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Edited Transcript of 8.HK earnings conference call or presentation 13-Feb-20 10:00am GMT

Full Year 2019 PCCW Ltd Earnings Presentation

Quarry Bay Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of PCCW Ltd earnings conference call or presentation Thursday, February 13, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hon Hing Hui

PCCW Limited - Group CFO & Executive Director

* Srinivas Bangalore Gangaiah

PCCW Limited - Group MD & Executive Director

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Presentation

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [1]

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Good afternoon. Welcome to the PCCW Group's annual results presentation for the fiscal year 2019. I'm happy to present a stable set of results for the PCCW Group. All our core businesses, namely our telco business, HKT, our Media business as well as our Solutions business performed reasonably well, given the economic downturn in Hong Kong. Our investments into regional expansion for both our Media business and the Solutions business has paid dividends in terms of revenue contribution coming from Southeast Asia, has helped us to shore up overall growth numbers, offsetting the Hong Kong slowdown.

With this, I would like to invite Susanna to walk us through the detailed financials, and I will come back and discuss a bit more on our Media business and our Solutions business. Over to you, Susanna.

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Hon Hing Hui, PCCW Limited - Group CFO & Executive Director [2]

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Sure. Thank you, BG. So to share with you the financial highlights. Overall, PCCW delivered a set of stable financials despite the challenging economic conditions and market conditions in Hong Kong, especially in the second half of last year.

Total consolidated revenue was down by 3% from $4.98 billion to $4.81 billion. This is largely due to the lower handset sales on the HKT side, discussion of which was in another session, actually recorded yesterday.

Excluding the Mobile handset sales, consolidated revenue rose by 3% year-on-year to USD 4.37 billion. A quick look at the table below the slide, you will see that the relative contribution of each lines of business is shown below. Basically, HKT service revenue was up by 1% to USD 3.8 billion, reflecting the resilience of the telecom business. Media group revenue also increased to $514 million for the year, in particular, you see that the OTT business continued the growth momentum with revenue up by 18%, and Free TV also ramped up revenue by 27%.

PCCW Solutions revenue also saw a 3% growth during the year from strong data center demand as well as our expansion into Southeast Asia. Our property arm, PCPD also contributed a total of USD 130 million for the year, comprising USD 79 million from the sale and handover of our branded residences in Niseko, Japan, and also the higher rental income from our investment property in Jakarta, with more than 86% occupancy.

Total consolidated EBITDA, therefore, grew by 1% from USD 1.569 billion to USD 1.587 billion, with narrowing losses from OTT and Free TV in the second half of the year and also higher contribution from PCPD during the year.

Obviously, accounting for higher amortization charges from the content costs as well as higher interest costs during the year because of the higher HIBOR that we saw during 2019. Consolidated NPAT for the period was $87 million, which was down from USD 115 million as compared to 2018.

A very quick recap on HKT results, which was announced yesterday. HKT service revenue was up by 1%, as I mentioned just now, despite the challenging market conditions where competition remains very intense. Both TSS and mobile segments recorded resilience with TSS revenue up by 1% to $2.814 billion. And this is made possible by the sustained growth in our consumer broadband revenue, which was up by 2% and from -- contributed by the continuous fiber adoption and deepening traction of our Home WiFi and smart living solutions during the year.

Our business segment, our enterprise segment also recorded encouraging growth of 13%, benefiting from the demand of data network, infrastructure build and, of course, rising demand of digital transformation from larger enterprises and public sector.

On the mobile side, service revenue grew 2% to USD 1.079 billion, driven by 13% growth in our premium 1O1O customer base and also higher ARPU from the mobile enterprise solutions.

In terms of EBITDA on HKT, it grew by 2% from $1.61 billion to $1.643 billion. Both TSS and mobile EBITDA recorded a 2% growth to USD 1.72 billion and USD 650 million, respectively, driven by continued cost efficiencies across all business units. Overall, margin also increased to 39%.

AFF, adjusted funds flow, increased by 3% from $663 million to $683 million for the year. And PCCW holding 52% stake would receive USD 355 million from HKT.

Turning to our Now TV business. We saw revenue ease off slightly from $366 million to $344 million against a World Cup boosted revenue of the previous year 2018. But if we are to normalize this, the underlying revenue was really very steady year-on-year.

Efforts have also been made to expand the market reach to the non-TV users with enhanced user interface and self-subscription models of our Now E-box service, resulting in the overall installed base, up from $1.34 million to $1.36 million.

The exclusive EURO 2020 soccer is also expected to provide another top line boost this year, in particular, riding on the imminent launch of 5G from CSL on the HKT side.

We continue to focus on content cost rationalization and improved operating efficiencies. You can see here that we have enhanced EBITDA margin for the year 2019. Margin improved from 16% to 17% accordingly, with EBITDA stable at USD 58 million.

Turning to our OTT business. Our regional OTT platform continue to exhibit very strong growth in driving consumer traction and monetization. Total revenue for the year was up by 18% to USD 137 million. This is underpinned in particular, by the 32% growth in video revenue from USD 86 million to USD 113 million, especially we see deepened penetration in our Southeast Asian markets as well as new markets in Middle East and South Africa.

The popularity and engagement of Viu service is continue to grow in the region, supported by our increasing lineup of Viu original productions with locally relevant contents. As you can see, the operating metrics in terms of MAU and video views jumped significantly.

Full year EBITDA loss narrowed to USD 40 million. And it is noteworthy to point out that the narrowing of the EBITDA loss, which is evident in the second half of the year, basically pointed to the fact that our business has started to benefit from scale, and we are hopeful that in the coming periods, it will be breaking even.

ViuTV, our Free TV business. Total revenue grew 27% from $26 million to $33 million for a year, on the back of expanded viewership, of which advertising revenue increased by 11% from USD 24 million to USD 27 million. The successful diversification and monetization of revenue sources to drama production and distribution as well as talent management also started to make meaningful contribution, which increased from USD 2 million to USD 6 million during the year. As such, EBITDA loss also significantly narrowed by 22% from USD 45 million loss last year to USD 35 million loss this year.

As for our IT solutions business, PCCW Solutions revenue rose by 3% year-on-year to USD 541 million. Recurring revenue accounted for 60% of total revenue portfolio, and it increased by 8% to USD 323 million, driven by higher utilization of our data center capacity in view of the higher demand from the customers as well as cloud solutions business, and of course, benefiting from the regional expansion in Southeast Asia, especially in the Singapore areas, where we have won various long-term contracts with local government agencies.

In terms of EBITDA, recurring EBITDA margin was very stable. But of course, for -- in order to support the regional expansion in Southeast Asia, we have basically built up delivery centers in -- not just in Singapore, but also in Malaysia and the Philippines and, therefore, onetime start-up costs were recorded. EBITDA, therefore, dropped by 6% to USD 130 million, but we are hopeful that this will be able to translate into much bigger contribution in terms of both revenue and in terms of both EBITDA from the Southeast Asia area in the coming year or so.

Turning to OpEx. Overall core OpEx increased by 3%, from USD 713 million to USD 734 million, with OpEx to revenue ratio increased from 14.4% to 15.7%. This is again largely due to the regional expansion of Media and also the expansion of our Solutions business as well.

Media OpEx rose to USD 221 million, as we discussed earlier. This reflects our continuous marketing investment to build up the leadership of view OTT in the region. Solutions OpEx also increased from USD 17 million to USD 24 million in support of our international market expansion, as discussed earlier. On the HKT side, there was OpEx savings of 3% across the different lines of business from sustained improvement in terms of operating efficiencies.

Turning to CapEx. Core CapEx for the year was $412 million higher than that last year, primarily from continued CapEx by HKT side and also increased investment in data center. CapEx revenue ratio was stable at 8.8%, which is within our 10% guidance. If we look at the breakdown, you can see that the HKT CapEx increased by 4%. And as we discussed in an earlier session, on HKT business, the CapEx included a continuous mobile coverage and capacity enhancements in preparation for our 5G rollout as well as the addition of our new local submarine cable in Hong Kong, Ultra Express Link connecting the data center hubs in Tseung Kwan O and Chai Wan.

CapEx for Media was reduced significantly last year from USD 46 million to USD 28 million, upon the upgrading and rotation of our office and studio facilities for ViuTV. Solutions CapEx increased from $18 million to $38 million, but this is largely demand driven, data center capacity CapEx, in response to the significant customer pipelines that we have.

Turning to the liquidity side. Overall, as of December '19, gross debt for core business was around USD 6.04 billion, with total liquidity of USD 2.7 billion, comprising cash of around $560 million and $2.1 billion undrawn bank lines for HKT and PCCW. As compared to June end 2019, gross debt-to-EBITDA was stable at around 3.7x, net debt-to-EBITDA was also stable at 3.4x.

At HKT, debt was stable at USD 5.2 billion, with around USD 1.55 billion liquidity. On PCCW level, debt increased to fund the expansion that we talked about just now. Debt level was $817 million as compared to $575 million as at June end. Liquidity remained very healthy with USD 1.1 billion, comprising cash of $200 million as well as undrawn bank lines of close to USD 1 billion.

Looking at PCPD. PCPD gross debt increased to USD 1 billion, as of December year-end, as compared to $790 million as at June end. And this is largely due to the drawdown of the funding required for the construction of the various projects, including Niseko, and including our Thailand projects as well. At the same time, you can see here that the cash balance of PCPD increased significantly from USD 90 million as at June end to USD 364 million as at December end, being including the sales proceeds realized from the completion and handover of a number of Niseko branded resorts in Niseko at the end of 2019 and in the beginning of 2020.

Turning to the debt maturity profile, we have this time, separated the two into HKT and PCCW separately. The HKT one, I think, very familiar. There is no imminent bank refinancing needs in the coming 1 year or so. Last year, we have issued another USD 500 million 10-year bond, which brings the total fixed to floating ratio to 70 and 30.

The bottom chart shows the -- both the PCCW and the PCPD debt profile. Except for the small chunk of PCPD bank loans due in 2020, which will be repaid by the sale proceeds that we received and collected from the Niseko project, there is basically no imminent and immediate bank loans required for financing until 2022. Across the group, we have a very balanced mix of short-term bank borrowings and long-term bonds. Current fixed and floating on a consolidated group mix was maintained at 60-40. Effective interest rate was steady at 3.4%.

Finally, the dividend. We are pleased to report that the Board has recommended a final dividend of HKD 0.23 per share, which together with the interim dividend will amount to a full year dividend of HKD 0.3218. This represents an increase of 3% over the full year dividend of the year 2018. This represents also a pass-through ratio of HKT dividends, which remains steady at 90%, and also representing a yield of 6.7%.

This ends my presentation on the financials, and we'll pass to BG for the operation sharing.

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [3]

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Thank you, Susanna. On that good note of the final dividend announcement, I would like to now walk you through the Media business and then followed by the Solutions business. The pay-TV business, as you saw in the results announcement, has delivered a steady set of performance for the fiscal year 2019, notwithstanding the spike we saw in 2018 because of the World Cup, the top line remains steady. The EBITDA margin definitely improved, both on account of operational efficiency improvement, rationalizing content costs. We also saw a marginal uptick in the sports pack ARPU for fiscal year 2019.

We took a decision 2 years ago to invest in creating new platforms and new revenue streams and Now E, which is our OTT offering for Hong Kong market, which offer a similar content, which is available on Now TV has helped us to gain new subscriber base. And today, we have a subscriber base of 1.36 million. The exit ARPU remains at 174.

We have exclusive broadcast rights for EURO 2020. And this is something which we will leverage all the 3 platforms, Now TV, our OTT, Now E, as well as the ViuTV Free TV platform to broadcast these matches. We do believe the timing-wise, this is a very attractive time. The prime time kickoff will be at 8:00 p.m. Hong Kong. We are well placed to leverage and monetize both subscription revenue and advertising revenue on this platform. We will also have selective 4K broadcast on top of our 5G offering.

We continue to bring to Hong Kong the best of both Hollywood and international content, both in terms of the top movies as well as TV shows. We do believe we have unmatched content as far as entertainment is concerned for the Hong Kong market. We will continue to monetize these content as well as increase our focus on on-demand particularly for the entertainment. This is again a content which will run on both Now TV and Now E platforms.

As was mentioned, HKT will be launching 5G services later this year, and we are well placed to build out content which will drop on the 5G networks. Both in terms of the sports events, Premier League as well EURO 2020, we're also producing locally, both VR and 360 degree immersive experience leveraging the 5G launch.

Moving on to the OTT business, as you saw a significant growth in Southeast Asia and Middle East, we had 35% uptake in the monthly active users, hitting 41.4 million. The video views jumped 69%. It clearly shows that we have been able to attract more monthly active users as well as continue to show high engagement with the video views with 5.7 billion video views for fiscal year.

We have clearly emerged as a regional leader, surpassing all the local players in Southeast Asia, as well as some of the regional players. We have -- we are ranked #2, next to Netflix. And we do believe this regional leadership is helping us bring to bear the best of the local and regional content as well as continue to invest in view originals. As you can see from this slide, we have brought in really high-quality video originals, view originals in each of the markets we are operating in Southeast Asia as well as Middle East. And as you can see from this slide, these originals have also won significant awards in the Asian academic creative awards. This clearly shows our ability to not only accrue and distribute content, we have been able to judiciously mix our original content and gain traction and as well as monetize in these markets. We will continue to ensure we are very selective. And in the originals, we will co-produce, we will seek sponsorship to manage our cost effectively as continued to increase our viewership in both Southeast Asia and the Middle East.

Moving on to the Free TV business. We saw a good growth for 2019, 27% uptake in top line, clearly showing our ability to monetize in spite of challenges in the Hong Kong market last year. Both drama and variety shows have led the monetization. We have also engaged with some of the international projects with co-production with HOOQ. And we will also continue to see partnerships in the international markets for enhancing our talent base.

Here, you can clearly see the library, which has continuously expanded in the last 2.5 years, over 9,000 hours of self-produced scripted and nonscripted content. And this will help us to continuously increase our monetization. Our self-produced programs continue to do well, not only Hong Kong, but also in select markets in Asia and North America.

Moving on to the Solutions business. As was mentioned, our investments into Southeast Asia started to pay dividends in terms of top line growth, as investments in Southeast Asia, which include Singapore, Malaysia and Philippines. Today, we have about 500 people in Singapore. We have a similar number in Philippines. We won several key engagements in both Singapore as well as in Indonesia. We continuously focus on the key industry verticals in these markets, namely telecom, the public sector and travel and transport.

As we continue to support our enterprise clients in their digital transformation journey, we are clearly focused on creating our own IP, specific point solutions as well as platforms, which will enable accelerated digital transformation for our enterprise clients. And here, you can see key examples for the telecom business, where we have strong domain capabilities as well as supporting the top telcos in China. We are working with some of the top telcos in Singapore as well as supporting our own HKT operations. Similarly, in other verticals, travel transportation, banking, financial services and retail and logistics, we have built out IP assets, which will help us reuse these assets and customize and deploy for these verticals. Our data center business continues to do well. This is -- gives us long-term annuity business as well as profitable business. We have already sold-out our foot-on facility in terms of prebook sales. The Phase 1 is already fully taken up by our anchor clients, and Phase 2 we will be completing by the second half 2020. We will actively plan to further expand our data centers, both in Hong Kong, and in select markets in Southeast Asia, on top of our existing customer demands.

Here is a snapshot of the Solutions revenue, both by industry and by service mix. As you can see, our advancement into Southeast Asia, the top telcos, our telecom vertical continues to show growth. Our revenues by services is pretty broad-based, but however the digital cloud solutions continue to show uptake as far as fiscal year 2019 is concerned.

For the first time, we are crossed $1 billion in secured order backlog, and we are entering 2020 with a decent order backlog, jump of 29% compared to 2018.

Here are the industry case studies, both in public sector, travel transportation and data center. To highlight a few, we won a significant long-term contract for managed services, the government agencies in Singapore. This, again, gives us annuity business on a long-term basis and helps us to significantly increase our traction in the Singapore market, particularly in the public sector.

Travel transportation, we have deployed solutions here for MTR. We're also using those capabilities to deploy solutions for SMRT in Singapore and other markets, including Thailand.

Our data center business, again, continues to grow. Hyper cloud service providers continue to see demand in Asia, particularly in Hong Kong and Singapore. And hence, we will continue to focus on this as a part of our expansion plan.

We won significant contracts in health care here in Hong Kong, the telco operator in Indonesia as well as -- we are working with several virtual bank operators here in Hong Kong, enabling them in supporting the right infrastructure for deployment of their applications.

We've won several market recognition, both in terms of the industry focus and in the key markets, China, Hong Kong, Philippines and Singapore. This again clearly establishes us in a leadership position and our ability to differentiate our services in these markets and continue to propel growth.

In summary, I would like to add the fact that HKT will make significant efforts to deploy 5G as planned. We will continue to deepen our customer engagement and come out with new applications on the top of the 5G offering. Our Media business will continue to maintain its market leadership in Hong Kong, as well as continue to increase penetration in the regional markets where we have already invested.

PCCW Solutions will continue to focus on helping enterprise clients, drive digital transformation, as well as to gain market share in the Southeast Asian markets, where we have already made investments we are clearly cognizant of the current situation here in Hong Kong as well as in Southeast Asia. With the view of the coronavirus outbreak, we are taking all the necessary precautions to safeguard, both our employees and, at the same time, to ensure business continuity. We are monitoring this very closely, daily actually, to ensure that we take all measures and take appropriate steps to mitigate the risks. We clearly believe significant part of our business is a bit resilient to the operations. We've already established, remote working for our employees to ensure business continuity. However, we will ensure that our -- safety of our employees come first. At the same time, we will continue to support our customers and continue to be engaged actively with all stakeholders to see the problem through. Thank you.