds a 42% penetration rate in its postpaid mobile segment. Their average revenue per user (ARPU) remains superior at TWD 703, while the churn rate stands steady at an impressive 0.9%. This indicates strong customer retention and satisfaction.
FET has diversified its business segments to include smart ICT services, which have seen an 11% increase in revenue and a remarkable 29% boost in margins. Notable subsidiaries like Nextlink have showcased impressive growth of 23% in revenue and 33% in EBITDA year-over-year. FET is also capitalizing on the rising demand for cloud and digital services, especially following the government's encouragement for digital health initiatives.
In consumer digital services, FET's Friday Video platform continues to thrive as the top local OTT service, enhanced by innovative AI features that drive user engagement. Viewing time per user is up by 23%. With the new iPhone launch and bundled service offerings, FET maintains a competitive edge in the market, evidenced by nearly 90% of service subscribers opting for higher-tier plans.
FET is poised for future growth through various strategic initiatives. These include expanding their smart health technologies, optimizing cloud services, and improving robustness against fraudulent activity using AI-driven analytics. The company's commitment to sustainability projects aligns with broader industry trends towards smart city solutions and sustainable infrastructure projects, further solidifying its growth trajectory.
Overall, Far EasTone's third quarter performance demonstrates resilience, effective management of merger synergies, and solid growth across both traditional and innovative service areas. Its strong financial health and forward-thinking approach suggest a promising outlook for both existing and potential investors.
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Welcome, everyone, to Far EasTone's 2024 Third Quarter Earnings Conference Call. [Operator Instructions] Please visit www.fareastone.com.tw under the Investor Relations section. And now I would like to introduce Mr. Gary Lai, the IR Officer. Gary, please begin.
Good afternoon, everyone. Thank you to attend Far EasTone's Third Quarter 2024 Results Conference Call. Both our President, Chee; and CFO, Sharon joined the call with us today. Finally, please pay attention to our safe harbor statement. Let me pass to President Chee for presentation. Thank you.
Thank you, Gary. Good afternoon, everyone. Okay. So we -- here, I'll report our third quarter performance. As you could tell that we actually gray out this revenue achievement rate, that is 96%. In other words, our third quarter revenue slightly fell short of our guidance. This is mainly because of our handset only sales, we have adjusted our target for it. The original target was higher, but then we -- as we have observed during the third quarter, the price of the iPhone has dropped faster than we expected. And then because of some market activities, we decided not to follow and not to dump our iPhones at that time, but then because we could just do more fund of sales with iPhones. So we adjusted down our iPhone sales -- handset-only sales.
So this is -- as a result, so our revenue fell a little bit behind. But then this is to maintain our reasonable margins. So as you can tell, our EBITDA is 12.7% year-over-year and in terms of our board target, we actually exceeded our board target by 2%. And similarly, for the net income, that is also performing very well.
All right. And then another thing that I'd like to bring to your attention is if you look at our year-to-date, the first 3 quarters' EBITDA, we have come to TWD 26.93 billion and compared to the same period last year, it was TWD 23.93. And as I recall, when we first announced that we were going to merge with APT, there were analysts the questions and ask us what do we expect? And at that time, what we gave out was we expect TWD 3 billion EBITDA that will benefit from the merger in a year after the merger.
So we actually achieved that in 3 quarters. So ahead of schedule, of course, our organic growth without the APT part certainly would need to grow as well. So that certainly helped. But this is just to tell you that we have fulfilled our promise. So TWD 3 billion EBITDA merger synergy within the year, and then that was delivered in 9 months.
Okay. And then in terms of the EPS, as you're all aware, right, because of the merger, so our -- the number of shares that's kind of inflated like 10% or so. But then if you adjust it in any case, so we are looking at TWD 2.55 right now. And then compared to last year, TWD 2.56 with a different denominator base. It is close. But then if we look at our guidance, we are actually 14% better than our guidance. .
And then just for my own kind of apple-to-apple kind of comparison, if I use the same base, this would be a TWD 2.82 kind of EPS, right, compared to the same base last year.
So we have done better than we originally expected. Because of the merger synergy, and we did execute really well to pull it up, okay? On the next page, just in terms of trending, we can take a look. So for the total revenue and the third quarter revenue, it is 6.5% year-over-year compared to the same quarter last year.
And then this is -- so the merger synergy, of course, right? And then -- but then on the other hand, our 5G plan upgrade that is just a continuous, very steady upgrades. And then with additional upgrades from the former APT customers. And then this is the 16th consecutive quarters that we have seen a positive Y-o-Y growth for our mobile service, okay?
And for the EBITDA, it comes to TWD 9.1 billion for the third quarter. This is actually a new record high in FET history. Okay? So 12% of -- 12.7% is Y-o-Y EBITDA growth. And this is definitely the merger synergies. As I mentioned, we executed very well. So there are -- the benefit comes in 2 major categories. One is the OpEx savings, right? So we have converged or migrated the RAN network, so a lot of that migration work has been completed and then it was ahead of target. So we had big savings there.
And then on the other hand, right, from the customers, the customers when we migrate their customers to Far EasTone rate plans. And then so it's not just the plan migration, but we also have seen a good uplift. And then so combined together, that gives us a very good EBITDA growth.
Okay. And next is the net income, okay? So the third quarter net income is TWD 3.16 billion, and then the EPS comes to TWD 0.88. This is achieving the target by more than 9%. And this is also an 8-year high for the same period, okay?
And by the way, when I said the third quarter EBITDA record high, obviously not just for that quarter, it is just for all time. Period. Okay. All right. And then the Y-o-Y growth rate for our net income is in double digit, 11.7%. This is 2 quarters in a row now for double digits, okay?
All right, and some financial metrics for your information. And as you can see, our net debt and our net debt to EBITDA, both are sound and healthy, okay. We come to from TWD 55.8 billion to TWD 49 billion in terms of the net debt. And also the ratio, right, so from 1.74x to 1.54x.
Now in terms of the cash CapEx, we were a little bit -- we expect to be a little bit slightly lower than our guidance of TWD 8.1 billion, mainly because of the timing of the payment when they will be realized. The final acceptance and all that, okay. But then basically, it is close to our TWD 8.1 billion guidance, okay? That is for the cash CapEx.
All right. And a few more points on the telecom core business area. So our mobile service revenue continues to grow. And then for the same period, the first 3 quarters, we are looking at a 18% growth. And our postpaid 5G penetration continues to lead our peers as the #1, and we now have 42% penetration for the postpaid customers, okay?
And then for the mobile postpaid ARPU, we still maintain the lead even after post merger. So we are at TWD 703 versus our rivals or my peers. And the postpaid churn rate is stayed at about 0.9%, although we continue to work it down. And then so far, this is on a good trend. Okay.
And then for the new economy part, for the last 2 years, we've been emphasizing since now, especially on the enterprise side, we have established our reputation in our smart ICT capabilities and then the actual deliveries that we have made in the past. So we've been optimizing in terms of the profitability and in terms of our selection of the project and also derisking in our cloud services.
And then to make sure our portfolio for the managed cloud service customers is healthy and sound. So what you're looking at is we actually are able to increase our solutions efficiency and the ICT portfolio. So we have much better margins. And then this rose to 18% year-over-year in the first 3 quarters.
So compared to only 7% Y-o-Y increase from 22% to 23%, okay? And some highlights for the contributors in the consumer digital part. So the consumer new business that accounts for the total pie of the new economy, about 44%. The enterprise part is bigger than half. So it's 56%.
And then some of the digital services in the consumer side already are very steady. And then we see double digits in the revenue growth and also double digits in the margin growth. And then so that is like the handset insurance or direct carrier building and things like that.
Now for the fraud prevention service, which is kind of new for us and this is to block attempts to dangerous website. So these exits will be checked by our network. So for customers that subscribe to the servers, to this service. If they click some link, that was actually would lead them to some dangers website, and then that could be harmed -- their device could be harmed because of that.
So for those kind of attempts, if the targeted or the destination website or link is in our database for this kind of like a blacklist, and this attempt will be blocked. So then we are protecting our users from reaching those dangers or -- we actually -- this includes some inappropriate web fab is not for the use, those kind of protection from the parent's perspective.
So this kind of service is getting a lot of acceptance. So we are looking at a very good growth compared to the first year launch. So we are looking at -- right now, we have more than 300,000 users already subscribed to this service. And the conversion rate, when we give them like a 3-month trial period and the conversion rate is like more than 60%.
So that compared to other services in the past before, this is a very good ratio. So this is something we'll continue to promote. This is also good for the society anyway, okay? For the revenue from the enterprise side, so our smart ICT business, and that includes a cloud is still giving us some very good growth and also very good margin.
As you can see, the double-digit 11% for the revenue and 29% for the margin. And then we have 2 subsidiaries that especially worth mentioning here. First one is Nextlink, and they were already listed and then hopefully, will be soon traded on the open OTC by the end of the year.
And then for Nextlink, we are looking at EBITDA that is 28% year-over-year. For the past few years, Nextlink has grown very fast. And as I said, we have made some adjustment to the customer portfolio. And then so we are looking at -- also they are improving their margin as well. And at the same time, derisk from some market churns and all that.
And the other subsidiary is offering the security service. And as you know, the security, the information security is a hot topic, right, for every company and even for the government. So the demand is always high. In the past, we had challenges in getting -- retaining the talent and growing the staff. And these 2 years, we have offered some stock program, stock option program. So that helped stabilize our staff, our experts and then so this is -- it is growing very well.
And this year, we're already looking at 23% revenue and also the EBITDA is 33% year-over-year growth. And so hopefully, this will be our next -- we call it the gold chicken. That's the second one.
Okay. Next slide. Just some brief into about Nextlink, and in the past, I don't think we particularly introduced about them. So it is a cloud service -- managed cloud service provider. It started with the AWS and then also, it has the GCP. It has a different legal entity to serve Google as well.
So in terms of the market position, it is the #1 for the AWS as a managed service provider and then they also -- it also gets AWS partner of the year. For the GCP area, it is actually growing very well when I look at the revenue because we separate AWS and GCP. And GCP, we are seeing a very strong growth in this area.
So overall, Nextlink has been doing very well. We acquired them in 2019. And then for the last 5 years. So I think we have nurtured this company really well and the CEO of the company, which was also the founder is a very good excellent entrepreneur in my opinion. So we are looking forward to their starting trading on OTC, Okay?
All right. We have some highlights to report here for our ICT business. So for -- we see a strong ICT demand that continues. And then especially in terms of total smart ICT contract value, which is a forward-looking kind of indicator, it continues to grow with the double digit year-over-year.
Now we have acquired this Microsoft LSP license a year ago. So this is the second year we are offering as the LSP for Microsoft. This is to build a very good cushion for our smart ICT business. So because these are subscription-based business. So once we get these contracts and then it's kind of like building up our revenue streams, right, year-over-year.
And this is -- so I look at this as a very strong area for our growth. And then so if you look at the first 9 months or the first 3 quarters, the contract value grew more than 100%. And then also it already exceeded the full year contract value for last year. And also in terms of the number of enterprise account clients, it has grown 44% from year-over-year.
And then what comes with it is because of the Gen AI. So we see a lot of AI-enabled digital transformation opportunities. So while we deliver these solutions and then use -- we endure Microsoft products and also we provide professional service to help the clients with cloud migration or implementation of a common data platform and also help them adopt the AI or Gen AI kind of enabled application. So this is definitely a growing business and it has got a lot of attention and interest from the industry.
Okay. In terms of the green and smart city area, we continue on our kind of focus on a couple of product lines that is energy management related. So we have like -- and then also IoT, of course. So we have just secured a big smart metering IoT project and then several public EV charging projects in the third quarter, okay?
And also because of the sustainability, it is becoming a very important area for our government and also big enterprise. So we have seen a lot of demand in terms of the telecom-based SI project. So we won several big fiber optics construction projects and then those are telecom based. And then also, we have a smart building project that we won in the third quarter.
And then for the smart building, we don't build the building, but then we come in with the energy management system and then also the monitoring system and all that. So it's on the software systems side. Okay. And last but not least, it's the Smart Health. For the first 3 quarters, where our revenue grew 28%. It is a steady growth because this is health related.
So it kind of pace with how soon the regulation changes or relax on some of the restrictions, which they have in July. So this new telemedicine type of regulation 2.0. It was started effective in July, and that gives us more scenarios where 5G telemedicine could be used or applied. And they are also -- they can be reimbursed by our government, Medicare, okay.
So in terms of the coverage of the population, where we used to only do the rural areas in those parts to reach kind of areas, that was about 330,000 kind of people, but then now we are looking at 2.4 million folks that will be covered in the new scope, the expanded scope that was effective since July.
So we do see a lot of opportunities there. And then so -- and then we are pushing for more hospitals and clinics to sign up for the service. And so far, we have 77 of them. This is -- at the same time, we are expanding this kind of service to like ambulance, this technology for ambulance. And we are also donating to -- by the end of this year, it will be 12 counties that will receive this first set of this system.
And then in return or as a result, when they tried it out, they do see the value and the life-saving value, by the way. So we are getting the orders from some of the counties already to order more because every country has so many ambulance that they could all benefit from this service, okay?
And we are also working on cloud hit, and this is a policy, our welfare and health ministry are pushing for. They really are pushing for like a digital transformation. We have lots of clinics. They are still using kind of more traditional type of a hit and then some are even still manual.
So they are encouraging them to go cloud and then with the telemedicine kind of capabilities and all that. So we are also applying for this program because the government has like 2 ways. One is they encourage the system providers that already are in this business, but they are the traditional kind of hit.
They also encourage us to come in because we have all the new technologies already. And how do we combine what's already there, like the basic hit functions on top of it, add to our new advanced technologies. So this is what the government is pushing for and that is what we are working on as well. So we just passed their midterm and their final example.
So we get some subsidy -- some -- yes, subsidy for that. But more importantly is next year, the government is going to ask the clinics all kind of conform to this new kind of system. They will give them a period of time apply for it. And then if they do it early, they have some compensation for them. But if they don't do it within a certain period, like a year or 2 and then their system will not pass those information security kind of criteria.
So we have this kind of ride on the wave where the government is pushing. And so we see this natural expansion from what we are doing in the smart health area. And also, we have done something overseas. So we actually -- just recently, we have time up with our Far EasTone memorial hospital that is in our group. So we team up with them to visit one of the Southeast Asia country to kind of test out this telemedicine. And the POC was very successful, and it generates a lot of interest. And also, we already start working on the collaboration because they definitely have the need and they could use technology.
And then the technology -- our platform is proven because it's overseas. You won't be using FET's 5G here, but then it's using the local telecom capabilities, including the satellite. So it was all already proven from this PLC. So this is one of the few areas that we will start seeing our solutions can go overseas, okay?
All right. For the consumer service highlights, the new iPhone launch that definitely always helps with the new ads and then especially with the 5G upgrade. Although this time, the new iPhones as kind of always -- it just come enough, right? So that also kind of -- we always expected that, but then still, what we actually got is still a little bit less than what we expected. That also contributed to our third quarter revenue fell a little bit behind.
But then this still in terms of this effect in boosting our bundled service sales, that is still there, okay? And then close to 90% of those that signed up for our service, they actually sign up for the higher rate plans, those are like TWD 999 or higher. Okay.
And then our Friday video, as we have reported before, that has -- actually has been like holding the #1 local OTT platform. This year, it won the award again. So it's 4 years in a row. And also, it is #1 for both online buzz and the user engagement. We actually -- this team, we are the first adopter in FET and also, I believe, in Taiwan that we actually use the Gen AI to generate this AI kind of you query, what movies to watch and then you can have the dialogue with AI. And recently, we even added the voice input directly.
So all these features actually help us see more active engagement and more -- and a longer view time by the users. So -- and that is something we'll continue to improve and using this gen AI many features that we can apply to our various services to help our consumers to enjoy, okay?
So in terms of the -- we actually see a 23% increase in the viewing time per user. This is really much better engagement. And then so that is all good. Now in terms of the paid subscribers for this Guardian network, that is a fraud broad detection I was talking about, then we actually see the triple digit Y-o-Y that I already mentioned in the previous slide, okay?
And then also FETs -- this chart on the left is actually showing for those reported, they receive a fraudulent calls from this number. And then -- so which carrier actually that number comes from. The higher the worst in terms of the telco. So for FET, it's a red line. As you can see, where I have a red arrow going down, that was back to 2018. That was when we first got a concerned letter from the officials saying they are getting a lot of reports. The fraudulent calls actually come from FET SIM number.
So we then started this big data analytics, so AI machine learning project. So we were able to work it down. And then since you can see the red line is the one that is closest to the aisle. So then we have the others are our peers. But then this is something we continue to do and then using the AI to get better with the detection of these kind of calling numbers.
And then so we can actually terminate their calls before they reach the final users. So this has been very effective, and this is also part of our CSR responsibilities that we do. Okay. All right. And then -- so we have received some major honors and recognitions and some in the environmental sustainability area and some in terms of our corporate governance.
And then also our customer service received the best AI system application Team Award because we used Gen AI to improve our text chatbot and also the knowledge management and the database for our care center people to quickly answer the questions from the users. This was especially helpful during the migration because our customer care folks need to all of a sudden help serve the customers that are from APT, which has different kind of offerings.
So that quick migration and big demand all of a sudden that was eased by us using Gen AI to introduce this Gen AI-enabled knowledge management. So that's proven to be very effective. So we had a very smooth transition during the migration period, okay? All right.
This is already close to the year-end. So my team always asked me, we need to talk about our priority. I think it's already close to the end of the year. So we need to continue to deliver our smart ITC projects on time and on budget. Of course, they are on time, then we'll be able to book the revenue.
And then also our cloud hit, that's the one project I was talking about that we are getting ready for the first quarter soft launch because clinics will be able to subscribe and start using our system, okay? And then we will continue on the right course as we have been doing very well. The team -- I'm very proud of the FET team, and I believe we'll finish the year strong. Okay? With that, that concludes my presentation today. Thank you.
[Operator Instructions]
Well, I think that's -- again, if there are any questions for President Chee and CFO Sharon. I believe Chee's presentation is very clear.
And of course, you can always follow up with our IR team.
Just remember, yes, we will finish the year stronger than we expected earlier this year.
[Operator Instructions] There are currently no questions, then I'll pass the call back to Gary Lai. Gary, please proceed.
Okay. Thank you very much, again, to attend our third quarter conference call, and see you next quarter. Thank you.
Thank you.
Thank you. And 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.