Far EasTone Telecommunications Co., Ltd. (4904.TW) Earnings Call Transcript & Summary

Welcome everyone, to Far EasTone's 2025 Second Quarter Earnings Conference Call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.fareastone.com.tw under Investor Relations section. And now I would like to introduce Mr. Gary Lai, the IR Officer. Gary, please begin.

Good afternoon, everyone, and welcome to 2025 Second Quarter Investor Conference Call. We are pleased to have you join us today. Our side, we have our President, Chee and CFO, Sharon. Both will sharing updates on our performance for the quarter this year. Before we begin, I would like to remind everyone to pay close attention to the safe harbor statement on the first page of the presentation. Thank you for all your attention. And now let's proceed with the Chee's presentation. Thank you.

Okay. Hi, everyone. Welcome to our conference call. So for the second quarter, we have continued Y-o-Y growth across all major lines. And also, in particular, we've seen improved margin percent that is as we continue to improve our operations efficiency and all that. However, we -- for the total revenue due to some ICT projects delay. So as you can see, in terms of the achievement rate for our board target, we fell short a little bit there. But then because the delays affect some of the revenue recognition along the line and those, of course, will be shifted to the second half of the year. And in terms of the 2 quarters combined for the first half, we are meeting all BOD target and also with positive Y-o-Y growth. And then our EBITDA and our net income EPS also has made some record. And as we turn to the next page, we'll see more there. So for our second quarter revenue, it comes to TWD 25.23 billion. It is a record high for the same period for Far EasTone. It is -- so as the majority of the service still driven by mobile and this 1.0% Y-o-Y is still driven a lot by our steady growth from our 5G customer upgrades and also our prepaid business is also doing very well. I should also add our digital services also performed better than we initially had planned for even better than that. And this is also the 19th consecutive quarter that we have the second quarter revenue that is continued to grow from Y-o-Y. And as far as the EBITDA is concerned, our second quarter EBITDA comes to TWD 9.39 billion. It is an all-time high for the same second quarter. And this is 5.1% Y-o-Y EBITDA. It is contributed by several factors. First of all, of course, better revenue, better revenue margin and also our synergy from the merger as we have completed quite a bit of the merger activities. And so the network operations expenses, now we start seeing the reduction on that and the savings. So our EBITDA is -- it is better than the year before, okay? And for the net income, it is TWD 3.37 billion, and it is 11-year high for our Far EasTone for the same period, and our EPS come to TWD 0.94 for this quarter and achieving 106% of our second quarter guidance. And overall, our 8.1% Y-o-Y net income growth is leading our peers. Okay. All right. And then the next is in terms of our second quarter financial metrics, as we continue to pay down our debt, our net debt and net debt-to-EBITDA multiple continue to improve post-merger. Also, our free cash flow remains very strong. And then our CapEx is at TWD 3.04 billion, and that is in line with our 2025 guidance, which is TWD 8.3 billion. If we look at the first half together, it is exciting as we continue to set new financial records for Far EasTone. And so our total revenue for the first half that sets a record high. And then -- and our EBITDA is also a record high that comes to TWD 18.9 billion, and it is a 5.8% growth Y-o-Y. And as I understand, that is also leading the industry. And then because of the revenue and then also the EBITDA, both are performing well and our operating income also comes to the 11-year record high, which is TWD 8.5 billion, and that is a 16.7% growth Y-o-Y, and it is also industry #1, okay. And our net income is TWD 6.6 billion, and it is a 9.2% Y-o-Y growth. And then the EPS comes to TWD 1.83. It's also ahead of our schedule. All right. And in terms of our different areas, our major revenue breakdown in terms of our services and product offerings. And of course, so the mobile service and the digital essential services kind of consumer-facing accounts for 50% of our total revenue. And then we continue to see the steady growth from our mobile service. And then with some of our internal data that I didn't show here, but we are seeing very promising in our NT market performance for Far EasTone. And also our APT, that is formerly the APT users migration, the contract renewal continued to deliver good uplift. In this case, it's a 14% in monthly fees with a well-managed churn. And also, our continuous 5G upgrade resulted in the 40% uplift in our monthly fee. And in terms of our digital essential services, while only accounts for 4% of the total revenue, but then it is continuing to do well, and this is also an area we will continue to invest. And then hopefully, we will see the service area continue to expand. In particular, like the insurance agency business, actually, it has been showing very strong momentum and the growth momentum as we continue to expand our channels and also come up with innovative new features or new products. And the payment, the direct carrier billing, it is 4% Y-o-Y growth. And also the subscribers has also grown quite a bit in this area. And then our friDay video, the OTT, we have some highlights later on, but then it's also showing a 5% Y-o-Y. And our fraud prevention service, that's the Guardian network, it is showing a 40% Y-o-Y in terms of the revenue, right? And on the right-hand side is our ICT and fixed business combined. As I mentioned earlier, because of some project delays, otherwise, this overall Y-o-Y would be even higher. Then ICP revenue grew 8% Y-o-Y. But then, of course, according to our own board target, it could have been higher, but for some of the delays, but we will have it caught up. And we continue to see because of the resilience kind of infrastructure resilience requirements. And so we actually continue to see this area, the strong demand and that kind of boosted our contract in this area as well. And merchandise kind of stayed flat. And then this minus 1% is mainly due to our EC e-commerce performance. And also for the device sales, I would say it's kind of flat. And everyone knows like for Apple, the supply hasn't been that abundant. So that certainly has some impact. But basically, we managed to still have the margin sustained. And then so some highlights in terms of our mobile business growth. So if you can see the revenue-wise, it is a 2% Y-o-Y increase and our ARPU continues -- ICT maintains the lead in this area, and it comes to TWD 716 now post-merger. And also for the postpaid 5G penetration, we already have surpassed 45%. So it is also -- my understanding, it is also #1 for the telco industry. And in terms of postpaid churn rate, we continue to work it down, and it is now record low 0.75%. That definitely helps. And then like I said, we have -- we continue to do very well in the NT market, and this also reflects in the lower churn than before. And some highlights for the enterprise ICT. As I mentioned earlier, we do see strong demand that is driven by the infrastructure resilience kind of request, both government and the private sector all kind of call for that. So it boosted our new contracts. And then so we see an overall 126% Y-o-Y increase. And then in smart city alone for projects that fall under the smart city area, it is a 157% year-over-year growth. So all these contracts will, of course, fill into the later revenue for the end of the year and next year. So this is kind of an indicator that we project how we will be doing in the later year, okay? And the year next. Also, we have some key projects awarded. As you can tell, some of them came from the government sector. We managed not to -- okay, we have some of the department names disclosed here, but then I won't read it one by one, but then you can get a feel for it. So we definitely are continuing to do very well in the government sector and then grab opportunities as we can. And also as we deepen our own products in the smart ICT solutions area that also help us to improve the margin while we do the business. In terms of the digital service, we have some highlights there. So our friDay Video continues to be the local #1 OTT in Taiwan. And also our exclusive Korean content that definitely serves well as a niche for us. And then we have -- we are seeing a 20% monthly increase in paid users. And also, we have reset our viewership record 3x already in 6 months. Yes. So this area is very exciting. And also for the Guardian network, I mentioned earlier, this is AI-empowered feature. We want to help our customers protect them from these fraud. It really comes everywhere. And then this one, we actually hit a new record with now 437,000 paid subscribers, and this is up 40% compared to last year. And also, it is with a 60% trial before you pay kind of conversion rate and compared with other different kind of service conversion, this is very high, the highest. And then for the payment business, I kind of already touched on previously, the direct carrier billing and also the insurance agency, both areas, we call it mobile financial service are growing steadily, especially with the insurance agency area. We continue to have innovative features, products and also expanding our channel. So this is showing a lot of growth potential. And we have made some strategic investment so far this year. Previously, we have announced that we are investing in InSynerger and OTT, and we see the synergy between InSynerger with our focus on the smart city area, especially in the ESG solutions. So previously, we have invested 30%, and we'll continue to invest more to get a major shareholder here. And then in terms of the digital service that is like consumer-facing, we are expanding our mobile circle to have more bigger footprint for the users like a daily life needs. And then so we have invested in PRO360. I think in a matter of a few days, this PRO360 service will be available through mobile circle. So the users -- Far EasTone users will be easily getting access to it. And then we have made some other content investment as we believe no matter how the global economy situation is, entertainment seems to be doing well anyway. So we continue to advance in this entertainment area. So started with our friDay Video, but then we started also investing in the content business and then also with alliance with some of the domestic and also international partners. And in particular, we actually have just created entertainment fund, and that will help us develop quality local content. And then just we wanted to have a better global reach, okay? And also, we have this IP from CJ ENM for this Our Blues that was a Korean entertainment, the drama, I think, right? And then we are going to make the Chinese version. We just started filming and this is kind of after very rigorous production design and all that. So we are looking forward to the completion of it and probably sometime next year, right? This is will be released next year. But this is kind of started another chapter for Far EasTone entertainment area. And also, last but not least, it is LiTV and which has been our partner for quite some time. And we -- and it continues to do very well, and then it is our strategic partner as we continue to expand our involvement and engagement in the entertainment area. And also with LiTV's technical capabilities in the digital ad area, they are proprietary, very advanced technology, we are going to deepen this area collaboration with n LiTV. So we just made that investment recently or I should say, more investment in n LiTV. And also, we have several targets that are in progress and that will be announced later as each of them get approved and then we will announce them in due time. But again, this is an area we see -- we are based on mobile service and which is really saturated, but then we continue to manage to have a steady growth. But then we are also looking for the second and third growth curve. So this digital service, while it is only 4% of our total revenue, we believe that this is an area we can see more, we can grow more. So this is also one area you will see us invest more, okay. All right. And then we did receive some major recognitions, and I listed here, I won't repeat every one of them. The first one on the top, that is from the Ministry of Economics, and then it is the ninth National Innovation Award that we got this award for our engagement and our development in the telemedicine area -- 5G telemedicine. So the committee, the judges, their comment is this is not only a transformation for Far EasTone ourselves because from telco to kind of getting into the health care medical area, but then also through our 5G telemedicine solution, the platform, we are reshaping and transforming the tele -- the health care industry in Taiwan. So we are very encouraged by this recognition. This is also one area we will continue to grow and then also looking for target in this area, and then a target for this area. Okay. And also, we received the Best Customer Service in Taiwan, that is 14 years in a row. And this award actually has only 14 years history. So we have gotten it from the very beginning, and we are also the only company for this award that we -- that has been getting this 14 years in a row. This is a record that will not be beaten. Okay. All right. And then we got recognized in our ESG performance and also for our corporate governance, our executive team performance, we also get recognition from Extel, which is formerly the Institutional Investor. And for those of you who voted for us maybe and thank you for your support. And then also, we are consistently ranked in the top 5% of public listed companies for our corporate governance and for 11 years, that is by the Taiwan Stock Exchange. For our second half priority, now it's already August. So this is already kind of work in progress. As this is the year that we have promised fair trade committee that we will wait until the end of the year to migrate the APT customers. So that is a big task for us, and we already are ongoing, but it is a few hundreds of thousands of users that will need to be migrated. So it is quite some task, okay? And then we will launch some new offerings in the mobile area. And also, we are expanding as we speak, our digital essential service offerings and more -- you will hear more in the later half of the year. And also this -- we are looking to monetize the mobile circle. So the smartphone economy will continue to develop and grow. And also for the Smart ICT business, as I mentioned earlier, we continue to innovate and go deeper through these mergers or synergies with the subsidiaries, the companies that we have invested to strengthen our solutions and then focus solutions that we can -- as we offer these ICT solutions and we can, at the same time, improve our margins and also expand the areas where our solutions will apply. So -- and then with the prevalence of the AI these days, a lot of these solutions, we see opportunities and started already doing the AI-enabled enhancements as we speak. And we continue to increase our employees' AI tool adoption. So far, I'm very pleased to see the various scenarios, examples by all the departments, even in the back office, how they are benefiting from using these AI tools to improve their productivity and most importantly, their work-life balance. So it is definitely a good thing that is happening with these AI-enabled tools. With that, I conclude my presentation and wait for your questions. Thank you.

And ladies and gentlemen, we will begin our Q&A session. [Operator Instructions] The first one to ask question [indiscernible] from JPMorgan.

I have 2 questions. Maybe let me just take them one by one. Firstly, may I ask if the management can quantify this quarter's EBITDA benefit from merger synergy? And also how much more synergy is yet to be realized? Can we quantify that in dollar terms, please?

Okay. So for the EBITDA Y-o-Y, so there is definitely the expense savings because last year, the first half of last year, we were aggressively closing down those APT radio stations and all that. So there's a lot of network activities in the operations expense that were spent that were incurred for that reason. And so now those have been completed, right? And so from the expense side, and that is definitely a saving. And also, as we continue to grow our -- the APT customer when they do the migration, and we have the uplift and that continues. So that builds up our revenue along the way and then also the EBITDA. Exact quantification, I don't have it off hand, and I don't think we get that deeper into it. But then we definitely see that's the 2 major contributors. And that will -- from the expense side, of course, it's the next year, right? And then the base will be about the same in terms of the savings from the network consolidation. But the synergy in terms of the migration, the uplift that those will continue, okay? And also the 5G upgrade as we will -- more and more users will go from 4G to 5G.

Got it. My next question is, management, could you share how do you plan to use the excess cash that Far EasTone is generating?

We are making quite a bit of investment. So that's why we actually are very actively looking at different investment targets. Those are -- but then, of course, those are strategic investments. We are not looking for financial investment targets, but then rather -- so the companies that have the kind of technical expertise that will help us grow our smart ICT solutions or the variety of solutions or deepen our solution depth. So those are definitely like in synergy. And also, as I was saying, we will continue to build our strength and engagement in the telemedicine smart health area. So some of the companies in this health care area is also our target among the target that we are looking at. And then also in terms of expanding the digital services, widening our footprint in the consumer services. So we are also looking for some of these new services that will have a different TAs and then that will appeal to more users. So those are -- we kind of -- so I keep my investment team very busy. So the number of investment cases they are evaluating only on the first half is already double the ones that they looked at last year. So they were saying they need more people. So we definitely have many, many areas where we can spend the cash. And also, our dividend, right, that dividend, we always put out very, I would say, more than well, our dividend has -- I wouldn't call this necessarily like a generous, but definitely, it is a very steady dividend policy. And as we continue to do well and what we want to return to our shareholders. So that is definitely a big area we will spend our cash.

[Operator Instructions]

So there's a question asking about our remaining percent of our APT customers. We actually -- I could share some of the information with you. For example, in terms of our target for our VIP customers, we -- the team in terms of the target achievement now is like 132%. And for those that are for the middle and higher rate plan customers and then our -- we are almost 100%, meeting our schedule for migration. And so it is progressing very well. And then this is a long process because it is still a large number of users. So we don't want them to be all processed in 1 month because that wouldn't be possible in terms of my stores, my customer care, all that capacity. So this needs to be spread until the end of the year. So we have a migration schedule and how many we want to achieve each month and month-over-month. But then so far, the team is progressing very well and ahead of schedule. And also in terms of the AI, sure, I can tell you is -- so we have this LSP business, right, with Microsoft. And then that one, we have seen a big growth. And I would say a big factor is because of the GenAI, right? So Microsoft has adopted OpenAI into their Copilot product. And then so that Copilot series that suits a lot of the companies that already are using Microsoft product. And then they all look for kind of how they can quickly adopt the AI tools. But then if you want to do more than just the user using Copilot, there are a lot of productivity automation kind of work that can be done. So in this case, my solution sales team actually is taking on this opportunity. They have a lot of increase in the customers in their pipeline that wanted to do this kind of work. So keep our professional service team very busy. So I definitely see this is triggered or because of the GenAI wave, and I believe that will continue. I don't have the exact number there offhand, but then this is definitely kind of like a premium we see on top of the LSP contracts. So in addition to the license, they need to buy, but they also need professional service to start from like helping them do the adoption plan and then also having their IP, the OA kind of set up right and then also build up using this OpenAI, the Azure, how to -- how they can build these productivity automation kind of project within. So this is definitely a growing area, a lot of actual, not just interest, a lot of the demand. So my professional service team is very, very busy with that demand. And that comes with all these LSP kind of license as well. So it helps boost the growth in the LSP program.