Far EasTone Telecommunications Co Ltd
TWSE:4904
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Far EasTone Telecommunications Co Ltd
Earnings Call Analysis
Q4-2023 Analysis
Far EasTone Telecommunications Co Ltd
The company has successfully concluded its merger with APT as of December 15 and exhibited a solid financial performance in the fourth quarter, boasting an 8.6% year-over-year increase with revenue hitting TWD 26.47 billion. The full year's earnings were also fruitful, achieving TWD 93.69 billion, which eclipses the performance from the previous year by 5%. The EBITDA rose by 4.2%, surpassing their internal targets, marking a net income of TWD 11.19 billion. Calculating earnings per share (EPS) became slightly complicated due to the fluctuating number of shares post-merger, resulting in TWD 3.42 based on the weighted number of shares, which decreases to TWD 3.10 when based on the year-end share count.
The company reported growth in mobile service revenue, ARPU, and postpaid customers. The latter witnessed a significant jump due to the APT merger, contributing to increased customer base and leading to a diluted but still industry-leading 5G penetration of more than 37%. The company managed to lower their postpaid churn rate, striving to keep it reduced in a competitive, yet rational market. New economy businesses also progressed steadily, contributing to roughly 20% of the total revenue. These segments experienced enhanced profitability and improved margins, rising by 8.7% year-over-year with enterprise-facing business contributing to more than 50% of the new economy revenue. A variety of subsidiary businesses, such as Nextlink and Prime EcoPower, showcased revenue and profit growth, alongside consumer services like friDay shopping and friDay digital videos, which performed well in a saturated mobile market.
The company's core telecom-based SI remains a significant growth driver, with expansion in smart healthcare through its homegrown 5G-enabled telemedicine platform reaching 14 countries. The company has been proactive in digital transformation services, providing data migration, IT cloud services, and AI-enabled applications. They also partnered with Microsoft as a licensed solution provider, exploring opportunities within generative AI. Their consumer services have been successful as well, with their friDay video service ranking highly in Taiwan and the mobile circle retention app maintaining the top satisfaction rating. The company utilizes AI, big data analytics, and machine learning across platforms to enhance productivity and ensure network safety. Furthermore, their engagement with startups via the Startup Accelerator program has led to collaborations with 37 startups and facilitated over $320 million in investments from other parties.
Looking ahead to 2024, the company aims to accelerate network migration, consolidate their user base, and boost mobile growth with targets set for 45% 5G penetration. They plan to extend their new economy growth through smart ICT solutions and enhance their partnership with Microsoft. The company is committed to expanding its consumer market presence and will continue investing in entertainment and Smart Health services. Their consolidated financial forecast for 2024 is optimistic, with a revenue target of TWD 104.92 billion, an EBITDA target of TWD 35.66 billion, and projected net income of TWD 11.20 billion. This forecast aligns with the anticipated benefits from the merger, predicting only partial synergy realization for the current year but still demonstrating a balanced increase in EBITDA and a slight improvement in EPS to TWD 3.11. In terms of capital expenditures, the company plans for a cash CapEx of TWD 8.1 billion, including carryover from the previous year.
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Welcome, everyone, to Far EasTone's 2023 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, please begin.
Good afternoon, everyone. Thank you for attending Far EasTone's Fourth Quarter 2023 Results Conference Call. Both President, Chee, and CFO, Sharon joined the call with us today to discuss 2023 results and '24 guidance. A reminder before Chee's presentation, kindly pay attention to the first page disclaimer about the safe harbor statement. Let me pass to Chee.
Thank you, Gary. Good afternoon, everyone. It has been a while since we talked last time. So we're going to report to you how we did in the fourth quarter last year and the full year performance overview.
So as you all know, that we have finally successfully completed our merger with APT on December 15. And the migration or convergence has been going on and -- very smooth. So we are looking at the fourth quarter next -- yes, okay.
So the fourth quarter and the full year financial performance is displayed on the screen for you now. As you can see, we have very solid fourth quarter. The Y-o-Y, we came to 8.6%, and the revenue is like TWD 26.47 billion. And then EPS alone is also very good, which is TWD 0.85. And then for the full year, right, we actually have achieved TWD 93.69 billion. And then that is, of course, 5% over our 2022 performance. And EBITDA is also -- we have a 4.2% increase. We had an internal target, and this is all exceeding that as well. So the net income is TWD 11.19 billion.
And our EPS, this is a little bit complicated. So we show 2 numbers because we did have the merger effective on the 15th of December. So the number of shares that we have actually changed after the 15th. So if we use the weighted number of shares as the denominator and then our EPS will come to TWD 3.42. Therefore, a lot of analysts, you look at how many shares we have at year-end. So that would be a bigger denominator for the whole thing. And then our EPS will be TWD 3.10. Okay? That's the difference between the 2.
Okay. So our total revenue, as you see, we show you the trend here and quarterly. So this total revenue, actually, we have been seeing a positive Y-o-Y growth for 13 consecutive quarters. To be exact, it is since the fourth quarter of 2020, the year when we launched 5G. And our EBITDA is also reaching a new record high since 2019, and came to TWD 8.15 billion for this fourth quarter. And also, the 3.3% Y-o-Y EBITDA, of course, it is due to our improved gross margin from both core business and our new economy services, okay? And for the net income, we show 11.4% Y-o-Y, and it is also an all-time high for the same period. So the Y-o-Y growth rate is at 11.4% as we understand, it continues to lead our industry, okay, for 10 quarters in a row now, okay?
Okay. And some more financial metrics for your information. So in terms of our net debt and the net debt to EBITDA slightly increased post merger. But then overall, it is still very healthy. And as you can see, our free cash flow continues to be strong. And the CapEx spend in 2023 was TWD 8.15 billion, and it is -- our target or our budget was TWD 9 billion. So it's about 9% shy of the target, okay?
All right. So last year actually was a very good year for us, even though we were all very busy working these extra efforts on the merger alone. But then still, the team, the FET team really has delivered a very good solid scorecard and actually marked our 7-year high for our history. So in terms of the total revenue, EBITDA, net income and also EPS. So my Chairman has no complaint about that. And we did pretty well here. All right. And we're happy about it.
Okay. And then in terms of the mobile core, so 5G, of course, continues to be our growth driver and then the momentum is good. So as you can see, our mobile service revenue continues to grow year-over-year. And also, our ARPU is also growing. And the postpaid customers, it is also growing and then of course, with the addition of APT customer, that gives us a big jump. That's part of the synergy we were looking at because of the bigger customer base. Now in terms of our 5G penetration, before December 15, we actually already reached 40%, and that is exceeding our internal target that we set for ourselves. But then with the bigger customer base, postpaid customer base now, it's diluted a little bit, but we are still has -- we still add more than 37% penetration. And then I believe that is still the highest in the industry.
And in terms of our postpaid churn rate, it continues to drop, which is a good thing, although we will continue to improve it. And as -- well, because with the market now with only 3 big companies in it, although I would say, the competition is not -- it's more rational, but it's definitely still very competitive. But then, we will continue to work on the churn rate, and hopefully, it will remain low for us, okay?
And then our new economy, this year, if you recall, the target we set for last year 2023, we were -- we wanted to derisk some of the more kind of areas that may be more risky. And also we wanted to be more selective and then -- so we can improve the profitability and then improve the margin. So we did achieve that. And then -- so overall still, the new economy business, it is growing steadily as we grow the total revenue. So it is still about 20% of our total revenue it accounts for.
Now in terms of the margin, it did rise 8.7% Y-o-Y. And then because we optimize on the projects that we engage and then also our consumer digital services, like -- okay, like mobile financial services and our video business, they have -- they always have a higher margin and then they are growing as well. So that all contributed to the margin rate, okay, to about 8.7% y-o-y.
On the right-hand side, it shows that out of the total new economy revenue, the enterprise facing actually accounts for more than 50%. It has been the case for at least a couple of 2, 3 years now. So that means we actually see more rapid growth on the enterprise side. Consumer side is steady and then -- but then it is also growing. And we showed some of the highlights. For example, one thing as we work on improving the profitability on our ICT project, one very important key factor is to use our homegrown solution.
So as that percent -- and we are tracking how many solutions -- of our homegrown solutions were used in our ICT project. And we see a 75% increase Y-o-Y. And also, one of our subsidiary companies, that's Nextlink, which is a cloud service provider, and it is successfully listed on the Emerging Stock Market early this year, okay? And then our security service that's [indiscernible], it continues to grow. And last year, we have seen 8% Y-o-Y growth.
And also our green energy company that is Prime EcoPower, although site-wise it's relatively small scale, for the end -- the year before, they already posted positive net income. And then this past year, we actually see a 54% Y-o-Y in terms of the revenue and also the profit, it has posted significant increase there.
Okay. And our friDay shopping posted 14% and outperform the market. And then the friDay digital videos, we have more paying subscribers. It will show 7% Y-o-Y there, okay? And the handset insurance, although it's showing 5%, and this is a market where you deal with already saturated mobile market. So we are pleased with this 5% increase anyway still. Okay.
All right. And some highlights for your information. On the business side, we have conversion in like 4 major areas for our ICT business. So in Smart City where there is also a lot of ESG-related solution that will be used. So this is one of our concentrated areas. So in this area, we will be deploying our homegrown EMS, energy management system as solutions. So we have more cases in this area. Also, we have this traffic intersection UPS so that in the case of power outage, the traffic light will still work and it can sustain 4 hours. And that is also our own innovative solution, and it also helped with the recycling of the batteries that are from the electric motorcycle.
Okay. In the telecom-based areas, so we have -- because telecom is our core business. So telecom-based SI is still one of our major growth areas. And then -- so we have a couple of big successes in the public sector. And on the right-hand side, it's the smart healthcare, which is, of course, based on our homegrown 5G-enabled telemedicine platform. And in terms of the reach now, we have covered 14 countries and 48 rural health centers. And this year, it will come to a conclusion with 15 counties and then 53 rural health centers covered.
And also, based on that platform, we have enhanced additional facilities and then we came up with this 5G ambulance solution that was deployed in Taipei City and also a couple of other cities and counties. We are also donating the solution to the -- to some of the counties with more kind of a rural areas that could use this kind of technology to just help them with more rural residents. And then on their way to the hospital, more things can be done to help them.
And here comes the ambulance, you can hear in the background. Okay. All right. And then digital transformation. This is a one growing area where we see a lot of companies of all kinds of sizes that are looking for digital transformation. Part of that is driven by the ESG-related requirement. And then part of that is for -- how to accommodate the competition, right, worldwide. And then, so generative AI has become kind of like a trend. We have many partners or clients that would ask about this area. And then we have become the license solution provider for Microsoft. So that scope includes their copilot product. So we see this as another growing opportunity for us.
And then this one, last year, we only just launched that in probably April last year, but we have seen some very good success. We will expect this to continue to grow. So for the digital transformation, this area, we provide like professional services by our own team with the technical expertise to implement, including data migration or the IT migration to cloud or the AI-enabled applications or data services, or big data analytics kind of services. And this is what we provide to our customers in this digital transformation area, okay?
And then more like on the consumer side. So our friDay video ranked #3 by Nielsen Research in Taiwan's OTTs view share. So even beat Disney Plus and all other local OTTs. So our OTT platform usage is also ranked #1, okay, from another survey provided by the local Taiwan Creative Content Agency. Now FET's customer loyalty application, that is a mobile circle, we maintained the top satisfaction rating in the market and then also it leads in the download, which we have now more than 5 million, okay? And then friDay Shopping, as I mentioned earlier, it is 14% Y-o-Y. Also, we have actually rearchitected the system and then using the AI and also generative AI, which definitely is helping with the productivity.
While our revenue has grown like a lot compared to one year or 2 years ago, but then we actually were able to use less number of employees. So this AI definitely -- the AI technology definitely benefit friDay Shopping in terms of increasing the productivity for us. And then FET has this Guardian Network that we use with a lot. So it is getting a very good acceptance rate by the users that trialed it. And also on top of it, FET network team has been very proactive in using AI, big data analytics and machine learning to prevent or to detect and prevent fraudulent calls or texts or those suspicious website links.
So overall, we wanted to let our customers know that this is a reliable and safe network, so they should feel safe to navigate through our network. So this is one thing that we continue to build as a very important image, that our network is not only fast, but then also it is safe, okay? And in terms of investing for the future, we continue to host the Startup Accelerator. This year will be the third time. And so -- for the third year we're doing that. And so far, we already have worked with 37 start-ups. And then we work with them and find them the monetization opportunities, and we take them to our clients for some real projects implementation, using their solutions and all that. Also, for some of them we think there were more synergies and then strategically aligned with our product direction, we also invested in them, okay? All right. And then also, even not from us, we also helped them attract more than $320 million investment from other interested parties, okay?
And we have received some major honors and ESG recognitions. I wouldn't read through the list, but just as you can see, some of them are definitely well known, renowned. And like the first one, DJSI, we actually were ranked #1 on the World Index. So for Emerging Markets, that is #2 in the world for the telecom industry, okay, which we really took pride in it. And there are some other recognitions that -- we don't work for the recognitions, but then we are happy that our work gets good recognition, okay?
All right. And then in terms of 2024 priorities, of course, we wanted to accelerate our network migration. We have already completed the RAN network consolidation before the end of January. And then now we are going through dismantling the site from the former site from APT. So as soon as we dismantle them, actually, as soon as we turn them off, which we already did, we already start saving on the utility. And once we complete the dismantling of those and get those equipment or spare parts and all that out of the site, and then we can clean up the site and return it, and then that's when we can turn [it into] lease, and we'll be saving on the lease. So that's more OpEx savings.
So this is something we are accelerating because the sooner we complete it, the sooner the part of the synergy on the savings that we can realize or start realizing. And also, our BU has been accelerating our user migration, APT user migration. And since December 15, we actually have seen very good numbers. We are pleased with that. So we have migrated or some of them renewed. And then also, we see some upsell, cross-sell opportunities. And then just from a simple migration, we see good uplift contribution from the users.
So I am very pleased with the speed right now and then we expect this to continue. Also, for the mobile growth momentum in 2024, we'll keep it up. And then with more 5G penetration, we will continue to grow. And then -- so we actually set our target at 45% by the end of the year, which is aggressive, but I have to give my marketing head a lot of credit for committing to it. And also -- and this is already the bigger base and just keep that in mind. And then we will expand our new economy business growth with smart -- with more smart ICT solutions deployment.
Also, our cooperation with Microsoft on the LSP thing, license solution provider, I do expect to see more -- even more aggressive growth this year as well, okay? And then we want to continue to grow FET's presence in consumer markets, so that is beyond just the mobile rate plans and also the device. But then we have other services as well. So we will have invested more in the entertainment-related work. And also for Smart Health, we will have some friendly launch on the 2C kind of service as well. That is part of the plan for this year.
Okay. So for 2024 consolidated financial forecast. So our total revenue target will be at TWD 104.92 billion, although I did tell my team, why don't you just round it up to TWD 105 billion, that's easier for everybody to remember, but they want to be exact. So it's TWD 104.92 billion. And then for EBITDA, it's TWD 35.66 billion, and then our net income will be TWD 11.20 billion. I think it's worth mentioning, though, for the EBITDA that we are targeting at TWD 35.66 billion, and last year, we actually finished with TWD 32.08 billion. So that is about TWD 3 billion increment.
As we have announced 2 years ago about our merger, that was what we think that we should be able to do with the merger. So according to this forecast that you could see, we are managing to meet our commitment back then. And our EPS, of course, this is already calculated based on the new number of shares, the bigger ones and then that will be TWD 3.11. So in terms of the increment, it is not as impressive. But again, this is the first year that we are doing the merger. And then as I mentioned, some of the work is still ongoing. So it wouldn't be a full year kind of a benefit yet, like for the dismantling of the radio stations. So those will take some time.
So this year, we only see some partial synergy to be realized. But then still, we managed to kind of have the increased EBITDA versus the increased depreciation that we are still able to keep it very balanced and then still we'll be able to do just a little bit better than last year's TWD 3.10, okay? But this is a bigger base of the number of shares now.
Okay. And then in terms of the CapEx, so our cash CapEx guidance for 2024 will be at TWD 8.1 billion, and then out of which, there is TWD 0.8 billion that is carried over from 2023. All right. Okay. So for our dividend, this is -- we are going to keep it at TWD 3.25 and then as you know, we are going to pay to the larger number of shares at the time in summer, right? So compared with that, just for apple-for-apple, so we are looking at TWD 3.25 versus TWD 3.10 EPS. So this is still a generous payout more than 100%. We'd like to thank our shareholders for their -- and investors for their continued support.
And then I think as you all can see, we have been doing very well with the merger now, and then it gives us a bigger scale and a bigger size. And then we believe we'll continue to grow with the synergy, and then we will grow at a scale. And give us a year or so, I think more of the synergy will be realized. So that should be it, right? Do I have any -- okay. So with that, I conclude my presentation, and we welcome your questions.
Thank you, President, Chee. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And our first question will be coming from Neale Anderson of HSBC.
I have a couple of questions really relating to the merger. So the first question is, it's 2 years since you outlined your initial plans for that. It's obviously taken a long time to complete. So I just wanted to ask you whether your view or expectations have changed in the interim. So it looks from your guidance like not much, but I think originally, you guided for net income to be positive or accretive in year 1. And it's just that, but it's pretty flat. So I wondered if there have been any change? That's the first question.
The second one was about synergy timing. You mentioned you completed the RAN switchoff and you're dismantling the site. So do you expect any spike in costs because I think you have to pay a penalty to exit some of the leases. So does that imply some quarterly volatility? And then once we get -- you mentioned the full year benefits will probably come in 2025. So that was when you will have completed the network integration and you're still working on other sort of revenue synergies. Is that the right way to look at it?
Yes. Okay, sure. So to your first question, as you can see, right, when we -- and my CFO is always more conservative. So at the time when we announced we were probably TWD 3 billion, right, TWD 3 billion kind of EBITDA increment, and then -- so we still can do it. So I would say, if the merger case wasn't prolonged so much that we probably would end up doing better and then sooner, right? And then for the second question, in terms of synergy, yes, so the network consolidation is a big part of it, especially the [RAN] part.
So we are looking at -- and then as you mentioned, there will be some penalty, but then because the year is really -- it's an annual contract. So actually, it's within -- it's manageable. So as we are dismantling, right, the contract is still going. So very few, I would expect, that we will actually run into a penalty situation. It's really just a matter of where -- when I can really clean out of the site and then let the [land owner] have it. So penalty isn't really a factor, if at all, okay?
So then the year after, it will be a full year savings. And especially with utility, price continues to go up. So that's a good thing. We definitely can have the full year benefit. And then -- so in terms of the total network migration, as you may know, RAN is not the only thing. I still have the core network that I need to continue to consolidate. And that is really not so much about the technology itself that takes time. It's also part of my business strategy because according to what we committed to the Fair Trade Committee, the users or the APT users do have until the end of next year, 2025, their old contract can still be valid.
So I need to time when I want to complete the migration or when they will stay on. So like I can calculate what may be to the best interest of us financially. But then still, we will only do it. And then -- so once we can migrate -- once we can retire the APT's core network, that will give us more savings, too. But then, at the same time, when I do that, I need to add capacity to my current core. So -- but then, for the ongoing MA and then license and all that, we definitely would have savings the year after, okay? So then is there a third question? I forgot now. Did I answer all your questions, Neale or there's anything that is still...
You did. Yes, that's very helpful.
Okay, sure.
Next question, Andy Huang, Morgan Stanley.
Just one quick question on your CapEx guidance of the TWD 8.1 billion. Could you give us a little bit color on how much of that goes to merger network consolidation related CapEx? And how much is others?
Okay. Let me see if I have the detailed breakdown. If not, we may provide it later. But then -- so out of the TWD 8.1 billion, of course, network-related always is the biggest part, right? And then just like the BAU, like every year, I need to pay the vendor for the optimization, for the technical support, those are all part of the CapEx. But then really the new -- we have -- I can tell you the plan. So merger-related as far as we -- so when I finish the RAN consolidation, anything merger-specific that is really already done. But later on, when I started some fixed network, that is more capacity related.
But then I do have planned right now because I have a bigger base, right? And then we still have 2,600 and how I would maximize the use of it and then also the 700 spectrum that I have. So I do have a plan to deploy additional 2,000 stations, for example, for the 700 and then maybe a couple thousand or 1,000 for the 2,600. So that part is the new -- kind of new CapEx for that. But then a big part of this is still ongoing. If I don't do anything, I still need to pay Ericsson and then also Nokia for the transport, some of this -- that's there.
And then we also include some hundred millions of dollars for -- like I have Prime EcoPower, right, to invest in the green energy, there's some CapEx lending we budgeted for it. And also, there are projects. Some of the projects now is like a government, they would ask us to put in the CapEx, but then they will pay us like over 10 years or whatever through their OpEx. So there is a model like that.
So if we bid for those projects and we win it and then that CapEx will then be needed. So there is some room for this kind of -- that is not necessarily going to be realized for sure. But then, to be exact, the breakdown, maybe Gary can provide you later, but then really merger specific, I think it's very limited, very small, if any.
[Operator Instructions] And next question, Sara Wang, UBS.
Just one quick question on the merger synergy time line, but is actually on the network and consolidation. So just wondering what's the lost time line, for example, first dismantling the overlapping base station from APT and then second, upgrade our core network as you just mentioned?
Okay. So for the dismantling, we are expecting to have it finished by the end of June, okay? So that's kind of a happier left for the synergy savings, and in terms of the core network, so it will like -- it will most likely to be next year because, as I mentioned, it needs to be aligned with my BU migration strategy. So I think we are going to do it sometime next year.
Got it. And then a quick follow-up because 2024 net profit guidance is relatively flat Y-o-Y, but EBITDA was quite strong and more than 10% growth. Is the discrepancy mainly due to higher depreciation. So my question is, if we could finish dismantling the base station from APT by June, then shall we see depreciation savings into second half?
So the budget here already take into account our plan that we will have the dismantling all finished by June. So this budget is done according to that plan. But then, if my network can pull it up, my network team can pull it up, anything that they do sooner than that will be extra saving for me. Otherwise, it is June, that is the schedule and that is what we put into this budget version. In other words, I already take into account the fact that the dismantling won't be finished until June. So the depreciation we calculated is based on that version. So unless the team can put up the schedule by a month or by 2 months, then the depreciation and all that will change a little bit. Otherwise, it is the same, the savings.
Yes. And maybe I'll just add a note here is because while we merged with APT, of course, we got more assets, and therefore, there is more depreciation. But some of that depends on the different durations. So what we are looking at this year, maybe, I would say, probably is the highest. And then this will go lower as we go. So this will only get better. And also for any synergy and also more subscriptions and that we were able to -- that we will be able to uplift and those then will be accumulating. So I do not -- I'm not -- so don't be too concerned about this depreciation that we added because of merger because it will go -- over time, it will soften up, yes.
[Operator Instructions]
Okay. So maybe if they have some more questions, they can always follow up with Gary.
All right. Maybe then President, Chee, should we wrap up the call?
Yes, sure. Last call, is there any question for me still? Otherwise, you are more than welcome to contact Gary and Amy afterwards. And if needed, we can arrange other call for you.
Then I think there are currently no other questions at the point. Thank you, President, Chee.
Okay.
And ladies and gentlemen, yes and we also 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 all disconnect. Thank you, and good bye.
Thank you all. Thank you.
Thank you. See you next quarter.
Thank you.