StarHub Ltd (CC3) Earnings Call Transcript & Summary

Good evening, everyone. My name is Amelia and I take of StarHub's Investor Relations. Thank you for joining us at our first half 2021 results update call. This evening, we have with us our Chief Executive, Nikhil Eapen; Dennis Chia, CFO; Charlie Chan, Chief of Enterprise; and Johan Buse, Chief of Consumer. We'll start off with opening remarks and an overview of our performance from Nikhil, followed by Dennis on financials, and Johan and Charlie on business highlights. Nikhil will then close off the presentation with some transformation updates before we open the floor to questions. Nikhil, over to you, please.

Okay. Thank you, Amelia. Good evening all, and welcome to our second quarter earnings for 2021. It's a pleasure to have you and to go through our numbers. So first page, please, Amelia. So in terms of financial results, I will go through these numbers and would ask that we keep in mind 3 things. First of all, we would note that over the quarter, as in previous quarters, we saw escalating hyper competition and generally lower market pricing versus the second quarter of 2020. The second thing to note as we go through these numbers is we saw no normalization from COVID in terms of a return of roaming or prepaid versus, again, Q2 2020, which saw 1 month unaffected by COVID. And we have shown purpose -- for the purposes of this page, numbers extracting JSS for comparative purposes. And Dennis will show you both sets of numbers on a later page. So going to total revenue to begin with. For Q2, total revenue was at $487 million, which grew 7.3% year-on-year, in broad terms, due to Cybersecurity, Strateq, Broadband and equipment sales, partially offset by lower revenue from Mobile, Entertainment and Network Solutions. In particular, we saw revenue from equipment sales increased 7.7% year-on-year due to customers upgrading to 5G handset models. But most important, we saw service revenue increase in Q2 by 7.5% year-on-year. Moving to service EBITDA and service EBITDA margin, again, excluding JSS for the prior quarter. We saw Q2 service EBITDA of $116 million, which was up 13.3% year-on-year, due to service revenue growth plus margin expansion by 1.5 percentage points. Sequentially, here, quarter-on-quarter, EBITDA was flat with reduced margin by 1.6 points due to incurring some upfront expenses offsetting the services revenue increase that I noted. Now looking at net profit and free cash flow. Second quarter net profit for this year was at $37 million, which was 63% higher year-on-year and 25% higher quarter-on-quarter with the service revenue growth that I noted as well as the EBITDA margin expansion. Free cash flow for the quarter was $85 million, which was 13% lower quarter-on-quarter, primarily due to lower cash from operating activities, higher working capital needs, including higher tax payments, offset by lower CapEx payments. Now in Q2 with a relatively solid free cash flow as usual, we were able to continue to reduce our leverage, reducing our net debt-to-EBITDA to 1.25x compared to 1.29x last quarter and 1.4x, which is where we ended at December 2020. Next page, please. So a quick snapshot of segmental revenues. We saw Mobile revenue at $130 million for Q2, down year-on-year, but stabilized and actually up a little bit quarter-on-quarter. As Johan will outline, this reflects in postpaid mobile that we added about 33,000 subs for the quarter, both at giga!, which continues to grow very well, as well as in our core brand. We were also able to hold ARPU both at StarHub and giga! as well as churn at good levels despite competition dropping prices. This reflects what we believe to be a tactically differentiated strategy, which Johan will outline. Prepaid, of course, continued its attrition while holding ARPU. Now Broadband revenue, on the top right of the page, came in at $49 million for Q2, which was higher by 12.4% year-on-year and 3.4% quarter-on-quarter. This reflects a small reduction in customer base as we withdrew discounts and rebates and a material increase in ARPU year-on-year as well as quarter-on-quarter. This was driven by steady upgrade to high-value packages with strong consumption of our OTT offerings like Disney+, again, what we believe to be a tactically differentiated strategy to drive sustainable growth. Number three, on Entertainment, I will note that we have reclassified Pay TV into Entertainment to reflect that this segment now composes not just classical linear play TV but also hybrid linear TV as well as OTT TV+ as well as OTT on Mobile and Broadband and other offerings to come. For the first time in a while, we registered a quarter-on-quarter increase in revenue as we grew ARPU strongly with compelling content offerings, Disney+, Hotstar and others. Looking at subs, what you will see is that Pay TV and linear TV subs continue to attrition. However, our hybrid subs, linear and OTT, are growing extremely strongly, and our OTT subs on Mobile and Broadband are growing even more strongly. Again, churn remains low for the segment and again, what we believe to be a sustainable growth and value-creating path for this segment through a tactically differentiated strategy. Now our overall Enterprise business, on the right-hand side, bottom right, has been growing well, $179 million in Q2 2021, representing 26% growth year-on-year and 16% growth quarter-on-quarter. Ensign, our cyber business, continues to grow strongly and improve profitability, albeit with large lumpy contracts and is now the dominant Singapore cyber company serving government and large enterprises. Strateq continues to grow well and improve profitability despite very difficult conditions in Malaysia with MCO. Now this growth was offset in part by our Network Solutions business that does face difficult conditions due to Phase 2 and weakening enterprise budget with macro conditions. With that, I'll pass on to Dennis.

Thank you, Nikhil, and good evening to everyone. I'll just call out a few financial metrics. Nikhil has gone through the movements in our total revenue as well as our lines of business making up and comprising the service revenue. We've also talked about the service EBITDA margins. In this table, you will actually see the service EBITDA margins and the absolute numbers, including and excluding the Job Support Scheme. And obviously, the numbers which exclude the Jobs Support Scheme will be representative of our operating performance. So for quarter 2, we generated $37.4 million of net profit after tax attributable to shareholders. This translates into an EPS, an earnings per share of $0.02. For the first half, it was $67.9 million or an EPS of $0.036. The free cash flow for the quarter was $84.6 million or $0.049 on an FCF basis. And for the half year, we generated $182 million -- $182.1 million or $0.105 on a free cash flow per share basis. As Nikhil has already highlighted, our net debt-to-EBITDA ratio stands at 1.25x at the end of June. On the next slide, we continue with very disciplined expenditure management. While our cost of sales bucket represents in tandem with the revenues that we actually record, that is representative of the StarHub cost -- telco generating -- cash generating unit: the Ensign Cybersecurity unit, which is captured separately; and the Strateq Group in Malaysia, which is founded under the Regional ICT. Worthy to note is the bucket that's highlighted in green, which is our other operating expenditure at the StarHub level. You can see that, that continues to be managed very tightly. And in 2021, 1 call-out is that we have started to invest in our 5G rollout, which has some impact on our operating expenditure. We have also invested in our IT transformation. And despite those investments that we have started to make, we still recorded overall savings and decline in our operating expenditures. On the right, it would be the capital expenditures. You can also see that over the 3-year period, we have brought the capital expenditure levels to a very respectable level as compared to a percentage of revenue. We are reducing our guidance for capital expenditure as a percentage of revenue for 2021 to 7% to 9%, bearing in mind that we started the year guiding to 9% to 11%. Nikhil will elaborate a little bit more when we provide our guidance. On the next page, our balance sheet remains extremely strong. We continue to generate meaningful cash from our operations. And as I highlighted earlier, over the 3-year period, our leverage ratio has continued to decline to what it is at the half year mark at 1.25x. We are declaring a dividend, and the Board has declared a dividend for $0.025 for the half year as an interim dividend. And we are committed to paying the higher of $0.05 or 80% of the net profit after tax, depending on which is higher at the end of the year. So we will adjust the final dividend when we announce our full year results early next year, but we are committing to paying at least $0.05 for this year. With that, I pass the floor back to Nikhil to provide the floor with our guidance. Nikhil?

So we -- there is no change to our guidance given in February, except for CapEx commitment, which we are reducing our guidance from 9% to 11% of revenue to 7% to 9% of total revenue. Now this comes about because we expect to do some transference from CapEx to OpEx as a result of shifting the large focus of our IT transformation towards cloud-based SaaS platforms, which are essentially pay as you go, and this is part of our DARE+ transformation. However, despite this higher OpEx, which comes out of this CapEx to OpEx transference, we do have other offsetting cost savings, and so we expect to keep our EBITDA margins within our 2021 guidance of 24% to 26%. But on the other hand, what it does allow us to do is alter our CapEx forecast to reflect this CapEx to OpEx transference as well as some delays in CapEx and are hence reducing our CapEx guidance from 9% to 11% to 7% to 9% as you see here. Johan?

Yes. Good evening, everyone, and welcome to our call. I'll take you through the product lines briefly, and then I'll hand over to Charlie for the Enterprise. So mobile, a good quarter. We grew the base, 1.8% or 26,000 customers added to it on a flat ARPU, which is good, and also churn rate is stable at 0.9%. Prepaid, as Nikhil already highlighted and Prepaid has been a challenge in the market, flat ARPU declining base due to travel restrictions. And overall, you can see that quarter 1 to quarter 2, we grew our revenue by 0.5%. And the data usage is around 13 gig on an average base per customer. Moving to Broadband. Broadband ARPU continues to increase, which is really good. We decreased the base, small, a little bit, by 6,000 customers. That is on the back of lesser promotions. The lesser promotions also helped us to improve ARPU and revenue. So year-on-year, plus 12.5% and quarter-on-quarter plus 3.4%. So that brings us to Entertainment, last section for me. Entertainment, we closed the quarter on a high ARPU, $42, and we started splitting Pay TV and Entertainment service. So you do see a small decrease on the Pay TV subs, but as highlighted earlier, total Entertainment subs increased to 380,000. Churn stay around 1.3%. The revenue, as highlighted also earlier, first time we see that in a long time, an increase by 1.5%. Year-on-year, we still see a small decrease, but we do see a very strong uptake on the OTT side, which is encouraging. So that brings me to the end of my section for now. I'll see you in a short while, and I'll hand over to Charlie for the Enterprise.

Yes. Just starting off on Enterprise and covering Ensign and Strateq before we hand off to Charlie for Network Solutions. As you can see, the overall enterprise business, as we talked about, grew strongly in Q2 2021, 26% year-on-year, 16% quarter-on-quarter. Ensign grew strongly with Q2 revenue of $73 million, up 84% year-on-year. And as we talked about, is a leading and premium positioned Singapore cyber provider to government and large enterprises. As I mentioned earlier, there is some inherent lumpiness in the Q-on-Q numbers due to large dollar sizes some of the quarter, contracts won, but we see overall growth is very resilient with strong demand, good execution on pipeline and outperformance versus budget. Last, Ensign has achieved profitability on both EBITDA and NPAT for Q2. Now Strateq grew from 2020 to 2021 broadly. However, Q2 revenue is at $18 million, stable despite some extreme difficulties posed by the ongoing MCO in Malaysia. Strateq has also moved, to give you some color, more towards cloud and data-driven use cases and capabilities and has seen higher revenue from large clients in data engineering and data analytics. And the other thing to note is Strateq has used this period to drive efficiency and position for resumption of more normalized conditions. EBITDA has risen well, while net profit deficit has been reduced dramatically to very low levels. And then just handing off to Charlie for Network Solutions.

Thank you, Nikhil. Specifically for Network Solutions, you can see that, on a year-to-year basis, we had a tough compare with one-off transactions in 2020 in the same quarter along the data transmission equipment and the voice services. When we came into second quarter 2021, what we saw was the experience of the COVID-19 heightened measures at the start as well as at the tail end of the quarter. And although that had put pressure on the business, we continue to see uneven consumption of our services as a result, reaching a slightly lower decline than one would expect in such situation. On to the next page, please. In Enterprise, it's all about growth. It's all about focusing on the digital transformation that our clients are going through. It centers around the cloud, and StarHub is focused on creating and growing our capability in the space. We secured our gold competency with Microsoft on their cloud platform as well as rolled out our Managed SASE service secure access service edge capability. To support clients, we need to ensure that the new way of working, distributed working that is over the net, over the cloud world, is continually protected and provides for secure access of services for their employees and their partners. On that front, as the workforce continue to remain distributed, whether working from home or from the office, we are in an ongoing effort in creating new services to enhance those capabilities. For instance, in the enterprise Internet and IP transition -- transit enhancement, we are the only carrier now that provides such extensive capabilities for up to 8 countries, providing an actual service level assurance that's not available elsewhere for Enterprise and wholesale clients. As far as the end users are concerned, we provide unified communications that are seamless across the various collaboration service platforms that you see out there, such as Microsoft Teams. Finally, we understand the need to consume digitally and we continue to revamp our online store capability in order to do so. On the next page, we want to talk about the continued momentum we have with 5G. 5G is about the difference StarHub brings to the technology for our clients. In the initial focus areas that we have, IoT stands out. IoT covers the previous aspects of cloud digital transformation and the application operation technology into the IT space. We will be focused on our ongoing efforts in the health care, retail, urban and advanced manufacturing sectors. This allows us to cover the entire value stack from device management right through to application enablement. And now I'd like to ask Johan to tell us about this aspect in the consumer space.

Yes, and welcome back. So 5G is definitely a very important element of our business going forward. We were very proud to be the first in Singapore to launch 5G NSA last year. And we were also the first actually to launch the 5G SIM-only not so long ago. And as you probably saw yesterday, we've launched also the SA network. So we're very active in this space. We believe this is a great potential future ahead of us. The majority of the tariff plans we're actually selling today, just in anticipation of your questions maybe later on, are already on what we call Mobile+ 5G-enabled plans. Now we believe that differentiation will be key going forward with 5G, so we have catered a world around 5G connectivity. Most prevailing at the moment is obviously Disney+, which we launched in March. You have probably also seen our announcement on NVIDIA cloud gaming. And that's not where it will stop. We're working feverishly on expanding that in terms of having strategic exclusive arrangements building differentiation around 5G, which will be delivering a very different experience from what customers are enjoying today. So on that note, I'll hand over back in terms of transformation update. Thank you for your attention.

Okay. Good evening, again, and I'll cover Slide #19 on the transformation savings. We rolled out our 3-year DARE transformation program starting from October of 2019. The third anniversary is coming up in a few months in October 2021, and therefore, we're providing an update of the expected savings that we'll -- we would have achieved at the third year anniversary mark in October of 2021. We guided the market at the launch of this 3-year program to savings which is $210 million or greater than that. We're happy and pleased to report that at the end of the 3-year mark, we expect to garner savings of $273 million over the 3-year period. On the bar charts on the right, you will see that this is bucketed into 3 areas: one being our workforce rationalization and optimization that we have done over the 3-year period; a whole bunch of operational efficiencies that we've rolled through in terms of rationalizing our operating model and business model across StarHub; and finally, in terms of our TV transformation into OTT proposition as well as our content optimization over the 3 years -- 3-year period that accounts for about 30% of the bunch of savings that we have locked in. We have reinvested approximately about 17% of this bunch of savings into other transformation initiatives that we're rolling through the company. With that, I will pass the floor back to Nikhil, who will take us through the rest of our DARE articulation. Nikhil?

So again, looking at the DARE transformation program, which we are completing as we speak, a few key aspects. Johan had talked about 5G leadership and our first launches on 5G NSA, 5G SIM-only and moving aggressively to Mobile+ and Biz+ plans on 5G. We've talked over the last year or so very much about our Pay TV transformation, which has transformed our cost structure and moved it more to a variabilized cost model. We've also talked, over the past few years, and I think I've shown the results around efficiencies and cost transformation vis-à-vis the cost transformation targets achieved and exceeded. One of the things we're really focused on, we have been focused on, on DARE, which we will be doubling down on, on DARE+, is not just connectivity but connectivity's sake, whether it's 4G or 5G, but connectivity to bring our customers the world's best experiences that enrich their lives. We're well underway with that with TV+ and Disney+. We've announced NVIDIA GeForce, which will be coming out into the market with over coming months. And this is just the beginning. We hope to do more and more. Digital is a key cornerstone of our DARE transformation and will continue to be at something we doubled down on for DARE+. We have a ton of online touch points, which we're increasing and moving to a digital platform across the business. We have, as you know, had good success with giga!, our digital fighter brand, which I'll talk about in the next page. And as far as acquisitions -- as part of DARE, with the acquisitions over time of the components of Ensign as well as Strateq, that has fueled growth and value for StarHub. So just double-clicking a little bit on IT and digital transformation, which was a cornerstone of DARE and will be something that, again, we double down on, on DARE+. We have seen strong growth in terms of our digital platform engagement on any metric. Online store sales, up 28% quarter-on-quarter. Monthly active users, up 10% year-on-year. MyStarHub App, up 17%. Our digital objectives are being slowly met. We have driven digital, not just at the front end but within the organization through RPA, simplifying processes and automating processes. And then giga!, giga! is clearly important as our digital fighter brand. We've experienced explosive subscriber growth. We've achieved the highest NPS in the market, the highest monthly active users, the highest Facebook rating in the market at 5 stars. And the proposition to customers, we believe, is something that we are going to double down on; seamless end-to-end digital experience, clear transparency, personalization and information on the touch of a fingertip. And then looking forward to DARE+, just sharing this with you as a preview of our overall DARE+ transformation, which we will review in more detail, including cost savings in November. This emphasizes some key things, about key themes. I won't go through each of these buckets in detail. The first theme is clearly digital across everything that we do from product to customer engagement platforms to systems to process to IT. This involves enriching experiences for customers, connectivity and beyond connectivity towards all kinds of product as long as they're connectivity-centric, with no boundaries and rather than fixed verticals, really an infinite continuum of digital product; customer empowerment to give our customers the ability to choose what they want, when they want, where they want on a pure self-serve model; and growth, growth in aggregate as we've demonstrated over this quarter as well as growth in every segment as we've also demonstrated this quarter with no constraints. So we've indicated this as a preview of a more fulsome review in November as we conclude our budgeting cycle. And what we will have for you in November is a more detailed review of DARE+, together with cost -- new cost transformation targets alongside our business initiatives. And with that, I believe we conclude the presentation.

Thanks, Nikhil. We'll now open the floor to Q&A. [Operator Instructions] So first up, we have Sachin Mittal.

And congratulations on a good set of numbers. A couple of questions. Firstly, after a long time, we saw stabilization of mobile service revenue, but then again, we saw market share loss despite good number of subscriber addition. Could you just throw some light here? Is it -- is that postpaid market is growing much faster -- very fast that -- is growing so fast that despite adding subscribers, you are behind your competitor in terms of additions? Or is it the prepaid is -- you lost some subscribers, so in that sense, the prepaid market is declining fast? Is that -- does this number include MVNOs number if I guess so? Then is it that the TPG is gaining subscribers? Just throw some light here on the dynamics here, number one. Number two on the 5G side, could you throw some light on what are the adoption of 5G in your customer base? And what is the timing for your standalone network launch given that your competitor has already launched one standalone? And lastly, on the 5G, there's a spectrum sale auction. In that spectrum auction, do you think that spectrum is good enough for launching a 5G network? Or just to plug the holes in existing 5G? Yes, that's it.

Thanks, Sachin. Maybe Johan could take the first 2 questions, and then we'll pass on the third question to Nikhil.

Okay, sure. Thanks for the question, Sachin. Look, for last quarter, obviously, Singtel hasn't published their numbers yet, so based on the numbers that we know, we actually grew 25,000 in postpaid versus what we've seen from the rest of 10,000, so I'm not sure on what you base your assumption that we are not growing as fast as the market. I think, last quarter, we actually grew faster than competition. And yes, these numbers do include MVNOs. So on that note, that would be, I think, giving you probably a bit of a more accurate direction if I may put it that way. On the SA network, your second question, as you probably know, this is a part of the JV, Antina, which basically runs this. So we're on track to roll that out as fast as we can. I think we can share with you today that we have around 50% outdoor coverage on the SA network. And the team is working very hard to roll out as fast as we can. And we are very bullish in terms of the potential in the 5G market. And we do have the advantage, by the way, there that we have a very good NSA network already up and running on 5G. So if you look at the underlying parameters related to 5G customers, their satisfaction of usage, we see very encouraging trends. So hopefully, that gives you a bit more color to that particular point. Handing over to Nikhil, maybe for...

Yes, and I apologize. Could you remind me, please, on the third question, maybe Sachin or Amelia?

On the spectrum, 5G spectrum auction, there's another spectrum coming up for auction. So is that spectrum -- I mean, it doesn't seem a lot of bands available in that spectrum. Is it good enough for launching a 5G network? Or it is probably good enough to plug the holes in the existing 5G network? Yes.

Well, we can't comment on competitors or those who are getting spectrum anew. But certainly, from our perspective, we see the new spectrum allocations and auctions as quite attractive in conjunction with the spectrum that we had. That opens up a number of new possibilities not just around capacity but also around performance, which is particularly important to us given all these 5G experiences that we're trying to drive, which are quite consumption hungry. As to whether what might be available for others who don't have existing 5G spectrum and whether it is enough for them or not enough for them, clearly, they're not going to be in the same position as the existing incumbents, but I can't really comment on how hampered or not hampered they might be.

Okay. This is a follow-up on the first question. I think you have indicated market share loss in this quarter compared to the previous quarter. This is a number, I think, is mentioned in your results, right? So there's a market share loss despite addition of subscribers.

You're talking about Mobile there, Sachin?

Yes, mobile.

No. Okay. Based on what the numbers we see, just to clarify that, postpaid, we definitely feel that we have been growing quite well on subscriber base compared to competition. We obviously don't know what the rest of the market is going to publish in terms of results. And prepaid, from what we saw, that may be leading to a bit of a difference in understanding. That's where probably we have been losing a few more subs compared to competition. But I wouldn't call that alarming because that market is mainly driven by tourists and foreign domestic workers, which we all know is shrinking. The ARPU is stable. So -- and you've been around, so you know how prepaid numbers come to an end, right? So I think the key thing is to call out postpaid performance, which is really very good for us at this point in time, on the back of steady ARPU.

Yes. Sachin, I think it might be worth you following up and confirming with Amelia because the numbers we're looking at, based -- when we look at postpaid mobile, with or without MVNO, the numbers that we have -- again, this doesn't include Singtel, but it does include the others, show us growing the fastest. On the back of steady ARPU.

Yes, yes, I can see that.

Thanks, Sachin. We'll catch up after the call. Next up, we have [ Fong ].

Two questions from me. Firstly, on the mobile business. When we see what's being offered out in the market from TPG, from Zero1 and M1's latest Max plan, it looks all pretty aggressive. But then, when we look at StarHub's postpaid subscribers is up and then if you look at ARPU and churn, it's actually pretty stable Q-on-Q. So can you talk a bit about the competitive pressure that you are actually seeing in the second quarter? And perhaps into July and August as well, for the postpaid device bundled contract segment in terms of what subscribers are doing when your contracts expire and the trend in StarHub's handset subsidies and then also, of course, if you can also talk a bit about the SIM-only trends as well. And do you see any need to fine-tune StarHub's offers in the coming months to be more competitive against what's being offered by the 3 players that I just mentioned earlier on? That's question #1. And second question with regards to the Cybersecurity business, revenue is up very nicely in the second quarter. And for the first half, it's up about $13 million -- $14 million right? But if we look at the operating profit, the delta, although it turned to a profit, it was only about $3 million of improvement. Is that because the profitability on the jobs that we secure are not very high? Or are we sort of front-loading the costs as we scale up the business? Yes, some color on that will be useful. And how do we see operating profit for the full year for cybersecurity? Yes, those are my 2 questions.

Okay. Thank you, [ Fong ]. The first question sounds like is a question for Johan, and then maybe the second one for Dennis.

Thanks for the question. So related to market competitiveness in mobile. No doubt about the fact that this is a very competitive market at this point in time. It has been so for the last 1.5, 2 years, and it continues to be like that. To give this a bit more context in color, I feel it's important to distinguish various segments in the market and purchase and consumer behavior. So the players, the operators you referred to, are definitely price fighters and they come with a very aggressive offer in the market. But if you look at the underlying purchase consideration of consumers, other factors play a very important role besides price. Those are: network quality, trusted brand, service, quality overall. And we do see that based on the fact that we have a very good 5G and 4G network that we have been awarded multiple times this year on network performance, which is one of the key drivers for consumers to join a network, in combination with the brand, in combination with a great customer service experience that actually leads to customers being very loyal and sticky to StarHub as a brand, so that's number one. In the price-sensitive segment, the one you referred to, we play a game. We play a game called giga! And giga! is doing a tremendously good job there, offering an end-to-end digital proposition which offers a greater and better-quality experience than, we believe, based on NPS results, most others do in the market. Now having said that, we do see a shift in the total market of consumers moving gradually, some of them to a SIM-only plan. But on the other side, the device is an important element in consumers' life. And if you look at the uptake over the last year of 5G devices, it is very strong. And we do expect that the rollout of the SA network, that will continue, and we actually probably expect a bit of a counter on the SIM-only offerings, consumers going back to device, to enjoy the great services 5G SA can offer. So it's a segmented market at the end of the day. I do feel there's a lot of attention to price, attention to offers in the market. But if you look overall, and the churn numbers prove that, by the way, there's quite a few customers who look beyond price and do value device and a great quality and a great brand. So hopefully, that gives you a bit more context to that, and on that note, I hand over for Cybersecurity back to Amelia.

Dennis?

Okay. I'll address the second question on the Cybersecurity operations. So there are a few lines of business within our Cybersecurity operations, namely the systems integration piece. You've also got the managed security services. And then the third line of business really is on consulting. So depending on the mix of projects that have delivered within a particular quarter, obviously, the margin profile of each of these lines of business, there are some differences around it. I do also want to call out that our cybersecurity practice has gained good traction, showing a nice revenue growth year-on-year. There is obviously an investment upfront in terms of capabilities that we're building as well as on the Ensign Labs in the R&D space. So we have invested and we continue to invest in building these capabilities given the intensive competition for resources and the finite resources we have in this region. I do believe, at some point in time, when the business does grow to a decent scale, which it's getting there, then the cost absorption becomes a lot better and the profitability profile will actually improve at that point in time as well. This is also evidenced by the year-on-year improvement in profitability. We do acknowledge that it is not a remarkable profit that is registered, but it's a year-on-year improvement that continues to be in tandem with the trend that we expect to see going forward.

Yes. I would round up by saying, whether it's Cybersecurity business or the Regional ICT business, these are fundamentally different kinds of businesses that grow quicker, where there's a need to invest upfront for capabilities as well as add resources against a relatively quickly mounting pipeline, and therefore, what you're going to see is you're going to see profitability quite typically lag revenue growth. But what we do like is we like the trajectory of that profitability. So we like the scale-up in gross margin. We like the fact that EBITDA is breaking even and net profit is either breaking even or the deficit is closing. And the overall trajectory as good, as we'd expect to see, as these businesses grow and scale. But as they continue to grow and grow rapidly, upfront investment in capabilities as well as resources is very necessary perpetuating that growth rate.

Okay. And can I just follow up by asking whether do we think that we will hit optimal scale perhaps next year and see an inflection point in terms of the improvement in operating profit for Cybersecurity?

You -- what you will see is a continuing -- and we'll see is a continuing and improving trajectory. Now whether we choose to continue to invest for growth and capabilities expansion is a dynamic decision that we'll take closer on a more of a just-in-time basis. It's not entirely a given that growth starts slowing down. We're seeing the advent of 5G. We're seeing cloud continue to grow. We're seeing security needs continue to grow. So what we'd like to see is the growth profile continuing to perpetuate for a period of time, which is going to take continued investment in that growth. That's a dynamic we will take prudently.

Thank you. Next up, we have Paul.

Paul from Phillip Securities. Just a couple of questions. My first one will be just on the cost of services. I noticed there was a decline of $34 million for the first half. It's quite large compared to, I think, the $40 million decline in 2020. Just wondering what's driving the decline in this line item? And whether can it persist into the second half? That's my first question. The second is the broadband subscribers. Obviously, revenue is more important than anything else, but I just noticed that it seems that the subscribers -- the number of subscribers, I think, declined the largest ever for a quarter if I'm not mistaken. I just wondered, will this eventually kind of hurt revenues or not necessarily? These -- are these subscribers that you don't want? That's my second question. My third one would be can you just elaborate again on the OTT subscribers that you mentioned now that you have this Entertainment division. Does it mean that if you have like a Disney+ subscriber, you're just going to take, I don't know, monthly percentage commission of the ARPU? And my last question, if you don't mind, just on the -- you mentioned cloud gaming ARPU. I just wondering what kind of uplift. I know you -- I don't think you have shared. But what kind of uplift do you get on the ARPU if you're able to provide any details there?

Johan, could you take the questions on broadband subs, OTT and cloud gaming? And then hand over to Dennis for cost of services.

Absolutely, I can. So thanks for the question. So just I'll take them one by one, okay? So the home broadband subscriber decline is a temporary element in the business. This is on the back of the fact that we did the cable-to-fiber migration 2 years ago, and we are coming to the end of a 2-year cycle. As you all probably have concluded, those customers came with quite a fair bit of promotional discounts. And that's why on the back of even a small reduction in the customer base, you do see the ARPU and actually the revenue going up. So there is no alarm bells on that one, and this will actually ease in this quarter. So that's on the home broadband subscriber side. On the OTT subscribers, this is the first quarter that we give you transparency in terms of reporting a different way what we believe is more representative for this business. I mean, classical Pay TV is a little bit limited, I would dare to say, in the current context. And this segment is definitely moving as something we call Entertainment. So we see quite a lot of customers actually enjoying content on their mobile devices, tablets or just in combination with a home broadband connection for that sake. So it's important that we do justice to the business and to this particular segment. So that's why we start to call it Entertainment, and we look at totality, meaning IPTV, OTT in different shapes and forms together. In terms of the question you asked about the revenue recognition, it's something, today, we haven't reported that yet here. And we will continue to monitor that as the business evolves, and we will adjust that accordingly once we feel that it is the right time to do. So hopefully, that gives you a bit of an indication on that side. Now the last question, I found very interesting, cloud gaming. So far, we've never actually reported any ARPUs or any revenues related to gaming. We announced 1.5 months ago that we will be launching GeForce NOW, the cloud gaming solution of NVIDIA. And we will be coming out with that in the very near future. I would say watch this space. Once we've launched that, then we'll be starting reporting details, where and when relevant, in the matter it makes sense to the external audience. So that's something I would like maybe to ask you a little bit of patience around, but it's around the corner and coming. So hopefully, that gives you a bit more direction on that one.

Thanks, Johan.

And then, for service decline, yes, maybe I hand over to Dennis.

Okay. Paul, I'll address your question on the cost of services. The cost of services bucket consists of a few categories [ one of ] which is the...

Dennis, you're breaking up quite a bit.

Connection charges that we record there. The other big bucket relates to [indiscernible]. Is this better?

Better.

Yes.

Okay. Sorry about -- okay. Thank you. Sorry about that. So in terms of the 3 buckets of the cost of services that make up the cost of services, you've got the fiber connection charges that go into that, the enterprise service costs in relation to all the Enterprise revenues, Network Solutions, Cybersecurity revenues and everything else that goes into the bucket. And the third bucket relates to content costs, which we've already articulated in terms of the cost optimization and rationalization in terms of the bundle of content that we now offer to our customers. So that is something that was part of our overall TV transformation journey as part of our 3-year DARE transmission, and that content cost has been recorded in this bucket. So that is the main bulk of the reductions that we've been able to record on a year-on-year basis.

Sorry, Dennis, can I just follow up? So which is giving you that large decline? Is it like -- you mentioned -- are you seeing this across all 3? Or...

No. It's primarily the content cost because the enterprise service costs is in tandem with the level of revenues that we actually book within the quarter. So it's primarily content cost.

Okay. And I guess, I mean without putting words in your mouth, this is something that you can sustain because this is more fixed in nature rather than...

Yes. So we've already articulated in terms of the transformation of the model from more of a fixed-cost model into more of a variable cost model. That's something we've already done and we continue to do and something that we are committed to continue to deliver in terms of the changing of the cost structure in terms of that line of business.

Okay, okay. So is like you say -- are you cutting it from fixed to more variable [indiscernible]?

That's right. So that's transformation of the cost structure. That's correct.

Annabeth, please feel free to unmute yourself.

I'd just like to follow up on some points that were made earlier. With regard to Nikhil's opening statement about lower market pricing. I understand the ARPU for postpaid mobile has been stable quarter-on-quarter, but obviously, it's been on a downtrend. And I know that you've highlighted that the past 2 to 3 years. So when do you expect the ARPUs to be on an uptrend again? Do you have any color on how you're positioning yourself for that recovery? That's my first question. And second question, just trying my luck here, but on the scaling up of the Enterprise Services and cyber and Regional ICT, do you have a time frame for when they expect it to make significant profit contributions to group as a whole? That's my second question. And thirdly, on 5G and the upcoming new auction for 2.1 gigahertz, Nikhil mentioned that it opens up a number of new options. So could you provide some color on what that would mean for StarHub, especially in relation to the joint venture strategy with M1? So would you necessarily be building with them? Or are there options for StarHub to pursue monetization on its own with the new spectrum? That's my third question.

Thank you. Maybe let's start off with Johan on the first question on postpaid ARPU.

Thanks, Annabeth for the question on ARPU, very relevant question indeed. I mean, the bulk of ARPU decline over the last 1.5 years was due to roaming and the effect of COVID not having roaming in place, actually. So that's why ARPU has been stabilizing in the last few periods. In terms of going forward, we will need to see. Obviously, ARPU would probably see an uptick if roaming is restored because that's something we would expect to come back at a point in time when roaming is enabled. Otherwise, it's hard to predict. Obviously, we work our best to make sure that we keep the ARPU at the highest possible level. And as you can understand, there are quite a few variations in terms of ARPUs between the different segments in the market. So that is what it is. And yes, it's difficult to predict the future. Let me put it that way. So on that note, I probably can hand over to -- back to Amelia on the other 2 questions. Hopefully, those [ answered your question ].

Thank you. Dennis?

Yes. Maybe [indiscernible] on cyber, but maybe I could just add to Johan's point. Annabeth, it's really hard for us to -- it's a dynamic market with a lot of competition, and it's really hard for us to make predictions on where our ARPU is going to trend. But what you may have picked up, as we've been through this presentation and from the Q&A, is that we're really focused on driving a tactically differentiated strategy, right? So it's 4G going to 5G, but it's not 5G connectivity just for connectivity and speed, although that's something that we drive quite hard, and we received accolades for, but it's really to enable enriching experiences for our customers. And these enriching experiences, whether they're Disney+, TV+, available anywhere on any device, cloud gaming to come and more to come after that are all consumption hungry, bandwidth hungry and hopefully, should drive better monetization. So that's the strategy. We've seen good leading indicators of it this quarter. We cannot really comment or predict where our ARPU is going to grow, but that's the strategy. Now moving to your second question on cyber and ICT and when we see -- expect to see significant profits at scale. As I mentioned earlier, this is kind of a dynamic decision, right? And to elaborate on that, a lot of people talk about -- AWS has talked about how their estimates for public cloud penetration have actually fallen rather than increased as public cloud has continued to grow fast. So they assess the addressable market to be even larger. We have artificial intelligence on our doorstep. We have 5G IoT on our doorstep. That's going to create the need for much, much more and more and more data workloads that are going to be everywhere. That increases more cloud work and more security work for our companies. So our intent is to really capture this addressable market and extend the growth profile of these businesses as long as they can. So it's going to be a dynamic decision, and there's some implicit trade-offs between when we want to stop growing or grow slower and start harvesting more and more in terms of profitability or whether we push that period 1 year out, another year out, another year out. What I will say to you is that the overall trajectory and the profile of profitability continues to improve in these businesses and they're at levels where they certainly do not threaten our overall cash flows or dividends. So that is obviously sacrosanct and we look to add a growth element on top of our yield.

Thank you, Nikhil. Would you like to also comment on the third question for the 2.1 gigahertz auction?

Yes. On 2.1 gigahertz, clearly, we have a JV with Antina, which is working well and has reduced our CapEx and cost quite materially. So with 2.1, we're reviewing all options, all kinds of pros and cons. We've seen a positive experience so far with the 3,500 on Antina in terms of what it's done for our flexibility as well as our cost structure and our CapEx and the move to the variabilized cost model. So with that positive experience in mind, we haven't made any decisions. We're looking at all options. We're reviewing this, and we will keep you posted.

And to that, the other question as well for some clarity and color on what you meant by opens up a number of new options for performance. Are you able to share what the 2.1 gigahertz means for that?

I think that's something that we will talk about at another point in time when we have more definition on the various constructs and how we're going to play 2.1 if that's okay, Annabeth.

Thanks, Annabeth. Next up, we have Arthur.

Can I just ask about 5G adoption? How has this been trending? And are you seeing consumers actually willing to pay the premium? I'm just actually wondering when we should start to see this as accretive to mobile revenues. Second question I had is with -- again, with mobile. You've mentioned competition has been aggressive on this side. I'm just wondering what's driving this. Given that TPG can't really meaningfully follow into 5G, who's really driving mobile competition downwards?

Johan?

Okay. Thanks for the questions. Let me start with the #1 first, 5G and the willingness for people to pay for 5G. Interestingly enough, the very vast majority of people taking a device subscription do take it with a 5G device and a 5G plan, and those subscriptions tend to be a bit higher priced than the traditional 4G plan. So there is definitely a willingness to pay. However, having said that, I think the key element for success in this area is differentiation and adding value into the subscription, so for example, like we do with Disney+. And that brings a value proposition end to end, which consumers appreciate. So the willingness is there, but you need to obviously make sure that the experience and the differentiation is there. So that is on that side. In terms of competition in the market, it's a busy marketplace. I think there are -- I lost count actually. There's like 13 or 14 MVNOs or something like that every week, come, go. It's very busy. The competition is mainly driven, I dare to say, by a particular MNO or maybe 2; and in combination with that, some of the MVNOs, I think, especially the smaller operators are actually fighting for market share to be sustainable because at the end of the day, it is a form of a scale business. And that puts, obviously, pressure on the market. Also not to forget that COVID and the fact that roaming and tourism basically took a hit puts additional pressure on the market in terms of revenue, as you have been seeing over the last 1.5, 2 years. So all that leads to where we are. We believe it is prudent and important that the industry is enabled to invest in new technology called 5G. This is an expensive network, which gives customers a great deal of benefits, but it needs to be rolled out. And we believe the differentiation, as we have been doing, for example, with Disney+, with Netflix, with cloud gaming, and there's a few other things in the future for sure which will come, are important to go beyond a price story. I mean that's important because it's just more than just gigabytes and price. We believe that consumers are willing to pay, at the end of the day, as I mentioned earlier, for service, quality and things which otherwise would not be there. So hopefully, that gives you a bit of a context to that.

Sorry, if I can just clarify, I'm just a bit confused on this side. You mentioned that there are some MNOs as well as MVNOs pushing this. Are they more aggressive on the 4G segments rather than 5G? Because from what I see, the pricing on 5G is all notably higher.

That's correct.

On that side as well, given that you are seeing migration into 5G, why is it not reflecting more -- well, obviously, in terms of the revenue growth for mobile?

There are 3 elements in this discussion to clarify that. So number one is the fact that roaming disappeared, right? So just keep that in mind. And for Singapore, that's typically a sizable amount. Second is that you have 2 forces which work against each other, to be very transparent. Number one is an upside on 5G; and the second is what you referred to, which is correct, the price pressure on 4G. So those 3 elements are in the mix and depending on the situation and the developments, it will go either way.

We now take the next question from [ See Hui ].

Could you please elaborate more on the M&A opportunities that you're looking at?

Thank you. Nikhil, would you like to take this question?

Yes. I think it's difficult to talk about M&A opportunities with too much specificity. But let me just say that when you look at our strategy, we're looking at driving different -- on the consumer side, we're looking at driving differentiation and driving consumption on top of connectivity, right? On the Enterprise side, we're really focused on the intersection between cloud, security and 5G and how all those things come together. So we clearly have the balance sheet. Our leverage level keeps dropping. We're at 1.25x, as Dennis talked about this quarter. Our free cash flow continues to be strong. So we clearly have the capacity and the desire and the identified focus areas to continue to do M&A. Beyond that, I think it's hard to provide specifics, and we'll keep you updated at the opportune time.

Thanks, Nikhil. [ See Hui ], I hope that answers your question.

Yes, yes.

Okay. We'll take the next question now from Zhiwei.

I'd just like to touch a little bit on the Cybersecurity front. Could you just share some color in terms of where you see those new contracts and projects coming from? Are we seeing a greater mix of more public sector work or private sector work? And I'm not sure whether you disclosed this in the past, but maybe some color about how your contracts have secured last -- in first quarter versus second quarter and how we see as they go into second half.

Yes. Maybe I'll start, and Dennis can add. So with respect to the Cybersecurity business, you noted the public sector business within Ensign is extremely strong and very deep with large contracts, and that business continues to grow. It's a strong imperative. The private sector business with large corporates -- large big-name corporates is also strong and continue to grow. Ensign is also focused on regionalization and has picked up good, again, big-name contracts with government and large corporate organizations in the region. And then away from kind of market segment but looking at drivers, we had talked about cloud. Public cloud workloads are growing extremely rapidly, and they need to be protected. And every organization is trying to put more on public cloud. Every organization is trying to figure out, particularly -- whether it's factory automation or device or asset management, trying to figure out their IoT strategy and how they get more value out of it. That creates a security need. So both with respect to market segment as well as fulfilling a lot of the demand drivers that are on the come, that's what Ensign is focused on. Now I'll hand off to Dennis to talk about the sort of the quarterly contracts. But again, what we will always have to caution is this is a business where the contracts are large and lumpy, in the millions, even the tens of millions. And what you will, therefore, naturally see is some lumpiness quarter-on-quarter. With that, I will leave it to Dennis to answer.

Yes. Okay. So as I mentioned earlier, there are a few lines of business in Ensign, namely the consulting, the SI systems integration as well as the managed security services, right? So the -- in each of these segments, naturally, they are skewed towards the public sector in some of these segments, particularly on the MSS side. But then, Ensign has also garnered in the pipeline -- both in the order books as well as pipeline opportunities, private sector opportunities, both in Singapore as well as in the region. What's actually interesting is that the regional mix of the pipelines and order books have actually increased over a period of time, so the dependency on just the Singapore market, which is already a meaningful market in itself, is also reducing. So there's diversification of the customer base and the segments over a period of time that we continue to see.

Just for -- you talked about the 3 lines of business. And in terms of the profitability of these business lines, which is a bit more profitable? You talked a lot about public cloud workloads-related work. Is that something that would be a major driver that -- and higher margin than, say, the other 2 lines?

Sorry, go ahead, Dennis. Go ahead.

No, no problem. So if you look at the mix of the businesses, obviously, the businesses that are fairly labor-intensive with a lower proportion of third-party products and technology that's embedded into the solutions, obviously, those are the projects that get delivered at a relatively higher margin than others. So it depends on the solution mix and the definitions as well as the requirements of our customers as well. In some of the public sector contracts, there are prescriptions in terms of the technology that needs to be adopted. So in some of these then, obviously, we work with third parties. But in many of the other cases where Ensign has already built capabilities on their own, they're able to put in their own capabilities around data analytics as well as cyber threat intelligence, monitoring mechanisms and tools that they have also developed and are proprietary to Ensign. Those obviously garner higher margins.

We will now take the last question from Varun, please.

I'll be quick. I have 2 questions. First, on 5G. I know everyone is talking about use cases and opportunity. But as a management, when you look at it, both from a consumer perspective and enterprise side, which use cases really excite you maybe end of 3 years, 2 years? Obviously, you mentioned about Disney and all that product, but you can do it with 4G. But real 5G use cases, when you look at it, which of them are really exciting from a Singapore market context? And how far are we to see that use cases becoming a reality, right, when you look at whether device ecosystem or other part of it? So would love to get your sense on that. And lastly, I think you have partly answered that question, obviously, your balance sheet and M&A, but wanted to get your view on increasing trend where telcos are getting into IT services. Obviously, it is a very adjacent territory. You have relationship with enterprise that you're providing network solutions, but increasingly, more telcos are looking to get into that segment because it's also, again, highly cash flow generative. What's your view on that and using that balance sheets tend to get into this segment? Obviously, Singapore is very competitive, but you are a big player but expanding regionally, maybe what you have done with a small acquisition in Malaysia.

Yes. So maybe I'll start on both, and then Johan and Charlie can add. I think on 5G use cases, it's pretty clear, right? When you look at our consumer businesses, it's here and now for us with new handsets coming onstream. We have the product. We've launched 5G SA. We have 5G SIM-only subscribers. We launched that a few weeks ago. We have Disney+ and OTT available anywhere from any device. We're launching cloud gaming very shortly, and we'll do more and more. So for the use cases, it's, in consumer, it's really all about driving bandwidth-hungry, consumption-hungry, enriching experiences for our customers. And the 5G experience with those kind of experiences is obviously much better. On the Enterprise side, without any surprise, 5G IoT is what we're extremely focused on. We've launched our -- it's again here and now. It's not on the tomorrow front. We launched 5G IoT, our platform in partnership with Software AG earlier this year. We have use cases around various things that we're driving, and we hope to have some announcements soon. So I think we have a pretty clear focus on our use cases between consumer and enterprise, and they're here and now. Now moving on to IT services. I think we're very lucky and privileged that we're not necessarily moving into IT services. I think we have IT-related businesses within our company, and those are Ensign. Those are Strateq, and those are some of the sub-businesses within Network Solutions. So we're already mature in this segment. But what we want to do is do this segment not in kind of the typical telco way that involves a lot of aggregation and resell. But what we want to do is do it in a way that's really defined and differentiated, so -- and focused on use cases of kind of today and tomorrow, not just the ones of the past. So Ensign is in cybersecurity. That's a growth area. Strateq is in ICT, but it's increasingly focused on cloud-native and data-driven use cases; similar for the ICT businesses within our network services business. So I don't think it's someone -- something that we're consciously kind of moving into. We're already there, but we think we're there in a way that's defined and differentiated in a way that's beyond kind of the typical aggregation and resell and low value.

Johan, go ahead, please.

Just the only thing I can add on the 5G, it's definitely here and now, and we're very bullish about this. We're obviously expanding our views also on AR and MR in this space, and we're working feverishly also on further verticals further down the road. But content and cloud gaming is a start, and we're growing all with it.

Charlie?

Yes. I just want to say that -- to echo Nikhil, it's about the differentiation we bring to the reuse case because everybody has a use case. The difference that we bring to it through our capabilities will matter. It's got to be connectivity-centric. It's got to drive the overall consumption of the telecommunications, [ things like that ]. So we hope that with what we are doing, as you can see previously on the slide on 5G momentum, that answers your question.

Thanks, Varun. I see a few more hands. Thank you for the interest. Unfortunately, due to the time constraint, we will -- that's all the time we have on this call. Please feel free to drop us a line on [email protected], and we'll get back to you on your queries. So...

We'd love the questions, so please leave a follow-up.

Yes. Okay. So thank you, everybody, for joining us this evening. Until next quarter. Please stay safe, and have a lovely evening. Bye.

Thank you. Thanks, everyone.

Thanks, everyone. Bye.