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

Welcome, everyone, to Far EasTone's 2026 Second Quarter Earnings Conference Call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after the conference has finished. Please visit www.fareastone.com.tw under the Investor Relations section. Now I would like to introduce Mr. Gary Lai, the IR Officer. Thank you. Gary, please begin.

Good afternoon, everyone, and welcome to Far EasTone 2026 Second Quarter Investor Conference Call. We have with us today our President, Chee and CFO, Sharon. Both will share updates and performance for the quarter. 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. And now let's proceed with Chee's presentation. Thank you.

Okay. Thank you, Gary. Good afternoon, everyone. So I would like to first look at our second quarter financial performance. As you could tell, we actually have achieved a record-breaking performance with all KPIs exceeding our guidance. So our total revenue came to TWD 28.66 billion, and EBITDA is TWD 10.15 billion. For the revenue, and we are looking at a 13.6% increase Y-o-Y. Just to clarify because for the base last year, we have not consolidated with our subsidiary FETC. So if we restate the base for last year, and that is shown in the central column here. So the restated 2025 second quarter, our total revenue was TWD 26.11 billion if we include ETC second quarter revenue, then the Y-o-Y -- so this is apple-for-apple kind of comparison. The Y-o-Y became 9.8%, okay? So similarly, for every other KPIs, you can kind of look at them yourself. So for the net income, we reached TWD 4.01. This is actually a record high net income performance for the second quarter. And our EPS came to TWD 1.11. And then for our guidance, you can look at from the far right, it's at TWD 0.94. So we are certainly exceeded our guidance for now, okay? And if we combine the 2 quarters for the first half, it's also -- we delivered growth above our guidelines. And then also from a Y-o-Y perspective, it is also looking very good. So our combined revenue came to TWD 56.47 billion, and our EPS came to TWD 2.14. And then for the net income, it's TWD 7.72 billion. And if you look at Y-o-Y, it's even in the double digits for operating income, net income and also EPS. And compared to our first half guidance, the EPS is TWD 1.89. That was the target. And then we now have TWD 2.14. So it's looking pretty good that we exceeded our guidance, and we expect to continue to do well for the second half. So the investors should be happy with that. Okay. Now if we look at the trend for the quarterly performance, so you can tell in terms of the total revenue, EBITDA and net income and then also the EPS, each of the performance here has reached the record high. For the second quarter revenues, that's all the second quarter in history, the highest. And then for EBITDA, as you can see, actually, since starting in the first quarter this year, our EBITDA has kind of climbed up to the TWD 10 billion level and then continue to go up a little bit. So we'd like to stay at this 100 level and then hopefully, we'll get better. And then this is our highest quarterly performance across all quarters for the history, okay? In terms of the net income, it is TWD 4.01 billion. It's the highest quarter. And then also in terms of the EPS, that's also the highest for the history, okay? All right. In some financial metrics, our net debt, we have reduced to the TWD 32.8 billion level and the net debt-to-EBITDA improved to 0.83 multiple. Our year-to-date free cash flow remained really strong at TWD 14.5 billion. And then also our CapEx for TWD 3.0 billion remains in line with our full year guidance of TWD 9.6 billion. All right. So for the combined half year kind of trend, this is also a record-breaking in all areas for total revenue and operating income and then also EBITDA and EPS, okay? All right. And that was also the slide actually I showed to my Chairman when he came to the Board meeting today, okay? Okay. And then in terms of the key drivers for our revenue growth, and then here is the breakdown. So you can see for the red area, that is our combined mobile and essential services, which accounts for 50% of our total revenue and then showing a 2.4% growth. And then merchandise percent-wise, still 30%, but then the Y-o-Y is 11%. So actually, our merchandise in the first -- in this quarter actually performed really well. And then -- but on the other hand, merchandise margin is a little bit smaller. So if you noticed in the previous chart, we actually compare the margin. So our margin rate-wise compared to the same quarter last year, not as good, but then it's just the portfolio kind of changed a little bit and merchandise has a bigger weight in terms of their growth is like a stronger, okay? And in terms of ICT plus the fixed business, so we grew 32.7% there, and that includes the ETC's ICT revenue. So -- and overall, that is kind of our portfolio. And some of the drivers in the mobile area, of course, our steady continued 4G to 5G migration. And then for the monthly up -- for the fee uplift for those 5G renewals, we are looking at 40-point-some percent uplift. So it's a very good performance, very good quality migration. And then also, we manage the churn very effectively. And then our essential services, although relatively small compared to the mobile service core base, but then it's showing a good potential and good growth potential. So a lot of them are in double-digit growth like entertainment for 29% year-over-year. And also our fraud prevention features is showing a 56% increase. On our mobile financial service has been around for a while, but then still continues this 8% year-over-year growth, okay, very steady. And then merchandise, we see the upgrade. That definitely is the driver. And I think some of the price kind of -- the price is increasing. I think that places some uncertainty and give some pull for the users to want to get the new phone sooner. So we also see some of that purchase going on as well. So that all helped the merchandise growth here, okay? And then merchandise also includes our shopping here. So we actually have done some online merger with offline. So we see that very effective, the two channels kind of a combined strategy. It was well executed. For the ICT and the fixed business area, our ICT revenue increased 23%. This 23% doesn't include ETC area, just pure our own core ICT revenue. And then this is driven by the cloud. Our subsidiary, Nextlink, they have a very good cloud growth. And due to that, they have a new acquisition of a Vietnam cloud service company. So it shows a 30%. And then also that subsidiary also outperforms their own estimate of their BOD target. And in these four ICT concentration areas that we particularly see Smart City performed very well. And then it is Y-o-Y, they kind of doubled their revenue. And then for the first half of the year. And then we had some acquisition earlier this year with the subsidiary. So we're actually seeing the contribution there as well, okay? And then FETC, as a new subsidiary to us, they have a very solid business growth for their toll collection and then also some derivative business such as parking related. And then for their international expansion with the ICT kind of projects based on the toll collection kind of construction, it is also going very well, and that contributed to their growth very well, okay? All right. And some highlights for our mobile business. As I mentioned earlier, we've seen the continued 5G upgrade and now have -- we have very strong NP momentum, the neutrality portability, right, number portability, right? So in terms of our NP performance that we actually looked at every month, we are doing very well there. So you look at our service revenue, it increased 3% and our ARPU continues to lead our peers. It comes to TWD 733, although still lower than what we had before the merger with APT. But getting close, but still there's some -- I think we were like at TWD 758. So we definitely are climbing back, but then there's still some distance there. Okay. In terms of postpaid 5G penetration, it is now 49.3%. This is the total base of the postpaid. If we look at only the smartphone users for their -- for the 5G penetration, then this number would come to 53% or so, yes, okay? But then we look at the whole base. So it is still at 49.3%. So my team still owes me a little bit more there, but we definitely will break the 50% mark this year. Okay. And then the churn rate continues to come down and then it is reaching the record low, but we will continue to manage it down. Some highlights for our consumer service. We have launched actually one major application that is called Taste Taiwan. It's a new app. It's a one-stop kind of dining service app. We already have attracted over 250,000 users by now. And then -- so this is -- it is growing as well as we expected. And then in terms of another app that we didn't launch, but it is a service we put on our mobile circle kind of using our digital reach and partner with adjoe. That's a gaming platform. So our users that can play to earn. And this actually, it is what I see as a very typical and a good example of a platform economy. It's really a platform monetization. So this is actually generating revenue every month very -- with a good growth as we speak. And in terms of the entertainment business, for our friDay Video, our subscription -- paid subscription base has grown 20% Y-o-Y this year. And then also revenue-wise, it's a 17% -- and then we continue to expand our FET's footprint in the entertainment ecosystem and IP content related. So the users or analysts should see more kind of voice of Far EasTone in this area. And we have some like ID Music Festival and that is partnered with Spotify. As I was told, that is like a first in how many years that Spotify did that with any of the local companies here, okay? And then for the new mobile products, so we launched 5G FWA and then plus the home entertainment kind of package in April. We are also seeing a very good response from the market. And it is exceeding our target by 23% for this quarter. Okay? And then we launched another product that is the mobile product. That is different than our typical X99 kind of pricing. This is with a segment focus. This is a young segment. We call it Youthful Companions and then it is targeted at the Gen Z. So 33% of our new subscribers came from the younger segment, okay? And then fraud prevention, I think I mentioned it earlier, the paid subscription grew 44%, okay? And then this is with -- we continue to work with the vendor for the AI-enhanced capability. So they continue to improve that and also that helps the adoption as well. And then just for reference, this is no money, but we blocked over 200 million attempted visits at those unsafe websites, what we consider as a blacklisted for the subscribers of the service in second quarter alone. So it is definitely doing its service. All right. In the ICT area, so our ICT revenue grew 23% in the first half. And then in terms of the contract value, we actually grew 103%. So it's like a double what we had last year for the first half. And then in particular, Smart Campus in the Smart City area that we see a very strong growth there for 46% and some big projects that we have gotten from several cities, and that definitely helps. And then also for the health, the Smart Healthcare, although the base is relatively small, but this is definitely one area it is growing slowly but surely. And then our telemedicine contracts has grown 76% Y-o-Y. And then also the Smart Hospital Solutions is growing 114% Y-o-Y. And then we also have some big wins and that -- so even though Smart Health base is small, it is definitely growing very -- with a very solid, some wins. In terms of digital transformation, that mainly is driven by the demand for AI and then which then drive the demand for cloud. So we have seen that trend since like 2 years ago, and then it just continues and then even stronger. So for the first year in our digital transformation service area, that already we are seeing 50% Y-o-Y revenue growth. And then also the contract value that we have accumulated in the first half already surpassed the full year 2025 total. A few big wins in terms of central government, we have one particular central government ministry cloud migration project. And then also two with the leading global Taiwan-based electronics and cloud infrastructure companies. So those are kind of big wins for us as well. And for telecom-based SI, we have several multiple large-scale telecom SI, we have secured them across transportation and Smart Infrastructure areas. And the major wins, including Taiwan Railways and also a leading technology company. That is BOT projects and then the Smart Building related. And also, there is a government agency training center that's also Smart Building related that we have got a contract. And some major honors and recognitions for your information only. So we have earned the BSI Data Center Mark of Trust. And then as I was -- as we were informed, this is the first IDC operator worldwide that is recognized for excellence in IT service management. So we took pride in that. And also, we are Taiwan's Best Customer Service Golden Award. We won it for the 15th consecutive time, and that's the only one -- only company in Taiwan to achieve this distinction. Okay. And then we have some environmental sustainability that is recognized and also some corporate governance and leadership-related awards for your information there. I just won't go over them one by one. Finally, for our second half priority, so we will continue to accelerate the growth in the consumer essential services. As I say, that's where I see our potential growth is, and then also ensure the timely delivery of the Smart ICT projects. What the numbers may not show, even though we're already seeing ICT with a 23% Y-o-Y revenue increase, but then we do have some projects that didn't complete as per our original schedule. So those revenue will be realized in the next quarter or so. So some of the revenue, otherwise, if they completed as originally estimated, our ICT revenue will be even higher, okay? So ensure timely delivery of the Smart ICT projects will be our priority as well. And then we have several -- the pipeline actually is long. So those AI project delivery, and as I mentioned, that was really driven by the enterprise interest and demand and which also drives the demand for cloud. So together, our delivery capacity and capability will continue to build up this team just in response to this high demand. And then we have started our 5G stand-alone deployment. So we'll continue to advance that per our schedule. And also LEO Satellite service readiness, we already have the kickoff meeting with Amazon in July, and then we have formed several work streams. So the work continues. All right. And then with that, I concluded my presentation and ready for your questions. Thank you.

[Operator Instructions] Our first question will be coming from Ranjan Sharma, JPMorgan.

I have one question, like on the advanced 5G stand-alone deployment, what is the benefit that you're seeing of stand-alone versus nonstand-alone 5G? And how much capital are you looking to deploy? And if there's any like numbers you can share on IRR of these investments, it will be very helpful.

If I'm not mistaken, I believe you asked the same question last time. Okay. So for 5G SA, we look at it as a technology evolution and also a must-do on the way to be ready for 6G. And then also, on the other hand, with the 5G deployment, 5G SA is like -- it will unleash some of these unique capabilities for enterprise applications. So we are kind of fall short if we don't complete that part. So we have looked at several different scenarios in both the consumer and enterprise areas. So while my NT team is working hard on the deployment and all that, and my business team are also working with the NT team to familiarize themselves with these features that are going to be available when and then so they can design their product or service accordingly. So we definitely see the monetization opportunities there. And also on top of it, right? And then part of these capital investment will also help us to further improve the penetration into the home because the 5G along with the 5G SA and also what we are doing with the 700 spectrum area. So all these are kind of investment together in terms of our NT deployment that is going on right now. So in terms of the network quality, network performance and then also the potential -- the future monetization opportunities for both consumer and enterprise. So that's why we are doing it. In terms of -- I think you asked about the scale probably. I think we are looking at more than 50% of the coverage that we should be able to complete that by the end of the year in terms of having 5G SA deployed. Part of that, we need to work with Apple, right? So when we said we want to enable the 5G SA, Apple needs to kind of certify and then you need to show -- demonstrate that you -- it's not you are just doing a POC and those kind of things. So I think more than 50% of the coverage is what we are looking at for this year, if I remember it correctly.

Next one, [indiscernible], JPMorgan.

I have about 4 to 5 questions. Apologies in advance. Should I ask them all together? Or should I ask them one by one?

Well, either way, just -- well, it depends. Let's hear your first question then we'll see.

Okay. Sure, sure. Yes. So maybe let me just take it one by one. My first few questions are about the ICT segment. Firstly, could you just give us a sense of the 103% year-on-year increase in contract value growth? What would be the -- what are the specifics of the contract values?

Okay. So you were asking about the ICT revenue growth and specifically what kind of projects they are in the contract value. Is that?

So specifically for the new contracts that we signed in first half and second quarter.

Contract value, yes. So should we repeat that? Yes, we actually look at for the first half, I think more than TWD 8 billion, more than TWD 8 million that we have accumulated. And we got more in July. But then yes, for cutoff at the end of June, it's more than TWD 8 billion, okay? And then -- so for ICT, we have four major concentration areas. The first one is telecom-based SI. And then the second one is Smart City. The third one is Smart Health and the fourth one is digital transformation service. And then -- so I think in the Smart City and digital transformation service, in particular, we got quite a few contracts from the government. And then those numbers are all big ones.

And my second question is about the AI project delivery that you mentioned towards the end of your presentation. Could you let us know how much of our ICT revenue right now comes from AI-related projects? And for the AI-related projects, are we seeing any margin difference from the rest of the ICT projects?

Okay. We -- I don't think we have like a KPI or we have specifically do that calculation there. But then I think I can answer. So in terms of the AI related, right? And I know a lot of companies talk about AI related. This statement could be -- could have a lot of difference, right? And then -- so what I'm talking about here, I can tell you very specifically, as we are the licensed solution provider for Microsoft. And then so on one hand, we sell Microsoft service, the M365, for example, and also Azure. But then those have been there, but then they got even more popular because the Gen AI, the OpenAI association with Microsoft. And Microsoft recently has even opened up their AI-related capabilities in terms of the sourcing. So we see all that. But then when we do this digital transformation, it's not just about selling the license. More importantly is to make the customers see the value of getting these license capabilities. And then so how we help them adopt AI and then also how we help them with AI tooling or AI capability, now they have their fingers on and then to make and then to create some applications for them in terms of helping them either with like productivity improvement or like error detection. So that is the service, the AI adoption and AI transformation service we provide on top of the license selling. So the total revenue here because with the license, of course, that is kind of like the base. But all that other service, that is what's provided by my engineers. And this is also, if you have heard the term FDE, the forward delivery engineering. So this is the professionals understand the tooling and working with the clients and then help them using the AI tool to solve their problems. So this is what my team does on top of selling the licenses because licenses themselves don't sell. It's what the capability that they can create, the value they can create for the clients that will sell and my team sells that. So that margin will be relatively high because the cost of goods sold is low. It's my capital, my human capital and talent, okay?

Sure. That's very helpful. And the last question regarding...

I actually can give you another piece of information if I didn't mention it earlier. So just this area, the revenue growth for the first half is 50%. So we definitely see the momentum that is going really strong in this AI-driven cloud demand and AI transformation service. We see ourselves as our clients' AI transformation partners.

Got it. And my last question regarding the ICT segment is, could you give us a sense of just the margin of our overall ICT segment? And as the ICT contribution percentage to group revenue steadily increases, what's our view on the group's EBITDA margin going forward?