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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 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 Co., Limited, or hereafter the company, undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation. All right. Now that we have done -- we're done with that, let's head straight to business overview. Please turn to Page 4 for highlights of the quarter. In 2Q '23, consolidated revenue rose by 5% year-over-year, underpinned by solid output from our 3 core engines, namely 5G, E-commerce and Home Broadband. During the quarter, our Mobile Service revenue growth accelerated again to 6% Y-o-Y, the fastest pace since 5G service launch in 3Q '20, while our smartphone postpaid subs also saw a healthy 2.3% Y-o-Y uptick. These great results were mainly driven by our unique bundles, steady 5G conversion, improving 4G pricing environment and further recovery of our roaming revenues.
Meanwhile, Momo continued to outperform its peers and recorded a 6% Y-o-Y growth in E-commerce revenue during the quarter. Our Home Broadband business also delivered a 6% revenue growth in 2Q '23, aided by our expanding footprint. With Telecom Service revenue growing another 6% Y-o-Y during the quarter, Telecom EBITDA rose to the highest level since 4Q '19. As a result, we broke our company record in terms of consolidated EBITDA during the quarter. Yes.
Next, let's turn to Page 5 for a closer look at our Mobile Business. During 2Q '23, we continue to execute our sustainable growth foundation strategy exceptionally. Our smartphone postpaid ARPU grew by 2.8% and hit TWD 700 mark, lifted by unique bundles, 5G renewals and roaming revenues, which recorded 30% sequential growth and has returned to over 70% of pre-COVID levels as international travel further recovered. Our unique bundles, i.e. momobile, Double Play, Disney+ and OP Life continue to 45 rate plan mix improvement. Accumulated users across these unique bundles rose further and accounted for 21% of our smartphone postpaid user base by the end of 2Q '23. Our momobile bundles continue to gain traction with users while 60% of our Double Play users are on TWD 999 or higher rate plan, which is notably higher than the company average. As for OP bundle -- as for OP Life bundles, half of users are on TWD 1,399 or higher rate plans. And the proportion of users on 48 months or longer contracts is much higher than that of our regular 5G handset bundles. This while 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 of 0.73% in 1H '23, setting another company record on a half year basis.
Now let's turn to Page 6 for updates on our E-commerce business. Given an already high revenue base and further recovery of leisure and physical retail, momo's e-commerce revenue growth decelerated to 6% Y-o-Y in 2Q '23, albeit higher than industry growth. Our e-commerce profitability was also ahead of the pack in the quarter. On the Logistics side, we have built 55 warehouses as of quarter end, 4 more than a year ago, while our active SKUs reached TWD 4.6 million. The southern distribution centers should be up and running early next year, while central distribution center to follow in a few years. This will expand the coverage area of our rapid delivery services. As for Momo coin and its ecosystem, we will continue to focus on broadening its feasibility. Now let's take a look at our Broadband business on the next page. In 2Q '23, we continue to focus on growing our Cable Broadband business, 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 subscribers were up for speeds of 300 megabps or higher rose by 65% Y-o-Y. As a result, Broadband revenue grew by 6% Y-o-Y in 2Q '23. While we only rank as the #4 largest MSO in -- with an 11% footprint for basic TV services, we have expanded our cable broadband coverage to 85% of the country by leveraging our Double Play bundles. Now let me pass the virtual mic over to our CFO, George Chang, for financial overview.
Good afternoon, everyone. Let's start with the performance side business. In 2Q '23, consolidated revenue rose by 5% Y-o-Y, driven by solid performance in our Telecom business. Mobile service revenue grew Y-o-Y for 9 quarters in a row, thanks to ARPU improvement on this steady 5G conversion and benign 4G pricing. This, along with a healthy expansion of the fixed line service revenue, allowed us to record our highest Telecom Service revenue since 4Q '18.
As a result, Telecom EBITDA increased by 2% Y-o-Y and helped our consolidated EBITDA reached a historical high. The decline in momo's EBITDA was attributable to lower E-commerce revenue growth and weaker Legacy business, however, its E-commerce take rate was stable Y-o-Y. Broadband growth compensated for the drop in Pay-TV subscription and kept Cable TV EBITDA steady Y-o-Y during the quarter. Let's go to the results summary. With a healthy performance in our 3 core engines, 5G, E-commerce and Home Broadband, consolidated revenue rose 5% Y-o-Y in the quarter. Our cash cost and expenses increased Y-o-Y during the quarter, owing to solid demand of our unique bundle plan, which made up 21% of our postpaid smartphone subscribers. Consolidated operating income recorded a 2% Y-o-Y uptick in 2Q '23, giving a new high since 1Q '20, driven by healthy Telecom EBITDA growth [indiscernible] D&A expenses. Nonoperating expenses went up Y-o-Y on the back of higher financing costs from rising interest rates as well as high base and disposal gain. As a result, net income grew by 1% Y-o-Y in 2Q '23. Let's move on to balance sheet. Starting with assets. Receivables rose Y-o-Y owing to an increase in postpaid subscribers and monthly fee contribution from our mobile bundle plans. Inventories grew Y-o-Y along with Momo's business expansion. Long-term investments were Y-o-Y due to the valuation gains and our strategic investment in cloud services and new economy businesses. As for liabilities, other current liabilities went up sequentially following AGM's approval of dividend payment. TWD 37.2 billion of expense reserve remains available for future dividend top-up. Despite the bonds issuance of TWD 6.5 billion for 5 years at 1.537% during the quarter, gross debt declined by 6% Y-o-Y to TWD 63.21 billion as we repaid short-term borrowings. Therefore, the proportion of long-term borrowings increased to over 70%, up from 62% a year ago. Benefiting from decent free cash flow generation, our net debt to EBITDA fell to 1.47x in 2Q '23, the lowest since 4Q '19. On cash flow, 2Q '23 operating cash inflow rose by 13% Y-o-Y, thanks to steady Telecom EBITDA growth as well as good handset inventory turnover. Investing cash outflow decreased Y-o-Y as both CapEx investment came off from a high base a year ago associated with Momo distribution center and our participation in LINE Bank's rights issue last year. As for financing activities, our healthy free cash flow generation allowed us to reduce the short-term borrowings, benefiting from improving operating cash inflow and decrease in cash CapEx. First half 2023 free cash flow calculated on a pre-IFRS 16 basis increased by 10% Y-o-Y to TWD 6.81 billion, translating into an annualized free cash flow yield of 5.1%. Let me turn the presentation back to Jamie for event updates and key message.
All right. Thank you, George. So it is my greatest pleasure to share that in Institutional Investors 2023 Asia executive team rankings announced in June, Taiwan Mobile was voted the #1 telecom company in the rest of Asia ranking for the second year in a row. We also received the All Star status as we won first place in all categories. More importantly, we were the only Taiwanese telecom company to make it in a much more competitive overall AGR ranking, which included our much bigger Mainland China competitors, our peers. And placed first in the sector by scoring the highest in Best CEO, Best CFO, Best IR program, Best IR team, Best ESG and Best Company Board categories. I would like to take this opportunity to express our sincerest gratitude to our investors and covering analysts. We could not have achieved this without your trust and support. We remain committed to improving further. Thank you, guys. We really appreciate every single one of your votes. I would also like to share some of our recent ESG highlights. Taiwan Mobile has declared 2023 as the starting year of our biodiversity conservation and is committed to achieve 0 deforestation by 2050. To reach this goal, we have embarked on 4 new projects, including the introduction of TNFD, the Task force on Nature-related Financial Disclosures to better inform stakeholders of our strategy and governance regarding nature-related risks and opportunities. Furthermore, our Solar for Good project, which combines social care and green energy initiatives, has already built solar power systems and generated stable income for 6 NPOs. The seventh year of this project has just kicked off. If you're interested in supporting this meaningful project, please do contact my colleagues over at the IR team.
Next, let's turn to Page 15 for a special announcement we would like to make. 2023 CapEx budget additions on August 4, 2023, the Board approved network-related CapEx budget additions for 2023. Total CapEx budget will be TWD 15.653 billion, with actual cash payments subject to the actual progress of the network deployment. Finally, to wrap up our presentation, here is the key message we like for you to take away with. Key message. TWM continues to fire on all cylinders with our unique bundles; momobile, Double Play, Disney+ and OP Life, propelling our Telecom Service revenue. Coupled with steady growth in E-commerce and Home Broadband, our 2Q '23 consolidated EBITDA reached an all-time high. Free cash flow also went up by 10% Y-o-Y during the first half of this year, reflecting our strong fundamentals. Meanwhile, we are one step closer towards establishing a sustainable foundation for longer-term growth -- actually for long-term growth.
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.
Ladies and gentlemen, we will now poll for questions. [Operator Instructions] Our first question comes from Neale Anderson with HSBC.
I have 2 questions, please. The first one relates to the cash costs. You mentioned that has gone up because of the increase in the bundled subscribers. Could you give us a little bit more idea on how you see the trajectory of that unfolding? I guess it's going to remain high for the coming quarters. But then what I assume is you'll see lower retention costs over the next couple of years. But how do you see that panning out? That's the first question. The second one is to get an update on the Taiwan Star situation. Thanks very much.
Thank you, Neale. So in terms of cash costs, especially the spending on [indiscernible] subsidies, we don't see the trajectory to continue to go up too much further. And like you said, we do expect this investment to bring benefits in the long run in terms of reduced churn rate and also retention cost. In terms of the Taiwan Star deal, right now, it's still pending FTC approval. And FTC has earlier accepted the deal, which means that they will have accepted and extended the deal, so which means that they will have until early November to give us the final verdict on the application. I hope those answers your question.
Our next question comes from Peter Milliken with Deutsche Bank.
Congratulations on the good results. My question is really about some of the bundled services that you were mentioning, one of them being OP Life. Now can you explain to us a little bit more about what OP Life is? I believe that the offer review you give people a large screen TV and I guess, some content related to that. Is that correct?
Thank you, Peter. Yes. So OP Life in Mandarin is OP [Foreign Language]. So within this sub-brand, right now, we have 2 products here. One is [Foreign Language], which is a home theater [ packed ] bundles, in which we bundle large screen TV and sound bar and Wi-Fi and other home theater related products with our rate plan. And because these are higher ticket size items, that's why with the bundle, there are more customers opting for higher rate plans and longer contracts. And we also have another product series that's the [Foreign Language], which is the game player series, in which we bundle products like Sony's PS5 and VR2 gaming devices and also handheld cloud game consoles like G Cloud from Logitech.
Right, I see. Okay. That's interesting. And also earlier on, you mentioned on the cable TV front that you're the fourth largest Pay-TV operator, but you have 85% of the country covered by broadband. Can you remind me how you get the extra coverage? Is that just reselling other cable TV operators in other areas? Or is there another way you're doing that?
Yes. So yes, in our Double Play part that we actually work with third-party MSOs to bundle their home broadband service sort of white label their home broadband service to bundle into our Double Play product and to be shipped to our customers. So yes, we work with third-party broadband -- home broadband providers in order to achieve our footprint. And one of them being Kbro, MSO in our group.
Our next question comes from Sara Wang with UBS.
So I have one question regarding CapEx. May I ask what's the, like, key reason of increasing the CapEx budget for 2023? And then why do we decide to increase the CapEx before the merger given the potential significant network synergy with Taiwan Star?
Thank you, Sara. So yes, the approved CapEx is related to the merger with Taiwan Star, and we do need to spend some CapEx in order to integrate the 2 networks to achieve the sort of maximum synergy between the 2 companies. And so we will not be spending until we have gotten the approval -- we have gotten the green light from FTC.
Got it. Just wondering why -- which area do we spend in order to like facilitate the network synergy with Taiwan Star? Could you please provide more color?
Sure. So Taiwan Star has 9,000 base stations, and we have around 13,000 base stations. And in the process, we need to consolidate all of the base stations. So there are many equipment that will need to be moved. So that's basically the sort of the [ key step ]how we're spending the CapEx.
[Operator Instructions]
Operator, if there's no questions on the telephone line, we can go to a question from the web page first.
Yes, Mr. Lin, there are no further questions at this moment.
So we're going to go to a question from Rob Lowe of [ Money DJ ]. I would love you to shed some light on the additional CapEx in which domain, the CapEx will be in invested in, I guess, maybe it's invested in. Are they core network, network construction in relation with TStar merger or what else? Why adding such a huge chunk of CapEx at this moment? is it triggered by competitors move? What will be Taiwan Mobile's competing edge? The high hauling OpEx is now an issue, most people notice that, Jamie, by how long you think this will go away? All right. So the CapEx question, like we just said. So it's, for the Taiwan Star merger and the investments we need to make in order to integrate the 2 networks. So most of the CapEx will be spent on construction, meaning tearing down the equipment from the Taiwan Star base station locations that we will no longer need and moving the equipment to the Taiwan Mobile base station locations that will continue to operate. So we will not keep the bulk of Taiwan Star's base stations. So the reason why we asked the Board to approve the CapEx right now is because any day from now, we might -- we can get a green light from FTC. So as long as we get a green light from FTC, we'll start to invest to accelerate the synergy extraction of the network integration. So that is why we take this opportunity during the regular Board meeting to get this approval. In terms of the CapEx, like we just communicated earlier, we don't expect this to continue to grow too much further. We started accelerating our unique bundles since last -- Q3 last year. So on a Y-o-Y basis, you can expect things to normalize starting from Q3 this year. George, you have anything to add?
Yes, if I may just add a little bit. Please bear in mind that we are not going to have our next Board meeting for like at least another 3 months. So as Jamie mentioned, we may get FTC approval anytime between now or, let's say, within the next couple of months. So we do need Board's okay too, so we can spend the money once we get approval. Otherwise, we need to call an extraordinary Board meeting, which is a little bit inconvenient, let's put that way. So another thing is this CapEx is not a surprise at all. If you recall, last year, when we announced the merger at first place where we stated that we expect to spend certain amount of money, and we expect to generate some synergies from this consolidation, so this is our plan. And this also answers back to Sara's previous question. So none of this, I would say, for surprise per se. It's all planned, and we just thought that now it's a good timing to ask for Board's approval because we can get FTC green light anytime now.
All right. I hope that answers your question, Rob. Operator, is there any more questions from the phone line?
Not at the moment, Mr. Lin. [Operator Instructions]
There is another question coming from the -- on the -- in the chat box. The question is, can you talk about your growth strategy in the Telco business other than 5G for consumers?
Thank you. So with our -- on top of our sustainable growth foundation strategy for consumers, we also have a Telco Plus strategy that is to leverage our -- the sort of special assets that we are able to generate by operating our Telecom business. And these assets are, what I call, gifts. So for example, our ability to protect information, security and consumer privacy. So we take all these gifts and we turn them into a strategy called Telco Plus in which we build these gifts into services, which is what I call Gift-as-a-Service.
So one example of our Gift-as-a-Service Telco Plus product is our [indiscernible] product that is called the [Foreign Language] in Chinese. So this is a service that has been widely adopted by E-commerce, Food Delivery and Taxi Dispatch businesses. And it's a service that uses proxy phone numbers to make it possible for the service providers and consumers to be able to call each other and talk on the phone. But in the process, prevent either parties from getting the real phone numbers of the other one. So they have the ease of communicating with each other, but they don't run -- we don't -- the platforms don't run the risk of leaking customer privacy information to the service providers. And it has greatly reduced fraud rate for the E-commerce or taxi dispatchment platforms that work with us. So that's one of our Telco Plus Gift-as-a-Service sort of products that we offer to the market.
Another one is our anti-phishing service, which we call [Foreign Language] in Mandarin. So in that product, we provide a 24/7 monitoring service that detects potential phishing websites that imitate our enterprise customers' IP and in order to minimize the damage a fraudster can cause to them and protect their brand reputation. And this is also why we adopted by many large enterprises, including financial services and manufacturing companies. So those are the 2 examples that we leverage our core strength that we develop by running our consumer telecom business and turn them into our Gift-as-a-Service businesses. And going forward, we will continue to develop more of these services, and we expect these services to bring meaningful revenue and profit to our group as a whole. I hope that answers your question.
So operator, do we have more questions from the phone line?
Not at the moment, Mr. Lin. [Operator Instructions]
If not, we'd also -- we don't see more questions coming from the web page either. So should we conclude this edition of our conference?
Mr. Lin, there are no further questions at this point in time. Thank you.
Okay. Great. Thank you, everybody -- everyone for dialing in. We look forward to seeing you again next time.
Thank you. Thank you for your participation. This concludes the conference. Goodbye.