© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, good afternoon, ladies and gentlemen. Welcome to the conference call. Our presenter today is Mr. Jamie Lin.
Mr. Lin, please begin your call, and I'll be standing by for the Q&A. Thank you.
Good afternoon, ladies and gentlemen. Welcome to Taiwan Mobile's Third Quarter 2019 Investor Conference Call. Before I start our presentation, I would like to direct you to our -- your attention to our disclaimer page, which states the information contained in this presentation, including all forward-looking information, is subject to change without notice, whether as a result of new information, future events or otherwise. And Taiwan Mobile Co., Ltd., 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. Let's start with the business overview. I'll start with the operating performance of our telecom business. So please turn to Page 4.
In the third quarter, Taiwan Mobile outgrew the overall market in telecom revenue as we rolled off the tougher [ pre-TWD 499 ] base in service revenue and recorded strong device sales from ICT [ projects ] and increased handset sales. Thanks to mobile rate plan profit rationalization and superior spectrum yield, Taiwan Mobile posted the smallest Y-o-Y decline in telecom EBIT and -- for the third quarter.
Now let's talk about Taiwan Mobile's versatile telecom strategy. With the launch of iPhone 11, we saw an upbeat increase in our third quarter iPhone bundle sales. Additionally, our ongoing upselling effort via promoting nonhandset bundled plans yielded strong results. Sign-ups for TWD 999 and higher rate plans more than doubled during the quarter. The collaboration with group companies also took further steps during the quarter as we introduced new digital convergence plans, which consist of high-speed broadband and unlimited mobile data services. The launch of the Taiwan Mobile store pickups for momo purchases has increased, has significantly broadened business opportunity for both parties as well.
As for the enterprise segment, ICT, cloud and IoT services recorded healthy growth on the back of new customer wins and increasing demand for M2M connectivity.
For IoT connectivity, we saw a tailwind on connected cars, smart lighting, and we expected it to accelerate in the next few quarters.
Turning to our pay TV business. Again, we fare better than other leading MSOs with smaller losses in basic TV subscription and much higher broadband and DTV adoptions with the help of convergence. Not only do we continue to increase broadband and DTV penetration in our cable TV customer base, we also made more strides in higher speed broadband take-up.
Moving on to momo. As we mentioned in earlier -- in last quarter, momo remains one of the few e-commerce platforms that have delivered stable profits. In the third quarter, momo once again outpaced its peers by growing its B2C revenue by 31% year-over-year, thanks to higher average ticket size and number of transactions, increasing SKUs plus collecting via Taiwan Mobile.
Overall, gross margin was stable despite the rising contribution from 3C and home appliances in the B2C product mix, while operating margin also grew year-over-year as a result of cost rationalization in TV shopping business and operating leverage from B2C business.
Now let me turn over the presentation to Rosie for our financial overview.
Hi, good afternoon. In the third quarter of 2019, the year-on-year decline in pre-IFRS 16 telecom EBITDA decelerated to 4% as we rolled off the tough pre-TWD 499 base and had lower dealer commissions, interconnecting costs and spectrum usage fees. Pre-IFRS 16 cable TV EBITDA dipped by 5% year-on-year due to market competition. But EBIT still grew by 13% as a result of falling depreciation of set-top boxes. As for momo, in addition to its robust revenue growth, EBITDA surged by 26% year-on-year in the third quarter.
Let's move to the results summary page. We are delighted to see that the year-on-year trend in overall operating income turned positive for the first time this year. In addition to the easier base mentioned earlier, effective cost control in momo's legacy business and its strong operating leverage were key factors in bringing about a solid performance. Meanwhile, the uptick in dividend income and the decrease in interest expenses caused nonoperating expenses to plummet.
Overall, operating income for all major businesses was within management expectations for the first 3 quarters, and net income reached 77% of the company's full year guidance.
On the balance sheet, on the asset and liability front, the year-on-year surge in cash and accounts payable was driven mainly by momo's payments that were delayed by the typhoon holiday on September 30, followed by momo's continuous growth and a more optimistic iPhone launch. Gross debt declined by 15% year-on-year following CB holders' conversions. As for shareholders' equity, the increase in paid-in capital and capital surplus reflect the conversion of our CB, which had an outstanding balance of TWD 2.27 billion at the end of the third quarter.
Looking at the ratio, the sequential hike in current ratio was within the seasonal pattern as we paid the accrued dividends payable in the third quarter. Benefiting from lower debt, our net debt to pre-IFRS 16 EBITDA remained at a low level of 1.16x.
Moving on to our cash flow analysis. Now that the rental expenses are classified as financial cash flow as opposed to the operating cash flow after the adoption of IFRS 16 in this year, comparing on the same base, our third quarter pre-IFRS 16 operating cash flow still show a year-on-year increase, even with the exclusion of the typhoon holiday payable increase. The increase in investing cash outflow was due to a higher inflow from the guaranteed deposits we took back in the third quarter a year ago.
As for the financing activities, the net outflow was a result of dividend payments, which were mostly funded by an extension in short-term borrowings.
The cumulative CapEx for the first 3 quarters declined year-on-year as we approach 4G spending late cycle, combined with momo's high CapEx base from the warehouse build last year. After adjusting for the typhoon-related one-off payment delay, our free cash flow for the first 3 quarters was flat year-on-year, owing to lower CapEx and higher operating cash flow.
Now let me turn the presentation back to Jamie for event updates and key messages.
All right. So now let's turn to the 5G spectrum auction slide. This slide summarizes the key information with regards to the upcoming 5G spectrum auction. The auction is scheduled to begin on the 10th of December this year, and we expect it to conclude late December or early January next year.
For the mainstream 3.5 gigahertz frequency band, a total of 270 megahertz are available for auction with the floor price of TWD 24.3 billion. The rollout requirement is 1,000 base stations and 50% population coverage in 5 years. Note that the rollout obligation applies to all successful bidders regardless of bandwidth won. Furthermore, the second stage of the auction may not take place if the bidder comes -- if the bidders come to an agreement with regards to location after the first stage of the auction.
Moving on to our CapEx update. momo's Board of Directors approved an additional CapEx of TWD 630 million to purchase a parcel of land for its South Distribution Center. Subsequently, Taiwan Mobile's financial year '19 consolidated CapEx guidance was revised to TWD 7.1 billion from TWD 6.4 billion previously. The second part of this slide summarizes the awards and recognitions we received in the third quarter for your reference.
Finally, to wrap up our presentation, this slide summarizes the key message that we would like to deliver. Margin disciplines have contributed to our operating income growth in the third quarter of 2019. Free cash flow stability provides good visibility to shareholder returns.
Looking ahead, efforts to extend our business value chains would be a long-term growth driver for Taiwan Mobile, besides satisfactory earnings growth contributing from e-commerce business. Thank you.
Now I would like to open the floor up for a Q&A session.
Operator Instructions]
Our first question comes from Jack Hsu with SinoPac Securities in Taipei.
I have 2 questions. First, I just want to make sure about the CapEx because we see the CapEx increased from the June quarter. And so could you give us [ a valid ] reason? It is flat -- we -- [ you said that TWM filled with ] new base station or something else? This is the first question.
And my second question is about the 5G, because according to the information -- so will the -- the auction will maybe start in December. So could you give us about your -- some color about the strategy, the TWM's strategy in the 5G spectrum, the auction?
For your first question, the mobile CapEx in the third quarter increased slightly from the second quarter. It's more of a timing issue. But for the whole year, our mobile CapEx was still within the guidance. And compared to 2018, 2019's mobile CapEx will still be lower than a year ago.
And Jack, in terms of our 5G auction strategy, I think that is -- we're -- more difficult for us to share that because all of our competitors would be listening. But in terms of 5G strategy overall, we have expressed that we're going to be methodical about it. We see it as a 10- to 20-year process. We're going to participate, but we're going to be rational about it. Thank you.
Okay. Just one follow-up question. And could you give us the [ value or your viewpoint ] for the iPhone 11? Because the sales in the telco is the -- still has good news. So just -- what's your viewpoint for the iPhone 11 sales? Will the sales can [ beat ] the almost the same revenue in the 2017 or 2016?
Thank you, Jack. So we continue to observe stronger iPhone sales than the previous year. We're right now feeling pretty good about it. But -- well, in -- when will the party end is a harder question. So of course, we would like for the party to continue to go on for a long time.
[Operator Instructions] Our next question comes from Peter Milliken with Deutsche Bank in Hong Kong.
Yes. A question about the 5G auction. Any thoughts on the cost of rolling out 1,000 base stations and 50% population coverage on the 3.5 gigahertz? And related to that, is it expected that all 5 telcos will bid in the auction?
Thank you, Peter. So in terms of the cost, we have stated in the press before that we're expecting each station to cost anywhere between USD 100,000 to USD 200,000, depending on the actual vendor and actual technology you choose. So if you time that by 1,000, and then, of course, you need to add on top the [ cord ], then you get a pretty close ballpark of the actual CapEx you have to spend in terms of rolling out the first 1,000 stations.
In terms of covering 50% of the population, it takes a run anywhere between 4,000 to 6,000 stations, depending on your deployment strategy.
Okay. And yes, and has there been any word on whether all 5 companies are still looking to bid?
Well, I'm sorry. So yes, the sort of the authority did share with us, and it's also public information that all 5 mobile carriers have submitted their application, but we have no idea if other players are committed to participate in the bidding. And also, there's going to be an interview process. There's also a slight chance the authority might decide -- or disqualify applicants if they so deem [ fair ].
Got it. Okay. And then -- and one final question from me. Your key message on the last page of the presentation includes a statement, "Looking ahead, efforts to extend our business value chains would be long-term growth drivers for Taiwan Mobile." Those business value chains, is that referring to momo and sort of IoT-type things? Or is there more to it that I might be missing?
Yes, Peter. So I think you got us correct. We talked a little bit about the collaboration or the convergence between us and our cable business -- or our mobile business and our cable business, also our telecom business and our e-commerce business. And looking forward, we see this type of vertical integration as a key growth driver for our longer-term value generation.
Our next question comes from Amber Lee with Yuanta in Taiwan.
I have one follow-up about the cost per base station. So that number was for 5G. What about 4G? What was the cost in past years?
Thanks, Amber. So 4G is 1 per base station, I think -- so 5G per base station is 2 to 4x more expensive than 4G. That's -- if you want to look at the multiple, that's the ballpark.
[Operator Instructions] And next, we have a follow-up question from Jack Hsu with SinoPac Securities.
Oh, okay. Just have 2 question. First question, so right now, will we change our financial forecast for the whole year? This is my first question.
And my second question is about -- so how about the cable business? Yes, because recently, we gather information from your peers, they say the price competition is still [ fierce ]. So will the company -- maybe what's the strategy for your company to [ fit ] this kind of situation?
We don't have any plan to change our forecast for this year. And for cable TV competition, the current competition is not in the areas that we provide services. And longer term, we will sell more services into the same household. And that's the way that we grow the business.
Yes. Jack, if you look at our DTV and broadband penetration, we're one of the highest among our peers. And one of the reasons -- and we're also growing at one of the fastest speed in terms of those 2 sort of services that we provide within the realm of home business. And going forward -- and one of the reasons is because of the convergence type of bundled packages that we offer as a group. And going forward, we see acceleration in terms of providing bundled packages through our convergence program. So we're going to -- probably going to continue to grow our DTV and broadband products much faster than our peers.
So just one follow-up question. So right now, our depreciation -- the cost of the -- our cable TV, could you give us about the numbers, about that, for the whole year over just 1 season?
Actually, if you go to our website, we do have the details that you are looking for.
[Operator Instructions] Excuse me, Mr. Lin, there seems to be no further question at this point in time. Thank you.
All right. Thank you guys very much for dialing into this quarter's earnings conference call. We look forward to talking to you again next quarter.