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Edited Transcript of CC3.SI earnings conference call or presentation 5-Nov-19 10:00am GMT

Q3 2019 StarHub Ltd Earnings Call

Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of StarHub Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Choon Hwee Chia

StarHub Ltd - CFO

* Eric Loh

StarHub Ltd - Assistant VP of IR

* Johan Hendrik Martinus Buse

StarHub Ltd - Chief of Consumer Business Group

* Peter Kaliaropoulos

StarHub Ltd - CEO

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Conference Call Participants

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* Arthur Pineda

Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research

* Choong Chen Foong

CIMB Research - Analyst

* Luis A. Hilado

Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst

* Piyush Choudhary

HSBC, Research Division - Telecoms Analyst, South East Asia

* Prem Jearajasingam

Macquarie Research - Analyst

* Ramakrishna Maruvada

Daiwa Securities Co. Ltd., Research Division - Head of Singapore Research

* Ranjan Sharma

JP Morgan Chase & Co, Research Division - Analyst

* Varun Ahuja

Crédit Suisse AG, Research Division - Associate

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Presentation

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Eric Loh, StarHub Ltd - Assistant VP of IR [1]

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Good evening, ladies and gentlemen. Welcome to StarHub's Third Quarter 2019 Results Announcement. My name is Eric, and with me this evening, we have the Chief Executive, Peter K; the CFO, Dennis Chia; and also the Head of the Consumer business, Johan Buse; and not forgetting the acting Head of the Enterprise Business, Aeng Keong Lim.

Now before we go into the presentation proper, just a bit of housekeeping for you. (Operator Instructions)

Now with that, let's welcome Peter to walk us through some highlights of the third quarter results.

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Peter Kaliaropoulos, StarHub Ltd - CEO [2]

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Thank you, Eric, and a very good evening, ladies and gentlemen, and thank you for your interest in our company. Let me, first of all, to offer view -- an overview against some of the key initiatives that underpin our transformation program, which we announced 12 months ago before our CFO, Dennis walks through the details of the quarter 3 performance. I refer you to Pages 4, 5 and 6 of the pack we published only a few minutes ago.

We had a strategy 12 months ago, which we announced as part of the transformation program called D.A.R.E, there were 4 Pillars: Delivering market-leading experiences; accelerating optimization and value from our existing assets; finding growth from new investments and new opportunities in the marketplace; and the fourth pillar was all about enhancing and accelerating our digital transformation.

12-month slide up, if I refer you to Slide 5, you will see that we executed a number of initiatives to support our strategy under driving customer experience. We refreshed the brand and the brand promise with new pricing plans and new propositions for both mobility as well as TV. We completed the cable-to-fibre migration and we actually improved the overall customer experience through various initiatives, and we started a digital innovation. Some of the proof for those initiatives come in terms of definitely the migration of customers from cable to fibre, but also very importantly, we're seeing net promoter scores and customer satisfaction and customer experience improving, and some of our lines of businesses are receiving NPS scores up to 45 points, which we have never seen before for the last few years, at least.

If we look now at how we get more value from our existing business, we optimized our resource levels and our workforce. We drove some further operational efficiencies across all lines of businesses. We launched some new entertainment offers, including Go Max and other OTT offerings. Part of that's value optimization, part of the proof is in the fact that we also announced a $210 million optimization program and 12 months into the program, we are reporting, and I'll walk you through the details, at least 60% achievement against year-to-date against that program.

In terms of value from new growth opportunities certainly, we -- in the last 12 months, we accelerated the growth of our cybersecurity business, and we consolidated the Ensign Group in terms of both the crypt, the cryptography side of the business. We're also preparing the 5G bid because we see potential opportunities, and of course, it underpins our mobility business. And we're exploring further M&A opportunities. Again, as a proof of that part of the strategy, if we're executing well, tremendous growth continues on double-digit levels from both cybersecurity and the Enterprise business. And again, we were one of the first companies to offer a number of 5G trials so far, and we're working on other trials with other customers. Finally, in terms of enhancing ourselves on a digital front, we've done quite a bit of work in terms of our applications like MyStarHub app. Currently, we have more than 500,000 customers with very high ratings, over 4.5, and leading in terms of the Google Play Book (sic) [Store] and the Apple App stores. And 12 months later, we're very embarrassed to share with you what that rating was, but it was very, very low. So again, we're fixing the apps. We're promoting our aligned digital sale capability. We doubled the online sales in terms of transaction as well as value over the last 12 months. We launched a fully digital brand in terms of giga. And with a lot of innovation, first in Singapore market, in terms of the proposition itself as well as the customer registration and activation of the SIM card in the Enterprise market. Again, in addition to cybersecurity, we invested in new capabilities like software-defined [win] capability. And we also deployed robotics process automation across all our operations to improve efficiencies.

If I now refer you to Slide 6 out of the pack, our transformation program and the benefits we're trying to derive. We're showing you high level. There are a lot of initiatives that we group them in different categories. Certainly from the workforce optimization, about 39%, 40% of the savings came from that initiative. About 25% is coming from a number of operational efficiencies in terms of rentals, in terms of repairs and maintenance. There's quite a wide number of initiatives underpinning that specific pillar. And of course, the third category has to do with the TV business in terms of content and operation. TV is part of a brand. It's one of the pillars of the lines of businesses. We are committed to a more sustainable business and making sure we reduce the operating cost and the content cost while giving customers a true alternative for content.

So, so far, 12 months into the operation, about 60% has been delivered. We believe there are more savings than the $210 million, but at this point in time, we're committing to that. We have reinvested about 17% to 20% of those savings. And the rest of the savings, once we deliver the rest of the program, predominantly will go to fund further our digital capabilities to fund potential acquisitions and some of those savings will go to the bottom line, but the majority is going to transform the operation.

If I now refer to quarter 3 results, let me say, quarter 3 was characterized predominantly by, again, double-digit growth from our enterprise revenues, both network services and cybersecurity. It was also characterized by the completion of the cable migration project. It was characterized by the consolidation of all cybersecurity assets under one roof, due to the synergies and potential complementary capability, and it's also characterized by the start of preparation to submit the 5G network bid to IMDA.

Also, if you look at quarter 3 results versus quarter 2, Dennis will obviously comment on quarter 3 2018 versus quarter 3 2019. But we do take some comfort that quarter 3, 2019 versus quarter 2, in terms of bottom line revenue, in fact, we are delivering a 3.7% growth in overall revenues in quarter 3 versus quarter 2. That's fueled predominantly through network enterprise sales and cybersecurity as well as equipment sales because a number of new models were launched in the marketplace. But if you also look at our other lines of business, mobility was almost flat, $190 million in Q3 versus $192 million in Q2. We did have a slowdown in revenues from TV, 13.3% reduction in revenues quarter-on-quarter. Because predominantly of the migration, we have less customers subscribing to TV. And also, there are a lot of promotional initiatives, impacting both TV revenues and broadband. So overall, the quarter 3 results versus quarter 2 encouraging for revenue and encouraging for bottom line.

Finally, Dennis will give you detailed guidance. We're really not changing our guidance for a lot of the parameters with the exception of revenues because on the service revenue side, we impacted a little bit more than we expected due to the Pay TV revenues.

With that in mind, I'll now ask Dennis to go through some more details on quarter 3 year-on-year and some other numbers in your pack.

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Choon Hwee Chia, StarHub Ltd - CFO [3]

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Thanks, Peter. So I'm moving on to Slide #8 in the deck. So we reported total revenues of $572.6 million, a year-on-year decline of -- a slight decline of 1.6%. We reported EBITDA under post-IFRS 16 impact of $170 million or service EBITDA margin of 35.1%, and free cash flow generated during the quarter of $107 million or $0.062 on a per share basis.

Moving on to Slide #9, Mobile. On the Mobile revenues, we ended the quarter with 1.442 million postpaid subscribers and 785,000 prepaid subscribers. In terms of ARPU, we -- in terms of postpaid ARPU, it stood at $39 at the end of quarter 3, and for prepaid ARPU, it stood at $13.

Moving on to Slide #10. If you look at the Pay TV numbers, our post migration to fiber at the end of Q3, we stood at 347,000 customers. And post -- Pay TV ARPU stood at $40. Moving on to broadband. The total number of subscribers in Q3 is 505,000 customers and ARPU is at $27. Enterprise revenues wise, for the quarter, it remained fairly stable. The approximately $107 million. And in terms of the cybersecurity revenues, that's grown from $16 million to $39 million per quarter and translating to 135% increase.

In terms of the Enterprise revenue breakdown, you look at the data Internet revenues are fairly stable. We saw some growth in terms of the managed services revenue.

I'll move on to the financial details, and you go on to Slide #13. I just pull some -- and highlight some key statistics. In terms of -- we talked about service, total revenue of $573 million. Service revenues were $435 million versus $460 million a year ago, and that results decline in Mobile as well as Pay TV revenues, as mentioned a while ago. The EBITDA stood at $170 million for the quarter versus $147 million a year ago. In terms of net profit, we reported a net profit of $57 million for the quarter. Net profit attributable to shareholders would have been $58 million or $0.033 on an EPS basis. For the full year, it would be $145 million, or for the year-to-date rather, it's $145 million or $0.084 on an EPS basis. For the quarter, we generated $0.062 on a free cash flow and $0.105 on a year-to-date basis. And the net debt-to-EBITDA ratio stood at 1.48x.

The revenue and revenue mix, we've mentioned on the Mobile and the Pay TV and broadband, which remains fairly stable at Enterprise revenues, and that slide on Page 14, gives you a sense of the revenues breakdown for each of our lines of business.

Moving on to Slide #15, and EBITDA, which has gone up to $170 million, which is the result of a higher CP margins we recorded during the quarter and income grant or other income that recorded during the quarter as well as well as better operating expenses. If you look at service EBITDA and service EBITDA margin, we're standing at 35.1%, as we mentioned earlier, that's at the end of quarter 3.

Moving on to the cost of sales. The cost of sales is broken down into 3 main components: The cost of equipment, which is higher year-on-year as a result of the higher revenues that we recorded in quarter 3; the cost of services is lower, despite the higher fibre costs, variable fibre costs due to the migration to fibre for our TV and broadband customers; and as a result of our lower content costs. And we've also recorded lower traffic costs as a result, better rates and lower traffic volumes. Other operating expenses is $254 million for -- is actually fairly stable at $248 million versus $247 million. The movements in the other operating expenses categories are primarily due to the reclassification of operating leases into the depreciation and amortization bucket, which has shown an increase however, we didn't have a reduction in the R&M costs as well as staff costs, which has been part of the transmission savings that we reflect on Slide #6.

Net profit after tax is $57 million, as mentioned, compared to a year ago, which is fairly stable. And the free cash flow is $107 million per quarter or minus $0.062 on a per share basis.

In terms of the outlook, the changes that Peter mentioned is the revision of our revenue guidance on a decline of 2% to 3% compared to a year ago. The other revision to our guidance is a reduction of our CapEx commitment ratio, which is we formally guided to 10% to 11% on revenue. We're now guiding to 8% to 9%, in terms of CapEx commitment for the year. Otherwise, we are leaving our EBITDA margin guidance stable at 30% to 32% on a post-IFRS 16 basis. And we are guiding and keeping our dividend commitment to $0.09 on a full year basis and $0.0225 for the quarter.

With that, I hand the floor back to Eric.

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Eric Loh, StarHub Ltd - Assistant VP of IR [4]

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Thank you, Dennis. (Operator Instructions)

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Questions and Answers

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Eric Loh, StarHub Ltd - Assistant VP of IR [1]

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Now first on the line, let's welcome Luis from Maybank.

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [2]

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Can you hear me?

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Choon Hwee Chia, StarHub Ltd - CFO [3]

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Yes. We can hear you.

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [4]

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I had 3 questions. First 2 on wireless and the third on Pay TV. Peter mentioned earlier that, yes, it's another quarter where you're hovering at about $190 million in wireless service revenues. And this is the fourth consecutive quarter that it's around that range. Is it fair to say that now you're seeing the competitive environment is stable and there's room for some improvements going forward? Second to wireless question is regarding SIM only. Can we get an update whether that as a percentage of your subscriber base is still growing? And any rough indication of what it presents today versus last quarter or year-on-year? And last question on Pay TV. If I recall correctly, there was the intention to have a major renegotiation of a Pay TV content -- to the Pay TV content partner this last quarter. Is there any update on that?

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Peter Kaliaropoulos, StarHub Ltd - CEO [5]

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Okay. Luis, thank you for your questions. I'll take the first one. We do not believe that competition in Mobile market has stabilized. In fact, we're aware that there are a number of new entrants coming in as MVNOs, and there's going to be, potentially in quarter one next year, more competitive intensity. I think there's also potential expansion of offers in terms of further bundling between mobility, between other services. So I think it's -- we will all be very happy if we saw no further intensity, but we believe it is just as competitive as it has been before. And I think there is movement in some of their wholesale prices for MVNOs that will make sure the MVNO competitive threat will continue to be there. So I think we have not changed their forward-looking view on the competitive intensity. It is still as high as it used to be. In terms of SIM Only market it -- yes, they continue to be attractive. And if you look at -- over the last 12 months, there's been a trade-off between prepaid packages to SIM Only packages because of the value that they generate, and we're seeing -- we continue to see that trend. But again, we do not reveal the specific split between those numbers, but the majority of our customer base remains on postpaid bundled handsets and pricing plans, and we don't believe that percentage would change dramatically over the next 12 months. SIM Only market still is sort of the minor share of the market, maybe it's showing faster growth, but the overall revenue contribution is coming predominantly from more stable postpaid contracted revenues.

Pay TV, we continue to negotiate with all our content partners. Over the last 12 months, we have actually reduced the price that we pay for content right across almost every contract that's coming up for renegotiations. And that continues to be the case, and we will pursue that. And should the partners not be flexible at all and they stick to the old business model, we're quite happy to substitute that content for similar relevant content to our customers. So we're committed to have a sustainable pay TV business, which will not happen by signing content at the same cost as in the last 1, 2 or 3 years. So content negotiations continue with everyone, and I can assure you, we're moving more into variable and lower cost because, again, I think the content partners are realizing that the subscriber base is changing as well as they're coming -- the majority of the big content partners, if not everybody, is also coming direct to the consumer. So that will continue, and we're committed to driving more cost out of content as we have done already this year.

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [6]

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Just one quick follow-up on the content cost, which is very halfway done with going to variable or any percentage you can -- what's the percentage?

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Peter Kaliaropoulos, StarHub Ltd - CEO [7]

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In terms of the majority of our contracts, we can say, we're almost there. But in terms of the value, there's still a couple of major contracts in terms of total commitment of what we pay every year. And they're still not there. So that's where the negotiation continues to take place. But as I said, we're very determined, even if we have high value perceived by the customer content, we're not prepared to continue to pay a fixed amount for that. We appeal to the common sense and pragmatism of our content providers to come back with a variable cost model because this is really what consumers want today. They want to consume quality content at an affordable per unit price, and they tend to switch from one content package to another. So we need to provide that flexibility. We cannot just pay flat fee for content irrespective how many consumers actually subscribe to it. So I think, overall, we're getting there to have full variability, but we're not quite there, Luis.

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Eric Loh, StarHub Ltd - Assistant VP of IR [8]

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Right. Next on the line, we have Ranjan from JPMorgan.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [9]

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Maybe first question from my side is on the 5G. We have seen the 5G policy being set by IMDA. If you can share how you approach the -- how you see the 5G opportunity? And is that something that you can pursue on your own? Or this will be a core build like you've seen in some of the markets? This is the second question. Is -- just a housekeeping side. Like, are there any one-offs in the third quarter that have been recorded?

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Peter Kaliaropoulos, StarHub Ltd - CEO [10]

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Thank you, Ranjan. 5G question. We've said publicly, I think, for the last probably 15 months that since I've joined the company that we do not believe in stand-alone networks. We believe Singapore is served extremely well by advanced infrastructure for both fixed and wireless. And the smarter business model is for the operators to share that infrastructure because that allow us to have lower cost and pass on to the consumer even more attractive offers. So we are committed to sharing as a principle. And certainly, the way we are approaching 5G is when discussions will fold, only the MNOs can submit a bid. So we're in discussions with all MNOs to find the right partnership to submit a bid to be one of the 2 networks. So on our own, the business case is extremely, extremely demanding, especially for a market that is so well served with fibre. Now we really have 100% fibre penetration. In a lot of other countries, 5G, the huge take-up rate of 5G is more because of fixed to wireless access as a substitution to fibre, when you see most of the deployments. In South Korea, of course, it's predominantly on mobility because of the content as well as the faster transmission. So here in Singapore, we do not have the opportunity to provide customers with very high-speed connections on wireless, because almost every location has fibre. So a standalone business case is very, very demanding, and we believe we will be submitting a joint bid. Once all the discussions are over, one that hopefully the structure of this joint bid is supported by MDA, that is the right approach rather than overlaying multiple infrastructures on our own and having like more than 2 mobile networks.

In terms of one-offs, yes, I think if you go through the MD&A package, we're reporting that we received some fees from TPG, their share of contribution for access to channels, and it was about $9 million because of that. So yes, that contributed to our bottom line for quarter 3 as well.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [11]

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Just one quick follow-up. So when you talk about joint build, I guess, you also opened for network JVs. Is that a correct understanding? And do you think that -- like if you only have 2 operators building a 5G network, that brings back some pricing power to the operators.

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Peter Kaliaropoulos, StarHub Ltd - CEO [12]

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Certainly, we're talking about 2 networks effectively because this is exactly what the call for proposal from the IMDA was all about, very specific, 2 networks, very specific about outdoor 3.5 gigahertz coverage and in indoor, everyone will get millimeter wave spectrum. In terms of, will that give more power to the 2 owners of these networks in terms of the right pricing. I think, again, the regulator has inserted that we have an obligation, whoever builds these 2 networks and markets these networks to make them available to the other MNOs who may not have won on a wholesale basis into the MVNOs. So that's an area, of course, yet to be finalized. But in the call for proposal, there is some very specific retail minus or cost plus obligations to the wholesale market, based on commercial negotiations. So again, if, let's say, 10, 12 MVNOs and 4 MNOs have access to 5G, I think the probability of really high pricing is there, and I think it's responsible because the investment made by the 2 operators is massive. And more importantly, the proposition for the customer is different to 4G. It's a totally different experience. So we see the opportunity for different pricing strategy. But again, it remains to be seen if all of a sudden, 14, 15 brands will have 5G available from day 1 or predominantly two operators will have 5G from day 1. So there's a little bit of work to be done. And again, the go-to-market is really 2021, first quarter 2021. So there will be quite a bit of negotiation between now and then in terms of wholesale pricing as well as access to the network.

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Eric Loh, StarHub Ltd - Assistant VP of IR [13]

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Let's welcome Arthur from Citigroup. You've got a question for us?

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [14]

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Yes...

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Eric Loh, StarHub Ltd - Assistant VP of IR [15]

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Go ahead.

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Peter Kaliaropoulos, StarHub Ltd - CEO [16]

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I think someone just dropped there.

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Eric Loh, StarHub Ltd - Assistant VP of IR [17]

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Okay. Arthur, you were listening in. We need you to dial back in again because I think you dropped out. Let's move on to Foong Choong from CIMB.

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Choong Chen Foong, CIMB Research - Analyst [18]

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Couple of questions from me. Firstly, on the transformation program that you've provided some update on. I just wanted to get a bit more details on that. So if I look at the savings from operational efficiencies, the execution there seems to be still rather low. Only 3% has been sort of executed. Why is that? Do you expect the savings to be sort of more back-ended for that portion? And can I also ask whether the savings for the cable lease from SingTel is under this category or is not included in the $210 million savings? And also on the cost savings, I wanted to ask as well on the content cost. When you have finally gone through and reduced your TV content cost, how much would it be as a percentage of your Pay TV revenue? Yes, that is my question on the cost side. Second question, I just wanted to ask a bit more on the reduction in the CapEx guidance is a fairly large change. What is driving that? And where do you think this will be heading going into the next few years? And if you could, perhaps provide us with a long-term CapEx level for StarHub? And thirdly, for the 700-megahertz spectrum, when do you think is the earliest we can start to use the spectrum in Singapore? Yes, those are my 3 questions.

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Peter Kaliaropoulos, StarHub Ltd - CEO [19]

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Okay. Mr. Foong, thank you very much for your interest. Let me take your last question first. 700-megahertz is still not available to us. And again, the arrangement with the regulator is that 6 months before it becomes available, we will be notified. As we understand, this is not going to happen anytime soon. It's more sort of pushed out because a couple of our neighboring countries, of course, are using 700-megahertz for free-to-air TV and there's interference if we also use the same spectrum. So we see that the availability to use that spectrum, more push back maybe 12 to 18 months, certainly not in the 6 months because we have not been notified. Your second question about reduction in CapEx, before I ask Dennis to comment a little bit more about some of the initiatives to optimize costs. The approach we've taken is that we have some of our core businesses that are not growing, and CapEx, we need to be very disciplined and prudent about funding lines of business that are not really growing, and we really want to do that within a single – mid-single-digit number in terms of CapEx. Of course, long term, we are about to invest in a 5G network. That investment will be sizable over 5 years. So again, being prudent with CapEx for the existing line of business, especially the ones that are not growing, and then funding the growth part of the business, which is really enterprise and 5G, that will take us into double-digit over the next few years. But the existing business without 5G, low single-digit numbers that we're giving you guidance now, will probably be the norm for the long term. Once 5G, assuming we are successful, then we will present the case of the investment we're going to make in 5G over a number of years. And of course, again, we're motivated by sharing that network because the overall CapEx expenditure can come down substantially and it also depends on what type of sharing we do, if you only say the radio access network, there's one level of saving. If the sharing model is more deeper than just access network, the CapEx required becomes even less. So that level of detail we'll share with you once we're in a position to say, okay, we've been granted a license and to build a 5G network with a partner. But in terms of business as usual, we're really committed to sort of having a mid-digit numbers in terms of CapEx to revenue. Your first question was all about whether we're executing quickly enough some operational efficiencies, whether the annualized savings are in that and the percentage of cost for content.

Let me take the content one. Again, we're trying to drive that percentage as low as possible, but again, we don't reveal that number. We don't split that number out. Dennis, you want to comment a little bit more about operational efficiencies?

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Choon Hwee Chia, StarHub Ltd - CFO [20]

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Sure. So I'll kind of add on Peter to sum the points he made. And the -- to especially Foong to your point about the NLA savings, those have been identified and which is why that's been quantified as such. They've been classified as not executed yet because the liability for the NLA still exists in the current year. And they will take the effect from next year, 2020. So you'll see that showing up as executed starting from 2020. The other reason why you've got operational efficiencies executed at a lower level, relatively lower level than others, it's because we've started on our digital transformation journey. And that obviously takes a little bit of time. So with that, you'll see that number going up over the years. In terms of content costs, I'll just supplement what Peter has said in terms of if this -- if we successfully get all our content cost into a variable model, then, of course, the content costs as a percentage of revenue will be lower but that's also a function of ARPUs as they go forward as well and what customers would be willing to pay. So to give you a guidance of what that percentage is going to be, is going to difficult because the market is very dynamic. Finally, on the -- just a supplement point on CapEx. On the guidance, we've managed the CapEx down to 8%. And we've looked at how to trim down the CapEx investments to what is essential to meet regulatory obligations as well as to grow the business. And we've done that to this level, and we intend to sustain this at this level going forward without the 5G obligations. But if you take 5G obligations going forward, we would also be looking for opportunities to reduce our business as usual CapEx to fund the 5G as well.

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Eric Loh, StarHub Ltd - Assistant VP of IR [21]

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Next on the line, we have Rama from Daiwa.

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Ramakrishna Maruvada, Daiwa Securities Co. Ltd., Research Division - Head of Singapore Research [22]

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I have only one question, please. Could you please comment a little bit about the customers on the postpaid side? I read the commentary saying that it's low ARPU Enterprise customers. Could you provide a little bit of color here? And also, whether or not you expect resumption in customer growth going forward?

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Peter Kaliaropoulos, StarHub Ltd - CEO [23]

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Okay. That particular case was one of our Enterprise customers who've had a very innovative solution for the hospitality sector involved few tens of thousands of SIM cards, low ARPU, and unfortunately, the company got into some trading difficulties and they stopped trading. I'm not sure, Johan, if you want to add anything more?

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [24]

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No, I think that's comprehensive.

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Peter Kaliaropoulos, StarHub Ltd - CEO [25]

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Look, in terms of ongoing customer growth again, we have to accept that the SIM Only market is really the new prepaid market. And from quarter-to-quarter, you're going to see movements in SIM Only market. There are a number of MVNOs out there, more than 12 that we've counted so far and digital brands, of course, and probably growing, and they have lots of promotional activity every month, every quarter. So that market will be volatile as the prepaid market was over many, many years. So yes, we can expect some of the operators one quarter, they may have few more postpaid SIM Only registered. Next quarter, there'll be a little bit of a wash out because some of the MVNOs, the pricing model they get from the wholesale market, it does not make it attractive for them to retain customers with no revenues. So you will see some movement, but again, let's keep in mind that we have 155% penetration for mobility in Singapore. So you're not going to see massive growth in people to people SIM cards. I think with 5G, with IoT, stop being sort of presented on slides and becoming reality in the next maybe couple of years, it'll be more machine-to-machine and IoT and 5G applications that will drive SIM cards growth rather than sort of people to people.

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Eric Loh, StarHub Ltd - Assistant VP of IR [26]

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Luis, you have more questions for us?

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [27]

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Yes, Sorry. 2 follow-up questions. One is on the nature of the policies from TPG. Is that a recurring rental income? And is the $9 million on a cumulative amount or something we should look at every quarter? And the second question is regarding, Peter mentioned the increasing number of MVNOs will be coming in. Are they having will to the listed or unlisted operators, [and on that strategy]?

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Peter Kaliaropoulos, StarHub Ltd - CEO [28]

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I'll let Dennis take the first question about the TPG fees, and I'll give you some feedback on MVNOs. Dennis?

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Choon Hwee Chia, StarHub Ltd - CFO [29]

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Okay. On the TPG fees is not a recurring quarter for fee revenues. So that's why we classified that as a one-off other income for this year. This will be a negotiated amount on an ongoing basis going forward. So if that's going to be portions of the tunnels that they would be looking to share going forward, then there will be fees negotiated on commercial basis on a case-by-case basis in the future.

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Peter Kaliaropoulos, StarHub Ltd - CEO [30]

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Correct. And then regarding phases as they get access. The question about MVNOs, whether they're listed companies or not. I don't believe it's appropriate to reveal some of the companies we negotiate. All I can say, some of them are very established operators in other markets, and some of them are very entrepreneurial. So we're seeing the full spectrum of operators coming into the market for a number of reasons.

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Eric Loh, StarHub Ltd - Assistant VP of IR [31]

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Keeping our fingers crossed now for you, Arthur.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [32]

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Can you hear me now?

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Eric Loh, StarHub Ltd - Assistant VP of IR [33]

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I am sorry. Say that again.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [34]

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Can you hear me now?

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Peter Kaliaropoulos, StarHub Ltd - CEO [35]

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Yes, we can.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [36]

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Okay. Great. Just 2 questions for me, please. Firstly, on the Pay TV. Can I just clarify, should we now be looking the third quarter number as the base number going forward. Or are there still some lumpy disconnections toward end September, which will only be reflected in fourth quarter revenues? Second question I had is with regard to the preference and philosophy for 5G partnerships. Do you think it will be better to pair up with bigger players such as a market leader? Or is it better to pair up with a challenger in this regard?

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Peter Kaliaropoulos, StarHub Ltd - CEO [37]

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Okay. Thank you, Arthur. In terms of your first question about Pay TV, yes, we expect stability in our Pay TV revenues from quarter 1 next year because in quarter 4, there was a residual number of customers that basically migrated or not in quarter 3. And we also have a small number of customers in who, in quarter 4, we had to extend only for a few days, the service to them until we migrated. So we'll have a little bit of churn from the first week in October. So quarter 4 revenues will still show some adverse impact from the migration, but quarter 1 onwards all the revenues will be -- they will be stable. And what gives us confidence to say that is the great majority of customers today that we've migrated, if not all of them. So let me be very -- all the customers we migrate are under 2-year contracts. So those revenues once the migration impact gets worsed out, they will be stable going forward from quarter 1. Your second question is very interesting, and certainly, in terms of being philosophical about partners. I think, to be honest with you, it's more commercial pragmatism and quality of service that drives the relationship. We were agnostic in terms of the partner. We do believe what is best is to be able to build our robust network with the right quality of service. It meets the security, the cybersecurity criteria and all the other criteria that INDA has set for us, and a partner who we agree about the JV arrangements in the shareholder agreement, we're more motivated to get that right rather than if it's the market leader or the challenger. By the way, we feel we have the challenges. So we're open to a partnership with any of the MNOs, as long as they're committed to the same objectives and goals we are committed, decent quality network, the robust and reliable network and a fair and equitable shareholder agreement between the parties.

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Eric Loh, StarHub Ltd - Assistant VP of IR [38]

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(inaudible) or MC, who's on the line for Goldman Sachs?

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Unidentified Analyst, [39]

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It's me. (inaudible) here.

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Peter Kaliaropoulos, StarHub Ltd - CEO [40]

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And you are [Stewart], right?

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Unidentified Analyst, [41]

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Yes. Just want to clarify quickly here. Did you mention that CapEx will go to mid double-digit with 5G. Am I hearing this correctly? And also, how will the 5G CapEx requirement defer versus 4G? And lastly, when you start spending on 5G, does this mean that you will not spend more CapEx on 4G? Or will the maintenance CapEx will be sizable?

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Peter Kaliaropoulos, StarHub Ltd - CEO [42]

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Okay. [Stewart], I did mention double-digit but not mid double-digit. So certainly, when you do the math, the type of investment required will definitely push us more than 7% to 8% that we're currently spending for our core businesses. So automatically, it will be double digits. But again, we will give you the guidance once the business case is not only supported by a Board, of course, but once we are in a position to say, okay, we're 1 of the 2 license -- consortium is 1 of the 2 license offered. We will be very explicit with the CapEx. But the variability in the CapEx depends on which model you will -- the partners will come to agreement about sharing. Sharing their radio access network gives you 1 type of savings between the 2 partners. Sharing more than radio access gives you a lot more savings and provides you with equal capability in the marketplace in terms of configuring products and pricing products and so on. So that remains to be negotiated. And of course, it remains to be approved by the regulator because whatever agreement we come to grips with, we need to get approval from IMDA. So if you do the math, definitely, will be double digit. It's the simple answer we can give you. But I didn't say mid-teens numbers. We'll come back and give you guidance.

In terms of ongoing CapEx for 4G, again, keeping in mind that eventually traffic will start migrating from 3G and 4G to 5G, so we will be very, very selective where we're actually upgrading the 4G network. Singapore is a market where the majority of customers today, either are on postpaid plans and within an 12 -- 18-month cycle, the great majority will come back to the market. And when 5G is available most likely they will take a 5G handset and 5G subscription. But of course, of 5G will not be instantaneous from day 1. So we need to have a very good 4G network. We're motivated to spend as little CapEx as possible to grow that network because a lot of the growth capital will go to 5G. So we're trying to minimize investments in 5G and we've been thinking long term, what we do with the 3G network. So again, we committed, as Dennis said earlier, the CapEx required for the current businesses will be managed to single-digit numbers, and really, all the additional CapEx will go towards platforms and capabilities that will give us the opportunity to raise new revenues and higher revenues. So 4G minimum CapEx, short answer. And 5G, double-digit, but we'll give you an indication of the average double-digit impact for the first few years once the business goes and the network license secured.

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Eric Loh, StarHub Ltd - Assistant VP of IR [43]

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We've got time for 2 more callers. The second last caller will be Prem from Macquarie.

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Prem Jearajasingam, Macquarie Research - Analyst [44]

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3 questions from me, please. First and foremost, I noticed your comment about Enterprise access pricing coming down. Do you think we've come to the end of that cycle? Or do you foresee that this is going to continue into 2020 as well? That's one. Number two, could you just remind me what is the nature of this TPG tunnel revenue? Is it something that -- are you building network, I mean, when they come at tunnels and when they come and share those tunnels, that's what they pay you a large fee? Or are you building together and this is your recognition of their cost -- their part of the cost? And finally, with equipment sales, do you see any change this year in terms of the timing of those revenues that you're getting from the equipment sales? Because it does look like you booked a fair amount of profit or gross profit from the equipment sales this quarter. I'm just wondering whether we continue into the fourth quarter or whether this is largely it.

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Peter Kaliaropoulos, StarHub Ltd - CEO [45]

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Okay. Thank you very much Prem for your questions. First of all, in terms of enterprise pricing for connectivity, what we say -- we've been saying this for years now. It's certainly not just last quarter, or I don't think it's going to be only next quarter. Corporates buy significant amounts of wireless and fixed access, significant amount of SIM cards. So that market is very competitive. And typically, there's an expectation if the same contract is going to roll over. There's an expectation of more value for that enterprise customer. And of course, what we as operators always try and do is actually do that offer more value, more bandwidth, more utilization in terms of gigabits and overall bandwidth, so we don't depress the price, but there are some enterprises that prefer to book the saving and prefer a lower price than more value. So that part of the market will continue to remain competitive. And the opportunity for us, of course, is that we have the smallest market share in the Enterprise market compared to everybody else and especially the market leader. So we see the opportunity to win new customers and have new revenues as well as defend the existing customers with the right pricing strategy and the right value transfer to them in terms of getting more value for the same price. So that's some feedback on your first question.

In terms of the tunnels, the background to it is very simple. All the MNOs here in Singapore have obligations to meet quality of service standards, indoors, outdoors. So the tunnels, of course, is an area where signal drops dramatically. And the IMDA and the operators over the years before TPG entered the market work closely together to basically introduce facilities and share the cost in the past 3 ways to have coverage for tunnels. With TPG coming to the market, that cost, of course, if TPG agreed to -- for the existing channels, they will pay their 25%. So whatever that cost was instead of being split between three, it's been split between four now for the existing installations and any new channel and any new infrastructure that the MNOs agreed to share that cost instead of [ours], replicating the infrastructure in that tunnel, new tunnel or a new highway, again, TPG will pay its 25% because what the operators are doing, we've discovered this for the last few years. Not only it's meaningless to keep replicating infrastructure, but some of those structures are very unique in a tunnel, you don't have the space and the freedom to run 4 sets of wires, 4 sets of equipment. It's a confined space. So we hope TPG in the future works with the other 3 operators, because it's common sense for all of us to share that cost. And well, the 3 operators have existing infrastructure as long as TPG pays their fair share to get access to that, that will continue to happen as well. Equipment sales. I think Johan is better suited than me, but they're seasonally driven when you get new launches of handsets, you tend to get more of them in the marketplace and the appeal of customers is high. And typically, quarter 4 seasonally is an attractive period for bargains, but I think, Johan, you can add a bit more color to that.

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [46]

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Yes, prem. So thanks for the question. So building on what Peter said, yes, we saw some contraction over the last quarter in terms of device sales both on existing customers recontracting as well as new. On top of that, it's probably worthwhile to add one point, which is related to the accounting treatment of device revenues. So with the IFRS standard, basically, the equipment sales grows at the expense of some of the service revenue and basically goes to the equipment revenue. So you need to see both in combination.

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Eric Loh, StarHub Ltd - Assistant VP of IR [47]

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Varun from Crédit Suisse, you've got questions for us?

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Varun Ahuja, Crédit Suisse AG, Research Division - Associate [48]

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Sure. I've got 4 questions. First, on 5G, you mentioned that you'll be more willing to go on a JV route and then partnership. But in future, if more spectrum gets available and the government wants to introduce another operator because that's what they have said, maybe it's a little bit medium to long term, how do you see it? You still want to have a shared network strategy in Singapore? Or is it more than you will venture out to have your own network. How do you see from a long-term perspective, whether Singapore 5G will be more on a share basis, or it would be -- eventually, it will be more operators into the market having standalone networks. That's #1. #2, on MVNO, it looks like your competitors have a much better competitive MVNO compared to start-up. So what's your strategy on that front? Is it any -- in terms of negotiations that you're not able to get a strong MVNO partner? How do you see that market per se? Thirdly, on the TPG one-time fee, can you just give some more color, what percentage of tunnels have been being taken up by PPG so that we can get some sense how much more is potentially possible? That will be #3. And lastly, on CapEx. Your CapEx guidance, obviously, now with the business, as usual, you're mentioning should be around 7%, 8%. Earlier, it was used to be 10% to 11%. So what kind of business as usual CapEx you have reduced versus earlier? What was the thought process where you were spending and now with the new management, you reduced that CapEx, some commentary -- qualitative commentary will be helpful.

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Peter Kaliaropoulos, StarHub Ltd - CEO [49]

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Okay. Thank you, Varun, for the 4 questions. First one, in terms of long-term sharing of 5G networks, the way spectrum is offered to the operators from day 1, it's outdoor spectrum, 3.5 for 2 networks, but the millimeter wave and then 800-megahertz of spectrum will be given to 4 operators. So what we see the future being all about, if you think more Enterprise use cases, Enterprise customers versus consumer, for the nationwide coverage, the consumer customer base predominantly will be a shared network of 3.5 And as the operators have more millimeter wave, they may decide to deploy that for the consumer market in some buildings more than others. So it will be a combination, but I do not believe you're going to see more than 2, 3.5G networks. The economics don't really make sense. However, in fast-forward to get to the future, you will see potentially many operators delivering solutions for Enterprise customers, specific use cases. In the short term, the use cases in the Enterprise segment, there's a lot of marketing hype about those. We see maybe the enterprise market taking off in a couple of years, 2 to 3 years, simply because a lot of Enterprise customers, they have applications and process that need to be retooled and transformed to new platforms, and that will take some time to redesign. It will take some time to offset the fixed cost and migrate. So again, for enterprise, maybe lots of micro networks, enterprise, mobile networks on millimeter wave, predominantly in some 3.5G, but outdoor consumer networks, definitely more shared.

Competitive offers to MVNOs. Well, again, we've competed with everybody else. We have 3 MVNOs on our network so far. We're talking to lots of other potential entrants coming in. But I think that's a fair share of what others have as well. And of course, we have a digital brand on our network as well. So we plan to have at least 4 different brands on our network, whether that makes us good or bad, I do not know. But our approach, again, is that we're being very sensible in terms of pricing appropriately to recover the investment, the CapEx investment we've made into the network, and make sure we get a good return on that investment, plus layer the opportunities for the MVNO to make the right margin. So our strategy behind MVNOs is that our network has capacity to accommodate many MVNOs, but we're not going to sell below cost, especially incremental costs just because an MVNO knocks on the door. We've got to get the right return. And with four different operators and brands on our network, I think we have a fair share of what's available in the marketplace.

Third question was about TPG. To give you more granularity, look, we don't share the level of details of how many tunnels -- we actually sharing so far with TPG and how many more. This is really driven by TPG. They review their roll out strategy and their quality of cover obligations to their regulator, and we're more driven by them. 100% of where our tunnels are -- sorry, that the tunnels in Singapore are and when these installations are with the other MNOs. We're quite happy to share 100% of that. But at this point in time, we're not at liberty to disclose the percentage of the tunnels so far that they don't meet -- we haven't shared. And as I said, we're driven more by them and where they believe the network has got any sort of black spots and lower coverage versus other parts. So definitely not a lot of the tunnels so far. But we think, over time, if they're going to meet all the quality of standards of service standards for IMDA, they need to have 100% coverage.

When that happens, we will share with you any one off revenues going forward. In terms of CapEx intensity for the core business, again, I think we said earlier that we're not putting a lot more CapEx into our 4G network, and certainly not the 3G network because within 12 to 15 months, there'll be another network that will take on capacity and coverage from our existing networks. So that's one area where we're spending less. Another area we're spending less is that some of the buildings which are nonenterprise buildings, some of the consumer locations, again, we're quite happy not to roll out our own fixed network to those. We're quite happy to buy capacity on a needs basis, variable cost and variable quantity from NLT. So again, in the past, we were spending a little bit of CapEx wiring up some residential buildings. Again, going forward, NLT offers a good product at a good price point. So we'd rather pay -- use that CapEx for fixed network, where we believe Enterprise customers are and the better returns. And on the consumer market, the residential, we're going to rely more on NLT. And again, that brings down the level of CapEx intensity. And some of the other CapEx we're actually investing in is more on digital platforms and digital enablement of our processes. But again, compared to the infrastructure CapEx, these are smaller amounts.

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Eric Loh, StarHub Ltd - Assistant VP of IR [50]

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We're going to squeeze in one last caller and it's going to be Piyush from HSBC.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [51]

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Two questions, please. Firstly, on this TPG fees. Is there an estimate which you can share on other income, which could potentially come over longer term, like probably 2 to 3 years, if TPG has to share all the tunnels? That's question number one. Secondly, on Pay TV and broadband ARPU, are there any one-offs which are impacting the reported ARPU? Or this is going to be the new baseline numbers?

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Peter Kaliaropoulos, StarHub Ltd - CEO [52]

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TPG tunnels, again, to be honest with you, we really cannot give you any more granularity on this. As an operator, TPG, I assume every MNO, if they can meet the quality of service standards to IMDA, then they decide that I don't need to go into every tunnel. It's really -- we can only speculate, and then we don't even have the right to speculate. I think it's important that you hear from TPG, whether they intend to be in every tunnel or not. Certainly, we welcome them to come into every tunnel. And once they decide to do that, we will work out whatever the cost is. That has already been prepaid by the other 3 operators, ourselves included. So we can't share with you whether it's 50% of the tunnels today or more, that's up to them, because they may be able to meet the quality of service obligation without access to the tunnel. Personally, I can't see how. But as I said, I can't speculate on that. In terms of one-off for TV, yes...

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [53]

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Maybe I can give you a better clarity on that, Piyush. So the one-off, I would say is basically the ARPU revenue impact from both home broadband TVs on the back of the cable to fiber migration. As part of that, we have been offering customers certain benefits. And that's something you will see flowing through in the quarters to come.

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Peter Kaliaropoulos, StarHub Ltd - CEO [54]

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And there is another one-off on the positive side, the migration cost us a little bit of OpEx, marketing, promotions, customer experience. We had to put more people, more installers. So that was one-off expense booked, and most of that expense is booked by the end of quarter 3. So hopefully, going forward, some of that OpEx for the migration is not required.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [55]

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Just on this broadband ARPU one-off, is it possible to share what's the quantum of that, which is impacting the ARPU?

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [56]

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No. I wish we could do that, but I think that would be going in too much detail at this point in time. Rest assured, this is a temporary effect in the (inaudible).

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Peter Kaliaropoulos, StarHub Ltd - CEO [57]

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And Piyush to be honest with you, again, part of the migration, we had to meet a number of regulatory requirements that we could not impose a higher price for some of the customers who are paying a certain amounts per month for the old TV service. But when these contracts are coming up for renewal, potentially there will be some uplift in revenues. So it's not going to be adverse impact. If anything going forward, there will be a small incremental positive impact.

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [58]

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Exactly.

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Eric Loh, StarHub Ltd - Assistant VP of IR [59]

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Thank you. Ladies and gentlemen, that ends our results call for this evening. We look forward to engaging with you as we go on the road from tomorrow onwards, either at 1/1 or at the conferences. Until the next conference call, which is February of 2020, have a good evening.

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Peter Kaliaropoulos, StarHub Ltd - CEO [60]

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Thank you for your interest, again.

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Choon Hwee Chia, StarHub Ltd - CFO [61]

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Good night.

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Johan Hendrik Martinus Buse, StarHub Ltd - Chief of Consumer Business Group [62]

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Good night. Bye.