Earnings Call: Q2 2021

Jul 30, 2021

Welcome everyone to Far Easton's 2021 Second Quarter Earnings Conference Call. All lines have been placed 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 a question. And for your information, the webcast replay will be available within an hour after the conference has finished. Please visit www.fridaystone.com. Tw onto the Investor Relations section. And now I would like to introduce Mr. Gary Lai, the IR Officer. And Gary, please begin. Good afternoon, everyone. Thank you very much to attend Far Easton's Q2 2021 Results Conference Call. Our President, Qi and CFO, Sharon, both join the call with us today. Before Qi's brief presentation, please pay attention to our Safe Harbor statement in the presentation presentation. Let me pass to Chi. Thank you, Gary. Good afternoon, ladies and gentlemen. So I will report to you our first half and the second quarter in particular, our performance. So if you would turn to page 3, we start with Taiwan's mobile market status. And as you can see on the left hand side, the chart shows that, Taiwan's mobile market penetration has already reached more than 125%. This is a very saturated market. However, the good news is, I think thanks to 5 gs, the mobile service revenue, the declining path has finally come to an end. So in the Q2, the combined for the big three combined mobile service revenue has turned around and then Y o Y becomes positive. However, FET has taken the lead and we turned positive in March. All right. And for our financial performance, for the Q2, our total revenue reached RMB19.4 billion or RMB19.5 billion and then it is 1.5% better than our board target and it is actually 4.4% better than a year ago. And also our EBITDA is $6,900,000,000 and almost $7,000,000,000 And then it is 5% over our target and 2% year over year growth. And for the net income, now remember for the first half last year, right, we had we did not have 5 gs amortization yet. And then of course, we started amortization in August. So for the first half, the net income and EPS, if we compare Y o Y, it wouldn't be very good. However, our achieve rate for target for our board target is 20% for the Q2. So it was a very good quarter. And but then year over year with the different base and then it is almost 12% led. And then for the first half the result we have reached RMB40.3 billion for revenue and RMB13.8 billion for EBITDA. And our net income is RMB3.8 billion. And then if you look at achieve rate in terms of our target, it's 15% better. And so it's the case with our EPS. Okay. And then if we look at our debt or free cash flow situation, we are improving our net debt and also the net debt to EBITDA ratio. So our net debt from the Q1, it was at a RMB63,800,000,000 or so level and has come down to RMB61.5 billion. And the net debt ratio also has improved from RMB2.33 to RMB2.24. And our free cash flow has increased from 3,800,000,000 to 6,600,000,000 at the end of the second quarter. And for the cash based CapEx, for the Q1, we only spent about $2,200,000,000 and then but then in the second quarter, we sped up a little bit, speed up a little bit and it's now in 5,300,000,000. And our budget for this year is actually at about RMB14.9 billion and then so we do have more cash back OpEx cash CapEx expected for the second half. And then so we are in line with our guidance. Okay. Now in terms of FET's mobile service growth, this is as I pointed out in March we already turned positive year over year. And if you just look at a month over month from this chart on the left, you can see in the second quarter, after Q2 that's when we launched 5 gs commercially. So you can see for the amount of the mobile service revenue every quarter it has continued to grow. And finally, in March, we have already turned positive. So for the entire second quarter, it is positive by 1.7% year over year. And then this 5 gs also helped our postpaid and blended ARPU. So for FET, our blended ARPU and postpaid ARPU resume growth in March May, respectively. And the percentage is not a lot, but then it is significant in terms of we have had this declining ARPU for so many quarters now and then that has finally been turned around. All right. And then in terms of our total revenue that is including both telecom and our new economy. So it is also very encouraging for 3 quarters in a row that our worldwide growth continues. So when it comes to the Q2, we have a RMB19.5 billion of the revenue total. And then on the right hand side for the EBITDA, we also had it has rebounded year over year as it turned positive, mainly attributed to the margin improvement and our cost optimization. For the revenue, even though 5 gs is helping with the uplift and all that, but in telecom basically it still doesn't it's a saturated market, so it doesn't grow as fast. So a big part of the revenue growth was driven by better handset sales and also the ICT revenue that has been our growing engine. Okay. So the next is business highlights. Subscribers, even though this is a saturated market, in terms of a number of postpaid submarkets, we have been increasing the number of post base customers for 11th quarters in a row now. And it is still the case quarter this year. And the YOI is one. And in terms of the churn, the market has been for the 2.3% better holders granted and we also continue to work on our churn. So it continues to hit our record low. It is now at 1%, but then we are continuing to improve it with more data analytics and customer insights. In terms of 5 gs, so far we have already deployed more than 7,500 5 gs stations out there And we already covered 90% of the 6 metropolitan areas. And then for the nationwide, it's already above 80%. So we are targeting to deploy 9,000 by the end of the year, if not sooner. And also the coverage for the whole nation or whole island will be more than 90% as well. And we are also approaching 900,000 5 gs subscribers and we're still targeting to reach 1,000,000 by the end of August. And also for those that sign up for 5 gs and then 90% more than 90% of them sign up for the high rate plan that is $9.99 a month or above that is like $13.99 So and then more than 20% of our monthly fee uplift is contributed by the 5 gs renewals. And then our 5 gs, it didn't take us long to reach the world class 5 gs performance. So we have had our number 1 for several quarters in a row. And recently one of the third party has certified Chunghwa, our peers, to be the number 1 and we congratulate them. And because we have been expecting them to catch up eventually and we are glad they caught up. And so now we can we are really improving together and I think that's good competition and that is good for the consumers. And then so they know other than Zhong Hao being always the number 1 or incumbent, they do have a choice and alternative that is for YiTong to choose from. We are glad we're both in the top 2 or the top performance, world class performance together. All right. And then on the for our new economy, just a little bit of history. So when we started this journey back in 2016, the new economy accounted for only 5% of our total revenue. But today, for the first half and this year, we actually had 16% as our target. But then for the first half, we already reached the target. So in the first half, the new economy revenue already accounted for 16% of our total revenue. Okay. So we are happy to see the growth that from many areas of the new economy. On the right hand side, you gave some examples. For example, like our ICT business, smart ICT business, even though because of the pandemic last year, it has a long haul effect. So for the first half, in terms of revenue realization, it's only 6% growth but it's still its growth. And then if you look at the contract that we were able to win in the Q1 and the contract value is almost 50% growth than the year before. And for the media services, those are like the text, the SMS, which is a traditional service granted, but then because of all the one time pass word and then because of pandemic a lot of trend lines. So this becomes very popular way of security confirmation and all that. And on top of it we also have this data analytics that we offer to companies for more fixed service, targeted marketing. So this is also growing and contributing to the media service growth here for the 30% year over year. And another thing that is definitely warrants mentioning is our mobile commerce. Although it is very small still and then last year we had $2,300,000,000 of revenue from this small Friday shopping. But then our its growth for the first half is very impressive. In May, it has reached 73.6% growth. In June, it's like a 56.6%. But then for the first half as a whole, that we see 37% of growth. And then it needs to grow as we have this mobile circle that we launched. And it help bring more traffic and also with our personalized recommendation engine that we will be able to boost private shopping sales as well. And then also we continue to be the number one direct carrier billing business And then it is also showing a growth of 13% year over year. And then in the ICT area, we do see the rising demand, especially it's a smart ICT demand. And a lot of this is really boosted by the government's attention and then also government itself is going through digital transformation. So we see smart government type of initiative. And then also the smart health, this is the first application we have been advocating that is the telemedicine because we see the real need and then that 5 gs is able to fulfill for the society and especially benefit those rural areas residents from lack of or insufficient medical resources. And this with the Ministry of Health and Welfare support this service that we launched for one province, that's Taitung well, one county actually, one county, Taitung County is now going to be prevalent to all of the rural areas in Taiwan. So this is also an opportunity for us since we are the first to launch this service and the model and the platform become the standard for the Ministry of Health and Welfare. And then also we have provided this National Health Insurance Card. That is like another form of ID for Taiwan people here. And then we also provided a mobile version of it as a POC for the Ministry of Health and Welfare. And the use of it will support more use of the 5 gs telemedicine service. So it will complete this service because right now we have the 5 gs telemedicine service and the patient is at the far end. But then for the doctors in the hospital here, you cannot have the physical card to scan or to process the payment. So with the mobile card and this will be just resolved. So each piece to the puzzle is being put together. And then Far Easton is definitely defining that solution and is delivering that solution. In the middle column, we talked about various projects that are funded by the government. And then and what I have to mention, Chunghwa being the incumbent. So it is very hard for us to compete in the government segment. But then in the past, I have to say my team has been really doing very well. We've worked very hard and I think we have earned our credibility. And so people start seeing that and we actually start getting a lot more winning, a lot more contracts with the government, which is encouraging and we definitely appreciate that and then we welcome more opportunities in this area. So this has also helped fuel our growth in the ICT area. So various government agencies they are going through the digital transformation and we provided not only the IT kind of support from infrastructure to build the data warehouse, data platform in order to provide the data analytics for the government. And also we have a subsidiary that is focused on cybersecurity. So this is combined with our software capability that Far Easton has. So we are into these cloud and cybersecurity applications as well. And then recently there is air condition in every classroom initiative. The government has already passed the budget for it. And then now all these counties that have this have these projects already formulated. We actually won more than 6. This is big win for us and then we are using our homegrown solution, 50% of energy management system. And then this is software based solution. So this is a good win for us. And then also it will contribute to about $1,000,000,000 or so revenue once it's all completed in the second half of the year. Okay. And the 5 gs private network since we have a really world class performance 5 gs and so the 5 gs private network is another area of our focus. One of the verticals that will in particular require the private network is in the smart manufacturing area. So we our cooperation was one of the biggest delta electronics. So that is the 1st 5 gs private network smart factory that we deployed or launched early next year last year, I'm sorry, early last year. And then because of the pandemic, so certainly a lot of companies were more tight or more cautious in terms of their capital spending. But we do see from this particular example that the good return for this kind of investment to upgrade your factory with 5 gs kind of private network, the communication network and with smart with AI and then this productivity increase from the factory is going to well justify the investment. And also we have other different verticals or in the southern areas that where they need private networks that we can design for them as we have very good network solution and also best performance 5 gs that we can provide. So this is one area we continue to grow. And with the pandemic almost behind us and we see the even during the pandemic, we actually were asked for some emergency help and support to upgrade some of the factories with the 5 gs network. So that actually gave us some business opportunities, business deals as well. And then it comes to the some of the major awards that we received in the Q2. And the first one is from the institutional investor. And some of you probably have voted for Far Easton for us and we appreciate that. Certainly, it's a great honor and we'll continue to do better. Thank you. And we also have some other awards in ESG areas such as our carbon disclosure project and we are one of the CDP supplier engagement leaders that is rated A. And our company is again ranked top 5 percent corporate governance company. That's 7 years in a row. Okay. And we have other innovation related awards as well just for your information. And then we even during pandemic, we support our community and then that just didn't stop. So earlier I mentioned about our telemedicine service. That was for the rural areas as always that is what the government has planned. But then as the pandemic hit Taiwan in May, so we saw what other the rest of the globe saw last year, right? People do not want to go to the hospital. And then that was quite sudden in May. So we work with Far Eastern Hospital and then make this telemedicine available on the mobile as an application. So for patients that they don't want to go to the hospital for non COVID-nineteen related issues that they can actually use our platform, this communication platform to consult with the doctors. And then so this was deployed. And then shortly after that, we already have thousands of patients benefit from that. And then we are working with 5 other hospitals at the same time to deploy this similar solution. And then so I'm sure this will become more prevalent as people start seeing the benefit of it. It's not just for rural areas, even for urban areas. People don't have to spend that much time in the hospital waiting if we have a better communication system over good 5 gs network, over good 5 gs phone and then they can be seen by the doctors over this mobile communication. And also as Thailand government has finally approved to have more testing vehicles or stations to be set up for vaccination or testing. And then there was a great need. And then so we were setting up these 5 gs boosters or just to make sure that their communication needs can be better served. And also because of the pandemic, a lot of people started working from home. So the network traffic definitely changed. And a lot of people cannot work from home and they stay home and like the for students they will have to do this online learning. So all that contribute to the 30% year over year growth in terms of our network usage. So that's a lot of increase in the very short of a time. So we do see more complaints coming from the users over the from the consumers. So we have been deploying additional 4 year network capacity for this release. And then now it's already getting better as more people now start going back to work and then life resumes a little bit more normal now. Okay. We also provide cloud service for the COVID-nineteen vaccination registration. This is a big thing, right, because everybody wants to almost everybody wants to get vaccinated. This registration and reservation system is hosted on the cloud service that's provided by Far Easton. And also for the COVID-nineteen contact tracing and this is using the geofencing and geolocation and then this has a lot to do with the capability for geofencing and geolocating and FED is best at that amount. All the telcos I can say that and then to support this government solution. And also we have donated SIM cards, tablets and the wireless routers for rural students or for those that are in need in order for them to be able to do the remote learning. And that is just some small things that we do as kind of part of our profession and we can easily or readily help our communities. Okay. And so for our second half priority, we will accelerate our 5 gs coverage and user penetration and that is in terms of covering the nationwide for to reach 90%. And for our user penetration, our first major milestone will be the 1,000,000 that we are looking at end of August. And then hopefully another $100,000 to $2,000 in by the end of the year. And also we will continue to grow the total customer value and then on the consumer side. So we use this mobile circle that will combine our telecom services and the new economy service that either we created from in house like our Friday video and then our shopping. And then we also work with many customers many partners that will provide and will curate different services that will best suit our customer needs because we have good customer 360 kind of insight and then we can do more personalized recommendation for our consumers. And then so it's not just a commercial to them but it's some helpful information for them. And then so we can grow the total revenue or the total contributions of these subscribers that they can consume through this mobile circle for the services that we provide to them. Okay. And on the industry or enterprise side, we will continue to expand our ITT business and also we have won many projects. So the second half we will have a lot of projects to finish. And then at the same time we'll continue to build our alliance with other partners that may be across different industries. And then as we see many of these ICT projects or ICT related work one company cannot do it all. So the ecosystem kind of support is very important. And then we will continue to control our costs and we will use our capital smartly. And so even we only give ourselves a 9,000 even though that is already more than some of our peers. But then we want to make sure we deploy the stations at the right place and then they will and then it will also maximize the return on what these stations can generate in terms of the customers that they can manage benefit from them. Okay. And last but not least, we will continue to enhance our customer experience, customer first, customer centers. It's always something that we want to emphasize and that should be part of Far Eastern CNA and we need to continue to do better. Okay. And that will be my last slide and I now welcome your questions. Yes. Thank you, President Qi. And ladies and gentlemen, we will now begin our question and answer session. And the first question is coming from Sarah Wong of Morgan Stanley. Go ahead please. Thank you. I have three questions. So first is on would you please elaborate more on how would you enhance mobile customer value besides like operating customers to 5 gs? And then second question is regarding the ICT revenue. So when I ask what percentage of the ICT revenue is recurring rather than project based? And then my third question is regarding the full year CapEx guidance. Is that remain unchanged? And then what's the target number of 5 gs base stations at the year end? Thank you. Okay. Thank you, Sarah. So for the first question about Mobile Circle. So we have this is a 1 year long project that we actually kicked off. So, so far, we have 250 2,500,000 downloads of this app, okay? So through this app, the user not only can look at their telecom services, their bills and then different rate plans and then also different kinds of devices that they need. They also see the other services that we offer such as the digital entertainment. So our Friday music, our Friday video. And also it has this difference like a product of the month, product of the week or product of the day, those kind of offers from our Friday shopping. So and then every customer that with their different information inside that we have, so 2 different people that they log into the application they may see different first homepage, what will show on the homepage, what are recommended for them from in terms of video choices will be different. And then what are the products that we show on the first page of them to recommend for them to buy is also different. So we use personalized recommendation engine in this. So each time the customer log in or sign into the app and then they stay actually active And then they will see different things that will trigger their needs and then to buy things. And then we have with customers or with other partners that we also offer because we don't own restaurants and all that. But then we have alliance with like partnership with 711. We have like with the 3 major convenience stores in convenience store chains in Taiwan. So we offer this like a coffee in any of them. So you have this coffee coupon that you can redeem in any of these 3 chain stores that you can get coffee. And then that is for the convenience. And also with Kentucky Fried Chicken for example and then they offer better discounts to Far East owned subscribers. So and then we gave this we kick in these discounts for our subscribers. And this mobile circle is for Far Easton subscribers only. So this is a reward, a membership program kind of thing. And then it serves several purposes. First is like we want to strengthen the engagement with our consumers. We want to strengthen their loyalty. So they see themselves as far east customers and then there is a lot that we offer to our valued customers. And then through this engagement there are different services that we can provide to serve their needs. And once they consume through this mobile circle and then those become and then either we have profit sharing with the partners or those are the services that we created ourselves. So by doing this, we are no longer only looking at these customers as they pay $13.99 or $9.99 a month for the telecom service. But there's all these additional things that they consume or they buy from us. So that's how we can add up the value or contribution every customer of ours that will be able to contribute. Okay, that answer your first question. And the second question is regarding the ICT revenue, like how much or what's the percentage of a recurring? And do we have an answer right away? No. But if we have some of the maintenance service, so we can have this kind of maintenance of each voluntary period. So there will be around 10% at least. So it depends on the different countries. Okay. Yes. So for the ICT business, a lot of them actually would have after the project is finished, But it's not the whole thing is finished because what would come after that is the maintenance, the managed service that they will ask us to provide. So that is that will become the recurring part. We don't and then that usually is about 10%. So right now, we actually don't have exact number on that and we can look into it. And some projects also go from here. So that's also different. Right. Just like the Smart Street Light project, right? That is 15 years of contract. And then so we will get this managed service for 15 years. So it varies, it varies. And then we can look at that percentage overall. All right. And the third question I think is about 5 gs. And then Sarah, are you talking about guidance on CVS, Yes. So, if there's any change in the CapEx guidance, yes, for this year and then what's our target number of 5 gs base station by the end of this year? Okay. So that's what I have said, 9,000, that's our budget number. And also, right now, we already have deployed 700. So there's like another 1500 to go. Okay. Sarah, is that what you're asking for? Yes, yes. And then is there any change in the guidance? No. CapEx or even revenue or profit, I think. Got it. Thank you. Sure. Okay. There are currently no questions at this moment. Then I'll pass the call back to Mr. Gary Lai. Gary, please proceed. Thank you. Again, thank you very much to attend our Q2 results conference call. So see you next quarter. And if you do find some questions later, you can always contact Gary and his team, Amy. Thank you. Thank you very much. Thank you. Bye bye. Thank you. And ladies and gentlemen, we thank you very much for your participation in Far East Jones conference. There will be a webcast replay within an hour. Please visit www.fardystone.com.tw under the Investor Relations section. You may now disconnect. Goodbye.