Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
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Welcome, everyone, to Far EasTone's 2018 Fourth Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after this conference ends. Please visit www.fareastone.com.tw under the Investor Relations section.
Now I would like to introduce Mr. Gary Lai, the IR Officer. Gary, please begin.
Good afternoon, everyone. Thank you for attending Far EasTone's Fourth Quarter 2018 Result Conference call. Today, our President and CFO are both here with us as usual.
And just a reminder, before we start brief presentation, please kindly pay attention to our safe harbor statement.
Now let me pass to CFO, Sherman Lee, to introduce our new President, who was onboard in earlier January this year. Thank you.
Okay, thank you. Hi, everyone. This is Sherman. Thank you for joining today's Far EasTone investor update.
Before we start the formal update, I would like to take this opportunity to introduce new President of Far EasTone, Chee Ching. She joined Far EasTone last year as Chief Transformation Officer, leading the transformation of FET.
Before joining FET, Chee has been in AT&T for 23 years in the area of network and information technologies, responsible for leading the planning, system engineering, process engineering and delivering end-to-end solutions for AT&T's products and services.
Before joining AT&T, she has been in the faculty of Purdue University in the U.S. where she also received her Ph.D. degree in MIS. She also has a graduate degree of international business from Taiwan University.
She became the President of Far EasTone in January this year, relieving Yvonne Li, our previous President who has been terrific on [ closing ] the year 2010 and delivering an outstanding financial track record.
We thank Yvonne for her great contribution to Far EasTone, and we welcome Chee.
Chee will lead FET into the area of new economy with technology and applications like 5G, big data, AI and cloud and so on.
So it is my greatest pleasure to ask Chee to take the lead of this investor update.
Thank you, Sherman. Ladies and gentlemen, good afternoon. And as Sherman just mentioned, I just joined the company as the President on January 7, although I did join FET as a Transformation Officer back in September. So in other words, I've been with the company for 6 months or so now. [indiscernible] joining us this afternoon.
So let's just get to the business. And today's agenda, we will run as follows: I'll start to give you a brief market overview and also the operational performance for Far EasTone in 2018. Then I'll ask our CFO, Sherman, to provide details on our fourth quarter's last year financial performance, and also to give you our 2019 guidance. Then I'll conclude with some management highlights for your information, okay?
If you will turn to the next page. So Taiwan's mobile market in 2018, to say the least, it has been very challenging. And as you can see from the diagram on the left, the mobile revenue in Taiwan has been declining since a few years back although [indiscernible] even with the promotions of TWD 499 that, in fact, it's really to the negative from a revenue perspective. You can see it has a sharper decline from 2017, largely due to the TWD 499 promotion war, okay? And then from an annual perspective, it is only a minus 5.7% decline.
However, if you look at the diagram of the right-hand side, that's the quarterly view. So the third quarter and the fourth quarter showed significant decline, and that was largely due to the TWD 499 effect, right? And taking into consideration, this already -- we already were offset by the penalty, the onetime penalty type of income. Even with that, and we still show like a 10%-or-so decline for the third quarter and fourth quarter in a row. And that really tells more of the picture for 2019.
On the operational performance side for FET. So that was overall market, right, across-the-board for our telecom industry. But then from the FET perspective, just look at operational performance. Even though the market was not pleasant, it was very challenging. As a new person onboard, and I look for the silver lining. And I do see that we have a very strong momentum in the new economy, which is our -- for me, it will be one of our priorities. We have to transform out of the core mobile service. So the new economy will be -- will take a lot of our focus and effort in the coming year. And then we do see the new economy areas thriving. So just briefly, for example, our cloud business has grown 41% year-over-year and then our security business has grown 31%. Both indicate very significant growth.
And on the right-hand side, this is to show the orders, like as a contract that we have got from the ICT area. And of course, not all the revenue will be realized in-year, but then if you look at the amount that we were able to sign, right, for the contract, last year, we actually showed a 89% increase. That's the growth. So this is a very encouraging information in our new economy area.
Now back to our mobile core. So despite of all this competition, the companies, the battles, the wars and the low monthly fees, but then we do start seeing the postpaid subscribers' churn has come down. And this didn't happen just by accident. We have made significant efforts using big data analytics to address the churn issue and then to work it. And the result is clear. So we did see a very good improvement from the first half, 1.9%, down to 1.6% by the end of the year. And the January result that we have received was even lower. So this is a very good trend for us to stabilize our customer base and that is very important for us to protect.
On the other hand, for the customer satisfaction on the network quality, as you can see, this is done by a third-party that did the survey. So as FET comes here to the other -- the customers using other carrier's service, you can see the red line indicates our customer satisfaction. That is way above the other customer satisfaction for their carrier.
So these two combined give me a lot of confidence in us stabilizing and then protecting our core mobile base, okay?
And with that, I'm going to ask Sherman to talk about our financial performance for the fourth quarter. Sherman?
Okay. Thank you, Chee. So now let's look at the service revenue for Far EasTone. In the fourth quarter, it's TWD 13.6 billion service revenue. But if we look at the whole year, just to give you a perspective again, remember, we have an IFRS 15 impact in the beginning of 2018, which asked us to amortize subsidy and commission. So you see a drop from -- a quarterly revenue drop from TWD 16.769 billion from fourth quarter 2017 to the first quarter last year.
And then the second quarter, we have TWD 499. That explains why there's uplift of the revenue because of the penalty in TWD 499. Many consumers have canceled their contract, paid penalty and moved to a new rate plan. So in third and fourth quarter, we see lower service revenues.
On the right-hand side, we can see that this is on a consistent basis, [ residual basis ]. So we can see that the ARPU has been consistently declining in Taiwan because of the market matured in 2015. But then the drop gets deeper between second and third quarter last year from TWD 847 to TWD 787 and then come back to stable again. So this give you a picture of how the market is moving, okay?
And the next page, the EBITDA. So this is to reflect the new change of the market situation. The EBITDA, so you can see that we have -- the fourth quarter last year, we have 2 factors. One is the seasonal iPhone sales. Apple introduced new iPhone models in fourth quarter end of the year. So we have that. And also, I want to mention that in fourth quarter this last year, we have a onetime early retirement program that also reduced our EBITDA, okay? But that is a onetime impact. So we have only a 0.5 drop in dollar EPS for the fourth quarter. So on the net income, we can also see the impact. So the fourth quarter's income is TWD 1.6 billion.
And then the consolidated financial results for last -- for fourth quarter, the total revenue year-on-year basis dropped by 1%. It's TWD 22.3 billion. EBITDA is TWD 5.85 billion, that is minus 5% [ we have ] in the year. And free cash, TWD 2.084 billion, minus 11%. And then net income is TWD 1.6 billion, minus 14% year-on-year basis. So EPS is TWD 0.5. And for the fourth quarter, we missed our EPS target by 35%. Again, one of the major reasons because of the onetime early retirement program.
So the whole year -- on the right-hand side, the whole year of 2018, the total revenue is, year-on-year, dropped 6%. We are 3.6% short of guidance. But the EBITDA is TWD 26.685 billion and that is also short of guidance. And then the net income is TWD 9.38 billion, that is a 10% drop in guidance as well as EPS. So the annual EPS is TWD 2.88.
And then, so the financial results are compared to the -- let's look at the fourth quarter last year. We still have -- I mean, we still look at net debt-to-EBITDA. We have a very healthy balance sheet. Our free cash flow is TWD 15.96 billion, which is almost the same as 2017. So although we have -- we missed our guidance, but our free cash flow is -- has been as good as 2017.
Next, the guidance for 2019. The total revenue year-on-year basis, we expect to drop another 2.3% because in 2018,, we reflect the TWD 499 impact on a half-year basis and 2019 we're going to show that on a full year basis. And EBITDA, if you look at this, it will increase by 8.1% versus 2018. To give the accounting treatment change in 2019, we introduced IFRS 16. That accounting rule asked us to move all the rental contracts or expense from expense to make it capitalized and use depreciation and amortization. So we have to move a significant amount from above EBITDA to below EBITDA, to G&A, okay? So although it looked like EBITDA increased by 8.1%, but the pretax income, this is not really affected by these accounting rule change. So the pretax income basically is lower year-on-year -- will be lowered than 8.7%. And then net income lower by 9.8%. And then the EPS for 2019 will be TWD 2.60.
And the CapEx for 2019, Far EasTone has been declining on the CapEx because of 4G construction has all been completed. And so we are spending for 2018 on CapEx on [ geo ] basis with TWD 10.1 billion and 2019 will be TWD 8 billion. But actually I want to remind you that on 2018, actually we did plan to spend TWD 8.5 billion on regular ICT extension, but that has been delayed and put back to 2019. That's why we see that we increased CapEx in 2019 and then a dip of 2018 CapEx. But basically it's the 2 years CapEx on actual basis should be about the same.
And for the dividend, FET wants to maintain a stable dividend policy to our shareholders. So we -- this year, we still keep TWD 3.75 dividend for 2018.
And now, I will ask Chee to take it back to talk about the management highlights for the upcoming year.
Okay, all right. So as the new President of Far EasTone, I'm going to continue the transformation strategy that Yvonne, the former President, has already kicked off last year. And as I mentioned earlier, we -- mobile service accounts for a big percent of our revenue, total revenue, more than 60% to be exact. So we have -- and with the declining mobile service revenue, we have to transform and we have to grow our portfolio and then we have to drive down costs.
So coming from a telecom/mobile-based company, we have to be -- or become telecom-plus, and the plus side represents how we use this new technology, such as big data, AI, IoT, cloud to enable our capability to provide advanced digital services and also enterprise solutions, okay?
And then the priorities that I set for this year for my team in -- well, this is -- actually it all is important. So it's not like a top 1 and 4 just for your information. So grow new economy business revenue. As I mentioned earlier, we definitely see the momentum -- the strong momentum that it's driving in that area. We will continue to ride on that momentum and deliver more. And then, of course, while we are growing the revenue, we want to make sure we also manage a sustainable and profitable margin in these areas.
And also, we -- in some of these very advanced technology areas, we cannot do it alone. So forming a strategic partnership is very important to us and we're are doing just like that as we have partnered with Amazon, right, AWS in providing cloud services. We were recently just certified as one of the only 3 worldwide for AWS that is certified to provide managed services for AWS. And that is -- that was actually a result of our intensive efforts last year to train our folks in this cloud area. We are also partnering with Microsoft in further enabling our AI strength. As we are speaking right now, we have a AI tech zone going on right now. We have like a 43 teams registered and we screened it and have 20 teams right now, they are competing and then presenting there today and have [indiscernible] on results.
And then the second area that we have our focus on is to protect our core mobile business with big data analytics. As I have mentioned earlier, we were managing our churn down and we were also improving our customer satisfaction on our network, and neither of that happened by accident. On the network side, we have put in extensive efforts in understanding the network, the user experience and then we identified those we consider red, unsatisfactory performance areas that we will improve and we do that proactively and before customers would even notice or complain. And that is why it results in very good customer satisfaction scores. And then we'll continue to do so.
And also, we use these technologies, such as RPA, to improve our efficiency and because we need to continue to drive down our costs.
And then for the mobile service, in addition to this theme, right, in providing a mobile number, we want to enrich our offer with some value-added services. And just yesterday, we have a press conference that released our partnership with DOCOMO in Japan on this [ photo board ] and that's a new service we provided to our consumer -- or our subscribers in Taiwan and that has become very popular.
And then we'll continue to develop our internal talents in new technology. We believe that people are our biggest asset, most important asset, and we'll continue to do that.
And then of course, when it comes to the dividend for our stakeholders, we'll continue to maintain a stable dividend policy.
And with that, I will conclude my presentation and we will now entertain some questions.
[Operator Instructions] First, we are hearing from Neale Anderson from HSBC.
Congratulations on the new appointment. I have really one sort of larger question about mobile business. In the past, there's been some discussion of when Far EasTone would expect the decline to start to bottom out and that to level off. And there's obviously various drivers, there's the regulatory effect, there's declining voice usage, there's competition. Can you give us your latest view on that, please? In particular, on the competition side, what are you are assuming? Are you assuming that the market sort of trends down to around TWD 500 per -- or a bit more than that per customer? I mean, is that possible? Or would something else prevent that? That would be very helpful.
Okay, and thank you -- I didn't get your name clearly. And also the question I think you were referring to, were you talking about the ARPU when you talk about TWD 500? Is that the question -- the first part of the question wasn't very clear to me, it came across the bridge?
Yes, I was referring to ARPU. But it's really about how much more about mobile business revenue could decline from here and which of the main drivers of that like regulation, voice usage or the competition, yes?
Okay, so the price cuts definitely are driven by the competition, right? There are 5 telecom companies in Taiwan, a small market, but 5 companies. So the competition definitely is driving the price wars. However, I think from time to time you see small ones for a day or two, but then I think over time, the customers will be tired of it. And then I think at the end of the day, it's like what will give the most bang for the buck and then -- whether it's TWD 200 or TWD 400 then the service level, the quality, has a lot to do with it. And then -- but then the trend is going down because it -- there's no way going back, right? We started with like TWD 1,399 and then -- with the price war, so there's no point of return basically. And right now, if you hear some of those, that is because we have a lowered rate, but then we add on to it for additional services for our customers. So it may still sound like it's a TWD 1,399, but they are getting more than the same service. So there are additional like a video or like a music service that comes with it. So it becomes a bundle. But then definitely, the ARPU is going down. And if there is any hope in the near future, I would -- and I think a lot of telcos are hoping the same, that is yet to be seen. It is about 5G. So hopefully, when 5G becomes available and there are more consumer-related applications becomes available and then that will stir up enough interest from the customers that consumers -- that they would like -- they will build -- they will be willing to try and then to pay more for their service. I think, in a way, our consumers in Taiwan are very pampered. They want to make sure they get enough value for what they are paying for. And then in the telecom market, since I came back from the States and I was surprised to hear the rate that is offered here. But then we are hoping that when 5G becomes available, then that gives us an opportunity to see some of the upward changes because of new technology and then not to mention the cost that would come with it from the telco side. I hope I answered your question, Neale.
Yes, that's great. I'm just -- perhaps to follow-up. So 5G in Taiwan, probably not before 2021? Do you think the mobile revenue could stabilize or even improve in 2020? Or is it too hard to say at this point?
Well, first of all, you are right. The 5G won't be -- the auction won't happen until first half of 2020. And then before the end of 2020, then there may be some rollout. But then how much of the monetization or commercialization, that will probably take a little bit longer. So that's why our strategy is, we are not relying on only the mobile service. We are trying to grow our enterprise business as well and then the new economy and then at the same time protect our base, right? And then we want to maintain our high quality in our service and then we want to -- and also the network -- and then so -- and we are confident that consumers have seen enough price comparisons. I think that is actually reflective, we have the information showing some of our peers are losing their attraction to the consumers compared to when they first kind of disrupted the market. So we are confident things should go -- should get better although probably in the slower-than-we-like kind of pace. But then the kind of price war that happened last year, we really don't expect that to happen at such a big scale soon or again.
Next, we're having Varun Ahuja from Crédit Suisse.
I've got 3 questions. First, I want to go back to mobile competition. I think, initially, everyone thought that TWD 499 competition just lasted for a few days in May, but looks like the TWD 499 plan has been there in the market though -- even though it remains under the table, but it's still there. But now, it looks, during this Chinese New Year, very aggressive plans, somewhere around TWD 100 or between TWD 100 to TWD 200 plans have been come across in the market. So I wanted to check in your view, if the competition seems to be worsening right now. Do you think we can go to a situation wherein TWD 499 was considered to be the baseline, the ARPUs can go down below that also? So that is number one on mobile.
Okay.
Yes, one on mobile competition. Secondly, on new business. Go ahead, sorry.
I'm writing down your question. You can go ahead. Your second on the new business?
Yes, the new economy, can you tell us how much is the contribution is to the [ bottom ] revenue for 2018? Because 89% in EBIT growth looks pretty good, but what is that? Is it...
Yes, it is 10% this year. And then we expect to grow 3% to 4% next year.
Okay. And what is the margins like in this business? And the third question is, now everyone is talking about this new economy. Do you think that the competition is also kind of catch-up there? Or rather how much of competition are you facing because even Chunghwa, Taiwan Mobile are kind of talking about the same business line as you are. Are you seeing a lot more competitive intensity also in this new economy businesses?
Sure, thank you. Okay, so I'll answer your first question first. So in terms of the mobile, the ARPU, you mentioned like a TWD 499 didn't seem to be the lowest because you have seen some like an even lower plan like during Chinese New Year. And those small ones do happen, but then they don't always -- the reality behind it is not as how it was commercialized or publicized because usually there is a quota limit to it and there are other conditions that you have to be prequalified before you could buy that plan. So there were actually restrictions. That's why the scale is relatively small. And so there's no comparison to the kind of TWD 499 competition that was back in May. So it was no comparison. It's very small scale, very limited and very restrictive as to who can actually benefit from it, okay? So I think TWD 499 is kind of like the consensus, at least among the 3 big telecoms here, and we think that's pretty much the bottom line. Yes. Okay, as to the second question, as I mentioned, the new business economy accounts for our 10.1% this year and we expect to grow another 3.5% or so. And then in terms of the margin, we are looking at about 20%, and of course, we want to continue to improve that where we can. As to the third question on the new economy, is it already very competitive? I would like to know if there's any business today that is not competitive yet and I'll be pleasantly surprised. There is definitely competition, but then, yes, like a Chunghwa, right? And then historically, it has a lot of government support and still does actually. And then, however, our EB, and enterprise BU, they have shown a lot of good progress in terms of getting the contracts from the government. So I would say this is still -- there is definitely competition, but since this is relatively new market in Taiwan and then actually just in terms of IoT, I think the Taiwan as a whole market is still kind of like awakening to IoT. It's still adapting. So I would say this is more like a blue ocean for us although competition is expected, but then at least there are growth opportunities for everyone that competes in it. And I hope that answers your question.
Yes, it does.
[Operator Instructions] Next, we are having [indiscernible], CIMB.
Just curious about the competition this year. Because I just find it funny that Chunghwa does think that they don't want to be -- kind of what you have to say about the competition and the Chairman made a statement and then after that Far EasTone and Taiwan Mobile began to introduce lower package price. Why did the 2 operators did that in response to Chunghwa's comment? And if that's -- does it mean you kind of [ sense ] Chunghwa like you are willing to compete or it's -- I thought that it would be nice that you don't compete versus Chunghwa, yes if you raised price, we will follow, that would be beneficial for the whole industry. But yes, could you...
Okay, okay. So first of all, it is not in response to what Mr. Cheng has said or anything. And then, yes, and I actually agree with him that will be our position as well. That's how we see the price war. And like I said, like I explained to the last gentleman, in terms of that -- like a Valentine, I think, we were really responding to another peer's price kind of competition going on and we do have like 2 different brands. So we responded with a very small scale just in case some of the consumers may be affected by that and then attracted to that kind of offer. So it was very small scale, limited, but then that had nothing to do with what Mr. Cheng happened to say and then that was publicized in the news. I think sometimes the media may read into like several independent events, but then because of the time sequence they've kind of given some casual effects in between and that wasn't really true, certainly not this case for Far EasTone. I cannot speak for the other telecoms, but certainly not the case for Far EasTone.
Okay. And is the government concerned about the pricing competition of the industry? Or the government just lets the players do what they want to do in the mobile space?
Well, I don't think the government has actually even expressed their concern one way or the other. The fact that they welcome the 2 smaller telecoms to join the competition, they want us to be a free kind of competition market. And I wouldn't mind the government does a little influence there, but the fact is we do have 5 telecoms. So I don't think there's any concern from the government side on the competition. So we'll see once the rules on the 5G become finalized, we probably can see how government look at the competition. If these are good competition or these are really costly competition that leaves everyone in kind of a lose-lose situation. But we'll see. So right now, as far as the 4G technology is concerned, this competition is pretty much just among the industry, the players.
Okay, last question for me is on free cash flow. How should I look at free cash flow this year compared to last year? Because on the mobile side, your revenue should be declining and then your CapEx seems to be stable. Is it correct to assume that your free cash flow is going to decline this year compared to last year? Or there's a way that you can bring in more revenue in other places or cut costs that you can keep the free cash flow stable for this year?
Yes, our free cash flow in 2019 because of the reduced CapEx and all the things, basically we still will have a very healthy free cash flow, which will be close to last year. We expect it to drop like TWD 1 billion. That's the range that we still consider very healthy and strong level.
Sorry. The free cash flow will drop by TWD 1 billion?
Yes.
[Operator Instructions]
And allow me to interject. Just even if you didn't get a chance to ask a question today, I look forward to meeting you in the near future. That can be arranged, if you're interested.
[Operator Instructions] And next one to ask a question, [indiscernible], CIMB.
I'm back again. Just a question on dividend. What should I think about dividend for 2019?
Okay. As I summarized previously, we are planning to maintain a stable -- still stable dividend policy. And then -- and I guess, that statement wasn't enough. So let me elaborate it and if you look at historically, Far EasTone has been maintaining a policy that is we have a relatively generous payout policy. So that is something we are continue going to maintain.
[Operator Instructions] Now we are having Pallav Jain from Nomura.
Two questions. One, could you please highlight the margin profile for the new economy businesses that whether it's more or less than the mobile services?
As I said earlier, that was 20%.
Okay, okay. And second question, after the TWD 499 plan, how many your total mobile subscribers are currently SIM-only subscribers?
25%? Yes, SIM-only is 25%.
Let's make sure we get the question.
Is your question is, how many subscribers is SIM-only?
Right.
Yes, 25%. I go back to the earlier question, new economy would have a very -- would have many different parts and different margins. We can discuss that off-line.
If you need more details, yes.
[Operator Instructions] There appears to be no further questions at this point. I'm going to turn it over to Gary for closing comments. Go ahead, please, Gary.
I believe there is one more question we can take from Yuanta.
Now we have got a new entrant, that's Amber Li from Yuanta Securities.
I have one question on your revenue guidance of this year. You guided 2.3% of decline in revenue. And how should we model it in terms of device sales, lower revenue and new business?
Amber, we'll probably take this question off-line. We can give you some direction, okay?
Okay, sure.
Okay. So I'm sure there are questions probably for more details and Gary is always available and you know how to reach him. And as for myself, being the new person on board and if any of you would like to meet with me, please, just let us know. We can certainly arrange it. And I look forward to meeting you all. And thank you all for your continued support and confidence in Far EasTone. We'll continue to do our best and to satisfy and meet expectations of our stakeholders. Thank you all.
Thank you.
Thank you participation in Far EasTone's conference. There will be webcast replay within an hour. Please visit www.fareastone.com.tw under the Investor Relations section. You may now disconnect. Thank you, and goodbye.