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 2017 Fourth Quarter Earnings Conference Call. [Operator Instructions] And 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. Gary, you may begin.
Thank you very much, everyone, to attend Far EasTone's 2017 Fourth Quarter Result Conference Call. First of all, sorry about the delay. Today, our President, Yvonne Li; and for the first time, the new CFO, Sherman Lee, both will attend the conference.
Again, before Yvonne's brief presentation, please pay attention to our first page disclaimer for the safe harbor statement. Yvonne, please.
Good afternoon, all the investors, and a late Happy Chinese New Year, and I hope everyone will have a very good year [ for this year ]. As Gary just mentioned that our new CFO, Sherman Lee, also joins the -- first time joined the investor conference today.
So with this, I will start with the usual, the market overview, next page. The -- basically I think, overall, the entire mobile market in Taiwan still I think the -- we're still seeing some of the consolidation of the same situation continue happening in Taiwan, but I think the status is getting stabilized. And if you look at ARPU side, that we're also pleased to report to all of you that the Far EasTone has continued to maintain the highest ARPU in the market, and we are the only one among the big 3 operators that's continued to growing the EBITDA line on a year-on-year basis.
In terms of our overall operational performances, we are also very pleased to report that in the past 3 years or so that our new business revenue actually has started seeing a quite a nice growth. So for last year, the total new revenue is represented 7.8% of the total revenue base; and for this year, our target is growing to 11.8%. So on this area, we continue to see quite a nice growth in terms of the new revenue. Another good thing to report is, last year that Far EasTone, in terms of the overall network performances is actually ranked very solid #1 in the market; we're actually being ranked as #1 in 3 majors tests. One is the SpeedTest, another one is OpenSignal, and another one is the NCC official casting. So all of them, we are ranked #1 in Taiwan.
In terms of financial performances, I just mentioned that our annual EBITDA has continued to grow. It has been a continuous 5 years that we continue to grow our EBITDA line. So this is in conjunction with the new revenue growth, also our spending efficiency improvement. On the quarterly EBITDA, of course, we have seen some decrease in the fourth quarter, it's mainly because of iPhone X, the sales volume. But if you're comparing the year-on-year, we -- usually we have a very high iPhone sales in the fourth quarter of the year, the year-on-year EBITDA is also improving above 1.8%. So this, I think, is definitely demonstrating the efforts that company continue to drive the efficiency.
In terms of the profitability, that -- our annual income -- net income continued to maintain a nice level. We're actually slightly above our forecast for last year. And our quarterly net income actually show a quite a nice year-on-year trend. In the fourth quarter of this year, that our net income actually is growing by 3.2% comparing to the same period of last year.
In terms of the consolidated financial results, we kind of miss our top line for last year; but in terms of the EBITDA line and also the EPS line, we -- both achieved that our annual financial targets.
On the balance sheet, continually we have a quite a strong balance sheet. There is not much change in terms of the debt ratio. In terms of free cash flow, this year, we -- I mean, at the end of last year, that we generated TWD 16 billion of free cash flow, still a quite a nice free cash flow, and we've aimed to maintain the same level of the free cash flow for this year.
Next page is about our 2018 financial guidance. For this version of the guidance, I think the total revenue was slightly down by 2.4% on a year-on-year basis. And -- but the EBITDA line will maintain to be flat. I think this is mainly due to the IFRS 15, the new accounting principle implications. So if there is no change on this IFRS, our EBITDA line is actually continued growing on a year-on-year basis. The net income line is slightly down by 4%. This is mainly due to this corporate tax rate that actually increased from 17% to 20% for this year. So that actually impacted the bottom line a bit; but overall, in terms of the operational performances, we are basically intending a slight or slightly improved situation comparing to the same period last year.
CapEx, as we mentioned, that the CapEx is peaked, I mean, a couple of years ago. And so this year, you will continue to see that our overall CapEx continue to trending down, particularly on the CapEx in the mobile sectors. We are -- total CapEx for this year is about TWD 8.5 billion, so continue to trending down from the TWD 8.8 billion of last year and roughly represent 9.4% of our total revenue. So the CapEx to sales ratio is continue to trending down. So this, of course, is also continued to give us more increase in terms of free cash flow.
Dividend payout, today, the board has approved that we're going to payout TWD 3.75 in terms of the dividend, which is about 113% payout ratio. I think this is also showing the strong commitment from the management team and all the way to Far EasTone board that we are trying to maintain a very stable dividend policy. And we wish that -- it is now wish and it's our commitment that we will continue to sustain this stable and the reliable cash dividend policy to all the investor community.
In terms of the -- this year's strategic direction, there is basically few areas I want to report it to all the investors. The first one, we want to continue to be the BEST customer intimacy company by using the customer-centric network planning and the precision marketing methodologies. For last year, just to share with all of you, that we have actually conducted a semiannual customer satisfaction survey that we actually ranked the highest, I mean, in the market in terms of customer satisfaction. So we'll certainly continue to strive this BEST customer intimacy policy along the way. Of course, during this period, if you look at the overall market of the Taiwan, that the mobile side is continuing to trending down a bit in terms of the top line. So how to continue to drive efficiency to actually continue the profitability of the company is a very important thing for all operators in Taiwan. So certainly in this area, we will continue to drive up the efficiency.
In terms of the profitable growth, we start to see, as we shared earlier on the new revenue streams, that we have seen a quite satisfactory growth on the enterprise ICT portion and all of our digital services. So in this year, that we'll target the enterprise to drive up their ICT growth by 82% for this year; and our digital services is also -- is more than 30% growth for this year. So these 2 areas will be another growth driver for the company in this year.
To really achieve Far EasTone's long-term ambition that we want to be the preferred digital partner for all our customers that we just have to continue expanding our digital and data analytics capability along the organization. Currently, in this area, Far EasTone roughly has 15% of our personnel -- is engaging in this period, and our goal is to increase another 5% to 20% by end of this year so that we'll continue to strengthen the digital and data capability of the company. Okay.
So joining all the 4 major actions, we hopefully that we will drive up the customer lifetime value by cross-selling a lot of the digital services and also give them the best -- the customer experiences; and also on the enterprise side, we'll continue to drive up the profitable growth.
So with this, that concludes our updates to all of you for this year. So we are now open for questions.
Thank you, President Li. [Operator Instructions] And our first question is from Neale Anderson from HSBC.
Two questions, please. The first one is a general question on dividend policy. So you've shown very strong commitment to shareholder returns with the payout ratio for last year. My question is, how you, as management, would think about going into next year [indiscernible]? Your guidance is for earnings per share to 4%. So you -- if that guidance turns out to be the case that implies a higher payout ratio, would you be looking to see, say, a turnaround in business conditions, improvement in pricing in order to be able to continue to recommend, say, a flat dividend? That's my first question. I'll be very grateful to your response on that. The second one is, -- thank you for sharing more information on the enterprise, digital services, et cetera, can you give any indication on the margin trends in those businesses? That would be very helpful too.
Okay. I'll first address on the dividend policy. For this year, although the bottom line is down a bit due to the corporate tax, but I think the management's position is still, we were going to maintain a quite a stable dividend policy. So that will be the management's position. And certainly I think, long run, the company will certainly grow. And we are pretty much optimistic because of -- although I think for last year, we see that the core revenue, like the voice revenue, continue to trending down; and even though the new revenue is growing like overall 45% on a year-on-year basis, the scale is not big enough to cover the downward trend on the voice revenue or even on the MTR drop. I think for next year, probably all the way up to 2020, I think we will start to see that this bottom line trend will certainly revert. So I think, to answer your question shortly, that we are going to maintain this very stable dividend payout policy. That's first thing. The second thing is, I think starting from the second half of last year -- next year or probably the first half of 2020, you will start to see this bottom line trend will start to trend up. So the management team are pretty confident on this going forward, the financial pictures. Regarding your second question on the enterprise margin, for the ICT part, what we have seen the margin is pretty stable on the ICT part that the margin is about -- is different range, but its range, I think, between 10% to 20%. So that's above the ICT margin. And I think what we have seen for this year or even for next year, I think, this margin trend is going to be continued. We don't see any, I mean, shrink margin in the ICT part. For the digital services, the margin is bit higher than the ICT. We also don't see anything that will impact margin. So for this 2 growth areas -- so it not only help us on the top line, but it certainly also helps on the EBITDA as well. So I hope this -- I answered your questions.
[Operator Instructions] And next we'll have Peter Milliken from Deutsche Bank for questions.
Look, just one question. You mentioned earlier that -- I think, I must have heard this wrong, but 15% of personnel were now in digital analytics. Is that -- did I hear that right? Or is that just a subset of the personnel that I should be thinking about?
No, it's the total personnel. So right now in Far EasTone, there is -- about 15% of the personnel is engaging in the digital development and the data analytics. And we are aiming to continue increase this portion, so the target for this year is to reach 20%. So this includes the business analytics side and also the IT and network related areas.
Right. So does that mean 15% of people in the ICT side doing this or 15% of total staffing?
No, 15% of the total staffing.
Right. Okay. It's a big amount. So there's a lot of training going on, even with people on the shop floor on how to use data...
Yes. We have invested in this area actually, I think, starting from 3 years ago. And so that's why I think, today, you can see that on our new revenue side, we can have this kind of growth. But we feel that, going forward, just 15% of the total personnel is not good enough for the future growth. So this is certainly the target for the entire company, we got to continue and strengthen in this talent pool.
[Operator Instructions] And our next question is from Varun Ahuja from Credit Suisse.
Few questions from me. Number one, I want to go to guidance. So if you look at -- my understanding is this, IFRS 15 should help you because you may recognize some of the revenue upfront and match it with the handset cost, so the subsidy portion should kind of reduce. Hence, I'm surprised that the guidance for EBITDA seems to be a bit muted. And in your comment, you mentioned that without IFRS 15 that should have declined -- should have grown, sorry. So am I right with my assumption or there is something else to the IFRS 15 that I'm not getting right? So that's the number one. Number two is on the dividend. If you look at on the chart, your dividend hasn't grown, but your free cash flow seems to be growing. So just wanted to hear what will make management comfortable in terms of increasing the payout, given that the free cash flow generation is definitely [ a delink ] from the earnings as of now? And number three, on the CapEx front. Can you give little bit more clarity on the 5G related CapEx, given Taiwan seems to be pushing ahead with 5G and it wants to be one of the leading nation to launch 5G services along with other countries? So how should we think about 5G CapEx, if we have more clarity emerging based on your discussion with network vendors? And lastly on service revenue. How do you see the competitive dynamics currently and how has iPhone X shaping up and helping you in terms of pushing customer to higher tier plans? Any update on that will be helpful.
Okay. I'll let CFO to answer about the IFRS situation now. I'll answer your -- the other 3 questions on 5G CapEx and on the top line. All right. Okay. Well, Sherman?
Okay. So for the IFRS 15, yes, you are right. Basically, it is -- it just make the handset subsidy defer to future years. However, in the past several years, Far EasTone -- I mean, the handset subsidy has been declining over time, year from year. So right now, what you are seeing is, there are lots of handset subsidies done 2 years ago, now it has its impact on the revenue side now. So we expect this kind of negative impact will be declining in the next 1 to 2 years because those subsidized contracts expire in the next 12 to 24 months. Then the negative insight will be -- impact will be diminished. Then we'll see a better balanced situation as you expected.
Yes. I'll just add one point is, without this IFRS impact that our -- both our EBITDA and the EPS is actually growing on a year-on-year basis. So I -- so we are pretty much comfortable with our financial pictures actually for this year. Coming back to your dividend thing, yes, we continue to generate a lot of free cash flow. Our goal is always to maintain a very stable dividend policy. And we just come out of a very peak, I mean, the spectrum auctions -- I mean, back to last year. So at this stage, I think the management's attention is more continue to maintain a stable return to all our investors. Of course, we never rule out that whether we will have a slight increase in the future payout, but for this year, the goal is to maintain a stable policy. Okay. For the 5G CapEx, let me talk about the Taiwan's 5G situation, okay? The government although is pushing people to try out on the 5G, but they also officially said that the spectrum will not be auctioned out until 2020. So I think one side, they will release some of the trial spectrum this year for people to try out the new service, and Far EasTone will also join some of the trials, particularly on the autonomous driving to join them. But I don't see that, in the next 2 years, there will be significant CapEx spending on the 5G side. In terms of the revenues, the competition in this market is always there. And if you look at, overall, the top line situation for Taiwan, although the overall industry is coming down a bit, but we don't see the competition is getting worse or getting superior. In fact, we think the competition situation is actually quite stable, I mean, in the past year or so. We continue to have this smaller 2 operator in the market, but if you look at the total numbers, they still roughly represent 8% of the total top line of the country. So still, I think, this is a victory player market in Taiwan. So I don't really see that the top line situation will be getting worse, I mean, for this year. So that will be my views to all of your questions.
On the dividend, I just want to try again. So what will make you increase the dividend? So what shall management or the board will have to see for them to get comfortable to increase the dividend?
I think right now, yes, indeed we have a quite a healthy free cash flow and we are actually contemplating several scenarios and -- but I don't have a definite answer honestly at this particular point of time. The only thing I can tell you is, we are contemplating certain scenarios. But for this year, the dividend has been approved by the board just now. So we're going to payout TWD 3.75, which is -- continue to show our commitment to the investors. But going forward, I cannot guarantee anything, but I can only tell you that we are contemplating certain scenarios.
And the next one is from Ronny Zhu from UBS. Mr. Ronny Zhu, you are now on the line. [Operator Instructions] And then next we'll have Neale Anderson for questions.
It's really a follow-up on the question of cash flow and related to network investment. So you have [indiscernible] in Taiwan for long time, average data usage is very high. Could you give us a sense of how much total traffic on the network is growing right now? And when you sort of look 3, 4 years out, do you believe or do you have confidence you will be able to keep the current level of network investments below 10%? Are you quite comfortable about that outlook? Or the utilization is relatively high and you're hoping that, that would flatten out?
Okay. I think we are pretty comfortable with the current network utilization rate. If I look at the numbers, I just looked at the numbers yesterday, is about our top 20% -- up to this top 20% -- I mean the -- how to word it -- it's the [ 80% ] -- if I look at 80% of my cell, the utilization rate is under 40%, okay? So it's only 20% of my cell. Right now, the utilization rate is up to -- is above 40%. So with this kind of capacity, I think, we will still have a very good capacity to sustain the long-term growth. Probably in certain cells, it's high traffic, I may need to add on a few. But certainly, I think, for the entire network, right now is in a quite a comfortable situation. So I don't see a big need to continue to expand that capacity.
Right. Then relatedly, do you know how many of the handsets on your network support all your spectrum? I believe, Far EasTone has some high frequency spectrum, which is not supported by all handsets, but presumably as customers upgrade then that should also help in terms of utilization and capacity?
The things I can share with you is, right now, I think more than 60% of our customer is about two-carrier handset, they are holding two-carrier aggregation handsets. So that's roughly the numbers we are seeing.
[Operator Instructions] There are currently no questions. I'll pass the call back to Mr. Gary Lai. Gary, please proceed.
Thank you very much again, everyone, to attend our Fourth Quarter 2017 Conference Call. See you next quarter. Thank you very much.
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. Good-bye.