Advanced Info Service Public Company Limited (ADVANC) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the First Quarter of 2024 Results Conference Call. First, let me introduce our management, our CEO, Khun Somchai; Deputy CEO, Khun Mark; Chief Consumer Business, Khun Pratthana; CEO Broadband, Khun Tee. We have head of Investor Relations and Compliance, Khun Nattiya. Myself, Somruetai, will be briefing you on the results and running this session. The session will begin with a short brief and then go directly into Q&A. [Operator Instructions] Now let me begin the presentation. In the first quarter, the Thai economy showed a mixed trend in the economic indicators. The recovery was driven by increasing tourist number and government subsidies, which benefited consumer confidence and device sales. AIS continued to demonstrate a core service revenue growth of 18% year-on-year and EBITDA growth of 23% year-on-year, driven by all business segments, especially mobile and broadband, spurred by the full quarter of [indiscernible]. Our focus on sustaining profitability through delivering quality revenue and operational efficiencies has linked to strong performance in both net profit and cash flow, resulting in solid dividends to shareholders. The mobile business continued the revival momentum from the previous quarter, growing by 3.7% year-on-year due to accumulated efforts in enhancing the value of packages for customers. The continued growth in ARPU led by a focus on high-quality acquisition as well as benefited from increasing tourist arrivals, which boosted the prepaid revenue. The profitability forecast extended to the subsidy optimization, also improving sales margin by close to 5% in the quarter. Our 5G subscribers reached 9.9 million with 5G coverage exceeding 90% of Thailand. Broadband more than doubled in size due to the consolidation of a full quarter of Triple T Broadband revenue. Organically, we also added almost 73,000 quality subscribers, reaching a total of 4.8 million subscribers through our extended coverage and attractive value-based content bundling packages. We placed focus on segmented package and introduced innovative products like Home FibreLan, aiming to improve ARPU, which also delivered an upward trend Q-on-Q. The priority this year remains in integration, which is progressing according to plan while ensuring sales and service remain uninterrupted to deliver enhanced experience for customers. Enterprise non-mobile service grew by 20% year-on-year, benefiting from the full quarter recognition of Triple T Broadband. We continued to see strong demand from customers leveraging the digitization trend. Our emphasis remains unchanged on capturing demand on connectivity, leveraging such relationship towards high-margin service led by cloud and platform solutions. Next, our P&L. Our core service revenue showed an 18% growth, both across all businesses, a continuous revival in mobile, full quarter consolidation of 3BB organic momentum in the broadband business and enterprise business with a positive Triple T Broadband contribution and at the EBITDA level continuous execution on operational efficiency, including 3BB synergies and improved margin in the price subsidy optimization. The EBITDA increased by 23% year-on-year, and the margin also improved to 52%. AIS delivered a net profit of THB 8.45 billion, a growth of 25% year-on-year, reflecting an improved operating performance. With the full quarter consolidation of 3BB, our broadband revenue contribution has now increased to 18% from around 8% last year. Mobile stands around 77%, while enterprise remains around 4%. The integration is progressing according to plan. We have derived a gross synergy of THB 750 million, largely from CapEx avoidance by leveraging the wider network footprint of 3BB. On the OpEx side, we are currently executing channel optimization to ensure seamless customer experiences. We have completed transmission network and content optimization with the added benefit of reducing churn rates and saving on the equipment write-offs. Revenue synergy is being realized as planned with existing customer transitioning to a higher value packages. Integration costs remained low in the first quarter as we finalize internal IT requirements. The timeline remains unchanged, aiming to complete integration by mid-2025. With the Q1 performance, we acknowledge structural headwinds ahead of us, such as high household debt and geopolitical risks that keep us cautious on consumer spending power in the subsequent quarters. We also had a benefit from a low base performance last year before the value-based package restructuring took effect. From the above, we keep our guidance unchanged. That's the end of the short brief, and we'll start the Q&A session now.

[Operator Instructions] And first question, we have Khun Pisut from Kasikorn.

Congrats on your good set of results. This is Pisut from Kasikom Securities. May I have 4 quick questions. The first one, if I'm correct, your gross profit margin of the handset sales was at 4.7% in the quarter, which was much higher than before. What was the reason behind if you can say? And do you expect this good margin to continue in the following quarters? My second question, your effective tax rate in the quarter was 18.7%, down from 20% plus/minus in the past. What was the reason? And should I assume your better tax management to continue in the next 2 to 3 years. And my third question, just noticed that your data subscriber is not 5G subscriber, came down for 2 consecutive quarters. And this quarter, you in fact added a good number of subscribers. Could you please tell us the reason, and it would be great if you can add some color on the trend going forward? My last question, your net profit growth was 25% year-on-year and exceeding your core revenue growth of 18% in this quarter. It seemed to me you no longer recognized accounting loss contribution from Triple T Broadband, and it would be helpful if you can tell us the contribution to the bottom line from the Triple T Broadband in this quarter. That's all for me.

Let me address number one question and number three question. If not mistaken, number one, Khun Pisut asked about the profit margin from handsets. Am I getting correctly? The handset in quarter 1, we have received actually a positive push from the government program, the e-tax incentive. So a lot of customers decide to fast forward purchasing into early of Q1, during January towards the mid of February, and a lot to buy and sales at AIS retail. So that's improved our profitabilities on distributing handsets. Whether it's continuing on, we aim to continue on reasonable profit margin, but the number remains to be seen depending on model and handsets, the distribution point. So in fact, Q1 has been good because of the incentive from the government program as a push. So that's number one. On number 3, I assume you asked about the subscriber, not data subscribers. You talk about the net additional subscribers when it comes to an overall AIS mobile subscriber. Am I correct?

I think I looked into the number of data subscribers that you provide as the percentage of total subscribers in the package that you sent to us.

And it's decreased.

Reducing. It's reducing, yes.

Yes. As the percentage number, it came down from 73% last year to 68% of total sub. I know that your total sub has been coming down. But if you look at the quarter-on-quarter from the quarter to this quarter, actually, you add good number of subscribers.

Yes. Maybe I'll get back to you on this. Let me check just now -- allow me to come back slightly later. In terms of total sub, it's just been increasing from actually 2-pronged. The first one is healthy growth in terms of the quality sub help us continue on growing from last year. The second piece is it actually came from the inbound tourists that has been coming more in quarter 1 as well. So that's the reason why we were able to add into the base. But the penetration of data sub, I will get back. Let me check now, please.

Let me take your second question and your last one. Your second question about the effective tax rate. Basically, in this quarter, we also recognized share of profit from 3BBIF. So that's the effect that caused lower effective tax rate. Excluding that number, our effective tax rate should be close to 20%. So we expect to maintain within that range. Your last question is on the NPAT growth. Despite of the NPAT growth, 3BB as an entity is still giving dilution to our NPAT despite quite significantly smaller quarter-by-quarter.

As mentioned from the previous call, what we will try to do is we minimize impact from 3BB acquisition. In the end, whether the full year contribution will be positive or not. I think if you look at each entity, it will be difficult because we manage combined. So far, what we have done is, I think we maintained the revenue momentum, plus we realized some of the cost synergy early. So -- I mean, on a combined basis, then we believe that we minimize the impact from the 3BB operation that we can grow the business. It is hard to pinpoint whether the operation from 3BB is positive/negative. I don't think it's relevant right now.

We have Khun Weerapat from CGSI.

This is Weerapat from CGSI. I have 3 questions. The first question, with sluggish consumption and slow economic growth, the government asked commercial banks to lower lending led to help their customers. For telecom sector, how do you assess the possibility that NBTC would be -- to be in the price structure for your core services or as operators to do national services? My second question, do you see if there is any difficulty in raising package price for mobile and broadband services in this year? And my last question, regarding 5G subscribers and data usage, I noticed that data usage has been -- has seen slow growth in the past 1 year. Are you confident that the more 5G subscription will drive more data usage and ARPU?

To answer your first question on NBTC, as a regulator, they had tried to always come up with -- ask for the operator to offer the best service and best offer to the customer all the time. However, based on today, their criteria, we can support them on the criteria that they set up. I don't think so that we will get more [indiscernible] to the pricing again because our price when we give that information, our price then in this region is also very low. However, they also see some group of people like the disabled people who cannot have the effort to do some Chinese plan, something like this. They may ask for AIS and our operator to give very good package. However, they will support by the [indiscernible]. This is one project that they try to help some group of segmentation that are not affordable on mobile service.

So on your second question, if I get it correctly, you talk about how difficult would it be to raise the price. So I'd like to emphasize here that we have been stopping the unlimited low plan, which is more on unlimited size is unreasonable and not sustainable to provide. It's not we're raising price. So by taking our unlimited low plan, which is not sustainable, so we're getting more reasonable usage towards the price point. The pricing is the more they use a little bit more they pay. So that's how rationalized we put in, is not exactly raise price. So we kill the unsustainable, not feasible to provide one. So I think that's number two, is not that we're raising price. For number three, when it comes to 5G data usage, your question is data usage are not growing. Part and parcel of that is to eliminate or to discontinue the unlimited low plan help us be able to manage the overflow of data in unlimited. That's why the average has not been growing badly. It's not that customers use less, but those super heavy, unsustainable one sort of disappear. The 5G coverage, 5G quality, we truly believe it will help, is much better technology for customers who use Internet to go for. Now the key main one is to continue on bringing in more 5G device for customers to adopt. The network is ready, and we truly believe that 5G will help out continue on driving the uplift in consumption and revenue.

Next we have Piyush, HSBC.

Congratulations for a great set of numbers. A few questions. Firstly, you have seen a strong EBITDA growth. And if I look at your top end of the guidance, you're already tracking 26% of your full-year guidance. So what is stopping us to raise EBITDA guidance? Is there any headwind that you expect in the remaining 9 months period? That is the first question. Secondly, on spectrum auction -- next spectrum auction, any kind of update which you can provide based on your discussions with the regulator? Thirdly, I -- Khun Pisut asked earlier about the government tax stimulus and how it helped device sales. Can you clarify? Like is it still sustaining that stimulus which is helping? And also, Khun Nattiya, on the tax side, so those tax benefits will continue? I didn't quite -- sorry, but if you can clarify how, why it was lower again in first quarter and would it sustain going forward?

Okay. So let me address the EBITDA and also the tax and then later on spectrum auction, maybe to the CEO, okay. On the EBITDA side, if you look through last year, we started to see rising of utility costs towards the second half of the year. So that's one of the major item that drives up our network OpEx in the second half. Apart from that, I think that's why that revenue growth came quite nicely in the first quarter. But partly, we believe that is both direct and indirect impact of the government tax campaign that helps for spending. I think overall economy on the ground, as the government announced and as well as we've seen, is not yet strong. I think the recovery has been fairly slow. So we are quite cautious on that. And for that reason, we do not yet raise our guidance for the full year. Clarification on the tax campaign. This is the tax campaign implemented for the month of January up until mid of February. So that is short term in nature. There's no any further incentive announced by the government at this point in time. So we are also quite cautious for the upcoming second quarter, which is usually a lower season comparing to the first quarter. And the last point that I mentioned about the effective tax rate, that Khun Pisut asked earlier, the effective tax rate now seems to be lower than 20% because there is a recognition of share of profit from our investment in 3BB infrastructure fund, which is not subjected to tax. That's why we see a lower effective tax rate, and that should be ongoing because we'll continue to recognize this share of profit on a quarterly basis.

On the spectrum auctions, we still have unclear and [indiscernible] from the NBTC. As you follow the news, at least at the beginning, NBTC are willing to auction the 0.5 gigahertz because this is the standard frequency for the 5G. But after they announced there are some problems because this frequency is also used in the broadcast today that we have to [indiscernible] frequency back. So I think NBTC have to reconsider on the original plan to have the 3.5 through to the auction in this year when they announced in the public. However, from our observation, there are other tools you can see from [indiscernible] in the past and [indiscernible] from CAT in the past. This frequency maybe in off-license next year. So they may come to have the player to auction. If that auction, I think 2.1 and 2.3 should be the first priority rather than 3.5, but still have no plan from NBTC yet.

Next we have Izzati Hakim from Macquarie, please.

Just one question from me. I recall in the previous call, management guided that you were targeting around 3 years for the balance sheet as in the net debt to EBITDA to go back to pre 3BB levels. Can you just give us some color how do you plan to do that besides the enlarged EBITDA? And is that target still 3 years? Or you think you can do it in 2 years at this point?

We are only into this journey for about 3, 4 months, give us some more time to make sure that the -- whatever progress we make can continue.

All right. But can you just give some color besides the enlarged EBITDA? How do you plan to reduce your debt?

I think on debt side, right, it's -- well, if we look at -- it relates to the expanded EBITDA as well because as we expand our operating cash flow, we have the capacity to deleverage. And that's why we talk about the 3-year outlook that we don't think that the high leverage will sustain at this level. So it has a lot to do with expanded EBITDA in order to deleverage. As Khun Somchai mentioned, we are also looking at potential upcoming spectrum auction in the next 2, 3 years' time. So that thing comes into play of how our debt will look like due to the auction. Other than that, I think in terms of CapEx, as you already see that we started to lower our CapEx, especially on mobile because we completed majority of the coverage work on 5G. Ongoing basis, it's capacity-driven, whereas on fixed broadband as we integrated with 3BB, we can also utilize the footprint of 3BB, which help us save the CapEx. So trajectory, additional cash flow that comes in will help us to support deleveraging as well as to spare for spectrum auction if any.

This is Wasu from Maybank. Can I start asking questions? Okay. Congratulations on the impressive performance in the first quarter. So I have 5 questions in total. The first question is about the integration cost. Do you have any guidance on the integration cost impact on P&L going forward in the coming quarters? So that's the first question. The second question is about competition. So far this year, have you seen any adjustment of data quotas or data pricing in the prepaid market segment? The third question is about the postpaid ARPU. Although the competition has been easing and 5G adoption has been rising, I've noticed that postpaid ARPU has remained below THB 450 per month since the first quarter of 2023. So what is the management expectation for the postpaid ARPU going forward? The fourth question is about the marketing expense. So the marketing expense in the first quarter of this year was 3.4% of the core service revenue. Is this a comfortable number for the management going forward? And can the number actually rise in the coming quarters given that Khun Montri used to say that 4% of cost with revenue is actually the ceiling for the marketing expense budget this year? And my final question is on the finance cost. The finance cost was THB 2.3 billion in the first quarter. How much of the finance cost in the first quarter came from 3BB? That's all my questions.

I think number one, integration cost, in the end, it would net off with the synergies that we make. So I don't think you'll see the impact of integration costs unlike what happened to our friend. I think we started to recognize synergy early, and that should forgo the integration cost, so you won't feel the impact there.

Allow me to take number two, three and four. Number two, you asked about competitions, quota on prepaid, on the data plan. What we kind of see for this past quarter as the quota for prepaid data remained fairly stable, the unlimited -- as I mentioned, unlimited unsustainable plan has been taken out. We believe for quarter 2 onwards, we kind of think it would be rather stable or just positive/negative depending on the promotion in the markets. So that's number two. For question number three, when we talk about postpaid ARPU, the postpaid ARPU for this quarter came out not so high in terms of growth, we were rather stable. The major driver for postpaid ARPU is a combination of device bundling plan as well as the normal postpaid subscription, the combination of that. In the market, as we proceed, it tends to be more PL device sales together with a financing plan. Installment plan is much less of the device bundling plan. That has a bit of effect to the topline ARPU in postpaid in terms of topline. But as a result, means also that we have spent less for the handset subsidy. As a result, it improved their productivity, profitability at the end. So postpaid ARPU in combined there, it may not be so easy to see, but this has been driven by that piece of less of the device bundling plan. For the fourth question regarding marketing expense, as we described from a previous call as well, that marketing expense will highly link the 2 seasonalities and where we want to push of the good timing where we need to spend and when we need to spend. We keep a fairly flexible in terms of time line to match the demand and supply. There are upcoming new model of the product so that we will be probably uplift the spending of marketing, making sure that customer receive the full benefit of what we have. So I would say it's seasonalities.

Your last question around the finance cost. Finance cost has 2 portions. First portion is the interest expense. Second portion is the deferred interest based on the ROU. So the interest expense, I would assume that, that comes up because of the acquisition of the 3BB. But if you look purely at the ROU, I think the addition per quarter coming from 3BB, that's close to about THB 600 million.

Next, we have Khun Thitithep, KKPS.

I have 3 questions. The first 2 questions are regarding the 3BB. The first question is that you start consolidating 3BB since sometime in November. Have you already started cost redundancy? Because if we look at consolidated parts in this quarter it looks like it's very well contained. And is there much more room for you to squeeze cost from 3BB acquisition. The second one, your fixed broadband business added more than 70,000 net adds in this quarter. Right now, you have a much larger footprint. So going forward, should we expect net adds to increase? The third question is regarding the payout ratio because the spectrum auction is coming. Do you think that you may adjust the payout ratio to be more conservative ahead of the auction? Or do you think that the competition in auction should be mild so there's no need to adjust the payout ratio?

On the payout ratio, we are very committed that not less than 20%, I think, is our guidance. However, when the payment curve is tied to as a dividend more than that -- as we can at our 2 major shareholders, also really, really support in this matter. However, like Khun Nattiya said, we have to check in detail of the environmental situation and also coming of the new opportunity also. That's why we still don't share the guidance.

I think you have asked about whether we have done some -- in short, yes, I think we combine a few operations, then I think we can reduce certain costs. How to expect? I think we used to give you some guidance on the total synergy per year. I think we are on track for that, but there's progress to be made quarter-by-quarter. I think that's part of the integration roadmap that we're going to carry on for the next 18 months to 24 months. Second, 70,000 net adds, the expected increase. My answer to that is broadband is quite a physical business to increase something significantly. I think there is a need to be a change in terms of resources and everything. So I think we'll be happy to be able to maintain that level of net adds. To increase much more or not, I think it's hard to say. For now, I think we'll be happy at that level.

We have Arthur from Citi, please.

Yes, several questions, please. Firstly, I'm just wondering what your thoughts are on the digital wallet scheme in Thailand. How do you see this as impacting consumption in the mobile space? And it's just in your current group guidance. Second question I had is with regard to mobile pricing. Is there any room to raise this in a more direct manner? I know you've mentioned you've been scaling down in the unlimited plans, but is there room to more directly raise pricing itself? I mean I understand the concept on [indiscernible] and revising that with unlimited, but that does not necessarily improve ARPUs per se.

Digital wallets, we hope that it would at the end come out, but in any way, it remains to be seen. Once digital wallet and THB 10,000 get distributed by the government, it's sort of the economy stipulations and people will spend a bit more. We do hope as well that at the end it will pass through communication at some kind, either buy a bit more on the handsets or the bundling. We are hopeful, but that remains to be seen. The second question regarding whether or not there is room on the price adjustment. I would say we continue on looking at the optimization's perspective rather than putting as a price raising as mentioned. Optimization in this case would mean if some plans are not still sustainable and we are final and the pattern of use has been changed, so we continue on reducing those unsustainable plan. And at the end, it will improve ARPU. Secondly, we continue on looking at more utilities and values, so customer would want to subscribe more. So that one would also help improve ARPU. It could be a combination of data, content and some other value-added service as a part of it. So I believe that in that search and continue on improved product offering will at the end help us getting stronger in terms of proposition to a customer and hope customer will spend a bit more.

Understood. So if I can just add another question with regard to the digital banking push, is that still something the company is looking to engage in? And what is the status of that?

I think we're still engaging with the partners in preparation for that. As you will be aware, the formal regulation has come out. So now it's under the time period, where all the interested parties need to submit the applications.

Any timetable for this?

I think the submission has to be done by early September.

Piyush again.

On the mobile side, do we still have customers who are on a lower-end unlimited plan or that is already completely out of the system? And if there are, like what percentage of contribution of customers are there?

There are still some of the customers in that plan that lasts about 12 months in general. There are some, but not in great numbers. And as the plan ends, it's also depending on what usage pattern they are in, and we will definitely propose to them that next best offer as mentioned.

And based on your observation, as you remove this low-end unlimited data plan, how has those customers behaved? Like do they start with lower usage? Because they have been used to such high data usage consumption, right, do they over time move up to higher value packs, start contributing more ARPU? Or what's the typical behavior? And a follow-up to that is, like, when I look at Thailand data usage, it's very high as compared to the region. It's already like 30 gigabytes. So if we are not increasing prices, then what is the other lever to improve mobile ARPU if the usage doesn't grow?

On the behavior side, it's so clear that customers have demand to use a lot, so when we start eliminating the unsustainable plan, mostly would make a decision to buy the larger package. So that's number one. So your second question regarding, oh, because it's 30 gig average consumption, if we're not raising price per gig that how would we do. When -- the average of 30 gig is also a combination of unlimited users as well as the quota-based users. Previous unlimited low plan has been significantly contributed to the consumption per sub. So as mentioned, we are not raising price, but we need to eliminate the one that we cannot sustainably provide because cost to serve are not being able to give us that ability. So by eliminating on that, so when customers want to use more gigabytes, so they upgrade to the larger plan, is more sustainable for us as well as the ARPU will increase and the mixture will change.

Right. And could you share with us like what is the usage trend on 5G customers? And how that has transitioned like in terms of as the customer becomes more seasoned like 1 year on 5G, how is the usage pattern versus when we entered?

Okay. I don't have the number on top of my head. In general, 5G would kind of stretch up usage a bit more because a better phone as well as a better network. Roughly, if not mistaken, it's about -- yes, it's about 5% to 10% more in terms of usage consumptions. For remaining parts that Khun Piyush had asked for, allow us to get back separately. We will refine that, and we will clarify with you.

Well, we don't have any further questions, and this is the end of the conference call. Thank you for participating. See you again next quarter.