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Edited Transcript of 4904.TW earnings conference call or presentation 27-Oct-17 8:00am GMT

Q3 2017 Far EasTone Telecommunications Co Ltd Earnings Call

Taipei Oct 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Far EasTone Telecommunications Co Ltd earnings conference call or presentation Friday, October 27, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Lai

Far EasTone Telecommunications Co., Ltd. - Senior Director of F&SS

* T. Y. Yin

Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services

* Yvonne Li

Far EasTone Telecommunications Co., Ltd. - President

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Conference Call Participants

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* Jinjin Wang

UBS Investment Bank, Research Division - Head of Asia Telecom Research, MD, and Research Analyst

* Neale Anderson

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

* Varun Ahuja

Crédit Suisse AG, Research Division - Associate

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Presentation

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Operator [1]

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Welcome, everyone, to Far EasTone's 2017 Third Quarter Earnings Conference Call. (Operator Instructions) And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.fareastone.com.tw under the Investor Relations section.

And now, I would like to introduce Mr. Gary Lai, the IR officer. Gary, you may begin.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of F&SS [2]

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Welcome, everyone, to Far EasTone's Third Quarter 2017 Investor Conference Call. Our President, Yvonne Li; and CFO, T.Y. Yin, are here with us today.

Before we start with our presentation, please pay attention to our first disclaimer page of our safe harbor statement. [Next is Li].

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Yvonne Li, Far EasTone Telecommunications Co., Ltd. - President [3]

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Okay. Good afternoon, and thank you for joining Far EasTone's Q3 conference.

As usual, I will start to update you on the overall mobile market in Taiwan in the past quarter. On your left-hand side, you have the slide that -- in terms of the postpaid ARPU in the first 3 quarters that Far EasTone do rank #1 in terms of the postpaid ARPU. And particularly on the EBITDA y-o-y growth, it was reported a positive growth comparing to our 2 major peers.

The overall subscriber in Taiwan is continuing to trending down due to the consolidation of SIM to [aging], but you can see in terms of the 4G and the 3G split that the 4G customers continue to increase. At the end of the August of this year, the total 4G subscriber represents 74% of the total market and 26% remaining is for the 3G subscriber and we expect that this trend will continue that more and more 3G customer will be migrate up to the 4G services.

Next, I'll move into that -- our operational performances. Our 4G adoption rate right now still ranks the first in the market, which is about 78% of our customer has been migrated up to the 4G services. With the 3G licenses coming due at the end of next year, we believe that both operator will try that to migrate the customer from the 3G service up to the 4G services. And for the postpaid subscriber breakdown, 78% is 4G and the 22% is 3G.

In terms of ARPU, we are seeing the ARPU trend is stabilizing and we still rank #1 in the market with $878 ARPU per month. The total postpaid customer using data has been all the way increasing. Now, it's to 87%.

On the financial performances, we are pretty (inaudible) with our current EBITDA performances. We continue to maintain a quite good EBITDA margin, although on the top line side we are actually under some top line growth pressure at this particular point of time. And on the net income level, it's actually quite stable and we are pretty confident that on the EBITDA and net income level will achieve this year's -- the forecast for all of you.

On the consolidated financial results, as I just briefly mentioned, that the total revenue (inaudible) due to that -- the more under civil services enterprise and also on some of the devices. However, on the mobile core service revenue, we do see that some of the existing core customer is migrating down a bit, mainly due to that in the first 3 quarters, essentially there is no really high-end devices. Aside from the Samsung Note 8 that are selling okay and we are expecting when the iPhone 8 and iPhone X is coming that fourth quarter that, for the new customer, the ARPU level will continue to be trending up. On the EBITDA and the net income side, as I just mentioned, that we managed quite well and we meant to achieve our target and we are also confident that this trend will be continuing until the end of this year.

In terms of balance sheet, our net debt-to-EBITDA level is about 0.9x at the end of third quarter. We still reported a very strong free cash flow, which is around TWD 14 billion up to the end of third quarter. So essentially, that is already still generating quite a good free cash flow yield.

On the business side, particularly I would like to mention 2 things. The first thing is about the future technology that many investors are asking us that we are the first ones to apply an IoT number from the NCC, which we got about 3 million, the IoT numbers. Also, that we are, right now, quite aggressively trying to deploy our NB-IoT network. By the end of next year, I think we will complete the (inaudible), the NB-IoT network deployment.

What we have seen is, in the next 3 years, that the entire market, the NB -- the IoT-related revenues, all the way from the access to the applications, will continue to grow. And we expect, in these areas, it will probably bring us close to TWD 1 billion top line in the next 3 years, okay? So we are quite aggressive in dealing with this NB-IoT-related application.

Also, on the 5G, right now, our lab is actually, every quarter, we are testing some of the future 5G technology. We have successfully in our lab demonstrated about 1 giga download speed. Right now, with our so-called [4 by 4 vinyl], we already implemented a small percentage in the market that we can provide the throughput all the way up to 800 megahertz, so -- which means on the future technology that -- for the IoT and for all the way evolution into the 5G, we are pretty aggressive in looking at the future opportunities.

On the innovation side, I just want to report to you that we have won shortlist Innovation Award-Operator for the World Communication Awards 2017 and also we have established green energy alliances with one of the electronic scooter maker, Gogoro, in Taiwan to build the first solar cell exchange station in Taiwan. I think the alliances with Gogoro, aside from this so-called solar cell exchange app station, that we are also working with them heavily on the future so-called EC solution, which I think, going forward, all the Gogoro motorcycles, when actually exported abroad, it will also embedded our EC solution. So this is another example that Far EasTone is pretty ahead in terms of all of these IoT-related applications, okay?

On the service side, we have always been very confident in our service and it -- I think it has been included in our culture that all our front liners and every touch points, we want to provide the best service to our customer. So we continue to won the #1 Top Service Award in Taiwan under the telecommunication sector. For now, it's almost 5 consecutive years.

And we are also honored with the best practice for the Direct Carrier Billing from Google. We have been -- this is the second year that we have been chosen as their set partner globally. So we had been their role model in demonstrating to all the other carriers worldwide that how good our Direct Carrier Billing is doing and there are some exclusive promotions that Google is working with Far EasTone to continue to push up this Direct Carrier Billing services.

Another one that we are also pretty happy is we had been actually garnered the 2017 Top Cloud Solution Provider Award by Microsoft. We had been very actively working with Microsoft on their Azure cloud platform, which sets not only on the cloud platform itself, but also a lot of the analytics solutions that is running on this cloud platform. We are also working with the entire supply chain and -- together with our partners. And we believe this area, going forward, will also give us a great top line growth on the enterprise sectors.

So with this page, I would also like to update you, probably many of you, that today is actually iPhone starts to have this preregistration with iPhone X. I just want to give you a very quick update on the iPhone 8 sales and some of the iPhone portfolio currently in Far EasTone's customer base. Currently, that -- in our base, that the iPhone accounts roughly 1/3 of our total smartphone base and the good thing about iPhone is, from our end goal, is iPhone takers subscribe their rate plan is at least about $999 and above. So -- and this ratio is, comparing to a year ago, although you see that the entire market is coming down. So with this iPhone portfolio, their rate trend is actually increasing about 4% of 88% to 92%. So you can see that, for the iPhone takers, I think it's also because of the iPhone has a price, it's higher, so actually people are willing to subscribe a higher rate plan when iPhone is launching. So we do expect, as I mentioned earlier, that in the fourth quarter, that ARPU level will continue to trending up because of this iPhone X.

The only thing that we are looking at for now is supply of the iPhone X. We know that by next week, next Friday, which is November 3, when iPhone X starts to sell, the first batch inventory, although it's a bit higher, they are as we know expected, but we believe that it's not enough. So we will have to see for the next couple of days whether they will continue supply coming in batch by batch so that we can actually fulfill the customer requirement.

So with this, that concludes my update to you for this quarter. So we are now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question for today is from Jinjin Wang from UBS.

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Jinjin Wang, UBS Investment Bank, Research Division - Head of Asia Telecom Research, MD, and Research Analyst [2]

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I just have one quick question regarding the financial performance in the quarter. Surprisingly, your EBITDA start to decline and also you have a very similar decline in term of the earnings. So just wondering what's the underlying drivers? And do you expect this trend to continue in fourth quarter because in fourth quarter you mentioned the revenue side now should be positive because of the iPhone, your mobile ARPU could improve, but how about the -- on the cost side?

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Yvonne Li, Far EasTone Telecommunications Co., Ltd. - President [3]

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Okay.

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [4]

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Okay. Yes. For Q3, you mentioned performance. From our end, actually it was no surprise. Despite the pressure on the top line, we managed to deliver on the EBITDA as well as net income. And obviously, we saw the revenue pressure coming for a few quarters now and, therefore, that shortfall or the softness on the top line definitely did not come as a surprise to us, yes, and that's why we put a lot of management attention to manage on the cost and the expense side and continue to meet our EBITDA and net income guidelines. And so from our angle, we are pleased with the performance because despite the softness on the top line, we came in on par versus our target for EBITDA and net income.

And looking into Q4, there will be some moving parts, the biggest one of them would be the supply of iPhone X. Yvonne just mentioned that from iPhone 8's introduction period, we did see an increase, percentage-wise, in terms of the subscriber taking the higher rate plan. However, the absolute number of the supply of iPhone 8 definitely is not picking up to change our portfolio. So we are expecting that, with a few month's accumulation of the iPhone 8 or iPhone X impact, that would gradually uplift our portfolio a little bit. But then again, this is a volatile space. It is a more than 5 million subscribers in total. So it will take some time for the impact to sink in.

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Jinjin Wang, UBS Investment Bank, Research Division - Head of Asia Telecom Research, MD, and Research Analyst [5]

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I have a follow-up question. So you mentioned your third quarter, the EBITDA and the earnings decline in Q2 are(inaudible) revenue pressure. So I'm just wondering, any trend or like a different trend in terms of costs because I think we're actually very good in terms of cutting down costs and to remain -- to improve EBITDA margin to remain healthy EBITDA growth. Did that -- anything changed in the third quarter?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [6]

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No, nothing has changed. So in third quarter, we continue to see certain subscribers asking for lower rate plans and, therefore, in so doing, they are choosing lower cancel subsidy as well. But by all means, subsidy the single most biggest item in our cost and expense item is higher than our CapEx. So we believe, going forward, there is really some opportunity for optimization in that area as well.

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Jinjin Wang, UBS Investment Bank, Research Division - Head of Asia Telecom Research, MD, and Research Analyst [7]

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I see. And I want to ask amortization and also [action] fee, the cost increase in third quarter, so which translates into the earnings decline?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [8]

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Everything on the depreciation and amortization was actually according to our plan because the amortization was driven by the futurization of (inaudible), so everything in that area had been taken to our 2017 guidance. So we have been executing to our plan.

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Operator [9]

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And your next question is from Neale Anderson from HSBC.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [10]

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I had a question on the SIM consolidation and the subscriber trends. Your chart on Page 4 shows the 4G adoption is very well-developed now, 74% or so, but still we're seeing the SIM, the total numbers decline. And that -- it's not just prepaid, it's postpaid as well. So do you have any views on how long this is going to continue? Do you think it continues well into 2018 or do you think it will start to level off?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [11]

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The impact is actually smaller in 2017 compared to prior 2 years. Obviously, we do look into our subscriber base in detail and we do find in our subscriber base there are some of them do carry a couple devices and then I do believe in other carriers' network as well now and some of those depreciates even more, even 3%, not all of the devices are active in our network. So on one hand, we do believe this is -- this consolidation impact is going to get smaller and smaller. However, we believe this is going to extend into 2018.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [12]

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Okay.

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Yvonne Li, Far EasTone Telecommunications Co., Ltd. - President [13]

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I would like to -- sorry, I would like to add on. I think on top of what T.Y. just said from the consumer side, we do see this consolidation of SIM may continue, but I think the trend is getting stabilized. We do see that in 2017 probably still we will observe that the -- overall, the mobile size is coming down. However, we do see that the IoT side, which, if we also counted IoT as one of the mobile things, that the IoT will start to pick up next year. So whether the overall mobile sub is continue decreasing, I personally think it's the IoT, it's really growing. Probably this trend will actually start to reverse again. In terms of the overall consumers, we still see this consolidation situation will continue all the way to 2018, but it's getting stabilized.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [14]

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Okay. And perhaps I can just follow-up on the IoT side. Most other operators, I guess, sort of fairly (inaudible) it seems quite difficult for one operator in a market to differentiate relative to others. I don't know whether that's any different for Far EasTone. You mentioned nationwide coverage by the end of next year. Do you think that's substantially quicker than your competitors? And do you think the revenue contribution from IoT -- can you give us any sort of feeling of how you're thinking about that? That would be very helpful.

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Yvonne Li, Far EasTone Telecommunications Co., Ltd. - President [15]

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Yes. I think Far EasTone is actually ahead of the market. We are the first one to apply the mobile numbers, I mean, the IoT numbers we tend to see here. I think the future differentiation of the IoT services is many, say, which area you are focusing on. And for us, that's why we are confident in our IoT services. We're already seeing -- or in the pipeline, there are certain enterprise related cases on hand so that -- meaning, on the energy-related areas and also on some of the transportation areas, we all see that there are some cases that is probably will soon be nailed down. So that's why, from our end goal, we are pretty confident with this growth. So that's why I am mentioning that, in our projection in the next 3 years, that it probably will bring us close to TWD 1 billion top line growth.

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Operator [16]

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And next, we're having Varun Ahuja from Crédit Suisse for questions.

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Varun Ahuja, Crédit Suisse AG, Research Division - Associate [17]

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I just want to go back to the financial performance in 3Q. Clearly, you mentioned that weakness in top line has led to a decline in net return and double decline in net income on a y-o-y basis. The understanding is that the top line growth is primarily also being accompanied with customer -- less subsidy that you bring to customer hands, the EBITDA performance should have been a bit more decent. That had been the story in the first half of this year. What seems to be in third quarter, clearly, this hasn't happened. So I just wanted to understand hardly if customer going more for SIM-only plans or some kind of a stuff wherein you're seeing real decline in ARPU or, hence, which is impacting your EBITDA performance? I'm just a little bit surprised, given the commentary over the last 6 months by all pretty clear has been that we are focusing on high-end customers and moving towards that, but still the top line stabilization is not happening. I just wanted to hear what is happening on the ground and what's your view on that.

And secondly, it's a longer-term question. If we look at last 5, 6 years, the net income is not increasing. It doesn't look like that the new option and the amortization expense will come in the next few years. Arguably, it's not likely to grow over the next 2 years also. So what is the management view? How do you want to -- how do you see this growth in coming in the telecom sector? What's your view or how does -- how do you improve? Because obviously we're looking into earnings, how should investor think about that?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [18]

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Okay. Indeed, the Q3 performance top line softness definitely was the biggest high tension item and it's driven by 2 things: One is subscribers choosing lower rate plans and since there are multiple rate plans available for subscribers and we do see customers moving down the rate plan mix a little bit, but actually more importantly, it is through the voice revenue decline so the absolute value of the voice revenue decline actually was greater than the margin fee decline. And the over [reachable] was actually priced profitable and, therefore, this piece of decline did cause us a pretty handsomely in the revenue margin front. So that is the single biggest hit. So revenue is driven by 2 things: One is rate plan mix shifting lower and, 2, continue the decline in the voice traffic. And if I look at our voice revenue right now, in our multiservice revenue high, it is still accounting for just over 10%. Although it's significantly lower than a year ago, but still quite a sizable piece of our mobile service revenue time.

And, Varun, your second question with regards to the outlook for the future, then definitely I think new areas such as IoT and fixed line part of our enterprise business contribution would definitely help FET in terms of identifying a new area of revenue stream as well as net income stream. So that would be the direction for FET in the next few years.

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Varun Ahuja, Crédit Suisse AG, Research Division - Associate [19]

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But on the mobile side, how do you see it? Well, are you -- obviously, all 3 of you are were kind of saying you want to push toward higher-end plans, but on the ground it doesn't seem to be happening or reflecting in numbers. So how should we think about it, right? Is it '18, '19, you think you -- with the -- obviously we don't expect unlimited plans to go away, but generally, in terms of trending up or in terms of profitability, you'd think that given 4G now is decent-sized, is it beneficial in the [tight end] to start monetizing it or what's the management view on that?

And lastly, just clarity on that you mentioned IoT revenue for the next 3 years, TWD 1 billion. Is it annual revenue you're expecting after 3 years? Or is it just the combined revenue for the next 3 years, the TWD 1 billion?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [20]

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For the ARPU, I think we just commented on it as well. So we then take iPhone 8 as an example, although it's only less than -- it's only been up a month. However, for the iPhone 8 takers, we have seen a high percentage of iPhone 8 takers taking up the higher rate plan, but all of our 5 million plus postpaid subscriber, it is a small piece and, therefore, it would take several quarters for the impact of premium handset popularity should have an impact on our overall ARPU especially -- even for those consumers who are purchasing iPhone 8 or iPhone X in conjunction with higher rate plan. This default may also reduce their voice traffic as well. So the outreach of their revenue contribution over and above the rate plan peak is likely to decrease versus before. So it would take longer time for the higher rate plan mix to sink into our overall ARPU average. And for the IoT revenue, TWD 1 billion, what Yvonne was alluding to was by year 3, we are targeting to reach TWD 1 billion for year 3.

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Operator [21]

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(Operator Instructions) And your next one is from Neale Anderson from HSBC.

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

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I just wanted to follow-up. If I understood correctly, mobile voice is 10% of service revenue growth. First of all, is that correct? And then, how quickly is that declining? Perhaps you -- could you share any figures on where that was at the start of the year just so we can get an understanding of how that's changing or you expect going into 2018?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [23]

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Okay. Indeed, it is mobile voice revenue was accounting for about 10% of our mobile service revenue high. And the decline rate, we're seeing somewhere between 20% to 25%. And the decline rate has been quite consistent for the past 2 years and we believe it will continue, albeit the decline rate may be lower a little bit, but direction of it, we think, will continue.

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

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Okay. As I think, like some of the other questioners, I'm struggling a little bit to reconcile the trends in the -- concerning the tariff plans. So as I understand it, it's lower value plans with lower subsidies, but I would have thought that would have been a positive to near-term EBITDA even though the revenue effect is negative over that 2 year contract, so I would assume that customers trading down to tariff plans with lower subsidies would result in a short-term benefit to EBITDA. But if I understand you correctly, that has been offset by much lower voice revenue for its usage, and that's obviously pretty high margin, and that's offsetting all of those benefits from -- all potential benefits from subsidy savings. Is that correct?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [25]

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Directionally, that's correct. And additional perspective is that you have to put in your calculation is the decline rate has directionally expanded in 2017 versus 2016 and, therefore, right now, versus 2016, we are losing a bit more on the service revenue margin front, although we continue to stay on the subsidy as well as other operating expenditure. However, we need to put in more effort to drive cost and expense down in order to meet -- to deliver our EBITDA guidance.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [26]

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I see. And that acceleration, that's on the voice side, is it? The sharp decline in voice usage -- voice traffic?

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [27]

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Yes. That's still a single-digit impact.

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Operator [28]

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There are currently no questions in line.

I'll pass the call back to Mr. Gary Lai. Gary, please proceed.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of F&SS [29]

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Thank you very much who participate on this quarter results conference call. We will see you next year. Thank you very much.

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Yvonne Li, Far EasTone Telecommunications Co., Ltd. - President [30]

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Okay. Thank you.

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T. Y. Yin, Far EasTone Telecommunications Co., Ltd. - CFO and EVP of Finance & Shared Services [31]

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Thank you.

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Operator [32]

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We thank you for your participation in Far EasTone's conference. There will be a webcast replay within an hour. Please visit www.fareastone.com.tw under the Investor Relations section. You may now disconnect. Goodbye.