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

Welcome, everyone, to Far EasTone's 2022 First 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 the Investor Relations section. And now I would like to introduce Mr. Gary Lai, the IR Officer. And Gary, please begin.

Thank you. Good afternoon, everyone to attend Far EasTone's First Quarter 2022 Result Conference Call. Our President, Chee; and CFO, Sharon, both joined the call with us today. Before Chee's presentation, please pay attention to the first page safe harbor statement in our deck. So let me pass to Chee. Thank you.

Thank you, Gary. Hi, good afternoon, everyone. Thank you for attending our IR call. So I'll give you a brief update or a sum-up of what we have done and how we have done for the first quarter. So the first slide talks about our financial performance. As you can see what's on the board that across the major KPI guidance that we are beating all the guidance across all KPIs. And not only that, for the Y-o-Y, we also posted positive and good growth, including the revenue for 5.1%. We also showed the guidance for the annual. So you could see for this year 2022, we are looking at TWD 88.789 billion of revenue, and then that is about 4.1% of Y-o-Y compared to last year's actual. In this quarter, we already posted 5.1% Y-o-Y. And then for the EBITDA, it's 11.3%. And also for the net income and EPS, it's pretty impressive 28.4%. So I cannot complain, right. Next slide, please. All right. So on the revenue side, since we have launched 5G in 2020, you could see that very soon, we led our industry and showing the positive trend on the revenue. So it has been 6 quarters in a row now. The total revenue has turned as Y-o-Y positive. And then on the EBITDA side, we have posted 11.3% Y-o-Y growth. And that is the record high since the fourth quarter 2018. So as you can see from the chart in terms of the growth percent and this quarter has posted the highest. And of course, this is taking out last year, the third quarter, right, for the third quarter, where we had a onetime building, so excluding that. And then this is the highest 11.3%. That was on the EPS side. Okay. Yes. So for the net income, that is also it is -- I think it addressed all the way back to 2018 third quarter as well, and it is the highest. And what I was referring to is the third quarter '21 that we have that onetime sale. If we exclude it on that, it's equivalent to TWD 0.64 for that quarter. So with that, and then this TWD 0.71 is so far the best record in a while. Okay. Right? Yes. And in terms of the debt, so you can see that we continue to pay down our borrowings. So the net debt has decreased to TWD 52.5 billion or so. And net debt to EBITDA multiple has come down to 1.82x as well. And then we continue to have a very healthy cash flow at TWD 55.1 billion or so. And the CapEx for this year, our CapEx guidance is about TWD 11.1 billion, of which TWD 2 billion is carried over from last year. But then so far, we have spent TWD 2.3-or-so billion. So it is in line with our guidance. Okay. Yes. So what has contributed to our very good first record results. On the core business, that is our mobile service. So we see very favorable mobile service trends, and that's reflected in our pool, the postpaid ARPU in particular. So you see we continue to grow our pool. Of course, 5G is a big contributor there. And then so the monthly fee for 5G renewals, we continue to see greater than 20% uplift. And then on the mobile service revenue part, it is also a 2.3% Y-o-Y. This may not seem a lot because the single-digit 2.3%. But as you all might be aware, right, for years, the mobile service revenue in the industry has been declining. So we are happy to see the upturn since we launched 5G, and this trend continues. And then in terms of the 5G postpaid penetration, we are now -- have more than 25% of penetration and it has been steady. And then so we are happy with what we see. In terms of the postpaid churn rate, even though with the 2 merger announcements, so the market gets a little bit more exciting than usual, but still, we keep the churn rate at a relatively low level. And of course, our main goal is to continue to work it down. Okay. And then on the new economy side, which we have always think of it as our growth engine. And it does show its strength. So for this first quarter, the new economy, it grew like 27.2% year-over-year. And then just from the amount wise. So the new economy revenue accounts for 18.4% of our total revenue received in the first quarter. So that is double-digit Y-o-Y growth and then almost 30%. So that was very strong. And on the enterprise side, it accounts for 55%, that's more than half of the new economy revenue came from the Internet side. And the major drivers there are from the ICT revenue, of which we can break it down to the cloud service and that has shown a 66% Y-o-Y growth. And then for the IoT solutions that are used in smart city or so, it shows 84% Y-o-Y growth as well. And then on the consumer side, out of all the digital services, the 2 upfront that are driving more of the growth are in the e-commerce and also our consumer IoT also did very well in the first quarter. Okay. All right. And the major milestones we have achieved year-to-date that included -- we have issued the first social bond in Taiwan Telecom industry for TWD 2.7 billion to -- for financing 5G on the ESG development. And also, we have started a 5G Metaverse Accelerator in December and after several months of working with the teams and the assessment and evaluation and all that, we have now selected 20 of them to continue to work with us to co-create and co-develop some go-to-market business applications. And of course, with the focus on FET users and also the enterprise clients as well. So in September, we will have a demo of the joint efforts results that we have from these 20 teams. And also, we are invited by Ericsson to join their global startup 5G program. And this is a program where they conducted those startups globally where they have some focus on 5G-related applications. And people are saying what is the 5G killer application. So certainly, there is a community working on that. So Ericsson is trying to bring them together and also invite telcos to join. And we are the first one so far, joined from the East Asia. This program will also help the startups that we have selected to work with us through our accelerators, we can expose them to this global community as well for more collaboration opportunities. So we are happy to see this development as well. And finally, although this is not FET's part, but it's still -- it's very relevant because in light of the merger plan. So we are happy to see that APT's shareholders have approved this FET and APT merger proposal, which is the big thing that happened on April 15. Okay. All right. And then we have a few more awards and recognition that we received year-to-date. The top 3 are for the ESG-related efforts. And the bottom 2 are more innovation than our solution oriented, especially in our IoT and using AI enabled quality management system. So not only we continue to work on our ESG-related efforts and work. And then also, we are very keen on promoting our homegrown solution as we go deeper in these newer technologies. So receiving these awards are very positive confirmation of the direction and also of our efforts. So we are happy about that and to share that with you. Okay. And finally, I see this is my final slide. And this time, we kind of changed a little bit. So we want to make it more like a quick and so and spare you with a lot of charts and then make it a little bit cleaner and shorter. And so just to recap. For FET 2022 priorities, we will continue to strengthen and grow core business. As we said, even though telecom or people may think of it as a legacy. But then with the 5G, we certainly see a lot of the trends are showing positive signs. And then so we will continue to grow our core business. And then on the other hand, our new growth areas in the new economy, they are very much related with -- related to the technology strength that we have. So we have combined our transformation office with our IT department to form information and digital transformation technology division. And I recruited this AI leader from -- AI cloud leader from Microsoft Peter Hu. So we have scaled up our technical forces so that we have dedicated team to help to support our enterprise solutions as well as our digital services. And then so that we can drive more new growth. Okay. And also, we have always considered our customers, what are the values that we can provide to our customers and what is the differentiator we can provide. So we'll continue to grow our customer relationships and then provide more value to FET customers. And I always emphasize with my team that if we can save TWD 1, it is like we are making TWD 10 worth of business ourselves. So this is important that we need to drive down our -- continue to drive down our operational costs and expenses using automation, using more process improvement. So we'll continue to do that. And then last but not least, because of the merger. So of course, this is new or additional efforts and definitely our priority that we need to pursue this regulatory approvals for FET and APG merger. Okay. And also in June, on June 14, we will have our FET Annual Shareholders Meeting held on that day. Okay. With that, that concluded my presentation for you all, and then we are happy to take questions.

[Operator Instructions] Our first question is coming from Peter Milliken of Deutsche Bank.

And congratulations on a great result. My question is perhaps a little bit mathematical, but what it is, is 5G ARPU is up 20% or more on the migration. And if I look at how 5G users have trended, right, up to 25% of the user base now, then I can basically estimate that the first quarter, maybe on a weighted average basis, 5G users are at least 20% of the user base. So then if I multiply 20% to increase by 20% of the user base on average, then I would come to a 4% increase in postpaid ARPU. But actually, since 5G have been launched, the increase is a little bit less than 2%. So that would suggest to me that maybe the non-5G users are spending less. Would that be the correct interpretation? Or is it something else that I'm missing out on?

Okay. So you have -- let me see, you have used several numbers together to drive. Your final part you said, the 4G has been less, is that what you're saying?

Yes. That's right. I mean, like basically, to put it another way, if I was to extrapolate out when you have all your users on 5G, should I be expecting something near a 20% ARPU uplift? Or would it be a lower number? Because it seems like that's not coming through in your postpaid ARPU on the run rate basis. And if it's too difficult a question to answer now, I understand. I just thought I would check with you guys to see if there was any simple answer to that one because it's something I'm a little bit confused about when I do my calculations and try to trend ARPU assumptions going forward. I wonder should it be the -- should I assume TWD 1 to TWD 2 ARPU increase per quarter like in recent quarters? Or should it be a more rapid increase, reflecting the 20% lift on… [Technical difficulty]

Excuse me, Peter. The line of our moderator just disconnected. We'll wait for a while, please. Thank you.

Sorry about that. My CFO hit the wrong button, so that disconnected us. Okay. All right. So to answer your question, I think your observation was basically correct, okay? So if we look at the -- so some of these -- when we calculate the renewal uplift, we are only speaking to those that we convert. But at the same time, we also can have some gross adds that didn't -- that wasn't with us, right? So to us, those are not calculated in this uplift space, okay? So there is a difference there for your information. And then also you are also right for the ones that are still stay on 4G, right? Because our initial strategy, we convert those already on a higher rate plan because they are more like a adaptive. They are new early advisers, right? So we go for those. And then as you know, they already are on the higher rate plan. So in terms of the uplift, actually, that will be relatively smaller. So ironically, if I were able to convert someone with 499 or 599 to a 1399 5G program or 1199 5G program, then the uplift will be bigger. But then it is also more challenging to convince those that are currently at the midway or the lower rate. Fine. So it is a mixed kind of a juggle. But then overall, this uplift of the 5G is able to contribute is definitely a very positive thing.

Thanks for helping me solve that mystery. That makes sense.

No problem. But you already have seen a lot more details about that actually. I didn't mix all these numbers together, but then you are right on target. Yes.

And next, we'll have Neale Anderson of HSBC for questions.

Two questions on us, please. And it relates to your last slide in terms of driving down operational costs and expenses. It looks like in the first quarter, you have potentially some pretty good operating leverage in the core telecom business. So my question on that part is what additional cost can you take out? You mentioned automation, et cetera. But I'm wondering which specific cost areas do you see the most opportunity? And then the second part of the question relates to the cost trend in the new economy business and how you see that panning out. Do you think costs can flatten or decline? Or do you expect them to grow in line with revenues in the fairly early stage of that business?

Okay. So I think when I joined Far EasTone, that was 2018, we actually had a early retirement kind of a program that we encouraged some of the employees to take early retirement and all that. In other words, that was trimming down our workforce. And it has been 3, 4 years now, and then I have some employees ask if we have some program like that. I think sooner or later, and also in anticipation of this merger, right? So I think it is actually a good time for us to look further in terms of if we have the right size for where we want to be. And also if we have the right talent and the right cost, so this is more of an overall kind of from the HR perspective, I think there's -- definitely, there's more leaning, that way we can do. Although I certainly don't want to publicize it to get any of my employees nervous. But it is -- so in addition to OpEx in terms of entertainment, travel, those kind of miscellaneous kind of thing. But it is also -- it also in the non-media standing areas, that is where I consider some area we can have more scrubbing. But then I'll just be very candid. I think from time to time, it is only healthy for the organization to look at the company's size and the company structure, especially we are going to have a merger. So I wouldn't be surprised, but I see areas where we can prune ourselves a little bit more. Okay. I think that's your first question. And then the second question is about in the new business area, do I see -- how I would cut the cost there. Well, so in the new growth area, as I mentioned, we really took pride in developing and promoting our homegrown solutions. A big driver for the homegrown is to improve our margins, right? And then so -- especially on the software area and then those are reusable. And then so the same solution like energy management systems, for example, or the telemedicine or some smart CD, smart tracking, monitoring kind of capability, those can be reused, and we use IoT platform. So not everything need to be -- need to start from scratch. So the more cases or the more projects or deals that we are able to make in this area. These software are just reusable. So my margins will only improve. So I do see despite that, the cost -- the relative average cost will go down, and then that will improve our margins as well.

Got it. On the first part, the cost in the core business, can I ask how much is retail and distribution? I'm just wondering in Hong Kong, we've noticed since -- or during COVID, the operators have pulled back quite a bit and save quite a bit of cost by reducing the store footprint switching more to digital and marketing. I was wondering if that is feasible for Far EasTone as well.

Yes. That's certainly, like we call that our kind of channel through [ that out ]. So that is towards more digital is the goal that -- it hasn't been the priority in the past. But then through this pandemic impact, we definitely see the digital channel in Taiwan, even with Taiwan's local culture, people just like to go to the real store. But then I think with pandemic, that is also changing. So that helps us to have a different channel strategy or more aggressive in terms of the digital -- using the digital channel. So we have been in planning and looking at how we scale down on the number of our retail stores, whether it's franchise or our direct retail stores. And so that is in the work.

[Operator Instructions] And next question is coming from Sara Wang of UBS.

I have 2 questions. First is regarding the new economy business. May I ask how is the margin profile so far? And then it seems the growth is very solid for the past few quarters. Do you see increasing? Or how is the competition landscape going forward, given we are not only competing with telcos but also other tech firms? And also, the second question is regarding the time line of APT merger. So it seems the shareholder meeting appointment is in June. And then when do we expect the regulatory approval? Like you said this year, fourth quarter, et cetera?

Okay. Sara, so for the first question, yes, so for ICT, it depends on project to project and then those are the size of projects. So the margin vary. But then on the average, we see between 15% to 20%. So that's the gross margin we see with ICT. And then in terms of the competition, I think certainly, it is not better than 2 years ago. But the difference is we are stronger and that we are more mature in this area. As I posted 2 years ago, we tended to start in this area. But in 2 years, we have built a lot of experience and then a lot of delivery, a lot of good projects. So that is like they give us a very positive energy and then the feedback and all that. So even though the market is still just as competitive, but then we are more competitive ourselves. So I think it works out fine and in terms of our ability to win projects, and that is also improving. So I'm pleased with what I see now. And then the trend also on the private network, we see quite a bit of demand that's coming. So just take a little bit. Since we launched 5G, we already were talking about private network. But it did need some time to cook to kind of educate or make the enterprise more comfortable or get them more acquainted with this technology and then with what the 5G private network can do for them. And with some cases that we had deployed, I think the story has got told more and people hear them more. So we actually have seen quite a bit of demand in this area and had a few -- quite a few contracts signed in the first quarter as well. So I see this ICT will continue to grow. Okay. Your second question is APT. In terms of the time frame, it's really -- well, I can at least tell you we -- there was hope that maybe it can get approved by NCC in July, August time frame just because the committee members, like 4 of the committee members of NCC will change [ and shift ]. Their terms expired. So the new members will be inaugurated in August. So you would think with that change over, either you finish this before then or you wait until the new members to join and to finish. So that is a key factor to see if there is a chance to get approved by NCC before end of July, then FTC would usually follow after that. But then -- so we don't know at this time for sure. But then even if it would happen in July, that probably will be a record speed because usually, it would take longer. So we are still hoping we will be able to complete this merger by the end of the year. And I think that is still -- so far still a reasonable target. Even if we -- so between July and September, hopefully, we will see the approvals -- we will receive the approvals. But that's kind of the time frame we are hoping for. But as these are all government-related agency, we really don't have influence on how fast they will work this. Again, we are collaborating with them. And at the time they ask for information, we will get back to them promptly. So that's the kind of things that we can do and then to help accelerate. But then really, they are the ones that determine how fast and how soon.

[Operator Instructions]

Okay. And if you have some -- if you come up with some questions after the call, Amy and Gary are always available, and then we can help answering afterwards.

Of course. And there are currently no questions at this point. I'll now pass the call back to Mr. Gary Lai. And Gary, please proceed. Thank you.

So thank you again to join our first quarter 2022 conference call. See you next quarter.

Thank you all.

Thank you. Bye-bye.

Thank you. Ladies and gentlemen, we thank you for your participation in Far EasTone's conference. There will be a webcast replay within an hour. Please visit www.fareastone.com.tw under the Investor Relations section. You may now disconnect. Goodbye.