Welcome everyone to Far EasTone's 2023 Q1 earnings conference call. All lines have been pressed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.fareastone.com.tw under the Investor Relations section. Now I would like to introduce Mr. Gary Lai, the IR Officer. Gary, please begin.
Good afternoon, everyone. Thank you to attend Far EasTone Q1 2023 result conference call. Both President Chi and CFO Sharon join the call with us today. Just a reminder, before Chi's presentation, please kindly pay attention to the first page's safe harbor statement. Let me pass to Chi. Thank you.
Thank you, Gary. Good afternoon. First of all, thank you for accommodating our schedule, and we have this kind of late, you know, IR call. Thank you for joining. First I would like to report how we Q1 , as you already have seen the slide, that we actually exceeded all guidance targets in the Q1 , and it was quite a strong year, Q1 . Our total revenue came to TWD 22.3 billion, it is 1.8% Y-o-Y growth. Also our EBITDA net income, they have, you know, a pretty impressive growth as well Y-o-Y. In terms of achievement rate, it's all beyond 100%. Okay. Next. All right.
You know, if we look at a few details. If you look at the trend, this total revenue has turned positive Y-o-Y for Q10 in a row now. In particular for this quarter, it is driven by steady 5G customer upgrade. That has been the case since we deployed 5G in like in 2020. Also because of post pan-pandemic recovery, you know, Taiwan has reopened the borders, we start seeing more roaming and prepaid revenue coming in. Okay. The EBITDA, we broke another new record. It is the highest since the Q4 , 2018, came to TWD 7.9 billion. This 5% year-over-year EBITDA growth came to...
Was due to the improved service revenue margins, which always has a better margin. In terms of the net income, so we have created TWD 2.75 billion net income in the Q1 , and our EPS came to 0.85. It is reaching a six-year high for the same period. Also the Y-o-Y growth rate is 18.4%. If we excluded its one-time gains in the Q1 , that still is like a 12.2%, and I understand that is the highest in the industry. Okay. All right. Some financial metrics for your information. As you can see, both our net debt and the net debt to EBITDA multiple are improving. The net debt now is at TWD 47.99 billion.
The ratio of net debt to EBITDA multiple has come down to 1.54. Our free cash flow continues to be very healthy. You know, Q1 last year, the accumulative cash flow was at TWD 19 billion. For the Q1 alone, we have TWD 5.1 billion. Cash-based CapEx, it is still following our guidance, and it is TWD 1.78 billion for the Q1 . For our mobile core business side, we have to thank 5G because it keeps the momentum going. As you can see, our mobile service revenue continues to grow. This quarter it is 3.3% Y-o-Y growth.
Our postpaid customers, penetration for 5G has exceeded 34% already. Our mobile postpaid, our pool continue to grow. Again this quarter it is a 3.1% Y-o-Y growth. The churn rate, postpaid churn rate has come down to our record low. It's even below 0.9%, so it's on 0.86%. That is our history record low, I believe. Okay. On the new economy side, we have put our new economy still as our growing engine. This year we put a particular focus on improving the enterprise new business, the margin. We have achieved that. Overall, the new economy margin has improved 2 percent points.
The ICT continues to grow, our ICT margin grows 11% Y-o-Y as well. Our two subsidiaries, that is one is the ISSDU for security service, our Prime EcoPower subsidiary for the green energy. Both are turning positive and making positive contribution. Our FI project revenue continues to grow really, really well with a 27% Y-o-Y growth. For the new business on the consumer side. Consumer IoT showing a good double-digit growth. Both media service and e-commerce are growing at 8% Y-o-Y. Some highlights for our Q1 enterprise business.
We're still seeing a strong demand for enterprise ICT, and so it continues to be driving our revenue growth on the enterprise side. We have some major wins included, you know, energy management. One thing I do want to mention, because even though the economy is still kind of uncertain at a macro level, because of the demand for ESG and the efforts of, you know, for ESG by industry or by enterprise are, you know, increasing. At Far EasTone has been focusing on the smart, you know, ICT for quite some years as we focused on, you know, IoT, artificial intelligence and big data. We continue to build or, you know, create more green and smart ICT solutions and applications.
We definitely see the benefit paying off. This is also driving the growing demand in the ICT area, you know, based on our EMS energy management system platform. For example, we have, you know, a few cases that we won in the Q1 in this area, including the energy management for the power plant meter monitoring. This is in cooperation with my subsidiary, Prime EcoPower. We have that, you know, kind of as established skill base there to support this business. On the right-hand side, we have, you know, some smart city application for Hualien County, and that cooperation has continued for quite some years. Our smart city area is also driving the ICT growth as well.
We have done the 5G network slicing for live broadcasting at New Taipei City Marathon. This is the second live, you know, slicing application we have implemented. This one is a one event. Once the event was over, it was finished. The one that we did for Kaohsiung City, in for the police department, for the patrol car, you know, smart patrol cars, that still continues, seeing more expansion to that. We are providing the infrastructure for the company that is providing that is responsible for the tax return and also distributing the TWD 6,000 tax rebate with, for everyone in Taiwan, every citizen in Taiwan.
That application actually has done pretty well. Then we heard no complaints about the distribution or the of the money. Okay? On the consumer side, we have friDay Video, the paying subscribers hit a record high and also increased 10% just in the Q1 . It is driven by very popular content, we have selected, you know, such as Taxi Driver and the number one drama in Korea. We continue to invest in more exclusive content, we are engaged with producing the local movies going forward. Okay. FET launched secure network service. This is really, it has been pretty bad in terms of the fraud, right? We see a lot of fraud messages.
It first was fraud calls, right? We have used AI to, you know, screen out a lot of that, and then we even won award for that. Recent years, recent months, right? The fraud became like using the messages, and then they send out these links that were unsafe. We actually have launched a secure net service in November last year. So far we already have more than 300,000 users already signed up. Though they are protected, you know, by us screening these unsafe website links anywhere they may receive. They may receive it in the text, they may receive it in LINE messages or in Facebook.
Any, you know, link that they hit, and that it will be first, you know, compared against the database where we have worked with a Israeli security company, that they have a database that is updated real-time for all these fishy, you know, websites. So that is like additional protection we are providing to our users who signed up for this service, and it has received very good response from the users so far. Okay. Our Mobile Circle application also attained the highest customer reward satisfaction score by the third party in industry. We just had that result, and this is surveyed in 2022.
This is one area where we want to, you know, continue to improve our engagement with the users, and Mobile Circle is definitely our approach to our users. It is our digital channel that we want to continue to grow and then to help us to complete more self-transactions on our digital channels. Okay. Last but not least, friDay Shopping and we have been working on the AI model. The new AI business model, so it's a B2B2C kinda model, and then that would improve the customer experience. It has widened or broadened our merchants and also the merchandise sources by pooling these together. We actually also have deploy this ChatGPT within the this friDay Shopping app.
It is quite interesting. You know, it is kind of one of the fancy things these days. We already are using generative kind of AI engine for creating all these websites. Adding this on top of it, just another work. Our team actually has done that. Of course, we need to continue to improve that, you know, to optimize the performance. Okay? Just some more awards that we have received in the Q1 . The reason why we need to schedule this until five o'clock, because I was in the award reception ceremony just now, and we received a few more ESG related recognition. Okay? This is just for your information.
For those that some of those require the votes from the analyst, and if you have voted for us, we thank you for your support. For those that you haven't, then we hope we will get your report, get your support in the future. Okay. All right. Then on the merger update. Yesterday we had made announcement in terms of the extending the merger contract. This was the 2nd time we extended because the original contract was set at December 31st, last year as the contract expiration date. I have to say, at the time when we do that, we kind of just like, followed what our peers were doing.
We kinda used the same timeframe, although we thought that was very aggressive knowing, you know, we have these independent committees to go through. We did receive the NCC approval in January, right? We resubmit our application to FTC. I say resubmitted because last year we actually submitted to NCC. Because of the, you know, spectrum, excessive spectrum issue, my peer had kind of experience and then had a hard time with. The application were returned. After you know, after the issue was settled with NCC, we resubmit. We kind of did that too. This is like a resubmission.
We've been in very close contact with the staff at FTC. They have asked for a lot of information, like for years of promotions, for example, like that. We are, you know, doing our best to provide them this information. I believe it has come to really converge to at a certain level that they think this should be almost ready to submit for the committee to review. We are hoping very soon we will receive a notice that they have officially accepted our application. All that work, you know, since January or February, after the new year, I remember. It was kind of prep work by the staff. Okay?
The, the contract, on the other hand, expired on April 30th, so we needed to extend it, and extend it to June 30th. It is our expectation and we anticipate that and hopefully we will get a positive closure and response from the FTC before the end of June. Once we receive the approval, all the merger related work can start. You know, we can start consolidating our network, and we can start, you know, of course, our finance department will be very busy, you know, just to combine these financial statements and certify them, and then submit for stock exchange, you know, committee to review. Also, you know, in terms of the employee arrangement, right?
Our HR will be working on that as well. Once we receive the FTC approval, we can start all that without any delay. You know, even though it may take a few months for the Taiwan Stock Exchange to complete our following process, and then before we can have the effective merger date, the merger effective date. That really would not stop us or slow us down from doing the actual work that is required, especially to realize our synergy, especially on the network consolidation side. We still are looking to have the merger effective date somewhere in the Q4 . Okay? That is for your update. Okay?
For the Q2 and going forward, you know, even though it is because this is already May, so I'm already thinking about 2nd half, even though this is Q1 kind of update, but we are already 2 months into the Q2 . I'm looking at, you know, Q2 and going forward, right? Our priorities, you know, remain pretty much the same, right? We will keep growing our 5G adoption, and it has been growing in a very steady way. We want to continue and keep the momentum going. We will continue to grow our screen and smart IC business because we do see the demand because of the ESG awareness.
Then the C-band, you know, that will be implemented in October with EU certainly is impacting all of our manufacturers that do export. We still see a lot of demand in this area. You know, for the solutions we have in this area, it's a very good fit. This is where we will continue to grow. Also we will grow our consumers engagement. Then, you know, we want to also grow our ARPU, even though we already have the best ARPU in the industry, but we want to continue to improve that with value-added digital services such as the network feature I mentioned just now. Also we will accelerate the merger planning and prep work because it is really close now, right?
We will start consolidating our network, right after we receive FTC merger approval. Of course, you know, there are all other conditions to be met, but this is the plan. We are going to have our annual shareholders meeting on May 31st. That is like coming in like three weeks or so. Okay. With that, I conclude my presentation for you today, and then we now welcome your questions.
Thank you, President Chi. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Thank you. Our first question is coming from Neale Anderson of HSBC. Go ahead, please.
Thank you. Good afternoon. I have a couple of questions, please. The first one relates to the 5G business. I'm wondering if you can give us a bit more detail on the ARPU change from customers migrating from 4G to 5G, whether that's still consistent with what you were seeing last year. Whether you think that can extend through 2023. Perhaps I'll start with that one.
Okay. You are talking about like, in terms of the uplift, the uplift related?
Yeah. Exactly, yeah.
Okay. Yes. Yes. We are actually seeing about the same. It is. That's why even though in some media they have reported previously like, you know, kinda like, saying that Taiwan's 5G penetration wasn't good, we are actually pleased, you know, very pleased with what we see. Yes. It's definitely helping, you know, with our pool lift, you know, and our revenue, and our margin. You know, it is still doing just as well as we see last year.
Great. Okay. Thank you. The other one relates to the new business. I had a couple of queries on that. I think at the start of the year you mentioned that you were inclined to be a bit more cautious about cloud services and data centers. I just wanted to get an update whether you still feel that's, you know, correct and appropriate, whether you're seeing that play out in the market. The other one relates to the sort of allocation of capital here. Obviously, you've got a wide range of different businesses both in the consumer and the enterprise side. Given that you've now built, you know, some scale and repeat business in these areas, and you've mentioned the EMS in particular, what are the areas that are most appealing in terms of, I think, return on capital?
It's quite, you know, 'cause they're obviously very different businesses, so margins and capital invested or required will be quite different. Where are you seeing the best prospects from a return standpoint?
Okay. Thank you. On the first question about cloud and IBC. Cloud in particular, we have like two areas. I have a subsidiary, Nextlink. It has grown very fast in the past few years. I think last year it was like 40 some %, right? It was like on a very high growth. That is where I wanted to kind of scale back a little bit. Because especially some of the customers that use cloud are in the Bitcoin kind of business. You know, last year was the stock market and all that. It was a little bit scary. We wanted to kind of de-risk, you know, manage the risk.
This is one area, and because they are still relatively small, this is why I asked them to very carefully, you know, evaluate the credit, you know. You know, kind of like a spread the customers instead of having some big customers. That is all the, you know, like, the customer's mix and all that. I'd like them to manage that. That's why I wasn't, you know, asking them to continue at the same growth pace like they have in the past.
I think they are, you know, at a, at a nice, you know, revenue level, and now I want them to make sure, especially with the very, kind of still fluctuating economics or stock market per se. We want to be more cautious there. On the other hand, right, in Far EasTone, in our enterprise business unit, we have this digital transformation service. A lot of these digital transformation cases will require helping the enterprise to move their current IT infrastructure or upgrade their IT infrastructure and move them to cloud. That itself is not just a resale of a cloud capacity, but it is really a service. It's a managed service.
That require the expertise in IT infrastructure and in the cloud management. Then we have signed this strategic MOU with Microsoft, and we also became their LSP, one of their few LSPs in Taiwan. We are, you know, promoting the Azure-based cloud, you know, solutions as part of our digital transformation. We do see that part will continue to grow. It's not only the cloud piece, it's the whole solution that will grow. There are two aspects of cloud. From a cloud resale, you know, perspective, it helps the revenue to boost really fast. I want that to kind of like scale back a little bit.
On the other hand, the growth that we see with the real cloud service and usage that we manage the service and that is for the digital transformation, that is the part I do see, you know, the revenue growth in this area. It will continue for the years to come as well. Okay. IDC, it is more kind of a choice of the ESG. I have, you know, we have the new TPKC that is a green, you know, like a green building. We have reserved some IDC capacity. I was telling my team once we've filled the capacity and then that is it.
I'm not going to spend more capital to increase my IDC capacity to, you know, in other words, I'm not going to grow this IDC business beyond that. This is more from the ESG kind of a consideration, okay? I think that is the right thing to do. Okay. In terms of the capital, still, the majority of our CapEx is network related. For the new business solutions that we are looking at, so I have a IT team, so it's more like a software capitalization. It's not like the network CapEx with a lot of, you know, software license and equipment purchase and all that.
Compared to network related CapEx, you know, what we would need for the new business solutions are really, really, really small. Yeah. We have made some investments, right, into content production business. I think we announced it, we reported in the November IR call last year. We have a joint venture, you know, with some other companies in the business, entertainment business. Those are like from the investment perspective. CapEx wise, I think for the new solutions, they all will have good return. And I think especially when we hit, this because it's software based, so once you have more cases and then you reuse the solutions or only a certain extent of customization because we are platform module based software.
We do see as we sell more and then return will just get better and better. Okay? I hope that answer your question, Neale.
Yes. That's great. Thank you. Just one final query, if I may, just to clarify.
Sure.
As I understand it, correct me if I'm wrong, you can start the RAN consolidation. That would reduce your network costs potentially as soon as you get that approval. What then is the significance of the official merger effective date? That's some time later, is it? Or am I getting that the wrong way around?
that is when we will officially, like officially the APT will be finished. Right? you will the consumers will no longer see the APT-
Oh, I see. As a legal entity.
Right. Right. Right.
Yeah. Got it.
You're right. Yes. Also in terms of our, you know, financial statement filing, right? From the merger date, effective date, you know, onwards, right? That will be already combined with whatever I will receive from APT. That is really more on the financial aspect of it, and also because APT as a legal entity will be finished by then.
Right. You can still start booking some cost savings before then.
Um.
not?
No, no. We will, you know, because.
You'll start the work, but you won't be able to book it in the reported figures.
Yeah. That will really complicate the matter because they will be really focused on, you know, what they have, you know, on hand. All this work wouldn't finish until several months, right?
Mm.
When the merger effective date, our estimate is about four months after the FTC approval is received. The ongoing consolidation work will go beyond four months. Because the RAN, you know, consolidation, it's one network, I can't just like, okay, you turn on some of them, you know, while the others you work the rest of it. No. You really have to finish all the consolidation and turn them all on, you know, as one network at the same time. That is also why that is when we consider the RAN network is completed, the consolidation is completed. From an accounting perspective, that is also when the work is done. If any benefits or, you know, cost savings and all that will be, you know, booked after that.
Got it.
Does that help?
Yeah. Great. Thank you.
Okay. Sure.
Thank you. If you would like to ask the question, please press star one on your telephone keypad. Thank you. Next we'll have Peter Milliken of Deutsche Bank for questions. Go ahead, please.
Yeah. Hi, good afternoon. Nice results.
Thank you.
Look, my question is also about the merger. The last thing I remember was you talking about TWD 3 billion in EBITDA savings in year one following the merger. Is that still a number we should be thinking about?
Yes, that is still the case.
Okay. APT lost TWD 5.4 billion last year. I guess that means you're underwater in year 1, which is fine. Do you have any longer term views on synergies beyond year 1?
Not at this point. you know, when we, when we agreed to the merger and before that, we of course, did the DD, right? what we saw last year from APT wasn't anything we did not expect, let me put it that way.
Sure. Yes.
Yeah.
Just a normal year for them.
Unfortunately, right. Yeah. It is hard. That's why we wanted, we hope the government officials can really speed up, you know, because while they're taking their time to evaluate, you know, collect the data and all that, the small companies, they are suffering, right?
Mm.
It is hard to keep the morale up and then also keep the sales up. That is hard. When people are not certain, I think that really didn't help.
Mm.
As far as Far EasTone is concerned, we continue to do well, and we stay focused. We have team, you know, preparing for what would be required for the merger. On the other hand, people don't lose focus on what we have, right? In our own current business. That's why we can still post good results. It's harder for the small company. We like to see it through, you know, as soon as possible.
Yeah. Great. It sounds good. Thank you very much.
Thank you, Peter.
Thank you.
We're now in question and answer session. If you would like to ask the question, please press star one on your telephone keypad. Thank you. Next question is coming from Sarah Wang of UBS. Go ahead, please.
Thank you for the opportunity to ask a question. My question is regarding first quarter, say EBITDA or net profit growth. It seems the growth rate is actually quite good compared to our previous full year guidance. If put the APT merger aside, do we see upside risk to our full year guidance?
Okay. Well, we need to be compliant with our, you know, regulation here and all that. Our guidance that we posted really was only for the first half. Of course, you could see our Q1 already outperform our own guidance, right? Our Q2 , so far so good. We really can't go beyond that. Also depending on when the merger will be approved by FTC. We will update our forecast, you know, probably in our Q3 , you know, IR or we probably would do it like a quarter- by- quarter, but we cannot do that right now.
I see. Uh-huh.
I mean, it looks like I think our Q1 is already very good. Q1 is so far so good. We should have a strong first half finish.
I see. Given the new economy business is contributing like in... Revenue contribution is increasing, so, will there be any change in the seasonality or pattern of quarterly performance?
Well, actually, to the contrary. For, you know, last year in Q1 , we have a EMS project, which was a TWD 1 billion project, and we booked TWD 300 million revenue in the Q1 . It was kind of a high base. If you talk about the seasonality, it really wasn't seasonality. It really was, you know, influenced by the individual project. Some of them, you know, especially if this is the project we got, we win from the government and the amount could be very large. In this case, when you look at a Y-o-Y, it seems, oh, you were not as good as last quarter, but it was really skewed by the individual project.
We still expect the ICT piece to grow almost like 10% this year. It is. Of course, you know, you cannot complain when the project is too big, right? We like them to be all in good sizes and like a spread evenly. That's just usually is not the case. I wouldn't call it a seasonality when it comes to ICT. It really is the individual project. When we win them, when we get them, and then how long it takes to finish, you know. That's kind of, that's why in ICT business some quarters you see, okay, it's really good and, you know, and some if they have a little bit delay and it can change the picture, you know.
That is still something we are trying to, you know, get a better pattern there. So far the ICT projects are very exciting, they come in all kinds of shapes and forms. Yeah.
Got it. Thank you.
Sure. Thank you, Sarah.
Thank you. As a reminder, please press star one on your keypad if you would like to ask the question. Thank you. To ask a question, you may press star one on your keypad. Thank you. Ladies and gentlemen, we are now in question and answer session. If you would like to ask the question, please press star one on your telephone keypad. Thank you.
I understand this is a kind of late call, this, you know, for this afternoon, but my IR team, you know, stands by, so if there are any questions even after the call is finished, then I'm sure they will be more than happy to answer for you.
Okay, then. Thank you, President Chi. There are currently no questions at the moment. I'll pass the call back to Mr. Gary Lai. Gary, please proceed. Thank you.
Thank you again everyone to attend our Q1 result conference call. See you next quarter. Thank you.
Yeah. Thanks again for joining, this late call. Thank you for your support. Goodbye.
Thank you. Well, thank you for your participation in Far EasTone's conference. There will be a webcast replay within an hour. Please visit www.fareastone.com.tw under the Investor Relations section. You may now disconnect. Goodbye.