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Edited Transcript of Z74.SI earnings conference call or presentation 13-Feb-20 10:59am GMT

Q3 2020 Singapore Telecommunications Ltd Earnings Call

Comcentre Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Singapore Telecommunications Ltd earnings conference call or presentation Thursday, February 13, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur Wong

Singapore Telecommunications Limited - CEO of Global Cyber Security & Group Enterprise

* Bill Chang

Singtel Enterprise Security Pte. Ltd. - Director

* Cheng Cheng Lim

Singapore Telecommunications Limited - Group CFO

* Murray Philip King

Singtel Optus Pty Limited - CFO & Director

* Sock Koong Chua

Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee

* Yang Fong Sin

Singapore Telecommunications Limited - VP of IR

* Yoong Keong Lew

Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand

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Conference Call Participants

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* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Hussaini Saifee

Citigroup Inc, Research Division - Senior Associate

* Miang Chuen Koh

Goldman Sachs Group Inc., Research Division - Executive Director

* Piyush Choudhary

HSBC, Research Division - Telecoms Analyst, South East Asia

* Prem Jearajasingam

Macquarie Research - Analyst

* Sachin Mittal

DBS Bank Ltd., Research Division - VP

* Sharon Chen

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Singtel FY '20 Q3 Results Conference call. (Operator Instructions) Ms. Sin, over to you.

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Yang Fong Sin, Singapore Telecommunications Limited - VP of IR [2]

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A warm welcome to all investors and analysts. You are listening into Singtel's conference call for the third quarter and 9 months ended December 31, 2019. My name is Sin Yang Fong. Let me introduce management on the call. We have Ms. Chua Sock Koong, Group CEO; Mr. Allen Lew, CEO, Consumer Australia; Mr. Bill Chang, CEO, Group Enterprise; Mr. Yuen Kuan Moon, CEO, Consumer Singapore; Mr. Samba Natarajan, CEO, Group Digital Life; Mr. Arthur Lang, CEO, International; Ms. Lim Cheng Cheng, Group CFO; Ms. Jeann Low, Group Chief Corporate Officer. We also have from Australia, Ms. Kelly Bayer Rosmarin, Deputy CEO, Optus; Mr. Murray King, CFO, Consumer Australia; Mr. Art Wong, CEO, Global Cybersecurity. And for the benefit of our callers, we are -- Singtel has put in place BCP procedures due to the virus situation. So we are actually having this call from multiple sites. So if there is any delay in terms of our responses, please forgive us.

And then -- so we'll now -- we'll start -- before we start taking the questions, I would like to invite Sock Koong to share some highlights from this set of results.

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [3]

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Thanks, Yang Fong, and thank you for joining us for Singtel's results for the third quarter and 9 months ended 31 December, 2019. If I can take you to Slide 4, just a quick business overview. Our results clearly reflect the intense competition and ongoing carriage erosion in our markets. Performance in the enterprise segment was impacted by weaker business sentiment amidst the economic slowdown. We are making important investments and pivoting our strategy to navigate these headwinds and to drive long-term growth.

In the core business, investments in network and technology remain central. Optus was named Australia's largest and strongest brand, a validation of its network enhancement and improved market position. Its 5G network now serves customers with more than 400 sites in Australia. In Singapore, we will be submitting our 5G proposal to the government.

The digitalization of services and processes has helped us to better engage customers and realize cost savings of SGD 359 million for the 9 months. We are focused on building capabilities and increasing the scale of our digital businesses.

In the ICT space, NCS and Trustwave grew their order books. We took measures to stabilize the enterprise business in Australia, which strengthened its order book from a quarter ago. Amobee's performance was affected by clients' spending cuts and declines in managed media advertising. It will continue to leverage its technology platform to grow its programmatic advertising business.

Turning to Page 5, to give you a quick overview of the financial performance. Revenue was down 3% in constant currency, reflecting challenging market conditions and weak business and consumer sentiment. An increase in NBN migration revenue in Australia and cost management initiative lifted the group's EBITDA.

Airtel narrowed its pretax losses with improved performances from India and Africa. Globe turning strong revenue and earnings growth, contribution from Telkomsel fell with intense competition outside Java.

Underlying net profit declined 19%, a result of weaker enterprise contribution and finalization of investment gains on our pre-IPO investment in Airtel Africa. Net profit fell 24% as highly exceptional income was recorded last year. Free cash flow rose primarily driven by positive working capital movements and increased NBN migration revenue offsetting higher capital expenditure in Australia.

Let me just go through one more page, which is Page 12, which provides some -- the performance of our regional associates. And on Slide 12, you will see that pretax contribution from the regional associates grew 15%, with strong data growth across the associates. Telkomsel's results were impacted by intense competition outside Java; and to remain competitive and to defend share, Telkomsel introduced a fully digital brand and generous data packages in the quarter.

In India, Airtel losses narrowed on the back of strong 4G customer additions and upgrading -- and additions and upgrading and coupled with price increases, which are expected to drive ARPU growth in coming quarters. Airtel Africa maintained its growth momentum in carriage and mobile money services. The stronger operating performances mitigated higher costs and depreciation. Airtel further strengthened its balance sheet, raising $3 billion through a share placement and convertible bond issue. AIS' revenue rose on device sales, with handset launches and subscriber gains, offset by the higher cost of sales and marketing expenses. In the Philippines, Globe maintained its strong growth momentum in mobile and broadband services.

With that, let me turn over to Yang Fong for your questions.

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Yang Fong Sin, Singapore Telecommunications Limited - VP of IR [4]

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Thank you, Sock Koong. Participants, we are going to start the question-and-answer session. Please be advised that this call is being recorded for playback and for transcription. Our operator will now assist you to put through your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have is from the line of Miang Koh from Goldman Sachs.

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Miang Chuen Koh, Goldman Sachs Group Inc., Research Division - Executive Director [2]

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A few questions. One is on the guidance. So I think that just refreshed guidance second quarter and in third quarter, we see an amendment as well. Wondering what has changed since? And is there any impact from the current viral outbreak? Will you touch to that?

The second question is on Australia. So we saw mobile price increases last year. Results since has not quite reflected this. How should we reconcile those things? And I guess, also on that point, the NBN revenues has been quite a big contributor this year. How much is there remaining going forward?

And then lastly is on the digital bank collaboration with Grab. Can we further understand the structure of the JV, where you start taking a 40% stake instead of, let's say, a largest or even a smaller stake and specifically which SME or consumer segments will we be targeting?

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [3]

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Let me -- I think the guidance had indicated that there's ongoing pressures that we face. And I think in -- we've also seen some market developments in Australia in our consumer business, that has an impact on the earlier guidance that we've provided. So I would get Allen to -- and Murray or Kelly to talk through the revision in our outlook for Australia and also talk through the impact of what the mobile price increases mean and also the NBN question. And then maybe I'll let Arthur answer first this question on the digital bank to the extent that we are able to talk about it. Clearly, we are still waiting to discuss the proposal further with MDA and to get -- and to see what the final outcome is. But let me just pass to Arthur to talk a bit about what we intend to do with this joint venture.

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Arthur Wong, Singapore Telecommunications Limited - CEO of Global Cyber Security & Group Enterprise [4]

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Okay. Thank you, Sock Koong. I think with regards to the question on the digital bank, I think, as Sock Koong alluded to earlier, in terms of the customer value proposition and our strategy, we're not quite ready to share yet, because, first of all, we need to get the license. And of course, clearly, we -- some of this can be quite sensitive from a competitive standpoint. So I think at the appropriate time, we'll be more than happy to share both us and Singtel and our JV partner, Grab.

But with regards to the question on why 40%, I think we've deliberated on the levels for a fair bit of time. And I would say that this 40% decision reflects a few things. One is that we believe that it's part and parcel of our digital strategy, not just in Singapore, but also the region, particularly leveraging on our regional footprint.

Number 2, it also reflects our decision with regards to capital allocations in terms of how we want to allocate capital across the core business as well as digital businesses, which, as you know, have different profiles in terms of cash flows and also reflecting on what our shareholder feedback is in terms of growth as well as dividend -- dividends payments.

And I would say that the third point is that we -- as you have seen in the last 20 to 25 years in terms of our relationship with our associates, our telco associates with regards to not just -- we haven't been just a passive shareholder, but we have been an active shareholder growing the associates businesses until today, they are all #1 or #2 in their markets. And I think that spirit and the way that we work with our associates is very much similar to how we are working with Grab on this digital bank. It is definitely not just a passive stake, but it is something that we believe 40% is the appropriate level, given the various objectives that we talked about.

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Operator [5]

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We have our next question.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [6]

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No, no, no.

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [7]

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Operator, we -- please stop the question first. We have a different type of the earlier question not answered yet. So Allen, please go ahead.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [8]

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Yes. I'll answer the first 2 questions on guidance and the impact of the mobile pricing. And then I'll get Murray to answer the question on NBN migration revenues. The reason for the guidance change is basically, I think in Australia, there's been a change in the way the dynamics is happening in the mobile market. In the past, handsets and SIMs were bundled together and sold to customers. This has changed. Now where handsets are bought outright, there's no more subsidy. And then SIMs are available as well separately from the handset.

So I think the guidance reflects 2 things: number one, the fact that people are buying the hardware, the equipment for their mobile devices more and more from consumer electronics chains compared to from telcos. So the mobile equipment revenue that we expect how will be smaller going ahead. So that reflects how the guidance.

The second important is as people unbundle and buy more equipment separately from the SIM, then we are getting a higher mix of people picking only SIM-only plans, and that affects our mobile service revenue. So I think those are the 2 main things that drive the outlook going ahead.

The second important thing on mobile price increases that were recently implemented on market and whether we are seeing this flow through. I think if you look at overall our mobile revenue, basically, our mobile service revenue decline in Q3 is minus 3% compared to Q2, which was minus 4%. So that reflects a little bit of the price increase. There is counterbalancing that a shift in people taking SIM-only plans in the quarter as well. That's why you're seeing -- not seeing the full flow through of the price increases in mobile service revenue.

I'm going to let Murray talk a little bit more about the NBN migration revenue. A lot of it is still subject to the pace of NBN rollout, but Murray, can we share regarding that.

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [9]

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Yes. So in relation to your question, the NBN migration revenues are a function essentially of us migrating existing HFC customer to NBN. So you'll see in our MD&A on Page 41, as of the end of December, we still have 168,000 HFC customers yet to be migrated to NBN. So there is still further NBN migration revenues to be brought to account or migrations to occur. But as Allen said, the timing of that is somewhat dependent upon how NBN rolled out in particular areas where we have our HFC customers. It's also worth noting, if you recall, 12 months ago, NBN had essentially lifted its stop sale in relation to the HFC areas which will mean, so when you look at year-on-year comparatives, you'll start to see more moderate growth in our NBN migration payments from this -- from quarter 4 onwards.

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Operator [10]

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We have the next question from the line of Eric Choi from UBS.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [11]

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All on Australia. First one, I guess, just given the news around TPG, Vodafone today. Just wondering if you think that's a net positive or negative for Optus? And whether that changes anything in terms of your pricing strategy going forward?

Second question, just a follow-up on the ARPUs again. I'm just cognizant that your headline numbers may not be reflecting the underlying improvements that you might be seeing on the front book of your mobile products. And I just note that some of your peers like Telstra quote a metric such as TMMC. I was just wondering if you add a similar metric on front book ARPUs that you could share with us whether that's improving.

And then just a third question. I just noticed, I guess, for the Optus COGS, they look like they're a little bit better year-on-year as well. So just wondering, given new plans, whether you're seeing a material benefit from lower handset subsidies start to flow through?

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [12]

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This is Allen here. Let me answer the first 2 questions, and then Murray will take the third, one about COGS. In terms of the TPG VHA merger, I think from Optus' perspective, we obviously welcome competition. We've always been able to cope with the competition. And historically, we've always shown that despite different levels of intensive competition, we've been able to grow our market share in a financially responsible way.

We believe that we've got 3 very important assets that will hold us in good step, regardless of what happens with the merger of TPG VHA. And we still need to execute and deliver the promise that such a merger will yield in terms of benefits for other consumers or their shareholders. I think the 3 important assets that we have is, number one, we have a very good mobile network, which in all intents and purposes based on different independent survey matches up to the incumbent. We've just been accorded the best NBN service provider status, again, by the ACCC in Australia for the second consecutive month. So we have a excellent network in mobile as well as in fixed.

Number two, we have a app called the My Optus app that today has the best rating in our app stores, which means that customers can deal with us in the most friendly way compared to any mobile service provider in Australia.

And number three, we have very distinctive value proposition beyond just price, which is Optus Sport and Apple Music. So I think -- I hope that gives you a firm answer. There's still a lot to be played out but we believe our assets, plus the fact that we've just been awarded the strongest brand will give us a good position going ahead to face more competition.

In terms of the ARPU improvement and whether we report -- the number that Telstra reported, we don't report that number that Telstra reports, but I think we -- I think analysts will just have to look at our performance on a quarterly basis and see how that pulls through the -- in terms of the price increases into our ARPU.

I'll leave Murray to answer your question on COGS.

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [13]

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So Eric, so on cost of goods sold, you're right, it is down around just under 5% year-on-year, but it's predominantly due to lower equipment revenue. So equipment revenue, as Allen explained earlier, was down about 17%. So lower cost of sales reduced as a consequence of that. To a certain degree, it's offset because we have higher NBN access costs. But the majority of the decline year-on-year is due to lower equipment revenues.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [14]

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Murray, I don't know if you can comment on whether the margin on that equipment revenue has, therefore, improved year-on-year?

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [15]

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We don't disclose that to the market, Eric.

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Operator [16]

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The next question we have is from the line of Piyush Choudhary from HSBC.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [17]

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Three questions, Australia only. Firstly, can you help us understand of the strategy behind launching Optus Choice plans and how it's likely to impact ARPU and profitability?

Secondly, once -- on the NBN migration, once customers are migrated to NBN network, are there any cost savings? And if you can share what would be the magnitude of the cost savings? And thirdly, in -- on the 900 megahertz, what's the process of spectrum reallocation and likely auction in late 2021? Any indication of spectrum pricing over there?

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [18]

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Allen again. Let me answer the 3 questions. The strategy of the Choice plans is basically to respond to what customers are telling us. Customers are telling us that on the -- in the mobile space, they want 2 things. They don't want to sign a contract. They want to be able to change their plans and have the freedom to change their plan on a monthly basis. Number two, customers are also telling us they want personalization of the plans because they have different needs at different times of the year, and they want the ability to change these plans on that type of basis.

So I think the Choice plans is something that we are introducing to meet the needs of the customers on their SIMs in an environment where SIMs and handsets are starting to be sold differently. I think in terms of the profitability and what that does overall to our mobile business, I think, you just have to look at it on a quarterly basis. In terms of what that means, we have to also not just look at the revenue and customers that we're acquiring, and the quality of customers, we also have to manage our costs to serve these customers. So I think we have various initiatives to tackle both. And you'll see this coming out in the quarters ahead.

In terms of the NBN migration and what happens to the customer when they move from existing HFC network I presume is your question or even you had. I think unfortunately, NBN is one where we are a wholesaler. That means we have very small margins. So the profitability of the customer declines when they move from HFC to NBN. And the positive part for us is, as we get more and more customers off our HFC network, we can decommission parts of our HFC network. So you'll start to see that coming through in our cost line. So I think -- I hope that answers your second question.

In terms of the third question about 900 meg spectrum and I think that's something that the government will have to make a decision on. I think we and our competitors and lobby them with regard to that. And let's see what announcement, they make. I think they're still contemplating the difference of suggestions that they're getting from the industry, and hopefully, they'll make a decision and come up with a ruling on 900 meg in the next few months.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [19]

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So Allen, thanks for these. But on the 900 meg, so this is not definitive that it's an auction process in late 2021, it's still a discussion, right?

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [20]

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Yes, yes. Yes, they haven't made a decision that different representations had been put across by different operators. So they'll have to put that in mind and then they'll see how that allows them to have data competition, data equity of -- equity in terms of usage of that spectrum by different operators. But I think it's a work in progress.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [21]

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Okay. And just on the decommissioning of the HFC network, is it possible to share what's the quantum of total cost, which would be saved?

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [22]

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I'll let Murray answer that question. Murray?

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [23]

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So we don't disclose the exact quantum, but obviously, we have legacy cost structure around both the HSC and ULL network. So as we downsize and migrate the ULL and HFC customers to NBN, there will be opportunities for us to decommission parts of that network and to realize cost savings. And we'll be doing so over the coming years.

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Operator [24]

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The next question we have is from the line of Sharon Chen from MetLife.

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Sharon Chen, [25]

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Can you just elaborate a bit more in terms of the reasons for the 22% decline in Australia Consumer EBITDA during the quarter? And my second question is on TPG in Singapore. Can you give us an update on what TPG is doing right now? And how competition is in the market?

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [26]

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It's Murray King here. In relation to your question on the 22% EBITDA decline in Consumer Australia ex NBN migration. So firstly, as we've migrated customers from our HFC and ULL networks to NBN. As Allen explained, ULL economics are very challenging. And I think that's sort of well-known across the industry. So you're looking in relation to EBITDA ex NBN migration, you're looking at some of the economics that we're facing with regards to NBN. So clearly, NBN excess cost go up versus our HFC network were the excess cost very low and ULL reasonably low as well. So that's the first point.

The second point is the equipment revenue, obviously, as a result of equipment revenue declines, our margin also declines as we ship less volume and that's also having an impact in relation to our EBITDA ex NBN migrations.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [27]

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Yes. Regarding the question on TPG in Singapore, I think the position is still as said before, they have not commercially launched their service yet, they are still continuing to issue 3 trial SIMs to customers. I think they had delayed their commercial launch quite a few times over the last 6 months. We are definitely watching them when they could start their commercial service. And I think the earlier the better because it's unhealthy for the market when they continue to give 3 SIMs and there would be a lot of 3 SIMs floating around in the market, and there will be revenue leakage from all the real commercial service provider in Singapore. So I think we do want to see them offer commercial service. This is also the first quarter, probably in 2020, they will be measured for in-building coverage. We are also looking forward to see how NBN measures their in-building coverage starting from 2020 onwards.

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Sharon Chen, [28]

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Okay. Just a quick follow-up question, sorry. So I think your ratings are still a negative outlook. How are your conversations with the rating agencies going there? And do you envisage that they will stabilize the outlook at some point?

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Cheng Cheng Lim, Singapore Telecommunications Limited - Group CFO [29]

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Lim Cheng Cheng, I think, we continue to have one of the strongest credit rating among the regional peers. So currently, there's not been any change in terms of the negative outlook.

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [30]

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Sharon, do you have any more follow-up questions?

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Sharon Chen, [31]

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No, that's fine.

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Operator [32]

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The next question we have is from the line of Sachin Mittal from DBS.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [33]

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I have a couple of questions. You mentioned 168,000 HFC customers. So how much is that percentage of total customer that you have migrated so far to NBN? What's the annual -- what sort of quarterly run rate of migration? And does it indicate how much NBN migration revenue is less to be recognized? How much can you recognize over a longer term? And how much is left? Some indication on that will be very useful.

Secondly, we saw that Vodafone Idea integration has been little bit painful in India, and now we're talking about Vodafone TPG integration going forward. Do you sense a window of opportunity because networks integration could -- it's actually a difficult task. That's question number two. And question number three is why should EBITDA decline in Australia...

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [34]

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Sachin, sorry, sorry. Can I just stop it here, please. Sachin, Yang Fong here. Sorry, Sachin, we ask you to repeat your second question.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [35]

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My second question is on the Vodafone and TPG integration because we have seen lot of pain in India that integration was not easy. So do you sense a window of opportunity in Australia because network integration could be a challenging task. That's my second question.

And last question is on why should EBITDA decline in Australia, taper down from what we have seen in 20% plus now? Because margins are low in the NBN. And at some point, NBN -- and we also know that NBN revenue, which will decline the migration rev, question number three, yes.

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [36]

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I think the Vodafone TPG integration question, I think that's probably Kelly to answer. And frankly, the situation in India and Australia are quite different. I think any answer from us will be very speculative. And for facets, we don't even know whether ACCC is going to view that decision. So I think we won't go there and try and tell you what we think were the issues be for Vodafone and TPG integrating. Now let me pass on to Allen to take the other questions.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [37]

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Okay. With regard to your NBN migration payments question, I'm going to get Murray to answer that. And then after you answer that, could you please repeat your third question again?

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [38]

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Yes. So in relation to NBN questions. So firstly, 168,000, when we announced to the market, the original NBN deal, we indicated it worth $800 million NPV post-tax positive to us. So -- and you can see in relation to in our MD&A, the quarterly -- the movements quarterly and annually in relation to our HFC customers. Unfortunately, I can't, under confidentiality disclose the specifics of our agreements with NBN Co, but you can sort of get an indication from migration revenues and the movement in our HFC customer base what the quantums are on a quarterly basis. And therefore, potentially what is -- can be recognized associates with the 168,000 remaining -- that 168,000 remaining customers to be migrated.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [39]

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Sachin, can you repeat your third question, please.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [40]

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Yes. Sorry, follow-up on the second one. So $800 million was the total present value? And how much has been recognized so far? Can you disclose that how much has been recognized over the last...

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [41]

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Well, when we originally announced the transaction and the deal with NBN Co, we had around 0.5 million HFC customers. We now have 168,000.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [42]

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Okay. Understand that. My last question is on why should EBITDA decline in Australia? Decrease. We are looking at 22% in the last quarter. And given that we are going to a lower margin NBN business now, why should we see stabilization of EBITDA in Optus in 2 years or 3 years from now? That's not a possibility.

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [43]

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I think if I understand your question correct, you're asking us to give you a indication in terms of the next 2 to 3 years what we will see as a EBITDA trajectory. Now if that's your question, I think we don't give projections beyond what we have said in terms of our outlook for the remainder of this year. So unfortunately, I can't answer that question for you.

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Operator [44]

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The next question from the line of Prem Jearajasingam from Macquarie.

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Prem Jearajasingam, Macquarie Research - Analyst [45]

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Couple of questions from me, please. First of all, with this NBN issue, maybe it's asking Sachin's question in a different way. How are we going to plug the hole from this as the NBN revenues taper off because it is having quite a significant impact on your EBITDA. The EBITDA from Optus is obviously being held up by the NBN revenues and their flow-through into EBITDA. So what are our plans to plug this gap over the medium term? Or are we looking at a substantially reduced EBITDA from Optus over the medium term?

Secondly, with regards to Enterprise, you seem to be delivering on your promise of stabilizing the revenues and you've taken some costs out of this business and Enterprise looks like at the very least, it's stabilizing. Given -- yes, I do expect that the coronavirus is going to have an impact on the overall business for -- in the near term. But are we now in a position where we think that Enterprise, barring the coronavirus, should actually be on a firmer glide path going forward? What are your key concerns around the Enterprise business going forward?

And if I may, Telkomsel's numbers were quite weak. The -- I appreciate that the ex-Java business now has competition, whereas it previously probably didn't have that. The price adjustments in Java seemed to have been quite aggressive. Do you think that a scotched tactic in Java makes sense to get the competition in line? Or do you think that all of this is temporary and we should be back on a firmer growth path in Indonesia?

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Sock Koong Chua, Singapore Telecommunications Limited - Group CEO, Executive & Non-Independent Director and Member of Optus Advisory Committee [46]

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Okay. I think we probably can't talk about guidance on what the EBITDA margins going forward will be, at this juncture. So if I can suggest that we hold that till we do our full year results, and we review when we discuss the guidance for the next FY. So I'm not going to -- so suggest that maybe we go straight to Bill to talk about the discussion on the Enterprise business generally. And then Arthur can talk about Telkomsel.

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Bill Chang, Singtel Enterprise Security Pte. Ltd. - Director [47]

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Thank you, Sock Koong. Let me give some color to the Enterprise business overall, right? If you look at Singapore, largely a very big IT services business or digital services business under NCS and then the Singtel Enterprise business that serves Singapore market and the Asia Pacific market. Essentially, the revenues are stable despite of a slower economic conditions. And the EBITDA is a slight decline. The IT services business is growing and it's a leading service provider in Singapore, serving the public sector and also some commercial accounts. So that's a nice business that continues to be on a good, strong sort of growth, about 6% in the MD&A, you can see that.

The telco business, it's all about defending our leading market positions in Singapore and also the #1 position in Asia Pacific. We have, according to IDC, defended our market shares well in Singapore and Asia Pacific. The challenge there is in doing that, it's really about protecting our market share. There is some erosions of the core carriage business. And so the erosion of core carriage business, whilst the top line is people because it's a carriage business, higher margins, the ICT business cannot compensate. So there is a slight decline in EBITDA. But essentially, that's the strategy, grow the digital, grow the IT services business on a back of our strong position. And then meanwhile, take up costs, defend our position in the carriage business in Singapore and in Asia Pacific.

Where we face challenges is really the Australian Enterprise business, we detailed and broke it down for transparency for all the analysts, and that it's primarily due to the cost average erosions. And specifically in the NBN cost causing erosions due to the structural change and affects all the existing players there and because of the NBN allowing more retail service providers competing heavily on that and customers have a choice in that and engaging with more of this retail service provider. So there is adjustment of the ARPU for these customers as far as fixed line and adjusting towards that right.

The good news is that what we're seeing in the last 2 quarters, we're starting to increase our order books because the order books in Q1 was soft coming up from the past challenges of the Q1, and we're starting to build around Q2 and Q3. So we do see this trend continuing, and we'll continue to look at driving this into next year. So essentially, Singapore, it's stable. In Australia, we're basically bringing that up and ticking up costs along the way.

The other question about the Enterprise business is the coronavirus virus impact. I think, short term, we do see impact in the roaming traffic as more businesses curb their travels, right? And only to essential travels, hence we're reducing their travel. So the roaming impact, we do see that, that's a short term. In engaging many of our customers closely during this period, more so in Singapore and in Australia, we do know several sectors when our customers are having concerns, sectors like travel, air transport, FB&B, the F&B sector, retail, integrated resorts, hospitality, these are all the segments that's having challenges. And obviously, this would build into the business environment and the operating performance in next few months. So we're watching that closely.

In the manufacturing sector, we do see some of our clients also having concerns due to supply chain disruptions, many of them would have plants in China. And so obviously, with activity slowdown in China. This affects some of them. So I would see this probably other than the roaming impact in the short term, this would play itself on the Q1, Q2, and depending how long this coronavirus would largely contained. This would be sort of the midterm. I think whilst we see some of these challenges, we do see some customers asking for sort of a BCP plan in Singapore, primarily and just like what Singtel is doing. Hosting this call, and operating in a way with different teams, different locations. We do see customers asking some of this, more video-related services and some of these unified comps. These are basically in the software, cloud-based services type versus the in-room high-cost integration of the big expensive video system. So not those polycom or the telepresence type, a more software-based extension allowing their employees to work from homes in different locations. So obviously, we are rolling out packages to support these businesses. But essentially, a number of them have registered their concerns around this coronavirus and activating plans and obviously watching the sort of performance over the next few months. So that's how essentially I would describe the coronavirus impact. And this is largely in Singapore, Australia. We have not seen the impact gone into that yet. It's more getting the Australian business to recover as we try and to execute our way out of this climate in Australia.

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Arthur Wong, Singapore Telecommunications Limited - CEO of Global Cyber Security & Group Enterprise [48]

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And your question with regards to Indonesia, Telkomsel, I think you are right, the competition has significantly stepped up in the past quarter. But having said that, I think the Telkomsel is responding appropriately to maintain their position. As you all know, Telkomsel currently has -- still currently commands a pricing premium compared to the peers. There are efforts to actually calibrate this more specifically to ensure that we provide sufficient value to our customers.

The other area that we're focused on is really to drive renewal packages to ring fence the high-value customers by ensuring we've got personalized offers, special bundle offers to focus on the high-value customer to protect that.

I think the other way is also, I think you all have seen that Telkomsel recently launched its end-to-end digital brand, by. U, to really focus on the digitally savvy use segment. In fact, the response has started out on only focused about 8 selected cities, has been very successful. And I think Telkomsel plans to keep broadening this to across the regions. So these are some of the ways we're responding to competition. The other area is also cost of marketing strategy to really be very targeted and focused in taking this -- in addressing the competition that we are seeing.

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Operator [49]

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The next question we have is from the line of Hussaini Saifee from Citigroup.

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Hussaini Saifee, Citigroup Inc, Research Division - Senior Associate [50]

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Just a couple of questions from me. First is on the Australia, the fixed broadband margins, which has been going down because of the NBN. Just want to understand how 5G can impact this? And is it -- are there ways using 5G those margins can be tackled? That's question number one. Second question is on the enterprise side. As the order book is building up, just want to understand when we should be able to see its impact on the revenues?

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Yoong Keong Lew, Singapore Telecommunications Limited - CEO of Group Strategy & Business Development and Country Chief Officer of Thailand [51]

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Allen here. Let me answer your question on fixed broadband and 5G. I think it's way too early to make any predictions about 5G's better ability to impact home or fixed broadband margins. I think it's a new technology. There's a lot of evolution to go with regard to the device in the home as well as in the network infrastructure and the capacity of the network infrastructure. So I think 5G is an effective replacement for fixed broadband in a number of areas because of the different technologies of NBN. But at this stage, we are just early days in terms of launching the service. So at the appropriate time, we'll share with you where we see the full potential for fixed 5G, fixed/wireless access ability to substitute from a profitability perspective.

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Murray Philip King, Singtel Optus Pty Limited - CFO & Director [52]

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On the question of the order books in Australia. We, looking on an average about 5 to 6 months, will translate into revenues because there's a mixture of different type of services on average, I would say, based on the composition, probably will be a 5 to 6 months.

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Operator [53]

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(Operator Instructions) There are no further questions on the line. I'll now hand back the conference to today's presenters.

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Yang Fong Sin, Singapore Telecommunications Limited - VP of IR [54]

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Thank you, operator. Well, thank you so much for all your questions. So if you still have further questions, please feel free to reach out to the IR team. On behalf of everyone in Singtel in Singapore, Australia and many different locations in Singapore, we wish you good health, and we'll talk to you again next quarter. Thank you. Bye-bye.