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Edited Transcript of DTAC.BK earnings conference call or presentation 21-Apr-17 3:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Total Access Communication PCL Analyst Meeting

Bangkok Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Total Access Communication PCL earnings conference call or presentation Friday, April 21, 2017 at 3:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars-Aake Valdemar Norling

Total Access Communication Public Company Limited - CEO and Director

* Sverre Pedersen

Total Access Communication Public Company Limited - CFO

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Conference Call Participants

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* Sittichai Duangrattanachaya

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Thitithep Nophaket

Phatra Securities Public Co. Ltd., Research Division - Telecom, Media, Beverage and Commerce Analyst

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Presentation

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [1]

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Good morning. Welcome. Sorry for the line downstairs. We have those automatic machines, but no one knows how to use them so.

Yes, why don't we just start going quickly through the highlights and then some presentation material and then we afterwards go for Q&A. So, yes. Thank you. So basically, Q1. We see then that we have still a healthy growth in postpaid, adding 195,000 subscribers, but then with the decline in prepaid overall, we landed the quarter at 23.3 million in total. Now we're at close to 96% of the subscribers under DTN, and so we have 1 million subscribers left on dtac. So migration is going well towards end of concession and of course, are helping controlling the regulatory fees we have to pay. We see a heavy growth now in 4G. We see the smartphone penetration reaching 70% and actually 39% of the handsets now being 4G-enabled so that's what the market is all about. And then hence, data revenue is also growing very well. We'll get back to then the changes in the pricing plans, which will -- has been part of driving this, but now we see a THB 10.4 billion in data revenues, which is 64%, only 1 year after we had equal voice and data revenues 50%-50%. EBITDA, THB 6.9 billion, that's up THB 100 million since last quarter. It's down from a year ago, but overall, the quarterly improvement is quite good even though there are substantial handset subsidies out there in the market. And still, we're in a very heavy CapEx investment cycle. We are investing 28% CapEx to service revenue this quarter, which then is 22.7% to total revenues. Still then, with the EBITDA, we're producing a healthy cash flow of THB 2.4 billion this quarter. So with those highlights, I'd like to hand it over to Lars that can take us through some operational highlights.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [2]

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Thank you, Sverre. A few things of what we've done in quarter 1. First part, that you might have noticed that we've been running pretty broad now network perception campaigns. We used famous presenter Khun Aum, to talk about the smooth experience with dtac and it's being very well-received both of course, by dtac customers, but also with the competitors' customers in the markets. So that has been a good campaign and we will continue to drive network perception campaigns because we see now that the network quality and perception with our own customer base is really increasing. Of course, now we need to convince the entire market that our network is really good. We also launched new brand platform, which we call Flip It, so flip the customer experience from rather complex to be easy and worry-free. We have a really easy worry-free products with focus on value-add, smooth network experience and also general, really simple service experience, it should be super simple to be a customer with dtac. We also revamped the loyalty program. We address now more customers both prepaid and postpaid with the program. We also engaged more point of sales, more partners where our customers can reclaim awards and that means also that will increase visibility, so you see dtac on a lot of different point of sales out there in the shopping malls where our customers can reclaim rewards. We continue to drive network expansion and mainly of course, on 4G. If you see the light blue areas, it says 4G base stations. We increased from 10,000 up to 23,000 in just 1 year, so quite a big expansion. And of course, we continue to drive 4G expansion now as we go. What we also do is that we build more towers. So we densify our network with more towers to be ready to end the concession in the case that we don't have low balance spectrum at that point in time. So we build now a network that can sustain on a high band grid, on a 2.1 grid.

Overall, the perception, like I said, with our customer base, sure the network should have really been increasing, especially on data from '16 -- from '15 into '16, so in all parameters, the customers are really more satisfied with our network quality. And based on that, of course, that's why we have now drive a pretty broad perception campaigns to track all the customers in the Thai market.

Then when it comes to the brand platform, one of the first proofs of that, I mean, you cannot just launch a brand platform and think that all the customers can understand. They need proofs. The first proof point of the new brand platform was our new product portfolio that we call Go No Limit. Focus on worry-free, focus on ease-of-use and of course, focus on value for money. And what we're doing basically, both on postpaid and on prepaid is that we have listened to the customers. Customers don't really like this FUP and the quotas speed step down. They don't really understand that. They want to more have a service without an interruption. So what we've done, instead of differentiating our packs on data quotas, 1 gig, 2 gig, 5 gig, 10 gig, they differentiate on speed instead. So on postpaid, the postpaid portfolio, we start with really low resolution, but 1 megabit, 4 megabit, 10 megabit and then max speed. Also, we have free on-net calls in this portfolio. So it's been well received here on the postpaid segment and what we see also, compared to the old portfolio that the packs that the customers pick up, have a higher ARPU or higher pack fee than the previous portfolio, but we still have the previous portfolio as well. So customers that want to have high-speed, but still data bucket can choose that. When it comes to prepaid, then you can buy toppings for 1 day, 7 days and 30 days. So you can 256-kilobit speed, 512-kilobit speed, 1 meg or 4 meg speed. I think the most popular right now is the 1 meg speed. And of course, you can have a lot of upsells in sales mechanisms to drive customers to different toppings here. And what we see also compared to the old topping portfolios with this Go No Limit topping portfolio, lot more customer takes the 7-day and 30-day alternative, which also recurrence in them so if you subscribe to that, you have a recurrent subscription on it. So it's also quite been successful. Also here, we are unlimited calls on-net if you take those data toppings. Perhaps, we also have a special SIM on prepaid, also focus on worry-free that we don't charge for data. It's free data, 64 kilobit per second, but of course, the main focus of that SIM is to upsell with the toppings because 64 kilobits per second is fairly low speed but it's still worry-free. Development, I will say postpaid continues very strong, almost 20% year-on-year growth on revenue and 18% on subscribers. And I think both are attractive offers, especially also now we the Go No Limit portfolio. And also the device offers we have in postpaid is being successful. On top of that, we also, as you know, migrate from our prepaid base into postpaid, which is also an important acquisition base. But we also see in quarter 1 when it comes to number probability from the other operators in postpaid, we've been very positive in quarter 1, which I believe is a good sign. 4G subscribers continue to increase, close to 6 million now. And what's good also, they use more and more data mainly on streaming. So we see the 4G users really use the service in a good way and the usage keeps increasing. When it comes to prepaid, as before, a little bit more challenging. Of course, we migrate from pre to post that affects, but also voice revenues goes down pretty fast on prepaid, but also we see device subsidies continuing also into quarter 1, at least from 1 of the competitors. But a good sign, anyway, on prepaid is that we see stabilization of revenues quarter 1 to quarter 4. If you discount for the day effect, it's virtually same revenue, so the daily revenue for prepaid in quarter 1 versus quarter 4 is basically on the same level. So we see a stabilization in prepaid and that's what we focus on also, now going forward to have a more stable prepaid development. But of course, there's a little bit equation on how, a function of how much the competitors will spend on device subsidies going forward on prepaid.

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [3]

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Yes. So then, we can go into the financial highlights. First of all, the service revenue. We see that the service revenues are now up quarter-over-quarter, which is not normal in the Q4 to Q1 setting due to seasonality. But of course, Q4 was also a special quarter last year with a mourning period. So, but we saw the very high activity level in the market towards the end of December with this tax rebate continued into January and overall, with the postpaid growth, we're able to record THB 16.2 billion for this quarter. And then that is basically an increase quarter-over-quarter and also, if you take the daily service revenues practically flat year-over-year. Of course, last year was a leap year. Then, if you go to data revenues, as mentioned, we see the proportion of data part of revenues continue to grow consistently. It's actually increasing growth this quarter and as mentioned before, the smartphone penetration reached 70%, which of course, drives this. So data revenue, increasing still now, 26.3% this quarter as Lars mentioned, driven by video streaming and now the average data usage is actually 4.4 gigabytes -- gigabits, so it's definitely growing. So yes, thanks, byte, he had bit. And then the handset subsidies, they actually did decline this quarter. We see that the revenue, I mean, handsets costs are under pressure -- handset prices is under pressure due to subsidies, but the margin is actually improving quarter-over-quarter. So if you were to compare directly between Q4 last year and Q1 this year, you need to basically reduce the negative with 235 million to see comparable numbers. So quarter-on-quarter, an improvement and this reflects that December and January was very high on subsidies but while this has abated some towards the end of the quarter. So we go to next slide. So apart from that, cost of services would say it's well contained. The decline year-over-year, a slight increase quarter-on-quarter, but this is then also under a very rapidly growing network, so these costs are well under control. The regulatory cost declined from the IC rate reduction. That happened by start of the year due to new regulations and also, we had a decline in the domestic roaming rates from Q1 last year, which also affected these rates. So overall, we work hard to contain the cost as network evolves and we think that this is so far so good. Okay, so SG&A expenses and overall, they dropped from the reclassification, again, this is the cost to explain what we do now is to treat the different channels the same way is that instead of having the gross price and then a cost on the handset subsidies, we take this as protecting the price rather and reduce revenues and, hence the cost with exactly the same amount. So see a top line decline, which is then reflected also in the cost decline at the same level, so it does not affect the net profits. Okay, there's an increase in provision for bad debt and this is due to the strong growth in the postpaid segment, but this is, of course, something that we're watching very carefully and try to instigate so we can control it. But there's an underlying upward pressure on bad debts by nature as postpaid grows in prominence and prepaid declines. Next, so overall, this gives a solid EBITDA development quarter-on-quarter reaching THB 6.9 billion is an increase 2% since Q4 last year and the margin is now 34.9%, of course, that handset reclassification in a way helps the margin, but also then the absolute EBITDA is increasing over this quarter. And then if we go to the next, we see then that net profit is roughly THB 200 million, slightly more than THB 200 million for this quarter, it's a rebound from the higher EBITDA and that's despite the increase in depreciation charges this quarter. Operating cash flow still THB 2.4 billion. That makes financial ratios remain at 1.1x debt-to-EBITDA. So we feel we are well positioned for the upcoming required spectrum acquisitions that dtac has to go through over the coming time period. And this shows that actually, with the investment we're making, which now are at a very high level, we are able to generate returns and generate cash flow and this shows that actually, the investment cycle we're in is giving good results as we move forward. So with that, I'll hand it back to Lars for the direction and outlook.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [4]

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Okay, so focus areas for now going forward, of course, continued focus on the new brand platform, Flip It, you see, worry-free. And like I said first proof is there with the Go No Limit portfolio, but there will be more proofs to come later this year. Of course, continue this positive growth on postpaid is key, but at the same time, stabilize the prepaid development. I think network perception is key and we've put a lot of focus on that. Value for money is key. Expanding the channels is also important, and also, work with personalized offers both on postpaid and prepaid to drive both upsell and churn reduction. And when it comes to network and spectrum, of course, super important going forward to maintain apparently a good position now we have on data and 4G. So of course, acquire new spectrum before end of concession, key. And like I said on the network, what we do now is continue to roll out 4G but we also densify our network with more towers and especially in cities, we've really secured a rather super experience for data users. No coverage holes and good capacity. And last, efficient operations. We put a lot of focus now on bending the OpEx curve, absolute OpEx curve down. If you've seen '16 versus '15, we were -- we managed to go down on OpEx in total and we focus on continue the trend also, going forward. Of course, the digitization, the way we drive business is key here to take a really strong and leading position for online sales and online service. When it comes to guiding, we don't change from last quarter, so service revenue in line with last year. EBITDA at least same level with last year and CapEx in the range of THB 17 billion to THB 20 billion and the range is due to a little bit when we get new spectrum. So that's why we have a range there. Okay, so that was a short presentation. I think with that, we open up with Q&A.

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Questions and Answers

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [1]

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So everything was crystal clear or?

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Sittichai Duangrattanachaya, Maybank Kim Eng Holdings Limited, Research Division - Analyst [2]

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I'm Sittichai from Maybank Kim Eng. I would like to see more clarification on your strategy about the Flip It. You call it Flip It.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [3]

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Flip It.

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Sittichai Duangrattanachaya, Maybank Kim Eng Holdings Limited, Research Division - Analyst [4]

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Flip It, yes. It looks very interesting for me. So can you elaborate it into detail, what you would like to achieve and what is the big action you're wanting to take?

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [5]

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So the Flip It brand platform, the key sentiment here is to flip the customer experience to be really easy and really worry-free. We also talked to a lot -- we'd a lot of customers and they say, okay, even though that everything is digital and fine, it's still a lot of complexity. We don't understand FUPs. We don't understand speed step downs and a lot of things happening back and forth. So they want us to have a really easy, worry-free experience in their digital life, and that's what we focus on. And also shifting a little bit, we focus a lot more on what the customers want instead of what the competitors are doing, which has been a tendency perhaps before. So now we look more at customer needs and address those. There's 3 main themes under Flip It. One is the product side of course, and like I said, really easy to use products, worry-free products, but also value for money. So a good example of that is the Go No Limit portfolio is the first proof. And second part is the network, and where we say, we're going to focus on a smooth network experience. So when you do streaming, which everyone started doing, you should have a service with no interruptions, and where we now use Khun Aum also talked about that experience. And then #3 is overall, being a customer with dtac should be super simple. And I think we have a way to go there still but you should be able to do things really easy yourself online and it should be easy to understand the product, like I said and should be easy to upgrade or downgrade or whatever you want to do, so we focus a lot also on the service experience while you are a customer with dtac, so this is all 3.

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Thitithep Nophaket, Phatra Securities Public Co. Ltd., Research Division - Telecom, Media, Beverage and Commerce Analyst [6]

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I'm Thitithep, from Phatra Security. I have quite a few questions, I'll ask them all one by one. #1, the NBTC Secretary-General, told the press, I think, a few days ago that the auction of the 850 Mhz and 1800 Mhz is going to be in February of next year, but then he said that the resale price is going to be equal to the winning price of the last time. Now if the resale price turn out to be equal to the winning price, would dtac be interested in joining the auction?

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [7]

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In general, we don't comment on auction practice but like we said, more spectrum before end of concession is key to us. And there's a few opportunities, of course, 2.3 is the one that's on the table now but we also lobbied to have early auction over the spectrum on 1800 Mhz and 850 Mhz, and I think it's very positive that we see signs of that but exactly what we're going to bid or not bid for, that we need to come back to. But of course, overall, we're interested in more spectrum before end of concession. Clear.

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Thitithep Nophaket, Phatra Securities Public Co. Ltd., Research Division - Telecom, Media, Beverage and Commerce Analyst [8]

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Sure. You said you are now identifying the 2.1 gigahertz network just in case. In the worst case that you don't need been back the low band but let's say, if the worst case really materialize, can you really 100% replicate the low band network with the 2.1? My understanding is that you will have some hole anyway maybe in the remote area. Is that accurate?

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [9]

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You can replicate quite well, but of course, what we really want to be one-to-one is all the cities where most of the customers are. So that we should just have one-to-one. It might be some rural that it's not fully one-to-one 1, but overall, it's going to be a really good experience on the high band grid. And the advantage also we have for high band grid is for data. And because when you have a high band grid, you have more towers that means you have more base stations, that means that you have more capacity. So it's also an advantage especially in the cities to have a high band grid.

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Thitithep Nophaket, Phatra Securities Public Co. Ltd., Research Division - Telecom, Media, Beverage and Commerce Analyst [10]

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Okay, sure. Now let's move on to cost. I think you did pretty well in terms of cutting cost. Can you -- my calculation appears that you cut cost of THB 500 million of the marketing and expense compared to the first quarter of last year. Can you share with me, which area did you cut and how can you make sure that the cost-cutting doesn't -- is not going to affect the future revenue because the competition is quite intense.

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [11]

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Yes. Well, of course, it's always a dilemma in particular when you're cutting market facing activities. What I will say is that, I think the efficiency of the marketing has improved substantially since first quarter last year, so we have been able to reduce the spending on ATL basically, because we now refocused. We have fewer campaigns the, but more impactful campaigns instead of having a lot of different initiatives, which are actually left a quite unclear position of dtac in the market. So now we try to be more visible with what we do and through that, actually you can also save costs and do fewer initiatives. Furthermore, as we are expanding the dtac reward program, we've get a lot of brand visibility through that, through our partners in the malls, everywhere where they are so we get a lot of that visibility in a different way and more efficient. So those help us in actually reducing the cost but even getting more impact from it. So that's an efficiency improvement. On the regulatory cost, of course, the IC reduction is helping all the operators on the cost side, it also hits the revenue, but still it's a change, which is there throughout the market. Further, the migration from dtac to DTN is helping a lot because we have to pay the 30% regulatory fee on the domestic roaming from DTN to dtac. And that cost is going down as we're able to control the cost of that network. So you kind of get a double effect of that. You both get the effect that you drive down the cost on dtac operations and you then have to pay less in domestic roaming, which again reduces regulatory fees. So it's kind of a double benefit from that.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [12]

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It's Friday. Everyone wants to go out, don't they.

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [13]

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But also, if you have further follow-up questions, more detailed question et cetera, please also contact the IR department afterwards and then we can either take it directly through them or we're happy to meet investors and analysts in one to one sessions when that is required so.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [14]

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Okay.

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [15]

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Okay.

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [16]

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(foreign language)

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Sverre Pedersen, Total Access Communication Public Company Limited - CFO [17]

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(foreign language)

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Lars-Aake Valdemar Norling, Total Access Communication Public Company Limited - CEO and Director [18]

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Have a nice weekend.