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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen. Welcome to the conference call. Our Chairperson today is Mr. Jamie Lin. Mr. Lin, please begin your call, and I'll be standing by for the Q&A. Thank you.
Thank you, operator. Hi, everyone. Good afternoon. Welcome to Taiwan Mobile's First Quarter 2023 Earnings Conference Call. Before I 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, further events or otherwise, and Taiwan Mobile Company Limited and/or hereafter, the company undertakes no -- 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 that's out of the way, let's head straight to business overview. Please turn to Page 4 for highlights of the quarter. So in first quarter 2023, our consolidated revenue rose by 8% Y-o-Y, underpinned by solid momentum from our 3 core engines, namely mobile, e-commerce and home broadband.
During the quarter, our mobile service revenue Y-o-Y growth accelerated to 5.4%, the fastest pace since 5G service were launch in third Q -- in the third quarter 2020. Our smartphone postpaid subs also exceeded 5.8 million, rising by 2.3% Y-o-Y. This was driven by our unique bundles, continued 5G conversion, improving 4G pricing environment and recovery of roaming businesses.
On the other hand, momo continued to outperform its peers and recorded double-digit e-commerce revenue growth in the quarter. As for the home broadband business, its 7% Y-o-Y revenue increase has helped Taiwan Mobile achieve a new milestone.
Our market share in the cable broadband industry has officially crossed the 22% mark. With Telecom service revenue growing at 6.2% Y-o-Y, the highest level since turning positive in 2Q '21. Telecom EBITDA and consolidated EBITDA both saw a 3% Y-o-Y uptick in 1Q '23.
Next, let's turn to Page 5 for a closer look at our mobile business. Our smartphone postpaid ARPU growth accelerated to 3.3% Y-o-Y in 1Q '23 from 1.5% a year ago. So more than doubled. In addition to steady monthly fee uplift from unique bundles and 5G renewals, our roaming revenue recorded another 47% sequential increase and recovered to over 60% of pre-COVID levels as international travel further recovered.
Moreover, our handset bundles sold during the quarter grew 12.7% Y-o-Y, outperforming the overall handset market, which is down by 7% during the quarter. This also contributed to our superior ARPU and MSR growth.
Our unique bundles, including momobile, Double Play, Disney+ and OP Life continued to support rate plan mix improvement. Accumulated users across these products -- product lines rose further and passed 1 million user milestone, accounting for 19% of our smartphone postpaid user base.
Momobile's user contribution to momo's e-commerce revenue grew to 9.7% by the end of the -- end of March, up from nearly 3.5% a year ago. Meanwhile, close to 60% of our Double Play users are on TWD 999 or higher rate plans, notably higher than the company average.
As for OP life bundles, over 50% of sign-ups were for TWD 1,399 or higher rate plans. And the proportion of users on 48 months or longer contracts was significantly higher than that of our regular 5G handset bundles. This is why the variety of offerings as well as ongoing investment in longer handset bundle contracts helped enhance our customer stickiness and resulted in a postpaid monthly churn rate of only 0.71% in 1Q '23. Setting another record low in company history.
Now let's turn to Page 6 for updates on our e-commerce business. Despite an already high revenue base, momo managed to maintain double-digit top line growth without sacrificing its profit margins. Both e-commerce take rates and EBITDA margins were stable on a Y-o-Y basis, resulting in a 12% Y-o-Y increase in e-commerce EBITDA.
On the logistics side, we had 55 warehouses as of quarter end, 7 more than a year ago, with total warehouse space rose by 31% Y-o-Y. The Southern distribution center should be up and running towards the end of the year or early next year with the central distribution center to follow in a few years, expanding the coverage area of our rapid deliveries and raising the bar for the industry.
As for [ momo coin ] and its ecosystem, we will continue to focus on broadening its usability and introducing customer loyalty programs dedicated to our momobile bundle users. In fact, we will be hosting our first-ever momo -- momobile members Day on May 20 or [Foreign Language] in Mandarin, which means [Foreign Language] or I love you.
During the day, a wide variety of deals, exclusive to momobile users will be available on Momo's platform for 24 hours. We expect events like this to further enhance stickiness and help us gain wireless share.
I'm also excited to announce that Taiwan Mobile has recently launched its very own buy now pay later service called [ OP Pay later ] or [Foreign Language] in Mandarin, which means big [indiscernible] pay first and you can pay in installment in English. It's launched on momo on April 27.
This innovative payment solution offers a seamless experience for Taiwan Mobile postpaid users. There's no need for registration, ID uploads or approval waiting times. When checking out on momo, Taiwan Mobile postpaid customers can effortlessly select [ OP Pay later ] to complete their purchases in just 3 simple steps.
This marks Taiwan Mobile's pioneering venture into the telco finance sector. By harnessing our extensive user base, data and AI models, we're able to determine the ideal credit limit for each customer. This ensures increased financial flexibility for them while also reducing the risk of overspending.
We anticipate that these services will continue to -- will contribute to significant growth of an expanded competitive -- an expanded competitive edge for both Taiwan Mobile and momo.
Our next, let's turn -- take a look at our broadband business on the next page. In 1Q '23, we continue to outperform our MSO peers in broadband service penetration. Steady demand for faster home connectivity and our Double Play bundles led to a healthy Y-o-Y increase in broadband subs and ARPU.
Our subscriber who opted for speeds of 300 megabits or higher rose by 72% Y-o-Y. As a result, broadband revenue grew by 7% Y-o-Y in 1Q '23. While we only ranked as the fourth largest MSO with 14% market share for basic TV services, we have grown our cable broadband market share to over 22% over the -- during the quarter.
Now let me pass the virtual mic to our CFO, George Chang, for financial overview.
Thanks, Jamie. Good afternoon. Let's start with the performance by business. In Q1 2023, consolidated revenue rose by 8% year-over-year. This was fueled by a 10% year-over-year rise in momo's revenue and faster telecom revenue growth.
Mobile service revenue grew year-over-year for 8 quarters in a row, thanks to ARPU improvement and made continuous 5G conversion and benign 4G pricing. Coupled with healthy expansion of our fixed-line service revenue, Telecom service revenue reached the highest level since 2Q '19. Our cash costs and expenses rose year-over-year in 1Q '23 due to a solid demand for our unique bundle plan, which made up 19% of our postpaid smartphone subscribers. This is 3x higher compared to a couple of years ago. As a result, telecom EBITDA saw a 3% uptick in 1Q '23.
Although momo's year-over-year EBITDA growth decelerated in Q1 '23 on the back of declines in the legacy TV catalog business, its core e-commerce business, profit margins were actually quite stable year-over-year. Broadband growth compensated for the drop in Pay-TV subscription and kept the cable TV EBITDA steady year-over-year.
Let's go to the results summary. In addition to a strong top line expansion, healthy EBITDA growth, along with muted D&A increase led to a 5% year-over-year rise in consolidated operating income in Q1 '23. Nonoperating expenses went up year-over-year due to higher financing costs from the rising interest rate and also because we had a higher base in 2022 on a higher investment gain. As a result, net income was flat year-over-year in Q1 2023.
Let's move on to the balance sheet analysis. Starting with assets. Receivables rose year-over-year owing to an increase in postpaid subscribers and marketing fee contributions from the mobile bundle plans. Inventories grew in a similar manner, driven by momo's business expansion and sufficient supply in smartphone.
Long-term investments rose year-over-year due to our strategic investments in cloud services, sharing economy and food delivery platforms during the last few quarters. But sequentially, the balance is largely flat as we adopt a more prudent approach to investing during the quarter.
Gross debt saw a mild uptick to TWD 69.6 billion from a year ago, but decreased from the previous quarter. About 70% of our long-term borrowings due in 1 year will be refinanced by a new 5-year social bond this quarter. As net debt and EBITDA both rose Y-o-Y, net debt-to-EBITDA ratio was stable.
Lastly, let's look at the cash flow analysis. Despite a 1.5% year-over-year rise in cash earnings, operating cash inflow did not increase in the quarter. This is because momo had a large decrease in payables in 1Q '23 compared to a year ago.
Investing outflow declined year-over-year as we held back on the acquisitions during the quarter. As for the financing activities, our healthy free cash flow generation allowed us to reduce the short-term borrowings. Telecom CapEx edged higher as we build 3,000 more 5G stations on the 700 megahertz band over the past year.
But as you may recall from our previous announcement, on a full year basis, 2023 telecom CapEx will decline year-over-year, so we do expect free cash flow to rise this year. Let me turn the presentation back to Jamie for event updates and key message.
All right. Thank you, George. Let's take a look at 2022 earnings distribution on Page 14. On May 3, Taiwan Mobile Board approved the proposal to distribute TWD 12.1 billion in cash dividends, translating to about 4.2% yield to shareholders. Dividend per share is TWD 4.3 on 2.82 billion shares, excluding treasury shares held by 100% owned subsidiaries.
Post earnings distribution, there will be TWD 37.2 billion excess reserves available for future dividend distribution.
And on the next page, merger with Taiwan Star. On February 24, both Taiwan Mobile and Taiwan Star's Boards reached an agreement on a new share exchange ratio of 1 Taiwan Star share for 0.03260 Taiwan Mobile shares versus 1 for 0.04508 shares previously. 204 million Taiwan Mobile shares are planned to be issued versus 282 million previously, effectively lowering the equity dilution by about 30%. The deal is still pending approvals from the Fair Trade Commission and the Taiwan Stock Exchange.
On the next page, we have summarized the awards and recognitions we received during the quarter for your reference. And finally, on Page 17. To wrap up our presentation, here is the key message we would like for you to take away with.
Key message: we're confident that our 3 primary growth engines, 5G, momo and home broadband will continue to strengthen our market position and enhance group synergies. Taiwan Mobile is dedicated to maximizing shareholder value through 2 key initiatives: one, seamlessly integrating with Taiwan Star following approvals from the FTC and TWSE; and two, executing our Telco Plus strategies to provide meaningful applications, including e-sports games and telco finance services while capitalizing on our expanding customer base data and AI capabilities.
All right. With that, we open the floor for questions. You're welcome to send your questions via the chat box on the webcast page. We will begin by addressing the telephone line questions before moving on to queries from the web page. So operator, please go ahead.
[Operator Instructions] Our first question comes from Neale Anderson with HSBC.
I have 2 questions, please. The first one is on the churn rate, particularly as it relates to the bundled users and the 4-year contract. So I'd assume the 19% on the bundled plans, they have a lower churn rate than the overall blended rate. So where -- if that's correct, where would you expect postpaid churn rates to go to? What would be the impact in terms of retention cost?
The second question routinely asked, I think, is the delta between the 4G customers upgrading to 5G? Are you still seeing that maintaining? Do you expect that to continue to remain high? Are people spending more as they move to 5G?
All right. Thank you, Neale. Yes, your thesis is right. So the 19% unique bundle do produce a lower churn rate as far as what we're observing right now. And so our plan is to grow that penetration much higher than 19% going forward, and we do expect that to bring down the churn rate over time, exactly where the churn rate will sort of -- how low the churn rate will go. It's hard to predict, but we do expect this trajectory to continue.
Your second question. So yes, we're seeing a steady uplift from people converting from 4G to 5G. And right now, we're not expecting that trend to sort of go away anytime soon.
And the next question comes from Sara with UBS.
So basically, I calculate the -- for the telecom business, the service revenue growth year-to-date in first quarter was around 6%. It seems EBITDA growth is slightly lower at 3% for the telecom business. May I ask the key reason because I recall that last year, the EBITDA growth was largely in line or slightly higher than the service revenue growth for the telecom business.
Sara, yes, I think year-to-date, yes, our EBITDA growth is little bit lower compared to the top line growth. For a couple of reasons, I would say one of them is that our marketing costs is a little bit higher compared to a year ago. And also, if you look at some of the network costs, for instance, whether you look at utility or even HR-related costs these items, we are seeing a sort of like an inflation right now. So we do see the cost on these items go higher this year. So yes, that does offset our revenue growth by a little bit.
And on top of that, like we presented during the briefing, we're selling handset bundles, the Y-o-Y 12.7% increase versus last year. So since there are a lot of our handset bundles subsidies are front load, so a portion of it is front loaded. So when we're accelerating in terms of our handset bundle, naturally, it would also drag our EBITDA down a little bit.
[Operator Instructions] And the next question comes from Peter Milliken with Deutsche Bank.
My question is about the merger. Do you have any estimated timeline on when it will be completed now? And the other question is do you have any thoughts on potential synergies from the merger?
Thank you. So in terms of timeline, right now, it's going to be bottom half of the year, but it's hard to say when the fair trade commission is going to give us a green light. So we -- it's hard for us to give more precise prediction. And we're working really hard to expedite the process with FTC. And we're also hoping that in the interest of the 280 million -- to 2.8 million customers and 2,000 employees of Taiwan Star. We also hope sort of hoping that -- we're also hoping that FTC would speed up this process. In terms of synergies, we're expecting the same level of synergies as of the sort of the briefing that we gave during the first quarter of 2022 when we first announced the deal.
[Operator Instructions]
Okay. While we are waiting for more questions on line. Here is actually a question in our chat box. The question is, since our company has not provided a guidance for 2023. Again, that's also because of FTC -- can we give some color on the business outlook for some of the latest developments? Jamie, you want to take that?
Sure. So as we just briefed during the presentation that we're seeing quite a strong top line expansion momentum coming out of our telecom business and also steady growth from Momo and sort of continued demand for home broadband from our cable TV business. And we have no reasons to believe that these momentums will subside anytime soon. So even though we didn't give a guidance, we can say that it looks like these momentum at least will continue. And in terms of [ mobile ] business, also, we're also expecting roaming business to continue to recover due to people sort of resume their travels. So I think that's what we can say about the outlook. I hope that answers your question. Operator, is there any questions from the phone line?
[Operator Instructions]
If not, there's another question from the chat box.
The question is, can we elaborate a little bit more on the FTC process. Our competitor is saying that they submitted the latest round of request for information recently are we in a similar process.
The short answer is yes. So in terms of the FTC process, they will usually go through a few rounds of request for information until they're satisfied with all the information that you have provided to them. And from there, they will kick off the official process. And once the official process kicked off, then they have a limited timeframe to give you a yes or no. So yes, that's the FTC process. And we're in the same ROI phase with the other deal. So I hope that answers your question, Rob. And there's another one.
Okay. The next one, adapting about our medium and long-term outlook for CapEx. For 2023, CapEx, as you may have recall from our previous announcement, which we passed the board to a solution, I believe that was in Q1, early Q1 2023 and I think our guidance was for telecom CapEx down to TWD 5 billion-ish, okay? So that's significantly down from a year ago. So that's why earlier I mentioned that if you look at purely from a free cash flow from a telecom perspective, yes, we do expect free cash flow to increase this year. Momo's CapEx looks to be higher than last year, but that's only because it actually covers multiyear plans. So they are building a new warehouse in Central Taiwan. So that's not going to -- that doesn't mean that it will spend everything this year. So the cash CapEx will actually be spread over the range of maybe 3 to 4 years. So just don't get confused on that. Telecom CapEx will be down this year.
In terms of medium- to long-term outlook, we don't give the guidance usually, but if you were to think about 5G build-out, it's probably post its peak. And in terms of Momo, after the 2 large distribution centers sort of -- it's hard to expect that investment will accelerate. So yes, so that's maybe some colors on the medium- to long-term outlook that we can give. So it looks like there's no more questions from the chat box. Operator, is there any more from the telephone line?
Yes, we do have 1 more follow-up question from Peter with Deutsche Bank.
On roaming, you talk about how it's back to 60% of pre-COVID levels. Do you think getting back to 100% at some point is still realistic? Or have roaming rates and usage patterns changed in a more fundamental way where people just don't want or need to spend as much as they did before?
Right now, in terms of inbound sort of travel traffic. I don't think it's back to pre-COVID peak yet. So I think there's still growth momentum there. In terms of outbound, we're also not observing too much of a behavior change. So we wouldn't say that it won't go back to pre-COVID level. If anything, we all know that sort of pre-COVID, there is organic Y-o-Y increase in sort of both outbound and inbound number of travelers. So if anything, we wouldn't think that the ceiling is set there should be a medium- to long-term organic growth sort of possibilities for roaming business.
[Operator Instructions]
Okay. Here's another question from the chat box. Why is our operating profit growth higher than net profit growth. As mentioned previously, we do see a higher financing cost this year. So as you guys know, we do have a pretty sizable debt balance. But the good thing is we think that it's manageable. As we just mentioned, a good portion of our long-term borrowings during 1 year will be financed with the governance bond, which we are launching this quarter. I don't think we have disclosed the information yet, but I can assure you that the interest rate is actually lower than what some of the market is expecting -- so that's a good news. So yes, I think 1 of the reason is definitely the higher financing costs, which is everyone is facing right now. The other reason is that Q1 last year, we did have some investment gain. So that created a higher year-over-year comparable base.
So operator, is there any more questions from the line?
So there's no further question at this point in time.
We do have one more question from the chat box.
There's no further questions from the audio.
Yes. There is one question from the chat box. It's asking for the difference in terms of interest costs between our [indiscernible] bonds and the bonds that we are planning to issue. I don't remember all the details on top of my head. Sorry about that. But as you can imagine, I mean, our debt balance I believe it's about [ TWD 70 billion ]. So let's say if we do see 30 points increase year-over-year, that's already TWD 200 million per year or close to TWD 50 million, TWD 60 million a quarter. So -- and I believe that our first quarter year-over-year interest cost increase is about somewhere between TWD 50 million to TWD 70 million a quarter. So that probably gives you a ballpark figure what type of higher interest costs we're talking about. And for this particular bond, again, I think we are going to issue a press release here once it's listed.
All right, operator, is there any more questions from the line?
[Operator Instructions] There's no further question at this point in time.
We do have one more question from the chat box. So we'll take that as the last question. And after that, we'll wrap up the call.
Okay. The question is also continuing to be on debt. It's asking a small portion of the debt has been repriced or refinanced. Does that mean we expect continued increase in interest costs. Yes or no, again, because we do -- if you look at our corporate bond structure, we do have quite a few that are not going to expire anytime soon. So perhaps by those fires, which probably another 4, 5 years, some of them, we are already going to see interest rates coming down. So the answer is not necessarily. Again, the number I gave earlier for Q1 interest costs increased Y-o-Y, probably gives you a reasonable ballpark figure to look at what we are talking about for this year. But no, it doesn't mean that we're going to see continuous increase next year or the year after now.
All right. Thank you, George. So operator, should we call it a day?
Okay. There's no further questions. Shall we conclude the call now?
Yes, please. Thank you, everyone, for joining this edition of the conference. We look forward to seeing you next time.
Thank you for your participation. This concludes the conference. Thank you.