Far EasTone Telecommunications Co., Ltd. (4904) Q4 FY2025 Earnings Call Transcript & Summary

Welcome, everyone, to Far EasTone's 2025 Fourth 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. Gary, please begin.

Good afternoon, everyone, and welcome to Far EasTone 2025 Fourth Quarter Investor Conference Call. We have [indiscernible] and CFO, Sharon, both will share updates on our performance for the quarter and 2026 guidance. Before we begin, I would like to remind everyone to pay close attention to safe harbor statement on the first page of the presentation. Thank you for your attention. And now let's proceed with Chee's presentation. Thank you.

Okay. Thank you, Gary. Good afternoon, everyone, and happy Chinese New Year to everyone again. All right. So we would like to report to you our fourth quarter performance and the entire year of 2025. Actually, we have had a good year, and we delivered good results. So for the fourth quarter, we have some new record highs. If you look at on the left-hand side, the fourth quarter, our revenue comes to TWD 32.68 billion, and that actually is also the highest quarterly revenue that we have ever scored. And then in terms of the Y-o-Y, it's more than 12% and then achieved rate-wise, it's also 8% more than our targeted revenue. And if you look down, so all the way down to the EPS, the fourth quarter is pretty impressive. If we look at the full year, so we have achieved 5.5% Y-o-Y, even though our BOD was 3.5%. And then so we overachieved by about 2%. And then EBITDA, the Y-o-Y is 4.9%, and it's also above our target. And then the net income here shows 6.9%. And what didn't show here is our operating income that actually scored almost 12% Y-o-Y increase. And our EPS, we have done better than we originally forecast, and that is -- so we have now TWD 3.81 EPS relatively to our original target that was set at TWD 3.63. So our achievement rate is also 5% better. Continue. So this chart shows our kind of quarterly trend. As you see, we are definitely moving in the right direction with the fourth quarter last year, that really has hit the record high, except for the net income, that is a 20-year high. So last time, I was told the higher number was in 2006. So it's a 20-year high record for the fourth quarter, okay? All right. And then some other financial metrics for your information. Our debt has come down to TWD 36.03 billion and our net debt-to-EBITDA ratio has come down to less than 1. It's 0.95. And then free cash flow, it remains really strong, and then you look at TWD 25.91 billion as of the fourth quarter 2025. And our cash-based CapEx, that is TWD 701 million. So we underspend than what we original budgeted for, but that is just due to some cost efficiency savings on the network side and also some deferred payment in spending, which will be realized in this year. And then this is another -- okay, this is for the whole year. All right. So similar chart, but this is a yearly chart, annual chart. So like I said, so 2025, we just set new record highs again for FET, and then it's looking good. And then break it down to mobile business, which is still account for our majority, about 50% or so. So in terms of the growth, given the market is really pretty much saturated and -- but then we still show a strong solid Y-o-Y growth and also from our net portability -- neutral portability market, still, we are looking at the NPE numbers that is encouraging. So we've been kind of tracking that. So I'm seeing the solid growth even though it's a very oversaturated market. So if you look at postpaid 5G penetration that we ended the year at 47.5%. So this year, for sure, we're going to cross the 50% line. And then we will have more 5G users -- more users on the 5G than on 4G, okay? And then the mobile postpaid ARPU has come to TWD 719. It's about $14 higher than the year before although it is still less than what we did before the merger. So we still have room, we'll continue to grow to improve. But then we continue to be ahead of our peers in the industry. And the postpaid churn rate, that is something we continue to work it down. And also the market is not as active as before, I think, in terms of all the churn, which is a good thing. And so we also work really hard to improve our customer loyalty and all that. So we come to a record low for 0.79% for churn rate, okay? A couple of things to mention that we have -- because last year -- end of last year is the official date that we have committed to the Fair Trade Committee that we will honor those old APT contracts. So we are really coming to close that pretty soon. There are still some lingering numbers of APT customers, and we are in the final process of ramping them up. So -- but then it is delivering a good almost 20% of renewal ARPU uplift. And then so at the same time, we manage the churn very well. And also, we have launched this TA-focused service. So instead service plan, instead of looking at, okay, it is TWD 13.99 or TWD 9.99, TWD 6.99, TWD 7.99, so we wanted to have a different TA focus. So we launched this Golden Times. It's more for the 50-plus kind of people. And then since its launch in September, we are actually seeing a good traction that the service is getting, especially online, actually quite a bit of [ them are quite ] online. And then for the fraud prevention service, that is something we see definitely the right feature for this difficult time, lots of fraud costs and all that and then also the links. So this service is continuing, showing the growth and it actually has a 49% Y-o-Y growth. Some highlights for our consumer essential services highlights. First of all, this Mobile Circle application is our APT. We launched it in late 2020. I think the official launch is 2021. So the idea to have this is really serve as a digital platform that we want to increase FET's footprint in the consumer service that will go beyond the telecom, the mobile, right? So we wanted to not only offer what we already have, like our video, our shopping, our insurance, all those digital services, but we want to find very good partners that we can offer more services through this platform. At the same time, this platform is accumulating very good traffic and which becomes our base for further monetization for the platform economy. Right now, it has already 8 million downloads for this app. And then the monthly active users is more than 2 million. So it is looking good. And then for the Direct Carrier Billing, this is always something that we are ahead of our peers. And also last year, it hit a record high transaction. It's a 14% Y-o-Y. And then also, the team has been very innovative and very aggressive in kind of going out of box. And then so for Sandbox application is already approved for life insurance payment through CCB. And once this is done, it is really done for the industry. So we are the pioneer there, but then it benefits the whole industry, okay? And then for the mobile insurance, we started with the handset insurance and then the market share is already #1 for many years. We continue to do well there. And then also, we have increased the telemarketing sales and then direct EBITDA also has a very impressive Y-o-Y increase for 170%. And then also for the travel insurance alone, that's also 266% Y-o-Y. And then, of course, this is launched like later in 2024, about just half year base. So there's some difference there, too. But still for 266%, that is still quite impressive, I have to say. And then we also have the friDay videos, which is still ranked #1 local paid OTT for 4 years in a row now. And the number of paid subscribers has come -- has increased for 18% compared to last year. And also, we have expanded our entertainment business more than the OTT video. So we have been doing some content production and then also hosted and invested in some popular concerts and musical events. And that is also another way of kind of increasing our FET's brand in consumer business. And then we have a couple of good cultural content-related funds that we invested. Combined, it's about TWD 1.6 billion. And for one of them, half of the funding would come from the [indiscernible]. So that has actually given us the actual funding to do more business with the entertainment area and supporting the local content, right? And then now for the enterprise business, last year, we actually have very good Smart ICT business. The Smart ICT alone, we see a 28% Y-o-Y increase for the revenue. So it remains our growth driving engine. And then it accounted for -- combined with the fixed service, it accounted for 19% of our total revenue. And then for -- we have used like a 4 dragons to characterize our Smart CD -- Smart ICT type of project. So the #1 is the telecom-based SI. So that is using our telecom infra and also our expertise in this area and the related projects. And then that actually is showing a 64% Y-o-Y growth. And then also, we see that with the Gen AI, the adoption and then also the anxiety and then all the interest that come from the enterprise or small and medium business. Definitely, it has filled the demand for digital transformation type of professional services. It also helps us in this Microsoft Azure and Copilot program because we are the LSP for Microsoft. And with this wave of Gen AI, we definitely see the way that is pushing it forward even more. So just Azure and Copilot-related contract values alone, it has increased 94% compared to a year before. And then FET's own Intelligent Angel, that's the platform we have debuted last year. And then initially, it's for internal use, and we also monetize it for enterprise clients since the second quarter, and it has gained very strong traction, and we already have built a pipeline for it. And then for our homegrown solutions, and that is in the Smart City Solutions, Green and Smart City Solutions, a lot of that is built around this energy management, right? So -- and then the various applications. So that alone, the contract value has grown 48% Y-o-Y. And then these are the different areas where we have a project that we committed and then also successfully got the contract. And on the right-hand side is the Smart Health Solutions area. And of course, we started with the telemedicine, right? And then that has then evolved into the emergency system for the ambulance. And then last year, we dived into [indiscernible] area. So this is one that where the Ministry of Welfare and Health that they are looking at how we get these clinics onto the cloud. So they are hit. Otherwise, it's more like a siloed island. So this is one big push from the government, and we are aligned with that policy. So we got into this cloud business because a lot of the features they ask for is what we already have, and then that came from our telemedicine platform. So we definitely see the synergy there. And then we are also collaborating with some vendors or companies that are already in this area. So we are looking to some good growth this year in this area. And then we already have more than 500 home care clinics that have already adopted our solution for the telemedicine. And then for the cloud, last year, even though we only launched it kind of like a friendly launch in the fourth quarter, but then we have more than 100 clinics in pharmaceutical -- pharmacies that already adopted. So it's showing good progress. And we have received some major honors and recognitions. I won't just count them through. But then the one that is the most recent is that we, again, is the #1 for DJSI, Dow Jones Sustainability Index. We ranked #1 again. This is the third time in a row for the telecom industry. So that is quite a recognition, even our Board today acknowledged us for that. Okay. The others, I think, I just won't go through them in detail. All right. Okay. So now the dividend. Since we have hit the record high, TWD 38.1, so we have proposed that we will just keep it at TWD 3.81 with 100% payout, and this is 7% increase from the year before. And then you can also see the trend that below there, right? So we are seeing a healthy, steady going upward just like how we are doing with our bottom line and the top line. All right. For our 2026 priorities, we have had some -- made some investment last year, keep us -- keep my investment team very busy, lots of good companies that they evaluated and also [ went ] for. And then every -- each and every one of them took some time. But then we actually have had some good M&As or small M&As. And then that, in particular -- they, in particular, will help us in the Smart City and the Smart Health area. So we -- every time we invest in some companies, we look at the synergies. So it's not purely for the financial investment, but then also how they can work with what we already have and expand it and it's good for both. So we are looking at this year, we want to do everything we can to really maximize and realize the synergies from these recent investments in both the Smart City and the Smart Health area. And also one thing to mention, one of our new subsidiary is ETC, and then that's something you may not be -- you are not unfamiliar with because we have had close to 40% of our shareholder shares. But then just started this year that we will -- the revenue will combine into ours. So there will be some revenue boost there. And then all the cost and then their demand on the CapEx that will be reflected in our forecast as well. Okay. And then ETC, it has a subsidiary that is also working on both consumer-facing because they have all the ETC, the tech, so -- and the parking. And also, they are doing a lot of business in the Southeast Asia for the toll, the electronics toll that they are doing that business. And this year, they should see some -- already some results with Thailand, and there are several countries already in the pipeline, okay? All right. The second is to unlock the value from digital platform. And then that's what I was referring to, the Mobile Circle has accumulated 8 million downloads and then more than 2 million active users every month. And then so we want to merge the online and offline kind of a business that -- where we can give our customers more value. And at the same time, that can also help us increase our ARPU for the integrated or overall kind of services that we are able to offer to our users and the consumers. So we will continue to promote more TA-focused integrated mobile service products with our alliance. And then we will also launch new essential services this year with alliance. And we actually have one major service that will be coming soon. And then we will accelerate our return on AI. Last year, I personally was pretty impressed with what my team was able to do across all the divisions, especially in the network technology, NT, area and also IT. And then what they were able to do to adopt the AI and blend this AI technology into their operations and the SOP. And also, we have adopted this Era 3 principle and then how they do the check and balance and early detection of any issues and then double checking on the change request before they hit the network and all that. So -- and then also not to mention the productivity increase, right, for our workforce. So I'm really looking forward to more of that return can be quantified and then more can be realized this year. We are basically already kind of like in the hiring freeze because of all these efficiency and productivity increase. So I'm already seeing the return, okay? But then furthermore, for what we have done well, and we always like to share that, monetize it, commercialize it. And then so just like I mentioned, Intelligent Angel was already debuted for our enterprise business. And we will have more solutions that we have a homegrown solution that will be AI empowered or enhanced. So we are looking to do more there. Okay. Last but not least, so part of the reason that you will see our CapEx this year will go up a little bit. That is because we're going to have some major network for capacity for 5G SA and then also LEO service. And so we have some network and operations work there lined up for them, okay? Okay. This is our consolidated financial forecast for the next year. So we are looking at for the total revenue, it's going to be TWD 117.48 billion, and that is a 6.5% increase. And then for the EBITDA, it's TWD 39.83 billion and it's a 4.6% year-over-year. And then operating income is TWD 19 billion, and it's close to 10% Y-o-Y. And our net income is TWD 14.17 billion, it's a 3.2% increase. Our EPS is TWD 3.93, and I know I would have liked my team to give me a TWD 4.0 number, but I did tell them if they hit TWD 4, and I'll give them more rise next year. So TWD 3.93 is what we propose as our target for the guidance -- for 2026 guidance. And for the CapEx, it's going to be -- the cash CapEx is forecast at TWD 9.6 billion. It's up by TWD 1.3 billion from what we have projected for 2025. As I mentioned earlier that our -- we underspend our 2025 CapEx. So some of that is going to defer to 2026. So really, the net increase -- increment for 2026 is that TWD 1.3 billion and then mainly in several things. One is because we have -- we actually have more subsidiaries now. And then so they all have some CapEx demand already forecast there. And then also our RAN network upgrade for capacity and then for the 5G SA. And it's really more than there's a core network as well related. So these are the 2 major things that are driving this TWD 1.3 billion additional CapEx that we need for this year. Okay. But then -- so no worries because our CapEx to sales level remains very healthy at about 8%. With that, I conclude my presentation for you all, and we welcome your questions.

[Operator Instructions]

Okay. So I'm reading the question. Okay.

We have HSBC on call for the question. Maybe we go...

That's the first one. Okay.

The first one to ask question is Charlie Bai from HSBC.

This is Charlie from HSBC. Congratulations to your very strong results. This is very impressive. I have 2 questions. The first one is about your CapEx guidance. I noticed that you forecast additional TWD 1.3 billion because of the 2 reasons you mentioned. May I have more color regarding the subsidiary demands, why this could drive so much additional CapEx? And I also noticed that your actual 2025 CapEx is meaningfully below your budget. Can I assume your 2026 budget is also a very conservative budget and you have a large room to maneuver and probably the actual will also be lower than the forecast? This is my first question.

Yes, that's pretty much. I think so. Yes, I would think so, too.

Okay. Got you. So my next question is about your 2026 guidance because I look at your guidance, it seems to me that your forecast higher revenue growth and net income growth. I know why is that the case? It seems to me revenue growth guidance is higher than EBITDA growth and EBITDA growth is higher than net income. If there are some areas that causes some margin pressure and could you please give me more color on this.

Okay. Thank you, Charlie. So let me explain. As I mentioned, ETC, right, which we already have 40% of the shares. So by having it come into our P&L, so that does help with the Y-o-Y. So the TWD 6.5 billion if without EPC, which have about TWD 3 billion, I think that is roughly TWD 3 billion or so on the revenue level. So without that piece and then the Y-o-Y would be about TWD 3.5 billion. So that will be just like what we set out for 2025 forecast last year. And with the increase from EPC, then that gives us the extra 3%. So you're looking at a 6.5% because of that. Now if you look at now why didn't it accordingly increase in the other lines, and that is because before we have realized this revenue in our booking, we already are taking 40% of its net income and all that. So those are already accounted for in our past P&L.

[Operator Instructions]

If there is no questions on the phone, maybe we can start with questions online. Yes. Let me read it, and we can answer it later.

For the AI, the first one?

Yes.

Okay.

With AI, are there initiatives that you can take -- undertake to reduce cost or even down size take time over time?

I actually wrote in magazine, The Business Weekly magazine for -- I wrote in the column about how to adopt AI. It is my humble opinion, right? So I think it's good for companies to really focus on getting the return and not the result and not necessarily the return because it's the employees that need to really adopt them, and it's the employees that need to be willing to push forward with it. So if we now have an initiative to say, I'm going to reduce so many head count, you can bet, nobody is going to want to do this seriously. So -- and then also that's really not my original purpose for doing this. But then just because it is the technology evolution. So AI is for everyone to really learn, right? And then we already have a very good work-life balance. So I wanted to solve -- to help resolve that problem for my employees. And they will see the benefit and then how AI helps them with a lot of their pain points. And then with that, they are self-motivated, they are encouraged to do whatever they can to really utilize AI and then to learn AI. Now once they do that, and as I mentioned earlier, we already are basically like doing a hiring freeze. I'm not adding head count because of all these efficiency every department already is realizing. So they don't come to me for more head count. And also, every year, we have this performance evaluation. So for those underperform, if it's not satisfactory or need improvement in those bottom 2 categories. So some of them are shown the door, right? In the past and then the managers will come to us, now I need to backfill. But then now they don't do that because they know some of the work, the low performers have left behind are easily picked up because now with the AI assistance and all that, the workflow is very different than before. So I believe there's more value out of this. It's not like they are going to be like idle, but then rather now they don't have to deal with very trivial kind of a task, but then they really can spend more time on more -- the higher quality and then the more insightful type of task that will help the business even more. And then while we are growing our business as you see, then I don't need to add more head count. So I can keep the revenue growing, but I don't need to keep my expense growing. That is how I look at it. So I don't know -- I don't have a specific initiative that I said I will reduce cost because of AI, but it is happening. And I'd like to keep it that way. And then so the employees are self-motivated to do this. And the ones that resist or the one just can't keep up with it, and they will be left at the bottom 2 categories. And then eventually, over time, if they don't improve, they can't improve, then they will leave the company.

Okay. Thank you, Chee. Next question. Congratulations on the strong results and very solid guidance. Can we have some breakdown on how we can achieve the 6.5% revenue growth rate in the guidance? Also want to understand a bit more about the profitability on the enterprise business. And do we expect it to continue improving on a year-on-year basis?

Yes. So I think part of the question about the 6.5% I already explained because of the EPC piece. And then without that, it's back to kind of like 3.5%, like what we projected for last year. And then for the enterprise, that is our driving engine. So it will continue to move the needle a little bit further. But then on the other hand, so our device and also the mobile service, they will continue to shoulder their share and then with a solid growth. So the portfolio in terms of the contribution doesn't change much at all from last year as far as I can tell. It will still be because we have a large base for the mobile service. So a couple of percent of growth there plus the device, and we have probably less than 10% or so increase. And then for the fixed service and also this year, we're going to -- we have more focus on the fixed service as well. So not only just the Smart ICT, we will see some focus on the fixed service as well.

Next question. Given that debt has come down to less than 1x net debt-to-EBITDA...

There's another piece about the profitability. With more solutions that are homegrown, I do see that is part of the reason we do these synergies. So that will improve the profitability even more.

Okay. Next question again. Given that debt has come down to less than 1x net debt-to-EBITDA and our free cash flow generation is substantially higher than our net income, is there a possibility for us to increase the payout above 100% next year?

There's always a possibility. You never say never. And I guess -- Yes. We will do this year by year. So to be honest, like even last year, when we look at our improved EPS, our Board has different opinion, and we have to convince them to keep it at 100%. And this year, they agree with us with 100%. I guess we have to work a lot more. And then also, if this is the case that we don't do as well, just like in the past, we have over -- we paid more than our EPS, right? But then now I think we are in a healthier kind of condition in terms of the payout. And then so we will grow it together as we really grow our bottom line. And then now what we -- so -- and we have a healthy cash flow, yes. But then given the global economy and all this uncertainty, I think it's good that we leave ourselves some buffer. I never say never.

Okay. Next question is in Chinese. Let me translate it first. Far EasTone's ARPU is the highest among the industry. And since the competition is still quite severe, can we expect telecom -- core telecom business continue to grow? And what kind of strategy and what kind of expectation on the profitability growth...

Okay. So for the first part, for the ARPU, right, even though, yes, the telecom piece is very saturated, is very competitive. And that's why we are saying based on our mobile circle as a digital platform, we want to offer a variety of services that are of value to our users. So they will be willing to pay for them. And then -- but then how to pick the right services. And then, of course, we need to understand our customers' needs and then we need to pick the right service. And then also, in some cases, we need to create such new service. So that's where I call it like essential services. And then that is actually something we are currently working on. There is still room -- quite a bit of room for us to grow in the consumer area. The telecom piece may be saturated. But then I think the user demands are always there, and then we definitely haven't done enough in there, okay? So this ARPU, if you take into account all those additional essential services we will be able to offer and then this ARPU will continue to grow. And then in terms of the enterprise profit, so like I said, the homegrown solutions will be the key, right? So with our own homegrown solutions, I can actually control the margin. So that's why we believe as we develop our enterprise solutions, the homegrown solutions are essential for us.

Next, will 2026 CapEx guidance be a base for future CapEx spending?

I wouldn't say so because like I said, well, until there's 6 years again. But until then, I think for 2026, we actually -- because part of these are like if you spend it now or you want to kind of break it down to 3 years and then what are the terms and all that. So we have all that taken into account. So I believe a lot of -- quite a bit of that is going to be realized this year. So I don't think next year will be at the same level. It should come down. So this year, it actually is higher. So have we answered all, I think so. Are there more questions?

If there is more questions, please you can ask online or on the phone.

[Operator Instructions]

But in any case, I'd like to take the time, the opportunity to thank the investors and analysts, right? So we have had good results from the reviews and from the surveys and all that, and we get some good awards. Thank you very much for your support. And our stock price has been good, not today, in particular, but then we cannot complain. Thank you. And if you have any more questions, you can always find Amy and Gary to follow up.

Okay. Then we have the next question. May I kindly check how much of our mobile revenue is device related and how much is [indiscernible] related?

We actually -- so we -- okay, so the mobile service without the device part is about 50%, 50% of our -- 45% of our total revenue and the device is 31%, right, last year, I think that -- so the device and merchandise revenue is 31%. That's how we break it down. If you are thinking about the bundle, not bundled, that's a very different math that I don't have it here. 31% and 50%. 50% including essential service. Yes. So 45% for the mobile service alone, not including the digital services and 31% for the device and merchandise.

[Operator Instructions]

We believe there is no more questions. If we have any further questions, you can always contact IR.

Yes. And it's going to be a long break again, right, on weekend.

There are currently no questions. I'm going to hand the call over to Mr. Gary Lai. Gary, please go ahead.

Thank you again, everyone. See you next quarter.

Yes. Thank you all.

Yes. Thank you, ladies and gentlemen, 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. Thank you again, and goodbye.