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Edited Transcript of 3045.TW earnings conference call or presentation 5-Mar-20 7:00am GMT

Q4 2019 Taiwan Mobile Co Ltd Earnings Call

Taipei Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Taiwan Mobile Co Ltd earnings conference call or presentation Thursday, March 5, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rosie Yu

Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary

* Shirley Chu

Taiwan Mobile Co., Ltd. - VP of Finance & Administration Group

* Zhichen Lin

Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director

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Conference Call Participants

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* Billy Lee

Crédit Suisse AG, Research Division - Equity Research Analyst

* Jack Hsu

SinoPac Securities Investment Service, Research Division - Analyst

* Neale Anderson

HSBC, Research Division - Head of Telecoms Research, Asia Pacific

* Peter Milliken

Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team

* Yufang Lee

Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Mr. Jamie Lin. Mr. Lin, please begin your call, and I'll be standing by for the Q&A. Thank you.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [2]

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Thank you. Good afternoon, and welcome to Taiwan Mobile Fourth Quarter 2019 Investor Conference Call. Before I start our presentation, I'd like to direct your attention to our disclaimer page, which states the information contained in this presentation, including all forward-looking information is subject to change without notice, whether as a result of new information, future events or otherwise, and Taiwan Mobile Co. Ltd, hereafter the company, undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information content herein. Nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation.

All right. Let's look at the business overview. I will like to start with operational highlights of fourth quarter 2019.

Please turn to Page 4. We're in an operating environment where customers continue to seek lower rate plans, delay their device upgrades in anticipation of 5G as well as fewer paid -- using fewer paid voice minutes. Despite all the headwinds the entire telecom industry faces, Taiwan Mobile managed to deliver outstanding results and turned our telecom EBIT into positive Y-o-Y territory in 4Q 2019, the first time since the Q2 '18 499 frenzy.

The results can be attributed to our successful efforts in upselling our new and existing customers. Our commendable momentum in Double Play, so-called (foreign language), limited mobile data and high-speed home broadband bundled plans, and the successful launch of our Smarter Home business where we partnered with Google to bring its first Chinese-speaking smart speaker, the Google Nest Mini, to Taiwanese market in 4Q 2019. Also as importantly, momo continued to widen its lead in the e-commerce realm, which we will dive deeper into in later slides. As a result of our solid 4Q performance, for the full year 2019, Taiwan Mobile was able to deliver net income that beat our guidance by 1%.

Now let me talk about our versatile strategy and results on Page 5. During the quarter, we increased the monthly tariff on our handset bundled plans by TWD 106. The enterprise segment also continued to produce solid growth, with IoT connections rising by 25% on the back of tailwind from smart meters and connected cars. Cloud service revenue rose by 15%, thanks to solid IDC demand.

On the right-hand side of the slide, you can see that under our Double Play (foreign language) brand, we offered unlimited mobile data services bundled with different speeds of home broadband services, coupled with free video and music streaming and DTV subscription, plus a complimentary Google Nest Mini Smart speaker to enable voice command on your TV and smart home appliances, all together at a very competitive price to what a stand-alone same-speed home broadband would cost from incumbents. That is why our Double Play products have proven to provide strong incentives for customers to sign up to higher rate plans while, at the same time, position us to be a leader in the Smarter Home business.

Now turning to our Pay-TV business on Page 6. Once again, we fared better than other leading MSOs with the smallest loss in basic TV subscriptions and much higher broadband and DTV adoptions, aided by our Double Play bundled plans. Not only did we continue to increase broadband and DTV penetration in our cable TV customer base, we also made more strides in higher-speed broadband take-up rates. During the quarter, the percentage of customers subscribed to broadband plans with speeds of 100 megabits and higher rose by 7 percentage points from a year ago.

Last but not least, on Page 7, let's take a look at momo. In Q4, momo once again outpaced its peers by growing its B2C revenue by 33% Y-o-Y, thanks to market share gains in a growing online retail market. Average ticket size and number of transactions for customers were both higher. SKUs further increased, and a private label credit card was successfully launched. Throughout the 2019 year, momo also added 10 new satellite warehouses to further shorten its delivery time and solidified its leadership position against peers.

Overall, gross margin and operating margin have declined as momo leaned towards growth and invest in its logistics capabilities. Over time, we expect profitability to improve as scale benefits and operating leverage kick in.

Now let me turn over the slide to Rosie for our financial overview.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [3]

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Hi. Good afternoon.

On the performance by business, on Page 9. The reduced dealer commissions, lower interconnecting costs and spectrum usage fees helped us contain the year-on-year decline in pre-IFRS 16 telecom EBITDA at 5% in the fourth quarter. Telecom EBIT, however, went up by 1% year-on-year as D&A tapered off.

Reflecting the latest channel leasing pricing we charge TV home shopping companies, pre-IFRS 16 cable TV EBITDA in the fourth quarter dropped by 11% year-on-year. However, its EBIT increased by 6% year-on-year, aided by falling depreciation of set-top boxes. As for momo, in addition to its robust revenue growth, EBITDA also grew by 14% year-on-year in the fourth quarter due to improved profitability in its businesses.

Now let's move to the results summary page. In the fourth quarter, operating costs increased along with the growing e-commerce business and handset sales. However, our consolidated operating income showed year-on-year growth for the second consecutive quarter, thanks to effective expense rationalization. The low single-digit year-on-year decline in pretax and net income was mainly due to one-off equipment write-off losses. For the full year of last year, telecom EBIT came in ahead of our expectations, while the combined EBIT of cable TV and momo also surpassed our expectations, accounting for 22% of our total EBIT in 2019.

Now let's turn to balance sheet analysis. On the asset and liability front, the year-on-year surge in inventory and accounts payable was driven by momo's business expansion and solid iPhone demand. Gross debt declined by 17% year-on-year to TWD 43 billion, following CB holders' conversions and repayment of our 7-year straight bond matured in 2019.

As for shareholders' equity, the increase in paid-in capital and capital surplus is reflective of the conversion of our convertible bonds, which had an outstanding balance of TWD 0.93 billion at the end of the fourth quarter last year. As a result, share count for 2019 EPS calculation totaled 2.768 billion shares. Benefiting from a lower debt, our net debt to pre-IFRS 16 EBITDA remained at a low level of 1.16x.

Now let's turn to Page 12, cash flow analysis. In the fourth quarter, quarter-on-quarter and year-on-year drop in pre-IFRS 16 operating cash flow was mainly due to momo's payment, delaying from end of third quarter to fourth quarter as well as higher iPhone 11 payments. Investing cash outflow increased year-on-year in the fourth quarter as a result of the TWD 1 billion deposit with NCC for 5G spectrum auction. As for financing activity, the year-on-year increase in financing cash outflow was mainly related to the implementation of IFRS 16.

Full year 2019 mobile CapEx came off year-on-year as 4G approached the tail end of the investment cycle. Separately, momo's cash CapEx recorded a year-on-year decline because only 10% of the land acquisition cost for its Southern distribution center was paid in 2019. For the whole year of 2019, free cash flow of TWD 19.19 billion translates into free cash flow yield of roughly 6%.

Now let me turn the presentation back to Jamie for 2020 guidance and event updates.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [4]

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All right. Let's turn to Page 14 for our 2020 guidance. In terms of 2020 outlook, 5G, cloud gaming, streaming content revenue, enterprise cloud and enterprise connectivity solutions will be the growth -- growing areas among telecom business, leading to a 2% Y-o-Y growth in telecom revenue, inclusive of device sales. momo's top line will grow 18% Y-o-Y, underpinned by expanding the e-commerce business; Pay-TV to return to growth trajectory, aided by premium fixed broadband bundle services or (foreign language) Double Play.

As for profitability, the combined EBIT of the cable TV business and momo will grow 4% Y-o-Y, make up 20% of our total EBIT in 2020. That said, consolidated EBIT is forecasted to decrease. This is because profitability for 5G, cloud gaming, streaming content investments, et cetera, takes time to kick in.

For 2020 CapEx, the total of TWD 14.5 billion was approved by the Board. You can see the breakdown in the slide. We expect telecom CapEx to double Y-o-Y driven mainly by 5G infrastructure rollouts, cable TV CapEx to increase due to largely more demands for advanced set-top boxes, momo CapEx to rise as major payments for its new Southern automated center will start in 2020.

Next, let's go to the event updates. So with the conclusion of the 5G spectrum auction, Taiwan Mobile acquired 60 megahertz in the 3.5 gigahertz frequency band for TWD 30.45 billion and 200 megahertz in a 28 gigahertz frequency band for TWD 0.21 billion. Total spectrum cost is TWD 30.66 billion. Following our Board's recent resolution, Taiwan Mobile plans to issue an unsecured straight bond with a total amount of TWD 20 billion by end of March.

And on Page 16, you can see the summary of awards and recognitions we have received during the quarter.

Now finally, at Page 17, I would like to wrap up our presentation with the key message that we would like to deliver. Taiwan Mobile will be the only telco among the big 3 in Taiwan to be able to have partnerships on 5G network and spectrum sharing and create incremental benefits. 60 megahertz of spectrum in the 3.5 gigahertz frequency bandwidth -- frequency band is sufficient for Taiwan Mobile's 5G business in the next 10 years. In due course, we won't have CapEx inefficiency issues that others may encounter.

We believe we have a sensible 5G winning strategy in view that our total 5G spectrum and CapEx spend in the next 20 years' spectrum concession period may be the least among the big 3 without sacrificing 5G network quality. Progressing on the 5G journey, our overarching goal is to maximize related investment returns.

Now with that, I would like to open the floor up for Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Amber Lee with Yuanta in Taiwan.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [2]

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For CapEx, I think it looks like Taiwan Mobile has the highest expectation for this year among your peers as you're guiding to double spending to TWD 14 billion. I think that Chunghwa and Far East Tone each guided around TWD 7 billion and TWD 6 billion of CapEx for this year, that is specifically for 5G. I guess my question is, firstly, how much of the TWD 11 billion CapEx for mobile is specifically for 5G? And secondly, what's driving the more aggressive thinking on 5G builds compared to the others?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [3]

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The 5G CapEx actually is not over TWD 9 billion for us. So actually, our mobile CapEx is very similar to our peers.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [4]

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Okay. Then what's your view on your CapEx level going forward?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [5]

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Going forward, actually, the CapEx of 2021 will only be calculated or completed -- I mean the internal calculation will only be completed probably around January next year. So we won't have guidance for you at this moment.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [6]

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And just to add to that, like I said in our key message page, we are expecting quite some level of savings in terms of spectrum amortization versus our peers. So even if we would incur similar amount of network CapEx, we're still in a much better position financially versus our peers.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [7]

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But that TWD 9 billion is still a bit higher than your peers. Does that mean that for the less spending on amortization will be going into CapEx and result in depreciation in the years -- in the coming years?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [8]

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What we understand is we're spending similar amount versus our peers this year. In terms of the year after, we will comment once we have our CapEx plan approved by the Board.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [9]

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Okay. For the guided D&A of around TWD 16 billion for this year, could we have the respective number on depreciation and amortization?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [10]

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No. We don't disclose the numbers.

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Shirley Chu, Taiwan Mobile Co., Ltd. - VP of Finance & Administration Group [11]

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The amortization is quite straightforward. We will amortize the new 5G spectrum over the 20-year period. And for the existing one, the amortization expense will stay the same.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [12]

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Do you also expect to launch a 5G service in third quarter?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [13]

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That is correct.

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Operator [14]

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Our next question comes from Peter Milliken with Deutsche Bank in Hong Kong.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [15]

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Yes. Sorry. Yes, my question is about the CapEx and how you believe it will be lower through the cycle than your peers. Presumably, that's because you say that you can have these 5G partnerships. Why are you the only one able to do a 5G partnership?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [16]

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Yes. So right now, the regulations would -- based on the regulation, if you and your peer have a combined spectrum of more than 100 megahertz at the 3.5 gigahertz band, the rule is that they'll punish you. So if you have a combined spectrum of 120 megahertz, then you will only be allowed to share 80 megahertz of that spectrum, so which would make sharing nonsensible for some of the peers that hold spectrum of 80 or 90 megahertz. But in terms of our 3.5 gigahertz holding, it will enable us to have all the options to share with some of the other carriers that are holding less than 4 -- equal or less than 40 megahertz of spectrum assets at the 3.5 gigahertz range.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [17]

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I see. Got it. And my other question is about dividends. Have you announced what your DPS is likely to be this year?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [18]

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No. It will only be decided in April's Board meeting. But as you may have noticed from our 2019 balance sheet, if you look at our -- if you calculate our excess reserves, you'll find that we have roughly TWD 40 billion of excess reserves, which is TWD 8 billion up as compared to the past because of the CB conversion.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [19]

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I see. Okay. So you sound confident going into that decision. Okay. Look, the final question is about content and gaming and streaming, these sort of things that you mentioned as sources of CapEx. Is there anything else you'd be able to provide any details on what you're planning there?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [20]

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Right now, we don't have any details to share, except for the news that was already announced, which is our partnership with Riot Games and the plan to publish 3 to 4 of their incoming games in the next year or 2.

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Operator [21]

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(Operator Instructions) Our next question comes from Neale Anderson with HSBC in Hong Kong.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [22]

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So clearly, on the cable business, please, so I just wanted to clarify. So last year, we had 11% decline, and that's because of the channel leasing pricing to TV home shopping companies. And despite that, there was a 6% improvement in EBIT due to lower set-top box depreciation. So is that trend going to remain the same? Presumably, you've got a full year of the lower lease charges, but are you expecting to again make that back up this year with the lower depreciation?

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Shirley Chu, Taiwan Mobile Co., Ltd. - VP of Finance & Administration Group [23]

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The number that was for 4Q last year, not for the whole year. So for the whole year last year, the EBITDA decline was much less, and this year it will have similar trends with a small dip in EBITDA, while earnings will go up.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [24]

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Okay. And those are the 2 main drivers in cable. But I guess you're going to be pushing your double mobile and broadband promotion. Is that expected to be a significant contributor?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [25]

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Yes. That is actually a hot selling product right now, and we're expecting for it to be contributing to both our carrier -- mobile carrier business and our cable business.

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Operator [26]

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Our next question comes from Jack Hsu with SinoPac in Taiwan.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [27]

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I have two questions. First question is will we worry about the business a bit, especially for the mobile service business in this year? Because right now the COVID situation maybe will make some enterprise customers, their cash position -- I mean will we worry about enterprise segment development in this year? This is my first question. And my second question is about, we have announced we will cooperate with SK Telecom in Korea. Could you give -- could you elaborate some details about our cooperation, our plan in the future?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [28]

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Thank you, Jack. We're actually worried about the coronavirus situation in terms of the threat it might pose to our employees' and our customers' health. But in terms of our enterprise segment, it's actually doing better-than-expected due to increased demand for data transportation and remote meeting and remote working needs. So it's actually turning out to be a tailwind to our enterprise business.

In terms of SK Telecom partnership, so SK has been long -- has been for a long time our partner in terms of telecom business. So we have been long exchanging best practices and know-hows in terms of -- with regards to the mobile carrier business and as they are a first mover in the 5G deployment and 5G rollout. And during the process, they were able to successfully increase their leadership in the Korean market. And I think this partnership would help us learn from their experiences and be able to fare better versus our peers in the Taiwanese market.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [29]

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Okay. Just one follow-up question. So for the partnership with the -- the collaboration with the SK Telecom, will we learn the business know-how to build a 5G business plan? Or will we learn their strategy to develop, to build up the 5G network? So which kind of direction for the TWM in the future?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [30]

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Yes. Jack, both in terms of network deployment and market penetration strategies are among the things we are exchanging with SK upon.

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Operator [31]

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(Operator Instructions) And next we have a follow-up question from Amber with Yuanta in Taiwan.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [32]

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I saw the operating data. As you mentioned that the enterprise segment has seen strong momentum with 32% of year-on-year growth in last year, what's the segment sales contribution in 2019? And how does the margin look like?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [33]

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Amber, would you mind repeating your question, again?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [34]

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All right. It's on the enterprise segment. Just you mentioned that it's 32% of year-on-year growth. I was just wondering what's the sales contribution in that segment? And how's the margin?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [35]

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Amber, I don't think we mentioned this. We only mentioned there's a 25% year-on-year growth on the IoT connectivities and also 15% year-on-year growth on the cloud service revenue.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [36]

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Yes. It's on the -- it's in your data sheet. I think it's on the second page. Enterprise segment in the in the sales side.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [37]

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Got it.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [38]

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The monthly factsheet or the management report?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [39]

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The operating data sheet.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [40]

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Amber, can we get back to you on that?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [41]

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Okay. Sure. Yes.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [42]

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If you are talking about the enterprise segment, did you say the 32% revenue increase in 2019?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [43]

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Yes.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [44]

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That only refers to the combined revenue of ICT, IoT and cloud.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [45]

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Yes. And what's the sales contribution of the...

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [46]

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What's the contribution of what?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [47]

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Sales contribution?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [48]

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Could you please speak up? We couldn't hear you.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [49]

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Sorry, sales contribution from enterprise segment.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [50]

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You mean sales contribution?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [51]

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Yes. Sales contribution.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [52]

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Sales contribution.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [53]

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Sales contribution.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [54]

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I don't have that number handy, but if we separate the enterprise fixed business into the growing part and legacy part, then the growing part made up for like 75% of its fixed line revenue.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [55]

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75% of what revenue?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [56]

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Of fixed line revenue.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [57]

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Okay. I have another question. I think the 2020 guidance of EBITDA is -- implies that your EBITDA margin for this year will be 23.5%. That's more than 3 percentage decline comparing to last year. What's driving the decline for this year?

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Shirley Chu, Taiwan Mobile Co., Ltd. - VP of Finance & Administration Group [58]

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As we mentioned, this year, we will have several new businesses, which will take time to have its profitability kick in. So for example, we will start to offer cloud gaming service and also we will invest into more so-called Taiwan Mobile original content. And on the conservative side, we estimate that for the Taiwan Mobile original content business, the margin is lower compared to the telecom business. And also 5G is the main sector for the short-term lower margin situation.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [59]

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Therefore, the investments that you mentioned, do you expect these to go into next year as well?

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Shirley Chu, Taiwan Mobile Co., Ltd. - VP of Finance & Administration Group [60]

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On the EBITDA side, I think it's unlikely to go -- the margin won't go down further in the sense that the 5G revenue will gradually pick up. And then on the cloud gaming and the original content investment, we normally have, like, a higher initial cost. Then gradually when revenue pick up, we will fare better with better margins.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [61]

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Okay. And lastly for me, sorry, what's your expectation on the payout ratio of your 2019 DPS? Because I think, historically, your payout has been less than -- or about 110%. So I just want to know your view going forward on payout.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [62]

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Well, as I mentioned earlier, it's decided by the Board every April. So we can't share with you anything at this moment. The only thing I can share with you is on the excess reserve, which I've already done so.

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Operator [63]

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Our next question comes from Billy Lee with Crédit Suisse in Hong Kong.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [64]

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Jamie and Rosie, I have a couple of questions. The first one is regarding your 5G strategy. I noticed -- and you also mentioned that Taiwan Mobile is actually having fewer 3.5 than your peers, which have 80 or 90. So they have been saying that, and the industry has been saying that 80 to 100 is minimum for optimal efficiency. How are you actually going to have a decent amount of efficiency with just 60? I want to understand a bit on that relative shortfall versus your competitor.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [65]

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Billy, thanks for your question. Yes, we've been also -- thanks for giving us the chance to clarify it. So I think what a lot of people are saying is fake news. So if you look at spectrum holding, the most important element it provides is the capacity to provide data transfer for customers. And based on our production of 5G take-up rate and data traffic growth for the next 5 to 10 years, a 60 megahertz, 3.5G spectrum plus 200 megahertz, 28 gigahertz spectrum is more than enough to service our 7.1 million, 7.2 million users for the next 5 to 10 years. So that's the baseline.

And any spectrum holding more than that, yes, it's going to give you the luxury of results in speed test, but 99% of the customers don't decide their carrier based on the result of speed test. Otherwise, most of the customers will be using Chunghwa Telecom at this moment, right? But that's not the case. So I think what some of our peers are saying that would want to create false impression of spectrum holding equals to market share is purely fake news. You can easily double check that based on 4G spectrum holding and market share. So you can easily see that only us and Chunghwa Telecom would have a market share that is higher than our spectrum holding, but there are 3 carriers that would have a market share lower and sometimes even much lower than your spectrum holding.

So spectrum holding is not equal to your market share. And if the spectrum price is high, and you hold more than enough spectrum for yourself, you're only creating a negative drag on your bottom line, and it's an unnecessary drag. So that's why we think that owning 60 megahertz of 3.5 gig and 28 -- 200 megahertz of 28 gigahertz is our best combination right now.

On top of that, the government already announced, in 2 to 3 years, they will release the next wave of spectrum. So by that time, if we realize our projection is too conservative and our users would need a little bit more bandwidth, then we can easily just bid -- obtain more spectrum. And like we said, we also have an option of sharing spectrum with 2 of the peers that have -- that hold 40 megahertz or less spectrum on 3.5 gig range.

And then on top of that, the NCC chair also announced that on the 3.57 gigahertz plus spectrum, there's a possibility that they're going to clean up some amount of spectrum on that neighborhood -- in that neighborhood. So if that's cleaned up, we also have an option to obtain the spectrum right next to our holding and increase our spectrum holding. And it's only beneficial to us because that neighborhood is only connected to our spectrum.

So we have more than 3, 4 options that we can take in the next 3 years, if things turn out to be more -- not as -- more aggressive than we expected. So right now, I think it's only sensible for us to hold just enough spectrum so that we create the largest ROI for our shareholders.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [66]

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Right. Thank you for that logic. I think it makes quite a lot of sense, but I just have a couple of follow up on this. So you said the NCC has actually just talked about the possibility of a neighboring spectrum. Is that like right next to you, like a 3.5 or 3.6, something like that? And then second question is, I think you have talked about earlier, but I think I'm not sure if I get it correctly. So you said in terms of spectrum sharing with your peers, there's a cap of 100 in combined. And you also mentioned 120. So can you clarify a little bit on that as well.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [67]

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Got it. So in terms of additional 3.5 gig spectrum releasing, the NCC talked about moving the 3.57 plus range spectrum that satellite is using right now in the next 1 to 2 years. So they're going to work on clearing that and open a little bit more spectrum, and we're expecting that to be somewhere less than 50 megahertz. So if that's opened up, only us will be benefiting from this contiguous spectrum. So if we will have to bid on that, I think there will be a lot less incentive for our peers to try to outbid us on that.

In terms of spectrum sharing, the NCC has said, if you own 80 megahertz of spectrum, if you are to share it with another peer that is only holding 40 megahertz of 3.5 gigs spectrum, then the most you can share between the 2 of you is 80 megahertz, which would create no incentive for a 80 megahertz player to be sharing with the 40 megahertz player because you'll get nothing out of this sharing. So that is why based on the current 3.5 gigahertz spectrum holding, only us has the capability to share -- among the big 3 to share with 2 of the smaller players that hold 40 megahertz or less in terms of a 3.5 gigahertz spectrum.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [68]

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Okay. But is that technically possible? Because, for example, like, Taiwan Star, they are very far from you, they're next to Far East Tone. So can you technically share, let's say, 40 megahertz of them, technically speaking?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [69]

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Yes. So the equipment on the base stations already support that as of today. And then we're expecting smartphones to support this so-called carrier aggregation feature in the next 1 to 2 years.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [70]

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Okay. Got it. So it's possible. And then sorry, I haven't got this clearly yet. I'm not sure. So the maximum of spectrum sharing is 100, 120?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [71]

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100. So if you have more than 100 combined, each 10 megahertz you hold together will deduct 10 megahertz of sharing you can do. So if you hold 90 megahertz, and the other smaller player's holding 20 megahertz, then the two of you combined can only share 90 megahertz. If you hold 80 megahertz and the smaller player holds 40 megahertz, then two of you combined can only share 80 megahertz, which makes no sense for 80 megahertz player to share with the 40 megahertz player.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [72]

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Okay. Got it. And one last question. I appreciate that, like, Taiwan Mobile actually adopts a conservative strategy in bidding, but I'm just wondering, does that also reflect your view that you are actually quite conservative on the 5G outlook in terms of monetization? And in a 1- to 3-year view, what's your expectation on 5G monetization opportunities? And for example, in the consumer side, I heard -- I saw that you guys are already launching some of the 5G phone plan. And what should we expect the pricing going forward?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [73]

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Sure. So we're bullish on customers' willingness to pay for 5G, but they're not willing to pay for just the result of speed test. So if you look at what's happening in the leading -- the first-mover countries, people are not satisfied if you have spotty 5G connectivity, right? They want 5G to be highly usable. So in terms of 5G strategy, I think that's what we're thinking about.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [74]

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Okay. Could you also share some of your -- like, in terms of the revenue outlook that you have embedded in your guidance this year and also in next year, 2021, in terms of 5G contribution?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [75]

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Well, we said that the 5G service take-up rate this year will be low. And I think it's too early to tell the contribution for the next year. For sure, 5G ARPU will be higher than the current level.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [76]

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Okay. One last question. This is related to 4G. So what about -- what's your view on the 4G competitive landscape right now? Should we expect a stabilization in ARPU? Or are you seeing a continuous increase in competition?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [77]

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Right now, we're seeing a stabilizing ARPU environment. But it's still facing some headwinds. But as with all the previous technology upgrade, once 5G rolls a run, the higher ARPU users are usually among the first batch to upgrade to 5G. So that's going to create a -- increase the drag on 4G blended ARPU.

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Operator [78]

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(Operator Instructions) Next we have a follow-up question from Jack with SinoPac.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [79]

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I have just one question. Will we still let the SIM-only plan go on in the 5G?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [80]

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Thank you, sir. Right now, we're not ruling that out. But since our 5G launch is really in Q3, we'll have a more clear view the next time we have this conference.

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Operator [81]

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(Operator Instructions) Certainly, Mr. Lin, there seems to be no further question at this point in time. Thank you.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [82]

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Thank you. Thank you, guys. We'll see you next time.