PCCW Limited (TH3C.F) Earnings Call Transcript & Summary

Good evening, and welcome to the PCCW 2021 Annual Results Webcast. In attendance today, we have BG Srinivas, Group MD; and Susanna Hui, Group CFO. We'll start with the presentation, followed by Q&A. And with that, let me turn it to BG.

Thank you, Marco. Good evening to all of you, and welcome. I'm very pleased to share that we have had a very robust performance across all our business lines. We have seen double-digit growth rates in Solutions. The Viu OTT business reflected a 37% growth and the Free TV more than doubled its revenues for the year 2021. The results for HKT were put out just earlier in the day. So overall, the group has reflected robust performance on top line growth. At the same time, we also are happy to share the fact that Viu, Free TV has turned EBITDA positive, while the OTT business is also trending towards EBITDA breakeven. At the same time, we will continue to focus on ensuring we increase our market share in Hong Kong and also focus on the regional expansion. As the business narratives continue, including the financials, there are 2 major transactions which happened during 2021. One was the fact that the data center business was divested and also the fact that the PCPD, the property business, has been deconsolidated. And that is the part you will hear in the narratives both on financials as well as on the business front. With this, I would like to pause and invite Susanna to walk us through the financials, and I will come back and give more color on both the media and the Solutions business. Thank you.

Sure. Thank you, BG. Let me share the financial review. Against the backdrop of a gradual rebound in the local economy, especially in the second half of 2021, we are very pleased to report that PCCW registered robust performance across all the lines of business. And if you look at the first slide here, you can see that our revenue posted a gain of 7% from USD 4.6 billion to USD 4.9 billion. EBITDA also was lifted up by 6% from USD 1.5 billion to USD 1.58 billion. And including the gain from our data center sale, we concluded the year very strongly with a net profit after tax of USD 133 million. And as you can see from the tables below on the same slide, basically, all the lines of business, including HKT, Media, Solutions business registered growth in both revenue and EBITDA. Let me dive into the segment details immediately. On the HKT side, we have also just announced results. In terms of revenue, it was up by 5% from $4.15 billion to $4.35 billion, mainly driven by the continued strong demand for our broadband on the consumer side and also on the local data services on our enterprise side, and altogether posting a 4% growth year-on-year. On the Mobile side as well, in terms of the 5G adoption, it was accelerated and reported a growth in terms of the local mobile service revenue and also boosted by the robust 5G handset sales. We see revenue for the year 2021 grow very strongly by 13%. And this set of results has also included the full year of the Pay TV results. Of course, there is a headwind. The headwind is the overhang of the roaming drop due to the prolonged travel and quarantine restrictions and also the slightly slower international voice business, which in fact carried a very thin margin anyway. Now despite the headwind, HKT EBITDA increased by 2% to $1.632 billion due to the focus on various operational efficiencies. And bearing in mind the fact that the year 2020 actually included some of the government subsidies in terms of the ESS, the Employment Subsidy Scheme. If we are to normalize that in 2020, the EBITDA improvement for HKT, in fact, would have been 5%. So both TSS and Mobile also reported EBITDA growth and Pay TV EBITDA on a pro forma basis also registered 6% growth. Reflecting the early signs of quadplay synergies and content cost rationalization. So for HKT, for the year 2021, we have reported adjusted funds flow distribution of 2% growth to $707 million. And as we have presented before, it was contributed by higher EBITDA, disciplined CapEx as well as lower interest costs and tax payments, partially offset by higher mobile spectrum license payment due to the overlapping of the timing of payment for the old spectrum and the new spectrum come into play. And so PCCW holding a 50% stake in HKT is due to receive a dividend of a total of $367 billion for the full year 2021. Now turning to our OTT business. We continue to report very strong growth momentum with revenue increasing by 25% year-on-year from USD 152 million to USD 190 million. In particular, our video streaming service posted a very strong 37% growth in top line to $142 million. And as our strategic investment in Viu Original titles in partnership with a lot of local production talents across the entire region proved to be very successful in creating the content differentiation. And this has resulted in higher conversion into paid subscribers, which posted a 50% -- 58% jump from 5.3 million to 8.4 million during the year. And our viewer base continued to expand, experiencing a 30% growth in the MAUs from 45 million to 58.6 million, boosting the digital advertising revenue from USD 35 million to USD 43 million, which is up by an impressive 21% year-on-year. So with the growing scale of the business, the EBITDA loss was narrowed very significantly from $20 million to $3 million loss. And we are on course to achieve our EBITDA breakeven in the year 2022. Well, turning to our domestic Free TV business, obviously, for all of you who are -- for those of you who are in Hong Kong, definitely, you'll be very familiar with our early success especially with the -- our artistes and the broadband and so on. We saw a landmark year with robust revenue growth of 152% from USD 41 million to USD 103 million for the year. In particular, with its growing audience and attractive viewer demographics, advertising revenue more than doubled to $79 million on the back of relevant and appealing scripted dramas and reality shows. Now riding on the success of our broadband MIRROR as well as up-and-coming artistes, our talent management and event business also posted an exceptional growth with revenue increasing almost tenfold, and we shall continue to invest in quality content and talent creation to sustain the growth momentum as evident from our recent debut of the girls group, COLLAR. Now with the scale and diversified revenue base and after 6 years since launch, ViuTV achieved breakeven, concluding the year with a strong USD 12 million EBITDA. Turning to our IT Solutions business. As BG just now shared, we have concluded the sale of our data center business in the year 2021. And so the set of numbers actually included only the IT solution service business. And it had -- we are able to report a very impressive growth of 20% in terms of top line, with revenue growing from USD 524 million to USD 627 million. This growth reflected the successful completion of various mission-critical long-term projects in both Hong Kong and overseas, including one for a local banking client and those are for numerous government agencies in Singapore as well. Now secure orders continue to be very strong, and it was at USD 3.1 billion, with new wins, including large-scale technical projects from the Hong Kong Airport Authority and also other IT managed services in Asia as well. We shall, of course, as BG said, continue to leverage our developed IP to expand regionally and also refine our go-to-market strategy to focus on core industry verticals. Overall, EBITDA improved by 31% from $64 million to $84 million, basically contributed by further enhancing efficiencies through improved staff utilization and also optimizing the balance between local talent and offshore delivery centers. And so overall margin expanded to 13%, of which recurring EBITDA margin also improved to 14%. Now looking at the next slide, the OpEx. We see OpEx spending edge down marginally by 1% from USD 658 million to USD 651 million, with OpEx revenue ratio improving to 13%. I again point to the fact that last year, the OpEx benefited from the government subsidies in terms of the employment subsidy scheme. So if we are to normalize and adjust that, actually, OpEx savings for the group achieved a 10% savings rather than the 1%. Now turning to the next slide, the CapEx investment. We see here that there is a CapEx savings of 4% for the whole of PCCW Group. And in terms of the HKT side, it was kept stable despite the fact that it has included in Now TV CapEx as well. The relatively CapEx-intensive data center was gone. So you see that the -- for the Solutions side, it was very little CapEx required. And so altogether, CapEx to revenue ratio was down from 7.3% to 6.5%. Turning to the next slide, debt maturity profile. We have splitted into HKT level and PCCW level. And if you can see here, the -- in terms of HKT debt maturity profile has been very well spread out and 50% in fixed rate, 50% in floating rate. And in actually last -- early last month, we have on the HKT side issued a new bond as well, and this has further increased basically the fixed rate portion to 60%. And on the PCCW side, because we have completed the data center business, and we have received indeed the proceeds which we are all used to pay down the revolving bank facility. So you can see here that there is no more bank loans on the PCCW side. The remaining is actually the USD 300 million bond done 10 years ago, and it will be repaid as due later on, using the liquidity. So talking about liquidity, we would then turn to the liquidity slide. Overall gross debt improved to $6 billion as a whole. We have deconsolidated PCPD. Cash balance remained strong with $646 million, with $370 million on HKT side, $276 million on PCCW side. Undrawn facilities were $2.6 billion, half, half -- half with on the HKT side and half on the PCCW side. Gross debt-to-EBITDA ratio and net debt-to-EBITDA ratio improved from 4 to 3.8x and from 3.8 to 3.4x, respectively. Finally, a bit of good news on the dividend side. The Board today has recommended a final dividend of 20 -- a final dividend of HKD 0.2769 per share, which together with the interim dividend of HKD 0.0639 per share will amount to a full year dividend of HKD 0.3705 in total. This represents actually an increase in terms of pass-through ratio of HKT dividends of -- to 100%. In the past, we have kept -- if you look at the slide, we have kept to -- for the past 3, 4 years, it has been kept at around 90% this year. Because of the completion of the data center and also the increased liquidity, we have increased the pass-through ratio to 100% and this represents a 15% growth as compared to last year and representing a yield of almost 9% based on the current share price. And I think this also reflects the management confidence and the Board's confidence that we have in our resilient set of the businesses. This ends my presentation on the financials. I will now pass the floor back to BG for the operational review. BG?

Thank you. Thank you, Susanna. On the back of the good news, let me continue to give the update on the Media business. To begin with, we will run through the OTT business. As was mentioned, we have had a fantastic growth last year. But in spite of the fact that there is increased competition in the Southeast Asian market, we have demonstrated consistently for the 8 quarters in a row that we remain #1 in terms of the monthly active user base. The growth rate has been also consistent in the last 3 years, 36% growth. At the same time, when we look at the aggregated growth rate of 43% outpacing the average growth rate of the market. So overall, the team has demonstrated consistent performance across several quarters, and we continue to maintain leadership. We're happy to also share that we have been ranked in the top 2 with respect to some of the key KPIs, monthly active user base, our subscription base has also accelerated, we are in the top 2. And the engagement continues to be very good, given the quality of content we have been able to broadcast in these regions. A couple of key numbers again. 30% jump in MAUs. This was driven by some of our large markets within Southeast Asia, which includes Thailand and Indonesia. We also saw accelerated growth rate in Philippines. So together, we have been able to capitalize on both local and regional content to drive both MAUs as well as the subscription base. Subscription base is also accelerated given the fact that we have been able to launch several Viu Originals and also leverage our partnership in the Southeast Asian markets. Here, you can see a sample of award-winning quality originals, which has helped us drive both subscriber base as well as viewership. At the same time, these originals, we have been able to monetize on other platforms, both Free TV and Pay TV in the markets we operate on other platforms outside of our markets or 20 platforms use our origins beyond monetization on the Viu Original platform itself. Switching over to the Free TV. As was mentioned, we saw more than 100% jump in the revenue. This was primarily driven by significant ad spend on our platform. As you can see, we have over 680 clients, added 350 in the last year. And several of them are exclusively spending their ad spend on ViuTV. We also had significant growth on the rating as average prime rating shot up 23% year-on-year. We have also seen that we have been able to attract ad spend across diverse set of industry verticals. And we will continue to invest into scripted and unscripted content to continue to drive this as we invest into 2022. We've also seen that our active management of artistes and some of them have really become award-winning artistes being promoting brands. We see 13 of the top 50 brands in Q3 alone. We have also been able to leverage this attractiveness to our platform. We see the brands increased 3x during the year to jumped up to 240. We will continue to make sure we make prudent investments in these content and continue to develop talent as was mentioned. Apart from MIRROR, we are now promoting COLLAR as all girls brand, which we hope will also become successful. We have also been able to leverage some of our content on -- with international distribution. And this is something we will continue to do to monetize our content beyond Hong Kong market. Moving to the Solutions business. As was mentioned, we saw a 20% growth rate on top line. This was broad-based across several industry verticals. At the same time, we also saw increased traction in both digital and cloud and application development as for the service mix is concerned. These numbers do not reflect the data center, which has been deconsolidated. We do have a secure order backlog, a very healthy secure order backlog of USD 3.1 billion December 31. As Business Solution is clearly focused on some of the key parameters, the strategic focus, we will continue to focus on the key verticals where we have strengths, where we have built digital transformation capabilities and also where we have built solutions, our IP, which we are able to reuse for these key industry verticals. We will continue to sharpen our client focus in terms of addressing some of the key client challenges as most of our enterprise clients are embarking on digital transformation within their own businesses. As far as the regional expansion is concerned, we'll continue to stay focused on Southeast Asia, Singapore being the hub. And we will continue to leverage talent pool across Southeast Asia, PRC as well as Hong Kong. These are some of the successful execution of digital transformation case studies. The first one is a digital portal, which was built for a financial regulator here in Hong Kong, which actually helps digitize their licensing process. This was an end-to-end engagement interested to PCCW solutions, which has been successfully put in place. We also used our talent to implement HR Success Factors, SAP Success Factors, which has gone live across all our businesses globally. And this has helped automate and digitize our own HR processes. The other example you see there is for leading insurance platform provider in Taiwan, where we have helped them to digitize their claims process. So this is an area where we will continue to improve our capabilities and actually tap into the market opportunities across the key industry verticals which we are focused on. Here are some of the other case studies, some key wins in the last 6 months. We won a large deal, public sector across 22 government agencies in Singapore. We also won the second phase of SMRT trains in Singapore. On the back of this win, now we have a joint go-to-market proposition for similar opportunities in Southeast Asia beyond Singapore. Here are a couple of other key wins. As Hong Kong continues to invest in expanding the Third Runway and there are new projects emerging as a consequence of that investment, and we are winning these deals. The other win is on the housing authority where we have implemented Oracle HRMS suite for automating and digitizing the HR process. Lastly, we do believe that our reputation in the market with respect to delivery performance, consistency in our delivery as on back of several key quality initiatives within the group. This is something very consistent across all our delivery centers, including Hong Kong. We also see some of these certifications which primarily focus on security management and data privacy, which has become the key are certain prerequisites even to participate in some of sensitive client opportunities. And this is something which we believe helps us differentiate and win opportunities in the markets. To summarize, if you look at the past years, we have clearly engaged with very focused strategies, leveraging technology in all these businesses, both on the back of high secured connectivity, our digital OTT platforms, our digital capabilities and solutions and also key markets in Southeast Asia to expand footprint outside of Hong Kong. So we will continue to seek investments into new products and services, and we will continue to stay prudent as we see the COVID challenges continue to impact not only Hong Kong across Southeast Asia, but we clearly see as a group, we have demonstrated resilience in the last couple of years in terms of engaging and driving our customers, in terms of revenue growth, and we will continue to stay focused. With that, I would like to pause here, and I'm happy to take questions.

The first question is, do you think you can record similar levels of revenue and EBITDA growth in Solutions in 2022?

As was mentioned earlier, you saw that we have a very healthy order backlog of $3.1 billion, which spans over several years. We continue to stay focused on winning large multiyear deals. We do have a robust pipeline. And more importantly, we have a secure order backlog, which we have to deliver this year. And with also increased focus on increasing our market share in Southeast Asia, we do believe we will continue to show growth rates in Solutions, and we are confident that we can sustain.

The next question is, how does the Viu Original help drive growth in the OTT business?

As I mentioned earlier, we have clearly seen the traction Viu Originals have happened in Southeast Asia, not only the fact that we have been able to increase our subscription base through Viu Originals, we have also been able to, as a hybrid approach, also attract advertisers onto our platform. This not only helps differentiate but it's also very cost effective in terms of our content spend. And this, we do believe will continue to be the key driver for our growth in the markets we are operating in.

The next question is how does PCCW solutions cooperate with HKT on enterprise digital transformation projects?

So this is, again, we clearly see a benefit of having capabilities across different businesses, particularly HKT, which has also a strong enterprise customer base, providing high secure connectivity and other services related to telecom. When it comes to large key engagements, our customers expect us to be a system integrator, which brings capabilities beyond just providing IT services. We have seen in the past, including the [ E&P of win, ] our combined capabilities actually made a difference in terms of making sure that the customer gets not only the IT services part, but the full digital capabilities across HKT as well as PCCW solutions. We will continue to make sure even in Southeast Asia, some of these capabilities can come to bear when it comes to help us differentiate because these kind of combined capabilities do not exist with some of our competition.

Next question is what will be the key drivers for future growth in the Free TV business?

It is clear that the quality of content, whether it is scripted or nonscripted, we clearly believe the quality of content is the key. We have not only developed local talent pool, but even when we put out new programs, we make sure that there's enough analytics, which we spend in terms of understanding our customer behavior, customer demand and thereby tailoring our content to these customers. We also are ensuring that there is consistency in terms of the key programs. As you saw, the prime rating has gone up significantly in the last year. So this will be the key focus, and we do believe that our partnership with several brands who are advertising on ViuTV will continue, and those relationships will help us drive future growth.

That was the final question. Thank you joining our webcast today.

Thank you.

Thank you.