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Edited Transcript of 4904.TW earnings conference call or presentation 2-Aug-19 8:00am GMT

Q2 2019 Far EasTone Telecommunications Co Ltd Earnings Call

Taipei Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Far EasTone Telecommunications Co Ltd earnings conference call or presentation Friday, August 2, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chee Ching

Far EasTone Telecommunications Co., Ltd. - President

* Gary Lai

Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance

* Sherman Lee

Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO

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Conference Call Participants

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* Billy Lee

Crédit Suisse AG, Research Division - Equity Research Analyst

* Neale Anderson

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

* Wai Kit Chu

BofA Merrill Lynch, Research Division - Director

* 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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Welcome, everyone, to Far EasTone's 2019 Second 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. And Gary, please begin.

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

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Good afternoon, everyone, to attend Far EasTone second quarter 2019 results conference call. Both our President, Chee; and CFO, Sherman, are here with us today. Before we start Chee's presentation, please pay attention to the safe harbor statement at the first disclaimer page.

Let me turn to Chee, please.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [3]

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Thank you, Gary. Good afternoon, everyone. Thank you for joining us for the second quarter performance update. I'd like to start with the Taiwan telecom market situation. And I think it is not a great news, but definitely a positive news because the revenue decline is slowing down. As you could see on the left-hand side, the market mobile revenue, if we compare the first half to second half last year, it was 9.5% decrease. But then from the second half last year to the first half this year, we are looking at 3.4% decrease. So the declining is slowing down.

And then on the right-hand side, it's indicating the churning of the market, right? So in terms of the number of portabilities and how many subscribers are moving around among the operators. So if you look at first half last year to second half last year, and it was look -- we are looking at 3.6 million, 3.7 million subscribers moving around. And to this first half, we are looking at like less than half of it, which is 1.6 million or so. So the market -- the churning is slowing down. That is also encouraging because even though the price war tends to still be happening, but then the consumer's reaction to those low pricing are definitely not as aggressive as they -- or they were just not as attracted to these low price offerings like they were before.

Okay. And then now turning the focus to Far EasTone, ourselves, in terms of our operational performance. On the postpaid customers, even though last year, we kind of anticipated number may be declining, but then as you could see from the chart that our postpaid number of customers have actually been on the upward trend. So we are very pleased to report we are beating our forecast and -- by more than 80,000 subscribers. And then on the right-hand side, the churn rate, we have continued to manage the churn rate very, very well with our Big Data and AI analytics. So we -- every quarter, we just keep hitting the all-time low as such that we are now at 1.4%.

Okay. All right. And in terms of our new economy growth areas, in the cloud service revenue, we are looking at more than 600% increase year-over-year for the first half, okay -- for the second quarter. And then for the IoT revenue, we are also looking at more than 500% increase. And then for the ICT contract amount, and then, again, this contractor, how much -- how many contracts we have earned, but then this is not the same as how much revenue that has been realized. But then just to look at the contract amount, we are looking at almost 500% growth as well. So the momentum is just very encouraging.

And then on the digital service side, the revenue has now gone up 18%, and we are not extremely happy about it. And then this is one area we will continue to boost the revenue, okay, in this area.

Okay. If we compare ourselves with our competitors, the 2 major ones, and for the second quarter, right, only FET has beaten both top line and bottom line guidance. So if you look at Chunghwa, their achievement rate is under 100%. And while Taiwan Mobile achieved one and -- overachieved the other one and one is underachieving actually. And Far EasTone has achieved both -- overachieved in both EPS and the total revenue.

And the next section, I'm going to ask Sherman, our CFO, to speak in detail for everyone. Thank you.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [4]

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Okay. Hi, everyone. So now we are on Page 9. Let's first look at EBITDA and margin. Let me remind you that the EBITDA on 2019 is IFRS 16. So it looks higher than 2018. But actually, if we use apple-to-apple, last year's pre-IFRS 16, so we will see that our margin ratio second quarter actually is 31.8%, which is largely in line with what happened in 2018 first quarter. And then the net income for 2019 second quarter is $2.174 billion.

Next page. And then you can see that on the total revenue side, second quarter result is $24.425 billion (sic) [$20.425 billion], which is 102% of guidance and operating expense is $3.68 billion, which is 96% of guidance and EBITDA is 103% of guidance. And the net income is $2.174 billion, that is 105% of guidance. And the EPS for second quarter is $0.67 per share, that is $0.03 higher than the guidance.

So for the first half of '19 -- 2019, the total EPS achievement is $1.35, which is also 5% higher than the guidance, and it is also 52% of annual guidance, which is $2.60.

And then the financial results, as you can see that right now at the end of the second quarter, the cash on hand is $12.7 billion. And the total net debt is $19.145 billion. The shareholders' equity is $66.218 billion and the net debt is a healthy 0.74x of EBITDA. And the free cash flow as of second quarter year-to-date is $5.2 billion. The major reason this didn't increase as much as the first quarter is we have significant tax payout in second quarter and as well as we have to return Taiwan Mobile $0.9 billion for legal disputes. And because of that, so the second quarter cash flow is not as high as the first quarter, and we also spent $3.197 billion on basically network equipment procurement.

And that concludes my highlights for the financial section.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [5]

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All right. Thank you, Sherman. If you turn to Slide 13. Okay. Just a quick summary of our second quarter highlights for Far EasTone. In terms of 5G readiness and everybody probably already know that we're going to have the auction on December 9, and then so we continue to be prepared for 5G. And then we have completed -- and we have been doing quite a bit of lab testing, and then we also have completed 5G live EPC trial. And also we have completed the first packet switching call using 5G RAM.

Okay. On the software development part, which is one of major focus areas since I joined FET, that is to strengthen -- continue to build our software development and capabilities and team. And then in our transformation office, we actually have launched the IoT platform for enablement of applications. And that is internally built and is already available for commercial use. And then, we've been in touch with our enterprise customers for the usage of it.

Okay. In channel transformation, especially the digital transformation, we want to continue to enhance our user experience, the digital user experience, that includes how they would shop online and pick up offline. And then also across different touch points across all channels, how we can connect that together. And this is an ongoing one channel initiative that is one of the major initiatives we are undergoing in Far EasTone. And also we have provided a real-time sales performance dashboard to our stores and the sales managers as well. In the past, it's not as real time, but it's now real time. And then also in the growing ICT business area, the 2 recent wins that we have got, one is the Taoyuan City smart streetlamp. That is $2.4 billion worth of a contract that we have acquired. And then also the other one of the significant win that we got is Taipei Metro Station Monitoring System, which is $142 million contract, right?

And then we also got many awards and recognitions. Just to name a few were listed for here that included we are one of the top 5 listed companies for corporate governance evaluation. And this is -- this was held by Taiwan Stock Exchange. And this is our getting this award for 5 years in a row. And also we got the best CSR award from Global Views Monthly for 3 years in a row. And then we also earned the best service in Taiwan. This is across all categories, not just telecom, and that is 8 years in a row. And then all these is just indicating our consistently performing best service and then doing our CSR responsibility for the community, and that is just part of our mission for Far EasTone. And also we continue to work with our employees. We work on the open communications and then engagement of employees. And then -- so we are also recognized as the Best Companies to Work For by 2 of the institutes.

And then as far as the second quarter -- second half focus is concerned, and of course, as I mentioned, 5G is on everybody's mind. And that is definitely one of the major areas that we will be -- we are focusing on. And then that is in terms of the auction strategy and our business plan across BUs. And also we will need to do the network upgrade, which is already ongoing.

Okay. And we'll continue to accelerate our digital service growth and to improve our customer digital experience. And also, even though our ICT is showing a great momentum in growing, we will continue to do it and continue to grow it. And also one of the major advantage we have at Far EasTone being one part of the Far Eastern Group, the conglomerate, that we want to speed up on our synergy with Far EasTone -- Far Eastern companies that we have identified.

Okay. And then, we will continue to drive down our operation costs and optimize our capital investments, utilizing Agile, Big Data and AI as our enablers to improve our capability in this area. And also we'll continue to develop our employees' core capabilities, and then -- as that is what we consider our core capability for us to continue to grow with the new technologies.

With that -- and that will conclude my presentation, and I'll welcome questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from Neale Anderson of HSBC.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [2]

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I had 2 questions, please. First one relates to Slide 4 and the chart on the market MNP customers. It's such a dramatic reduction. I wondered if you could explain what you think has changed this year. Obviously, we have $499 in May of last year. Is that the main factor? Or there are others there? The second question relates to the ICT contract growth. And what I'd imagine is that each of the big 3 telcos has a particular focus in terms of vertical or enterprise customers. And I wondered if you could discuss a little bit about what you feel Far EasTone's strength is in the ICT space?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [3]

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Okay. Thanks for your questions. So for the first one, why this MNP, mobile number portability, has decreased so much. Well, I think the anxiety and the fever that came with $499 certainly over time it died down a little bit. But in -- as far as Far EasTone is concerned, we were very -- we use a lot of Big Data analytics, right, and predict the churns and all that. And then I think our campaign and watching how our competitors react to the market or they initiate some campaigns and how we respond. The 3 bigger telcos, in this case, I think we all kind of have learned, right? Last year, with the $499, everybody was rushing into a price war. And I think everybody now has think clearly as well. So I think that helped too. So even though we still see some price cuts here and there, but then they are all kind of like a small one. And then nothing major like last year. So I think that also contributes to the stabilizing of the market. That is really all I can say at this point, but then I think that's a very good question. Maybe when we go back, we can ask our Big Data team to really dive into it, if there is any other reason for that that I didn't see.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [4]

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Yes. Another reason is a lot of customers set their locking $499 or a similar contract in the past 3 quarters. So right now, a lot of customers, they are in contract. So the churn rate does become very low.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [5]

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That's true. So right at $499, at that time, right, because the rate has been slashed so much, so even with penalty, people would move, right, would break the lease and then pay the penalty, and it was still worth it. But then once they do that, they are locked in for 24 months or 30 months even. So that helped as well, definitely.

Okay. The second question is in the ICT area, if I remember. Yes, so I would have to say, Chunghwa because of the -- its special incumbent kind of nature that started as being government owned, so they have been always kind of having the advantage in the government and industry side. So they have been always doing pretty well. I don't think Taiwan Mobile is doing as well in this area. And I think Far EasTone definitely is closely approaching where Chunghwa is. Well, definitely that's our goal. So for example, in the smart city, smart factory areas, right, in the IoT area, even though in the past the government contracts usually are pretty much predominantly awarded to Chunghwa, but then we are already breaking into that. And then we have been getting quite a few wins and then where we beat Chunghwa. So I definitely see our momentum in the IoT area that drives a lot of this. And also another area is our cloud. We are doing very well in cloud, and I think we even topped Chunghwa in this, right? We have like 288 certified employees that are qualified to work on cloud or to provide cloud services. And Far EasTone is even awarded 1 of the 4, I think, only 4 globally Managed Service Provider for AWS. So that tells you how strong we are in terms of providing the cloud service, which is definitely a driving force in our growth.

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Operator [6]

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And the next one is from Billy Lee of Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [7]

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I have 2 questions here. The first question is, you mentioned the passion for the $499 plan or in general lower-priced plan has died out a little bit. If possible, would you be able to disclose the number of people on the network there on the $499 plan in terms of the proportion of subscribers as of now? And then the second question is on -- yes, I also noticed a new economy side of business like the IoT and cloud side. They are showing very strong momentum. Could you remind us what's the revenue amount from these revenues? And also could you also remind us where is it booked in terms of the [recognize]? Is it on the equipment and others revenue? That's my question.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [8]

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Okay. So I'm sorry, your second question, you kind of -- you were in and out. Your voice was low. So I think you were asking about ICT. Were you asking about specifically in which areas we are doing very well? Is that -- was that the question?

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [9]

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Sorry. I mean in general, the new economy revenue part, so including ICT and cloud. So everything excluding the mobile part.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [10]

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Yes. Right. So let me answer your second question first. I think we are on it. So there are really 3 major areas in terms of the ICT, right? One is cloud, and we definitely see almost like 4x of the growth in ICT area -- in cloud area. And then the second area is in the security, right? And then the third area is in IoT. Although IoT is relatively smaller in terms of the revenue, but it is definitely a new blue ocean. And then I think the Taiwan market is awakening to this new technology, the IoT. And then we also see with 5G, and then there will be more AIoT, Artificial Intelligence IoT, opportunities. So that is in the ICT or the new economy. And also if you look at the digital services, that's more on the consumer side. And then -- but then, I see the stronger momentum on the enterprise side with this ICT growth. Okay. I hope that answered your second question.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [11]

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Actually, do you have the number of the revenue figure for these business?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [12]

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Well, our IR person probably can provide that later on. I don't have them on hand here, but then we certainly have breakdown. That's how we can add out the revenue, yes.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [13]

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We can provide to you offline. Thank you.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [14]

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And for the $499, I don't have the number here, but I can give a reference. $499 is a single new web plan, and we only have 25% SIM-only customers. And not all of them are $499. So the $499 should be much lower than 25%.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [15]

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Right. Just to clarify whether they -- right. In case folks are not as familiar with our telecom jargon. So when we offer -- when people would pick $499, right, as the plan, usually they come already with their device. So it is -- we call it SIM-only. They only come for a SIM card. And then they get -- they pay $499 for no data usage limit, right? But then we still have a lot of customers because we do offer nice discounts on our devices and then we have a variety of very high-end phones, so we still have a lot of customers, they are longing for that. So the $499 is really just for SIM only, which accounts for about 25% of our postpaid profile. And then the others, we still have higher monthly fee for those that come. They get a bundled offer. So that's not just a SIM-only, they would get device or other kind of house appliances. So it's more than just a mobile device. They can get other things as well. That's through a variety we offer in our bundled program. I hope that answers your question, sir.

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Operator [16]

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And next, we have Danny Chu from Bank for America for questions.

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Wai Kit Chu, BofA Merrill Lynch, Research Division - Director [17]

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Just 2 quick questions. First, regards to 5G. Can I ask management from a strategic standpoint, down the road, if you have to, so-called, make a guesstimate, roughly how much of percentage of the 5G revenue you expect coming from the consumer side versus the 5G revenue coming from the enterprise, the corporate or the industrial customers? Which segment do you think will contribute a much bigger segment of the 5G revenue? That would be my first question.

And then the second question is actually related to the first one. I'm sure the management is doing a lot of government due diligence work on 5G. Based on the preliminaries, at least so far, among the initial services that you're going to launch with your 5G network, which particular service, you think, of it will be very popular with the consumers.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [18]

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Okay. To answer your first question about like the 5G revenue breakdown between consumer and enterprise. I don't really need a wild guess because I could use what we have now with 4G, right? So today, for Far EasTone, the consumer side of revenue accounts for more than 80% and then about 17% is enterprise. And I would say, for 5G, that will be something we can start with or look for. So nothing too wild or deviate from that. We are looking at consumer riding a bigger volume. However, given 5G is new, and then so -- and then this is not like 5G replacing 4G. So the adoption of 5G will take time, right? So even for like South Korea, in the first 3 months, the whole government is proactively advocating for 5G and then among the 3 telcos there, the combined, they just had -- they have got like 1.4 million subscribers. So the number at the beginning will be small.

But then on the enterprise side, right, so this is like a 5G. A lot of the IoT, like I mentioned already, we are doing it, and that is doing it with 4G technology, like NB-IoT, right, or LTE-M. So 4G already can do that. And then if you need -- you really need to find those really advanced enterprise clients or big factories that they may have special needs like, even like private networks or they need us to do some network slicing, or they have some automation like using AIoT. And then actually, as a matter of fact, in one of our -- a couple of our Far Eastern Group's that we have already done PoC on AIoT. So there we see the application for doing 5G. So to tell you from our region, 80-20 kind of thing from 4G.

Now given 5G is not replacing 4G, but then kind of add-on to 4G, so that model would not be how we started with. And I really don't know how to guess this, to be honest. But then I can tell you, with 5G being deployed, right, and then we need to be very careful and smart about investment. You are asking like what areas, what kind of services we will offer for 5G on the consumer side? Well, first of all, 5G provides big bandwidth, right? And then the fast speed and then also low latency. So I think just as a pure enhancement of 4G experience that consumer that would sign up for 5G, they will get that. And then now if they get the kind of device that will support like a 4K, 8K kind of resolution, then they certainly get that better entertainment experience as well. So -- and then we still have a year or so before the 5G will be launched. And then hopefully -- and before then, there are some other killer or killer-like applications that will be already

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which you'll see. But then I think as a telco, the first thing we provide is connectivity, right? And this is much enhanced connectivity from 5G to 4G, but we are going to look at 4G plus 5G.

So I think consumer, even without any new services, just their experience will be enhanced. The question is, if we can find some new services or renewed services that because of the 5G technology that will actually intrigue more users to adopt to 5G quicker, then we can see our adoption rate to accelerate eventually. But at first, I would say, it will take some time, just looking at South Korea as an example. But then just because some of the countries are ahead of us -- so South Korea is nice to watch because by next year, when we deploy, South Korea will not be still at 1.5 million. So their success would help the consumers here in Taiwan to see what 5G can do. So this is one of the advantages, not being the first adopter because you can see what others have done. And then that is the advantage of the learning we can get.

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Wai Kit Chu, BofA Merrill Lynch, Research Division - Director [19]

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If I may add a follow-up question. And actually like, I mean, when I looked at what happened with the 5G service in Korea, I believe the operators are recently -- actually, they have step up on their handset subsidy just to, so call, compete for 5G market share. Are you worried that like when 5G gets launched in Taiwan, some of your peers may do the same in terms of offering very heavy handset subsidy on 5G to compete for market share? And if they do that, like, I mean, how Far EasTone is going to respond?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [20]

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Okay. Do I worry or do I think they will do that, we certainly have seen something that like a $499, right? So anything is possible. And then when you have too many telcos, I think the kind of price cut or subsidy is just not inevitable, right? It's inevitable. So I think -- but then one other thing is by the time we deploy 5G, and then I believe that the price on the device will be already lower than what it is now, right? And then so, hopefully, the room for this additional subsidy will be smaller. So even if the telcos want to compete on that, it wouldn't be as harsh impact on the financials. But we have to really do some calculation to see what's the best move and then to react, right? But then, hopefully, all our -- the telcos, our peer telcos would all know the right thing to do, not to have it hurt everybody.

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Operator [21]

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(Operator Instructions) And the next one is from Amber Lee of Yuanta.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [22]

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I have 2 here. So I think on the overall handset outlook, recalling that earlier this year, you expected a more flattish performance in terms of your equipment sales this year comparing to 2018. But as we approach into the high season of this segment, how should we look at the equipment performance of this year? And that's a first one. And secondly, in terms of the percentage of revenue contribution of your new economic business, with the number to be provided later on, do you think the contribution would be greater than your previously expected 13%, 14%, given that the growth in the quarter seems to be pretty encouraging.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [23]

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Okay. Thank you for the question. So on the first one, on the device revenue. Well, I don't have the details, but our IR person can provide later. But then I certainly know our iPhone has been in top sales, right? Because I just kept getting the precious request orders from my team. And I have to ask them, but then it has been selling really, really well. And also I think another advantage I would see is we

(technical difficulty)

partner vendors, we know that they will have the 5G devices ready for like fourth quarter this year. So we can also make those available for consumers because then for the early adopters, I think we can offer some discounts just for that and then to boost up the interest because with 5G handset, they can still support -- it can still support the 4G. But then they were already -- if they are -- at that time they need a new phone, they might as well get a one that will support 5G, and then they will be able to use it in half year or so. We will have a look at our device strategy, but then devices is always a very strong area in Far EasTone. The device management here is just -- has been doing very well. So we will continue to do well when it comes to 5G, with all these additional available devices to work with.

Okay. That was one question. And I'm sorry, I may have forgot your second question. What was your second question, Amber?

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [24]

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I guess the contribution of the new business segment. I think in the quarter, the segment looks doing pretty well. So like do you still expect the contribution of this segment to be around 13%, 14% or go even higher for the whole year?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [25]

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Our goal for this year is 14-point-some, right, point 14 -- 13.4%, right? So that is our goal. And of course, I would like my team to continue to build out. We do have a higher -- our forecast for the second half is higher, right? We actually -- when we do the forecast, we expect for second half to be more -- revenue-wise, to be more and higher than the first half. So even though we are doing pretty well, but then it's not quite where we are yet. So I expect in the second half, we will pick up the momentum even more. And 13.4% is our goal for the year, and I'd like to see that exceeded.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [26]

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Great. And then I have one follow-up. Can you give us some color on the guidance for CapEx in terms of 5G?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [27]

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We don't have exact numbers, but then -- so then, kind of like in the past, you can see, right, with the auction then and with the 5 telcos. But the rules now NCC has passed, and hopefully, that will bring some rationale into the bidding process. So we are preparing for the worst, but then we are hoping for the best.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [28]

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Okay. So will we be seeing the spike in 5G-related CapEx in next year? Or the year after, or even in 2022?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [29]

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Okay. So in terms of CapEx investment, right? If you just look at the obligation that NCC have for any bidder or any bidder that walks away with spectrum, we have 5 years to build to cover 50% of the population and then to finish at least 1,000 stations, which is a small number actually. So we do have 5 years to do that. But then, like I said, we have to look at the demand, right, at the time and also look at what other services may be available to offer. So as we do, we will always be very careful, and then we want to optimize our capital investment. That is just whatever we do, so not just like on the 5G capital investment, but we'll be very careful in our capital investment plan. We certainly don't need to worry about the capital, but we will optimize the investment and then, hopefully, maximizing the benefit of it.

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Operator [30]

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(Operator Instructions) And the next question is coming from Billy Lee of Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [31]

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I'm a little bit confused about the handset strategy that you talk about. Obviously, if I look at the equipment revenue in the second quarter, it's down by 5.2%, whereas in the first quarter, you are able to grow by 3.8%. So could you explain a little bit about why is the drop here in terms of the equipment revenue? And then my second question is on the 5G auctions, the spectrum auction that you just touched on. Could you help us to put a perspective on the competitiveness of the auction? What do you -- do you expect a more aggressive competition this time versus the 4G? And the third question is, what's your latest dividend payout policy?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [32]

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Okay. So my team is checking on the device that you were asking. So let me answer the 5G first. So in terms of the landscape, as you know, there are 5 telcos and all expressed their intention to participate in the auction. So if you just look at the number of telcos, right, and then -- so the competition is foreseeable. If you want to compare to 4G, even though I wasn't here at that time, but I do know when they were bidding for the 1,800, right, Chunghwa had to bid really wild price for that. But then I think people all have learned some lessons from that. So I don't think 5G will be as bad. And also with the rules -- well, first of all, the 3.5 gig spectrum with only 270 meg, right, for 5 companies to bid for. And unlike 4G, right, 5G to really take advantage of the technology, you really need to have like 80 to 100 or so kind of bandwidth to really do its magic.

So with 5 telcos, if everybody is just like, regardless, at all cost, and then, want to go in, and then you may get 10 or 20 or that band. If you look at it, what can you do with 10 or 20 or even 30, right? So realistically speaking, it's not going to be cost-effective to build a network. And then when you buy the equipment, it is equipped for like 100 meg bandwidth, right? So you are underutilizing what you pay for to begin with. And then you still have the same obligations as the other telcos that get 100 or 80 or 90, whatever. So I just think if every telco does their really thorough thinking, they -- maybe going all the way for the spectrum is not really everybody's best strategy.

So with that in mind, I -- like I said, we are preparing for the worst. But then on the other hand, I'm also hoping for the best. Because if every telco does their own analysis, they should know their -- that getting some spectrum is now the only option. And then they -- certainly not necessarily the best option for everybody.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [33]

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Okay. Billy, I come back to your -- I mean, merchandise revenue. Like Chee mentioned here, actually our merchandise revenue performed better than our phone target, which is the result from higher ICT and also higher iPhone sales. So of course, like you mentioned, year-on-year, it might be quite flat actually for the trend. So I hope that answers your question. If you need more detailed numbers, we can talk about that offline.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [34]

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Sure. Yes, and then also the dividend policy part.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [35]

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We will discuss dividend every February. So we need to wait till the fall to decide it. We always have quite stable and generous dividend policy.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [36]

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Generous payout, right.

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Operator [37]

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(Operator Instructions) There are currently no questions. I'll pass the call back to Mr. Gary Lai. And Gary, please proceed.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [38]

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Okay. Thank you, again, to attend our second quarter results conference call. See you next quarter. Thank you very much. Bye-bye.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [39]

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Thank you.

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Operator [40]

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And ladies and gentlemen, 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.