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

Good afternoon, ladies and gentlemen. Welcome to the Taiwan Mobile conference call. Our Chairperson today is Mr. Jamie Lin. 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 Second Quarter 2026 Results Conference Call. We are reporting a record quarter in revenue and profitability outperformance. But before I share more details, please refer to our safe harbor notice on this page. Now let's start with our business overview. Please turn to Page 4 for our Q2 highlights. So in Q2, our 3-tier flywheel demonstrated remarkable momentum. Our core growth engines -- core growth engines, namely Telco, Telco+, and Telco+Tech all delivered robust Y-o-Y top line growth, reinforcing our position as the market leader as an AI-powered ICT company or an AICT company, as we call it. On the profitability front, Q2 proved to be the landmark quarter as we continue to embark on our golden decade journey. Consolidated EBITDA and EBIT rose by 9% and 18% Y-o-Y, respectively, with EBIT reaching a 2-decade high and showcasing powerful operating leverage, coupled with significantly enhanced nonoperating performance, net income surged by 38% Y-o-Y with EPS reaching TWD 1.49 delivering the highest EPS in the sector for 3 quarters in a row. This standout profitability was underpinned by our proactive integration of AI to drive operational efficiencies, optimized subsidy and commission structures as well as disciplined CapEx management, which led to a lower D&A expenses. George, our CFO, will explain our structural cost optimization in more detail later. Now let's take a closer look at our Telco Core business on the next page. So Telco Core includes our mobile and home businesses. The sustainable growth foundation strategy continues to yield excellent results, reflected in our record low postpaid churn rate of 0.5%, a 9 basis point improvement over the same period last year and a 3% Y-o-Y increase in smartphone ARPU to TWD 689 in Q2. As a result, our Q2 mobile service revenue grew by 3% Y-o-Y, hitting an all-time high. 5G penetration came in at 45%, up 3 percentage points Y-o-Y, leaving us ample runway to upsell going forward. For contract renewals, we delivered a 6% overall monthly tariff uplift driven by a 46% bump up in 4G to 5G upgrades. As a result, 5G revenue grew by 8% Y-o-Y, lifting its contribution to mobile service revenue to 69%. This commercial success is firmly backed by our leading network quality. In OpenSignal's H1 2026 report, Taiwan Mobile ranked #1 across 6 key categories, taking sole ownership of the top spot and placed in the global top 3 in both network reliability and consistent quality, while leading in video and voice app experiences. Our unique bundles serve as a strong moat, consistently driving upselling and customer loyalty. In Q2, we introduced a new high-value multi-platform OTT bundle that combines mobile data with a 2-year subscription to Netflix, Prime Video, HBO Max, and our own, MyVideo. Similar to our existing Double Play and OP bundles, the vast majority of subscribers opted for TWD 999 or higher rate plans, driving sustained subscriber and ARPU expansion. Moving to the Home business segment. Our broadband business recorded a solid 5% Y-o-Y growth in Q2. Including Double Play users, broadband users and speeds of 300 megabits or higher surged by 22% Y-o-Y, greatly outperforming the incumbent player. Next, let's turn to Page 6 for our growth engine #2. In the Telco+ segment, we continue to unleash the potential of our Gift as a Service model, providing integrated AICT solutions for enterprise, AI data center and cybersecurity services to our enterprise clients, including high potential SMEs. Growth in this segment has been stellar with revenue surging 19% Y-o-Y in Q2. This performance was driven by key government SI projects, steady contributions from our AI data center. Notably, our data center revenue soared 89% Y-o-Y in Q2, while our AICT for enterprise business also expanded significantly. As enterprises accelerate their AI-led transformations, Taiwan Mobile is uniquely positioned as the premier partner of choice backed by our robust infrastructure and telecom grade reliability. This provides a powerful long-term tailwind to our telecom service revenue. Next, let's turn to our new Telco+ and Tech businesses. So our third growth engine, Telco+Tech businesses, delivered a 4% revenue growth in Q2, while our new Telco+Tech businesses, which excludes momo grew by a robust 18%, driven by strong execution across 3 key businesses. First, our direct billing business or [Foreign Language] in Mandarin continue to expand steadily as we broaden our service offerings to drive recurring usage. Leveraging proprietary AI algorithms for precision targeting and risk management, we are seeing accelerated adoption of carrier-based payment across our user base. Second, our e-commerce services for brands or [Foreign Language] in Mandarin grew exponentially with revenue more than doubling Y-o-Y. This was driven by strong sales performance from key anchor brand clients such as Royal Canin and Philips, alongside the addition of a new channel partner in Q2. Furthermore, the upcoming launch of Japan's iconic lifestyle brand, 3COINS across key channels, especially momo will help fuel our top line momentum as we head into the second half of the year. Third, our proprietary OTT brand, MyVideo, delivered solid top line revenue growth through both platform subscriptions and content investments, boosted by the strong box office performance of several key titles. Finally, let's take a look at momo. So momo's GMV growth accelerated to 7% Y-o-Y in Q2. Since March, momo has delivered 4 consecutive months of Y-o-Y revenue growth, driving a 4% Y-o-Y revenue increase in Q2. Take rate saw a modest Y-o-Y expansion, while EBITDA margin maintained resilient despite market competition. Combined with reduced D&A expenses, momo's operating income grew by 3% Y-o-Y in Q2. On the cash front, its negative cash conversion cycle provided a powerful working capital tailwind, driving an even more pronounced increase in operating cash flow. The key growth initiatives, mo-shop+ and Retail Media Network, or RMN in short, continue to expand rapidly. Our 3P marketplace, mo-shop+ now features over 3.7 million SKUs and more than 10,000 selected merchants, delivering double-digit Y-o-Y GMV growth in H1. Simultaneously, the RMN initiative gained further traction with merchant penetration reaching approximately 50% at quarter end -- as of quarter end and revenue surging by double digits Y-o-Y. With that overview of our strategic progress, I'll now turn the floor over to our CFO, George Chang, for a detailed look at our financials.

Thanks, Jamie. Good afternoon. Let's begin with our performance by business segment. In 2Q '26, our telecom revenue delivered a solid 4% Y-o-Y growth with fixed line business contributing about half of this revenue expansion. Telecom EBIT rose by 25% Y-o-Y, representing 77% of our consolidated EBITDA. This massive margin expansion highlights our operating leverage driven by strong growth across all 3 engines and prudent cost disciplines in customer acquisition and retention. Accompanied by a gradual revenue recovery over the past 2 quarters, momo's EBITDA has stabilized Y-o-Y, whereas EBIT grew 3% Y-o-Y, thanks to a decline in D&A as momo strategically reduced its reliance on third-party logistics facilities and enhanced fulfillment efficiency. Accounting for our equity stake, momo contributed roughly 6% to Taiwan Mobile's net income in the second quarter. Finally, CATV EBIT dipped Y-o-Y, but this was mainly due to a high base in the pay TV business. Broadband profitability remained robust with double-digit Y-o-Y growth. To further elaborate on the powerful operating leverage in our telecom business, as you can see, on Page 11, telecom revenue grew by 4% in second quarter, but telecom EBIT grew by 25% Y-o-Y, expanding at more than 6x at the rate of the revenue growth. Within this Y-o-Y EBIT growth, more than half stemmed from AI-driven structural efficiency gains in subscriber acquisition and retention costs. As mobile CapEx continued to trend down, lower telecom D&A expenses contributed another 16% to the EBIT increase. Let's go to the results summary. Consolidated revenue rose by 4% Y-o-Y as Telecom, momo and cable TV all delivered revenue growth for the 2 quarters in a row. Operating income went up by 18% Y-o-Y, setting a new quarterly high in over 2 decades. On the nonoperating front, expenses dropped significantly Y-o-Y, mainly driven by lower financing costs, higher equity method income led by Systex, mark-to-market gains on our investment holdings and favorable base effect from second quarter '25 asset write-offs and FX translation losses. As a result, 2Q '26 net income surged 38% Y-o-Y to a 20-year high. For the first half of 2026, EPS reached TWD 2.86, the highest among our peers. Let's move on to balance sheet. We continue to drive improvement in our asset efficiency and balance sheet strength. Within current assets, accounts receivable and contract assets grew 11% Y-o-Y, in line with top line expansion across all business. In noncurrent assets, PP&E declined as capital additions stayed below depreciation with 5G rollout and network consolidation CapEx now behind us. On the liability and equity side, our disciplined capital management and steady cash flow generation allowed us to reduce gross debt by TWD 8.5 billion quarter-on-quarter and TWD 10.9 billion year-over-year. During this quarter, we also successfully monetized a portion of our treasury shares, adding about TWD 4 billion to both our cash balances as well as total shareholders' equity. Notably, at the end of second quarter, our legal reserve balance has reached a statutory threshold of our paid-in capital. As a result, we are no longer required to set aside earnings for legal reserve, and that will give us more greater flexibility for future profit distribution. Finally, driven by ongoing debt reduction and earnings growth, our net debt-to-EBITDA ratio dropped to 1.33x, while ROE expanded to 19%, underscoring our sharp focus and sustained capital efficiency. Lastly, let's look at the cash flow. Moving to cash flow and capital allocation. In second quarter, we delivered robust operating cash flow growth Y-o-Y, driven by expanding telecom EBITDA and favorable working capital dynamics at momo. Investing cash flow decreased both sequentially and Y-o-Y. The quarter-on-quarter drop reflects a high comparison base from our strategic media investment in Q1, while the Y-o-Y decline was primarily driven by reduced CapEx in mobile and momo. Backed by strong cash flow generation, we accelerated debt repayment during the quarter, well exceeding both Q1 and prior year levels. Consequently, second quarter pre-IFRS 16 free cash flow surged to TWD 7.45 billion, delivering an annualized free cash flow yield of [Audio Gap], further strengthening our foundation for sustainable shareholder returns. Let me turn the presentation back to Jamie for event update and key message.

All right. Thank you, George. So let's turn to Page 16 for our 2026 guidance update. So our strong performance in the first half, as you can see, driven by greater operating leverage from AI-led structural cost savings gives us high confidence heading into the second half of the year. As a result, we are raising our full year 2026 profit guidance. We're maintaining our revenue growth target of 5% to 7%, while upgrading our outlook for full year telecom operating profit growth to -- from 4% to 6% to 13% to 15% and consolidated operating profit from 1% to 2% Y-o-Y to 7% to 9% Y-o-Y. So please note that this guidance is presented on the stand-alone basis and does not incorporate any financial or operational impact from the proposed tender offer of Systex. Alongside our raised guidance, let's also look at our recent achievements in ESG and corporate recognition. On the next page, I'm very proud to share that Taiwan Mobile has once again achieved top honors in Extel's All-Asia executive survey. For the fourth consecutive year, we have been named a Most Honored Company in the overall Asia region, remaining the only Taiwanese Telco to consistently hold this distinction. Furthermore, in the rest of Asia region, we secured the #1 overall ranking for the fifth year in a row with our CEO, CFO, IR team, Board and ESG all placing in the top 3 brackets in their respective categories. On behalf of our leadership team and our Board, I thank you for your trust, your continued partnership and your recognition of our team's pursuit of strategic excellence and commitment to world-class execution with strong corporate governance. Speaking of which, we ranked in the top 5% of Taiwan corporate governance evaluation for the 12th consecutive year. One of the only -- 1 of only 7 companies in Taiwan to achieve this track record. On the environmental leadership, we earned the highest A rating in CDP Supplier Engagement assessment for the fifth straight year, alongside continued inclusion in the DJSI World Index and FTSE4Good TIP Taiwan ESG Index. On the technology front, our next-generation non-terrestrial network solutions won the Gold Award in the inaugural satellite Digital Application Innovation Competition organized by the Ministry of Digital Affairs. Furthermore, our in-house developed AI solution, Vortext AI or AI [Foreign Language] in Mandarin, received the Taiwan AI Award and Silver Award for product innovation at the Taiwan -- AI Taiwan Future Commerce Expo. This highlights our leadership as one of the few telecom operators in the world to successfully achieve the productization of in-house AI capabilities. Next, to conclude our Q2 presentation, here is the key message we would like for you to take away with. First, regarding our key growth drivers, we are driving sustained momentum across our mature core telecom operations and momo business while expanding rapidly in our Telco+ and new Telco+Tech businesses. Second, on capturing alpha in the agentic era, we are pioneering AI-driven structural cost reductions and productizing the platforms we have built, which in turn accelerates growth of our enterprise business. Finally, for our future outlook, we are fully confident in our ability to meet our updated full year financial guideline, and we remain firmly committed to maximizing long-term structural increase in shareholder returns, thereby delivering a golden decade. To further accelerate this next phase of growth, we have also taken a major step forward on the M&A front. So on Page 19, as you've seen in our material information announcement from August 12, we are launching a tender offer through our wholly owned subsidiary, TCC or [Foreign Language] in Mandarin to acquire up to 58% stake -- additional stake in Systex on top of the 11.86% we have already owned since September 2024. Here's a summary of our deal terms and time line. As shown on the slide, the offer features a 50-50 cash and stock split with the cash portion fully supported by TCC's own capital and group borrowings. The transaction is subject to Taiwan Fair Trade Commission approval with the tender period running from August 18 through October 6. All detailed figures are on the screen for your reference. But more importantly, let me walk you through the 3 major synergies of this transaction on the next page, which will allow us to double our enterprise ICT market share and drive bottom line growth. First, cross-selling and broadened market reach. So by combining Taiwan Mobile's CT leadership with Systex's IT capabilities, we are aligning our software R&D and sales force across cloud, network, software, hardware and cybersecurity. With nearly 4,500 software engineers and 1,000 sales professionals across 2 groups, we will offer comprehensive one-stop AI and ICT solutions, unlocking massive cross-selling opportunities across enterprise and government markets. Financially, as Systex is a profitable business, recognizing investment returns alongside its synergies will be immediately accretive to our EPS in year 1. Second, AI. To fully capitalize on the enterprise AI transition, we are matching our AIDC infrastructure already at 25 megawatts and growing with Systex AI for IA industry solutions. This synergy ensures seamless AI application deployment for enterprises powered by our high-performance AIDC and high-speed network assets. Third, regional opportunities. Taiwan Mobile and Systex shares highly overlapping regional development strategies in Asia with both companies already expanding into Japan and Greater Southeast Asia. Through this deep strategic alliance, we will join forces to accelerate our expansion in these regional markets and capture larger international opportunities. So in summary, this strategic investment bridges IT and CT, paving the way for sustainable growth and enhanced long-term shareholder value. Finally, on the next page, here is a pro forma net income contribution analysis under different ownership scenarios for your information. With that, let's open the floor up for questions. If you are participating online, you're more than welcome to send your questions via the online chat box. We will begin by addressing the telephone line inquiries before we move on to the web. So operator, please go ahead.

[Operator Instructions] And our first question comes from [ Sigrid Chiu ] with JPMorgan.

Congratulations for a very strong set of results for second quarter. I do have a long list of questions. Would you prefer to -- for me to ask all of them at once or take it one by one?

Let's take it one by one. It will be easier.

Okay. So my first question is on Systex acquisition. You mentioned that after the acquisition, you will double your enterprise ICT market share. Can I just check what's your current ICT market share?

So the combined market share between the 2 groups will be at around 7%, and we're shooting to double that number in the next 5 to 6 years.

Understand. And for the AIDC opportunity that you mentioned on the synergies slide, will we look to expand more on AIDC revenue opportunities beyond the ones that we have? At the moment, I understand that it is with the GMI Cloud. If we're going to do that, what is the capital needed to expand that part of the business?

Yes. We are proactively talking to many partners in terms of securing AIDC compute capabilities. And as you -- as you may know, right now, the bottlenecks for enterprises to deploy AI applications is in securing enough data center computing power. And so our pipeline of AIDCs that will come online the next -- in the next 12 to 24 months, will allow Systex to be much more aggressive in securing AI applications business across their customer base. And our strategy here is working with infrastructure developers so that it's more of an asset-light model for us.

Got it. I understand. And my next question is on group CapEx. I noticed that group CapEx has been coming down. Would you just remind us what is the main component of our CapEx at the moment? And to follow up, our peers are spending more CapEx on network upgrade. Do you see that we have a similar needs at Taiwan Mobile side? And maybe you can just give us a sense of how we're going to plan CapEx going forward, that would be great?

So like we said during the presentation, I think 5G rollout is behind us. And so going forward, yes, we will use AI-driven sort of strategies to spend CapEx in a wise way to make our network perform better but we don't imagine -- we don't foresee this to be a huge capital demand going forward.

My last question...

Sorry, I was going to say that as far as on a consolidated basis, the majority was still telecom driven in first half. Momo was probably less than 10% or around 10%.

Got it. So my last question is on guidance. I'm looking at the updated guidance of consolidated operating profit of growing at 7% to 9% year-on-year. Now our first half growth rate is well exceeding the upgraded guidance. So may I understand, are we baking in some form of conservatism for second half? Or I just want to understand why is the guidance much lower than first half growth rate?

Yes. I think you were pretty accurate in sort of anticipating our stance. So we didn't want to give a guidance that we don't have 100% confidence in achieving.

Can I just follow up on what's the reason for the conservatism?