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Edited Transcript of 8.HK earnings conference call or presentation 8-Aug-19 9:30am GMT

Half Year 2019 PCCW Ltd Earnings Presentation

Quarry Bay Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of PCCW Ltd earnings conference call or presentation Thursday, August 8, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hon Hing Hui

PCCW Limited - Group CFO & Executive Director

* Marco Wong

PCCW Limited - Head of M&A, Corporate Development and IR

* Srinivas Bangalore Gangaiah

PCCW Limited - Group MD & Executive Director

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Presentation

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [1]

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Good afternoon, and welcome to PCCW's 2019 Interim Results Presentation. I will start today with a presentation followed by Q&A. And with that, let me turn over to BG.

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [2]

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Thank you, Marco. Good afternoon, and welcome to 2019 interim results. We move to the first slide. PCCW Group for the first half has delivered a good set of results, given the circumstances currently we are facing, there's marked slowdown in economic activity in Hong Kong as well as some of the uncertainties we are seeing in the macro with the ongoing trade war.

If you look at the group, we have continued to maintain market leadership in all our core businesses, which include our telecom business, the media business and the IT services. We continue to strengthen our market presence in Hong Kong, while we are regionally expanding our footprint in Southeast Asia and beyond.

If you look at our OTT markets, we have now expanded into 30 OTT markets in the region, extending into Middle East and Africa. We're continuing to operate in about 45 countries, our monthly active user base has increased to 39 million users. We continue to work with the global multinationals, about 734 global multinationals are our enterprise clients, both for our enterprise business in our telco as well as our enterprise businesses as a part of PCCW solutions.

We will continue to invest and expand our regional footprint in a very planned manner, in a very focused manner, ensuring that we capture the market opportunities in these regions. I will come back to you and address in much more detail about our Media business and Solutions business.

I would now request Susanna to walk us through the financials. Over to you, Susanna.

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Hon Hing Hui, PCCW Limited - Group CFO & Executive Director [3]

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Thank you, BG. In terms of the financial performance, I think overall, as BG mentioned just now, despite the general slowdown in the economy both macro and both global and local, and also despite a very keen competition that we see in the market, PCCW delivered a set of very steady financials.

In particular, if we look at the different key lines of business, HKT have a service revenue growth of 1% to $1.765 billion for the first half of this year. And we also saw Media revenue grow by 2% from USD 242 million to USD 247 million, with PCCW solutions having a very stable revenue of $220 million. Of course, we will share more details in the coming slides. And all of these business revenue altogether rose by 1% to USD 2.23 billion.

Now total core business revenue dropped by 11% to $2.135 billion, when we included the handset sales revenue, which saw a significant drop in the period under concern, in phase of the generally longer handset replacement cycle, especially when the consumers await the upcoming 5G handset models.

EBITDA for core business was down by 4% to USD 680 million due to our continuous investments in OTT and the Media side. And incorporating returns on our investment portfolio, which are recorded in the net other gains, profit for the period was stable at USD 161 million.

On the property side, our investment property in Jakarta recorded a steady increase in occupancy during the first half, with 85% office space being reserved and committed already. So the overall PCPD revenue for the first half grew by 25% to USD 26 million, therefore, lifting the consolidated profit for the period by 4% to USD 141 million. And accounting for noncontrolling interest, group console NPAT attributable to equity holders was USD 21 million.

A very quick recap on the HKT results, which was announced yesterday. Total HKT Service revenue grew by 1% from $1.74 billion to $1.65 million. In particular, the key growth drivers were coming from the Enterprise side, where we saw a strong 12% growth in terms of the local data. And this is primarily due to the various digital transformation initiatives from big corp and public sectors. The business of the broadband also recorded a strong 5% growth despite the keen competition. Revenue basically grew from $280 million to $292 million, driven by the continuous fiber upgrade and also ARPU uplift from our home WiFi solutions.

Now on the mobile front, mobile service revenue also grew steadily by 1% to $497 million, despite keen competition, especially evident in the value-seeking segment. Counteracting this is our 17% growth in terms of the 1O1O customers, upgrading to a higher tier plan and also a successful stimulation of our roaming revenue, which increased by 4% for the first half. ARPU, therefore, rose by 2% to $198 as compared to $195 million for H1 last year.

In terms of EBITDA, total HKT EBITDA grew by 2% to $735 million, and both TSS and mobile EBITDA recorded growth to USD 491 million and USD 283 million, respectively. Excluding mobile product sales, EBITDA margin was steady at 42%.

In terms of the AFF for HKT, for the first half, AFF increased by 3% from $283 million to $291 million for the period, equivalent to HKD 30.01 per share for the period. And PCCW Holding, 52% stake in HKT will receive a cash flow of more than USD 150 million for the first half.

Now turning to our Now TV business. We saw a slight drop of 2% in revenue from $178 million to $174 million. And this is against the World Cup booster revenue in the first half of last year. If we're normalizing this non-TV underlying revenue actually grew by 3% year-on-year. And efforts have also been made to expand the market reach to individuals with cross-promotion efforts from HKT's mobile via the Now E services. And this can be a growth contributor in the coming periods. Obviously, the sign-up of the exclusive EURO 2020 soccer is also expected to provide some top line boost in the coming periods.

On the EBITDA side, we continue our focus in rationalizing content costs, which lifted the EBITDA margin to 15%, and there was a 3% growth in terms of the EBITDA for the first half to USD 26 million.

On our Free TV business, the ViuTV revenue grew by 28% from USD 13 million to USD 16 million. Advertising revenue was held steady at USD 12 million, despite the general slower economic growth in Hong Kong. In addition, our investment in the self-produced drama and content drove local viewership and also generated new revenues through sales to international distribution partners. We also have seen successes in terms of entertainment shows and so on. And therefore, some revenue was also recorded in the areas of talent management and events business, which still at early stage might contribute to a future growth in the coming periods. Looking at EBITDA of ViuTV, the loss was contained at the level to USD 18 million for the period.

Turning to our OTT revenue. Our regional OTT platform growth momentum continued to be very strong, with total revenue growing by 12% year-on-year, from USD 51 million to USD 57 million. In particular, we see video revenue grow by 24% year-on-year from USD 36 million to USD 44 million as we deepened our penetration in existing markets, such as Thailand, Indonesia, Singapore, and also expanded our presence into new markets like South Africa and Middle East.

The popularity and engagement of Viu service continue to grow in the region, supported by the offering of more Viu original contents with significant growth in terms of KPIs, which will be covered by BG later on in his section.

Because of our continuous investment in marketing and the content investment in the new market launch in -- and also the Middle East expansion, the OTT EBITDA loss widened to USD 30 million. But we are expecting that the growth momentum in terms of top line for the second half will be accelerating. And therefore, the loss for the second half will be narrowed.

In terms of the PCCW solutions. For the first 6 months, we see revenue edge up slightly to USD 220 million, and recurring revenue growing by 2% to USD 143 million. Our regional expansion is also showing initial progress in areas -- in countries like Singapore, Taiwan and the Philippines. Whereas, the PRT market continued to suffer from weak corporate spending amidst the escalating U.S. trade conflict.

Nevertheless, our secure order was up by 1% to $950 million. And also in terms of our data center business, right now, our capacity was running at full utilization, and we are in the process of building more capacity to meet the rising demand, which will be available in the second half of this year.

At this stage, around 63% of the capacity has been contracted. And obviously, this will start to contribute to our revenue starting from Q4 this year and, obviously, for full year next year as well.

As for the EBITDA, Solutions recorded an 8% growth from $35 million to $38 million, with improved margin to 17%. And this is primarily due to increased contribution from our higher-margin recurring business as well as improved management of our project delivery costs.

Looking at the OpEx, overall OpEx increased by 3% to $414 million. If you look at the breakdown, there was an OpEx savings of 4% across HKT from sustained improvement in operating efficiencies. And in terms of the OTT and the Free TV side, we saw Media OpEx growing to $112 million. And this is largely due to the continued investment in terms of the new market and also marketing efforts in the existing markets on the OTT side. In terms of Solutions, OpEx also edged up slightly to USD 30 million in support of international market expansion.

Turning to the CapEx. Total core CapEx for the period was $210 million, which is a 3% growth as compared to the same time last year. CapEx revenue ratio was kept within guidance at below 10%, 9.8%. If you look at the breakdown, you will see that HKT CapEx was contained at the same level of approximately 117 -- USD 171 million. And as we guided yesterday, even with the expected 5G rollout CapEx, we would be able to absorb within the existing budget of -- within 10% revenue ratio.

CapEx for media for the period dropped significantly from USD 24 million to USD 8 million upon the completion of the office upgrade as well as the opening of the studio facilities last year.

Solutions CapEx increased from USD 8 million to USD 31 million for the first half. And as I mentioned before, this is to expand the data center capacity in Hong Kong, in response to the greater customer demand that we have seen, and this will be bringing in incremental revenue starting from Q4.

Overall, in terms of liquidity, as at June 2019, group debt remained steady at around $6.5 billion, with total liquidity exceeding USD 3 billion, comprising cash of more than USD 400 million and undrawn bank facilities of more than USD 2.6 billion.

On PCCW level, debt increased slightly to $575 million, largely due to the funding required for the various investment that I have mentioned before in my earlier description and explanation of the business. And liquidity remained robust with undrawn bank lines of more than USD 1.2 billion.

On the HKT side, debt was stable with $1.5 billion available liquidity as well. PCPD debt was also kept stable with cash of $90 million and bank lines of $160 million, sufficient to support the various projects that are right now under progress. For core business gross debt to EBITDA was up slightly from 3.56x to 3.69x.

Across the group, if we look at the debt maturity profile, you can see here that we have a balanced mix of short-term bank borrowings and longer-dated bonds. And there was, again, a balanced fixed and floating rate mix of the group debt, which was between -- which was fixed at around 50-50. And except for the small chunk of the PCPD bank loans due in 2020, there is no imminent refinancing that is required until 2021. And even for 2021, that was a refinancing of revolving bank lines. And the effective interest rate was kept steady at 3.4% and weighted average maturity of around 5 years.

Finally, for my section, the dividend, we are pleased to report that the Board has recommended an interim dividend of HKD 9.18 per share for the first half of this year, representing a 3% increase year-on-year. And this is in line with the 3% growth of the interim dividend declared by HKT yesterday, and we continue to guide towards a steady partial ratio of the HKT dividends received by PCCW.

And with that, I would like to pass the floor back to BG.

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [4]

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Thank you, Susanna. Let me walk through in greater detail about our media business. As we've mentioned, our pay-TV business continues to steadily increase its footprint locally. We have had steady revenues for the first half. The operational efficiencies has kicked in, and we see a 3% improvement in EBITDA. And this is something we will continue to monitor closely, both on our content costs as well as increased monetization on multiple platforms, including our Now E platform. We have been able to hold steady our subscriber base as well. And we will continue to bring in enhanced viewer as well as the quality of broadcast, both in terms of sports, which will be coming out with 4K content in the coming weeks.

As I mentioned, we have the best of sports content in Hong Kong. We have exclusive rights for Copa América Brasil. We've also secured exclusive rights for EURO 2020 next year, which will also be broadcasted on all the 3 platforms, namely the NOW TV -- pay-TV platform, our Now E platform as well as our Free TV view, which will monetize across all the 3 channels. We will ensure that the quality of viewership, as I mentioned, that 4K viewing is going to be further enhanced, and we will have premium pricing for these set of viewers.

We've also launched a new STEM learning pack. This is to, again, bring in new source of revenue. This is more targeted for the family, for the kids. And we hope to increase monetization through this. We also are working closely with HKT on some of the content, which is already existing within the group.

Switching over to the Free TV platform. Our Free TV continues to grow. We have enhanced the new drama time base, thereby increasing the viewership during the prime time as well as increased engagement. Our quality production of both drama and variety shows have further enhanced with renowned artists. As an extension to our original production, we have talent management shows, which are bringing in new streams of revenue. We have also increased revenue streams through distribution partnerships beyond our Viu platform across 10 different markets. And this is something we will continue to do as we go more into original production. We're also trying to increase the variety with coproduction, which we have launched in Malaysia for the first time.

Moving on to the Viu OTT business. As you can see, there's a very healthy trend in terms of growth. We've reached 36 million monthly active users, which means increased viewership as well as increased engagement, 30 billion video minutes in the first half.

We continue to see this engagement and viewership increase. And again, this comes on the back of quality, original production as well as our key content, which emerges from Korea. We also had a validation from an independent source, this is App Annie, which really clearly ranks view in the Southeast Asian region as the #2 after Netflix. So we have clearly emerged as a regional player, a regional leader, beating both the local players in these markets as well as some of the other regional players who are very local to this region. This clearly shows our ability to not only attract new users and drive growth, the monetization aspect is also clearly ranked as #2.

Our original production continue to attract and engage users. You can see about 30% of Viu original viewers are new to the service. We are announcing about 80 new titles, and this has already gone into production. We will see increased monetization in second half, as was mentioned by Susanna. We don't see the margin contraction go up significantly in second half because the revenues will kick in, and hence, we will be able to monetize the investments which has already gone in the first half.

Switching over to the Solutions business. As was mentioned, we are very selectively increasing our regional footprint in Southeast Asia. Singapore has become the second hub outside of Hong Kong where we've established our presence. We have made some very good breakthroughs in the public sector as well as in the telco vertical in Singapore. We are also increasing our investments in terms of building up capability and scale in Singapore. What we have done is clearly our strength of the transformation initiatives of digital transformation, which we have been able to drive within our group for HKT. The PCCW Solutions group has been able to secure some very good wins in Southeast Asia as well as in China in the telco sector. We are also deepening our footprint within our existing set of clients, both here in Hong Kong, in China and Southeast Asia. We have a very focused drive within our named accounts to increase our footprint, cross-sell our services and expand our revenue share.

As you can see, there has been an uptick in the revenue share from the telco verticals on the back of new wins in China and Southeast Asia. We have had some marginal growth even in the financial services sector. Whereas, if you look at our service footprint, it is pretty broad-based. We have had upticks in our enterprise applications, technical services as well as our digital and cloud offerings. We have also had a very secure and very healthy order backlog of USD 950 million.

These are some case studies and examples of our digital transformation solutions. The first example is a very significant win for us, which we have been engaged with SPTel in Singapore. We are developing -- working closely with them and co-creating and developing a next-generation intelligent network platform for their business. And we continue to work very closely on their execution.

In China, we have won a key engagement, China Mobile across -- this is a planning management system, which we are deploying across all their business operations within China.

There is a key win in enabling a cloud-based mobile payment for a travel transportation company in Hong Kong. This, again, is their digital solution, which we are working closely with our partner.

Financial Services, we have had several wins. Here is an example where we are working with the Hong Kong regulator in developing and designing the next-generation licensing platform. This, again, showcases our key strengths in building out digital solutions and helping our enterprise customers go through their digital transformation journey. Some of the other examples are in hospitality and public, where this is more focused on technical services, digital display and enabling these sectors to digitally transform and focus on exciting their customers to be loyal.

We talked about our data center expansion. We are going to have the new data center, which is going to be opening up in the second half. This is a data center, which will have a full -- at its full capacity, it's 15 megawatts. The first phase will be opening up in quarter 4 of this year. We already have precommitted about 63% order book. We do expect by the end of the full year, this percentage to go up significantly. We have been able to work with some of the global hypercloud service providers to choose Hong Kong as their hub, and we as their go-to-market partner. And we continue to see traction in Hong Kong for further expansion of our data centers.

At the same time, there's a customer -- increased customer demand to support our customers in the region beyond Hong Kong, which includes Southeast Asia, Korea and Japan. And here again, we are making some selective progress and working with our clients to plan out investments as we expand our data center footprint in the region.

The market recognition, both in terms of our market leadership recognized by Gartner as the #1 IT service provider in Hong Kong, we continue to win industry recognition with our industry-specific solutions in the region as well as our initiatives in marketing, both in terms of our digital marketing efforts as well as supporting our enterprise clients go through their digital marketing transformation initiatives.

To summarize, as a group, we will continue to work closely. There are a lot of synergies between our telco operations, our media operations as well as our solutions operations. Both for our enterprise customers as well as consumers, we will continue to ensure we retain our market leadership in Hong Kong and build on the strengths of our investments. Particularly in the telecom, as we roll out our 5G networks in the phased manner, there will be newer opportunities to build new products and services on top of this network.

As a part of our media operation, we'll continue to expand in the region on our digital OTT platform and strengthen our presence in these markets.

Solutions will continue to service our enterprise clients in their digital transformation journey, and we will continue to invest into our data centers and work with our cloud service providers to capture the market.

With that, I'd like to thank you, and we would be open for questions.

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Questions and Answers

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [1]

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Thank you. Let's now take questions. The first question is regarding Now TV. What is the strategy to drive further growth and cost efficiencies at Now TV?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [2]

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As I mentioned, if you look at the growth element for Now TV, we have now multiple platforms within Hong Kong while we continue to strengthen our presence and footprint and the core pay-TV platform. We're also reaching out to individual subscribers on our Now E platform, and that will bring in additional source of revenue. We are also extending new service packs, which includes the STEM learning pack, which will also bring in new source of revenue.

On the cost front, we will continue to rationalize our content costs and ensure that we monetize across multiple platforms. We will also look at operational efficiencies, which we do on a continuous basis, which would help further strengthen our margins.

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [3]

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The next question is regarding Solutions. Can you provide an update and further details on Solutions' regional expansion plan and strategy?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [4]

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See, we've had a very good presence in Hong Kong, and we will continue to ensure that we stay relevant for our enterprise customers in Hong Kong and continue to grow in Hong Kong. We have invested in Mainland China. And that's, again, a market, while it's a challenging market, it's a big market. We will continue to focus on certain key industry verticals in China and enhance our footprint.

Outside of Hong Kong, Macau and China, we have chosen select markets in Southeast Asia, Singapore being a key hub. The other markets includes Taiwan, Philippines and Thailand. Here, we have made, again, inroads with key industry clients in the key verticals which we focus on, namely the telecom vertical, the financial services vertical, the retail vertical and travel and transportation.

These are some of the markets we have chosen carefully to expand. The service footprint could be broad-based, includes applications, data center cloud offerings and digital transformation offerings.

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [5]

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The next question is on Viu. Can you provide further details regarding Viu's revenue and MAU split by country or region?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [6]

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See, our footprint is in over 30 markets. And in each of these markets, we are still in the early stages in the last 2 years. So the revenue streams from each of these markets are relatively small, but the market opportunities in these markets are sizable. We do see some local regional competition. But as a regional player, as you saw from our presentation, we have already emerged as a leader. So we will continue to strengthen and deepen our penetration in each of these markets. Again, these markets have specific nuances. There are certain markets where the market reach in terms of MAUs are significant, namely Thailand, Indonesia and India. But at the same time, in terms of revenue productivity and ARPU, we see markets, the mature markets like Hong Kong, Singapore, Thailand, Middle East have significant revenue streams coming in.

So as we deepen our penetration, we hope to capture, as a hybrid player, revenue streams, both from subscription-based revenues as well as revenue streams from advertisement spend.

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Hon Hing Hui, PCCW Limited - Group CFO & Executive Director [7]

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If I can supplement?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [8]

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Please.

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Hon Hing Hui, PCCW Limited - Group CFO & Executive Director [9]

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Currently, over 70% of our MAU and the revenue are actually coming from Southeast Asia, which is a very important base for our OTT business.

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [10]

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The next question is back on Solutions. Which new geographic markets do you plan to add data center capacity?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [11]

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As I mentioned briefly in my presentation, we do have a very good footprint in Hong Kong, and we will continue to maintain that and expand in Hong Kong. We have certain select license in China, particularly in Guangzhou, where we will expand, again, based on the business demand.

Outside of Hong Kong, we have selected certain markets, again, based on the customer demand. These markets could potentially include Singapore, Korea and Japan.

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [12]

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The next question is regarding Solutions again. What is the amount of new revenue you expect from the new data center? And will this be reflected in full for the first time in the first half of 2020?

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [13]

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We will start seeing the revenue stream kicking in potentially in Q4 of this year and the full year next year, we will definitely see the revenue uptake, which could rise sharply as the occupancy rate goes up.

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Marco Wong, PCCW Limited - Head of M&A, Corporate Development and IR [14]

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That was the final question. That ends our webcast, and thanks for your attendance.

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Hon Hing Hui, PCCW Limited - Group CFO & Executive Director [15]

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Thank you.

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Srinivas Bangalore Gangaiah, PCCW Limited - Group MD & Executive Director [16]

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Thank you.