Taiwan Mobile Co., Ltd. (3045) Earnings Call Transcript & Summary

Good morning, good afternoon, ladies and gentlemen. Welcome to the Taiwan Mobile Conference Call. Mr. Lin, please begin your call, and I'll be standing by for the question-and-answer session. Thank you.

Thank you, operator. Good afternoon, everyone. Welcome to Taiwan Mobile's Third Quarter 2023 Results Conference Call. Before we start our presentation, let's first go over our disclaimer as per usual -- disclaimer. The information contained in this presentation, including all forward-looking information, is subject to change without notice, whether as a result of new information, future events or otherwise, and Taiwan Mobile Co., Limited, or hereafter the company, undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation. All right. Now let's take a look at our business overview. Please turn to Page 4 for highlights of the quarter. In 3Q '23, our consolidated revenues rose by 7% Y-o-Y, underpinned by solid output from our 3 core engines, namely 5G, e-commerce and home broadband. Our mobile service revenue growth accelerated to 7% Y-o-Y from 2% for the same period a year ago, marking the highest Y-o-Y increase for a quarter since 5G launch 3 years ago. This was driven mainly by the reliable pace of 5G conversion, the success of this year's iPhone launch, robust recovery in roaming business as well as the turnaround of our 4G business, which I will talk about later. Meanwhile, momo continued to outperform its peers and posted a 7% Y-o-Y e-commerce revenue increase during the quarter. Our home broadband subscribers grew by 5% Y-o-Y at the same time as we continue to cross-sell mobile and pay TV customers. Next, let's turn to Page 5 for a closer look at our mobile business. During 3Q '23, Taiwan Mobile's mobile business continued to execute our sustainable growth foundation strategy methodically. As a result, our smartphone postpaid ARPU is now back at TWD 715, a 4-year high, with a Y-o-Y growth rate of 5.6%, marking the tenth straight quarter of Y-o-Y increase. Note that Y-o-Y growth rate was 2.5% a year ago, which means we have more than doubled the Y-o-Y expansion speed. Consequently, our mobile service revenue has returned to its early 2019 levels. These positive outcomes were mainly driven by our unique bundles, effective upselling on contract renewals as well as further recovery in roaming revenues, which rose 15% sequentially in the quarter. Upselling is one of the 2 key pillars in our SGS strategy. As you can see from the chart on the top right, when our customers renew their contracts from 4G to 5G, we have consistently delivered over 40% monthly fee lifts. The tricky part is when they stick with 4G during their renewals, which used to be -- which used to result in lower monthly fees and hence was a drag to our ARPU. However, since 2Q '23, we have successfully turned our 4G business around, thanks to the team's remarkable efforts in executing our SGF strategy, especially on upselling customers to our unique 4G bundles. The monthly fee lift for 4G to 4G renewals further expanded to plus 2% in the past quarter. Due to this trend, on a blended basis, the monthly fee lifts -- the monthly fee uplift for all renewals has been steadily rising to reach plus 10% in 3Q '23. Given the 5G penetration in our smartphone user base is only at 34% as of 3Q '23, which you can see on the bottom right chart, we think that there's still a long runway ahead of us for sustained ARPU growth. Adoption of our unique bundles, namely momobile, Double Play, Disney+ and OP Life, have continued to grow further and now account for 24% of our smartphone postpaid user base. It bodes especially well for customer loyalty, evidenced by a postpaid monthly churn rate of 0.81% in 3Q '23. As a result, our smartphone postpaid subs saw a healthy 2% Y-o-Y uptick. As you can clearly see, our SGF flywheel has ramped up speed, and we will continue to push it. Next, let's turn to Page 6 for updates on our e-commerce business. We continue to see middling growth in our e-commerce revenue in 3Q '23 as consumer allocate -- as consumers allocate their discretionary spending towards leisure activities, especially during summer months. That said, our e-commerce EBITDA margin was still resilient and ahead of the pack. On the logistics side, we added one more warehouse during the quarter, taking the total number of distribution facilities to 56; that is 5 more than a year ago. The southern distribution center is slated to be up and running by early next year with a central distribution center to follow in 2023. This will expand our coverage of rapid delivery services and further widen the moat. As for momo coin and its ecosystem, we continue to focus on broadening its usability. By the end of 3Q '23, our momobile user base has grown to 735,000 and now contributes 12.4% of momo's e-commerce revenue. Next, let's take a look at our Broadband business on the next page. In 3Q '23, the unit's revenue and EBITDA were both resilient as we continue to face -- continued to focus on growing our cable broadband footprint. Steady demand for faster home connectivity as well as our cross-selling efforts led to a 5% Y-o-Y increase in broadband subs. With existing broadband users, we focused on upgrading them to higher speeds. As a result, our subscribers who opted for speeds of 300 megabits or higher rose by 57% Y-o-Y. While we only ranked as the fourth largest MSO with an 11% footprint for cable TV services, we have expanded our cable broadband coverage to 85% by teaming up with most of the leading MSOs in the country via our Double Play bundles. Now let me pass the virtual mic over to our CFO, George Chang, for financial overview.

Thank you, Jamie. Good afternoon, everyone. Let's start with the performance by business. In 3Q '23, consolidated revenue rose by 7% Y-o-Y, driven by solid performance in our telecom business. Mobile service revenue grew Y-o-Y for 10 quarters in a row, thanks to ARPU improvement amid steady 5G conversion and benign 4G pricing. This, along with a healthy expansion of fixed-line service revenue, allowed us to record our highest telecom service revenue since 4Q 2018. As a result, telecom EBITDA and consolidated EBITDA both went up by 4% year-over-year in 3Q '23. Momo's EBITDA increased Y-o-Y as well, due to improved efficiency in its logistics network. Growing broadband subs and good traction in our cross-selling bundles kept cable TV EBITDA steady year-over-year during the quarter. Let's go to the results summary. With a healthy performance in our 3 core engines, 5G, e-commerce and home broadband, consolidated revenue rose by 7% Y-o-Y in the quarter. Consolidated operating income recorded a 5% year-over-year uptick in 3Q '23, driven by healthy telecom EBITDA growth and a muted rise in D&A expenses. Nonoperating expenses went up year-over-year on the back of higher financing costs from rising interest rates, lower exchange gains in U.S. dollar assets as well as a high base in momo's disposal gains. As a result, net income grew by 3% year-over-year in 3Q '23. Let's move on to the balance sheet. Starting with assets, receivables rose year-over-year, owing to an increase in postpaid subscribers and monthly fee contribution from our mobile bundle plans, along with momo's growth. As for liabilities, the year-over-year climb in payables was driven by the launch of new iPhones and Google Pixel phones as well as momo's business expansion. Gross debt rose quarter-on-quarter to TWD 71.6 billion on the account of bank borrowing to fund our dividend payment in the quarter. A TWD 37.2 billion legal reserve and capital surplus is available for future dividend top-up. Benefiting from a decent free cash flow generation and growing EBITDA, our net debt-to-EBITDA fell Y-o-Y to 1.71x in the quarter, the lowest 3Q level in the past 4 years. Lastly, let's look at the cash flow analysis. Operating cash inflow increased by 12% Y-o-Y in 3Q '23, thanks to steady telecom EBITDA growth, good handset inventory turnover and cash receipts from SI projects. Investing cash outflow rose year-over-year in 3Q '23, mainly attributable to higher 5G government subsidies received a year ago. Year-to-date, both CapEx and other investing cash outflows decreased year-over-year, leading to a TWD 2 billion drop in overall investing cash outflows. As for financing activities, 3Q '23 cash outflow declined year-over-year, reflecting the timing difference in momo's dividend payment; this year it's in second quarter, last year it was in the third quarter. On the back of stable operating cash flow and 21% fall in investing cash outflow, free cash flow calculated on a pre-IFRS 16 basis for the first 3 quarters increased by 10% year-over-year to TWD 11.42 billion, translating to an annualized free cash flow yield of 5.7%. Let's turn the presentation back to Jamie for event update and key message.

All right. Thank you, George. So first, let's take a look at where we are with the merger with T Star. We received the conditional approval from the Fair Trade Commission on October 11 following NCC's approval back in January this year. We're now at the final stage of the process and have set the merger effective date for December 1 this year. I think this is also a good time for us to revisit our network consolidation plans post T Star merger. The top left chart illustrates our combined spectrum portfolio with Taiwan Mobile and T Star blocks each marked with orange and purple colors. As you can see, the new TWM will have 100 megahertz of spectrum on the 3.5 gigahertz frequency band, which is the most valuable and most effective frequency for 5G services. As we discussed before, 3.5G intra-band carrier aggregation technologies have been supported by iPhone since 2021, in other words iPhone 13 and upwards. And then every increasing lineup of Android models, including Samsung S22 and Plus. This will allow phones to take full advantage of the maximum speed our 100 megahertz spectrum has to offer, with virtually no efficacy loss from the non-continuity. Taiwan Mobile sees no technical difficulties turning on this relatively mature technology that our current equipment already supports. Moreover, in terms of providing capacity to both consumers and enterprise users, having 2 blocks actually gives us more flexibility to dynamically dedicate resources towards the most demanding customers at any given moment. As for spectrum for 4G services, the return of 10 megahertz will not affect the total 4G spectrum available to users as we wind down T Star's networks 3G service and take the TST 10 megahertz spectrum on the 21 megahertz band originally dedicated for 3G use and refarm it to 4G use. So minus 10 megahertz plus 10 megahertz, on a net-net basis, the total 4G spectrum available to our combined users will remain at the same level, while the number of stations increases. This will create a better net experience for users on both sides. Regarding to the CapEx additions we've announced previously, here are some recurring benefits we target from this one-off CapEx in network consolidation: electricity savings as we shut down TST's 3G network and part of its 4G equipment; rental savings as we tear down most of T Star's 4G sites; less CapEx in future since we will be upgrading and moving T Star's 5G equipment to new sites; and OpEx savings from rents and leased lines, et cetera. I hope this helps you better understand the great benefits we're getting out of this deal. Finally, on the next page, I'm delighted to share some achievements we have attained this quarter as we continue to be recognized for our commitment to the best ESG practices. During the quarter, Taiwan Mobile became the first and only telecom company in Asia whose 1.5º Celsius-aligned science-based emission reduction targets to reach net 0 by 2050 were validated by the SBTi. We were also named in the Financial Times and Statista's Climate Leaders, ranking second in the Asia Pacific region as the only Taiwanese company in telecom -- Taiwanese telecom company on the list. And we're included in the FTSE4Good TIP Taiwan ESG Index for the sixth consecutive year. We've received awards for talent, sustainability and corporate social responsibility from Commonwealth magazine and won the special award for digital resiliency at the 2023 IDC Future Enterprise Awards as well. Last but not least, we published our first TCFD report, improving our transparency around climate risks and opportunities. Finally, to wrap up our presentation, here is the key message we would like for you to take away with. As our flywheel continues to pick up speed, Taiwan Mobile delivered a solid set of operating results in the third quarter, with growth acceleration seen in our core business. Steady rise in 5G penetration, our unique bundles and Telco+Tech strategies, win-win collaborations with group companies as well as our integration with Taiwan Star will continue to provide a tailwind to our longer-term performance. With that, let's open the floor for questions. Just a reminder, we are currently in a quiet period due to new share issuance for the merger, and therefore we will not be able to discuss any forward-looking information during this call. If you are participating online, you're welcome to send your questions via the chat box. We will begin by addressing the telephone line questions before we move on to the web. So operator, please go ahead.

[Operator Instructions] Our first question comes from Neale Anderson with HSBC.

So I have a question on the mobile business, please, and particularly relating to the focus on Double Play and the operating costs. So I believe that you've been expanding the Double Play push for about 3 quarters now. So what I'm interested in is to what extent the cost and the profit profile might change or the trend might change as we lap the introduction of the focus on Double Play? So it looks as though you have a good forward momentum from migration to 5G. But how about the cost outlook from the Double Play side?

Thanks, Neale. So in terms of Double Play, we're seeing much stronger take-up on higher rate plans. And in terms of the EBITDA profile, it's not that much different from handset rate plans. So essentially, either customers opt for a handset rate plan or a Double Play rate plan. The profitability profiles are quite similar. I hope that answers your question.

Okay. And if I could follow up, I think you've also been focusing on longer-term contracts, so 3 years and 4 years. Are you able to give any disclosure on what proportion of smartphone or 5G customers tied in for a longer period of time now?

It's in sort of -- it's a double-digit percentage. Sort of -- yes, that's probably the only thing I can talk about.

Right. Okay. And then so the quiet period, you can't discuss anything. So the sort of order of timing of the areas of savings you mentioned on Slide 15. Can you give any indication which you'd expect to see sooner and which will take a bit longer to develop? Or is that off limits?

Let me consult my legal team. I'll be right back. All right, Neale. I think we can talk about it. So the sort of consolidation of stations will happen rather quickly. And so the synergies savings from rent and leased lines will be sort of faster to be realized.

[Operator Instructions] No question at the moment now, Mr. Lin.

Okay. We also are not seeing any questions from the web. So if that's the case, let's wrap it up. Operator, I think we can wrap it up.

Okay. Sure. Thank you ladies and gentlemen, thank you for your participation. You may now disconnect. Thank you. Goodbye.

All right. Thanks, everyone. I'll see you next quarter.