PCCW Limited (TH3C.F) Earnings Call Transcript

Welcome to PCCW 2022 Interim Results Analyst Briefing. Our presenters today are Ms. Susanna Hui, Acting Group Managing Director and Group Chief Financial Officer; and Mr. Marco Wong, Head of Investor Relations.

Good afternoon, ladies and gentlemen. Thank you for joining our Interim Results for PCW 2022. As I'm sure you recall, the first half of the year was earmarked by the onset of the fifth wave with return to lockdowns, social distancing rules and Hong Kong borders remain relatively shut. All these led to a relatively weak economic environment. But in spite of these headwinds, we managed to sustain our operations and growth for the period. With our OTT Viu business remaining one of the leading video streaming players in the region, and we achieved EBITDA breakeven for the first time since launch. Our Viu TV business sustained its growth in terms of viewership and revenue with high-quality content and attracted increasing viewers and advertisers. Our solutions also demonstrated revived growth in the business. And I'm sure you have already been made aware that we have today completed our strategic partnership transaction with Lenovo, and we believe that this will launch our growth across the region as well. So on the OTT front, we again sustained our growth trajectory, hitting USD 100 million in the first half on the top line and revenue CAGR achieved was 22% and EBITDA breakeven for the first time. And if we look at the MAU and the paid subs and also the streaming minutes, basically we are able to report a continued consecutive periods of ranking #1 in terms of the MAU and also ranking #3 in terms of the paid subscribers and also ranking #2 in terms of streaming minutes. And for the first 6 months, we are able to report MAU of around 60.7 million in total, representing a 23% growth. And in terms of paid subscribers, we also achieved a significant 31% growth from 7 million to 9 million. And in terms of our content strategy, we are trying to do a two-pronged strategy. Basically, we are still riding on the popularity of the Korean content as the regional content. And obviously, it has been a very competitive landscape and the cost is getting more and more expensive. So at the same time, we are trying to expand our local content in collaboration with the local production houses in the different markets such as Thailand, Indonesia, Philippines and so on, to produce locally relevant content. And during the period, we launched a number of new Viu original titles, including top brand titles such as Pretty Little Liars 2, in Indonesia, which was also dubbed in Thai and Tagalog. And we also had She was Pretty in Malaysia. And Remember 15 in Thailand and a lot of these were charted one of the top 10 titles as well. So on the free TV side. our Free TV Viu TV continued its momentum with growth in both prime time ratings, which increased by 24% as well as we see an increase in terms of the -- of our view app downloads, which grew by 19% during the period, bolstering our reach to younger and digitally savvy viewers as well. And despite a very weak macro environment in Hong Kong, we were able to see advertising revenue expanding continuously by 33% in the first 6 months as we continue to expand our advertiser base, adding more than 200 new accounts during the first half. Overall, in terms of content for the media business, we have lined up our productions across a wide categories of genres, including drama, variety documentary and partnering with well-known and successful local and regional producers in terms of movies as well. And this will be able to have content IP on our side, which enable us to explore basically monetization outside of the Hong Kong platform, but also to the overseas market as well. Moving along to our PCCW solutions. We see revived growth during the first half. as the enterprises and also the public sector, we started and accelerated the IT projects and spending. The pie chart here shows that the telecom and public sectors continue to be the main revenue contributors in Hong Kong and Singapore to our Solutions business. In terms of the revenue by services, application development and maintenance, together with the digital and cloud solutions represented over 70% of our revenues. Further project wins in Hong Kong and Singapore add to our secure orders of USD 3.1 billion as at June end. Moving along to our talent. I think one of the core assets of our solutions business is, of course, our talent. We have embarked on a number of initiatives to grow and nurture our talent. We signed an MOU during the first half with City University and working very closely with them to hire -- to recruit students and graduates as well as partnering with faculties such as data science to develop smart city solutions. We also implemented a talent development program that resulted in us recruiting over 100 university graduates for the first 6 months, where they will be trained and mentored with extensive learning opportunities so that they can become the future leaders. And on this slide, we can see the -- some of the case references in our different markets, including the Hong Kong Airport Authority in Hong Kong, where we provide automated transportation solutions to improve the flow of passengers and traffic. Another example in the China market is our project with China Mobile to roll out nationwide planning management system to provide business visibility and operational efficiency in China. Of course, in China, we also have expanded our delivery capability in the Greater Bay Area, in particular, Shenzhen and so on to help also fill up the -- our talent pool. In Singapore, we are partnering with numerous government agencies to provide a full suite of managed IT services. So there will be an upselling opportunity as well, which would, of course, contribute to higher revenue going forward. And also, today, we are pleased to report that we have completed our transaction in terms of partnership with Lenovo, an announcement has been made today as well. This would enable us to further expand across the region, which we believe create an Asia Pacific IT powerhouse to address the fast-growing regional IT services market. The partnership combines Lenovo's global footprint in more than 180 markets, broad portfolio of end-to-end solutions, solid pedigree in terms of innovation and strong go-to-market and delivery capabilities. With our solutions business strength in system integration and application development, operational expertise and highly skilled talent pool, the partnership will be able to provide one-stop customer solutions that integrate IT services, device and digital infrastructure to address complex IT issues and also transformation needs of customers across the region. The solutions business in Hong Kong will remain dedicated and fully committed to delivering digital and managed services for our existing customers in Hong Kong, in particular, for those in the public sector. So with that performance in terms of the different business units, the Board has earlier recommended an interim dividend of HKD 0.56 per share which represents an increase of 2.14% year-on-year. This is in line with HKT's distribution growth announced yesterday in terms of the first half. So the idea is to have the dividend growth aligned with the HKT dividend growth as well. Full year, we are looking at maintaining a close to 100% or 100% pass-through of the dividends we received from HKT. With that, I would like to pass the floor to Marco, our Head of IR, to share with you the financial highlights.

Thanks, Susanna. Turning to the financials. PCCW delivered a steady performance across all its lines of business for the first half despite the challenging environment. Service revenue was up by 3% to $2.176 billion. And including handset sales, revenue was up by 1% to USD 2.34 billion. EBITDA was up by 5% to $742 million. And as you can see, profit reduced down to USD 11 million. And as you can see in the tables below all of the lines of business registered growth. As announced yesterday, HKT grew 3% to $2.071 billion, of which service revenue was up by 5% to $1.906 billion, mainly due to strong local data revenue growth and broader 5G adoption. The EBITDA for HKT increased by 2%, driven by a similar increase in EBITDA for TSS and mobile. AFF also grew by a healthy 2% to $305 million. And with PCCW's 52% shareholding in HKT, it will receive a dividend of approximately USD 159 million. If we look at the individual businesses in PCCW, on the OTT side, it registered strong growth of 22% to USD 101 million, the first time it surpassed $100 million in terms of revenue. And this was spurred by growth on the video side with 23% growth. As mentioned earlier by Susanna, this growth was driven by growth in MAUs to 60.7 million and paid subscribers to 9.1 million, which led to growth in both advertising revenue as well as subscription revenue. The content of Viu [ introduced ] also allowed syndication -- international syndication revenue opportunities. And on the back of the enlarged revenue base, OTT achieved positive EBITDA for the first time of USD 2 million compared to a loss of USD 3 million as in the last 6 months of last year, demonstrating initial operating leverage. On the Free TV side, revenue increased by 52% to USD 50 million despite the challenges of the weak macro environment. And this was driven by growth in advertising revenue to USD 32 million. which was driven by a growing base of returning and new advertisers who are attracted by our prime time ratings increase as well as our digitally savvy and younger viewers segment as evidenced by the 9% increase in app downloads. As a result of the growth in both viewership as well as revenue, EBITDA was a positive USD 10 billion. Viu TV's and -- this represent Viu TV's second consecutive 6-month period of positive EBITDA. We also look forward to broadcasting the World Cup in the second half of this year. which should also boost viewership. On the solutions side, total revenue was up by 2% to USD 327 million, and this was driven by progress and completion of IT projects in Hong Kong as well as Southeast Asia. Specifically, recurring revenue increased by 9% to USD 226 million. secured orders were steady at USD 3.1 billion as we had new project wins, contract wins in both Hong Kong as well as Singapore. EBITDA increased by 35% to USD 48 million with margin improving from 11% to 15% due to better productivity. And as we announced earlier, the strategic partnership with Lenovo has been completed, and we look forward to that driving further growth in the solutions business. On the OpEx side, we saw an increase on the Media & Solutions side to support business expansion. And as we mentioned yesterday, the HKT OpEx declined largely due to operating efficiencies. And as a result, the OpEx to revenue ratio improved to 14%. In terms of CapEx, the CapEx to revenue ratio declined to 6.6%, and largely due to HKT's efficiency in CapEx as we completed the rollout of the 5G network, while CapEx for Media & Solutions business remains steady. Turning to the capital structure. We see that the -- on the HKT side, you see at the top. We don't have any outstanding debt maturity this year and the gross debt was stable at USD 5.69 billion. At the bottom of the slide, you see PCCW, we refinanced $300 million of bonds that were due in the first half with bank facilities. And as a result, this should result in some interest savings. Across the group, we have a balanced mix of short-term as well as longer-term bonds. And the current ratio of fixed to floating is 60-40, which will help us insulate from any potential future interest rate increases. Average debt maturity is around 4 years and the effective interest rate was 2.7%. In terms of liquidity, extremely healthy at USD 3 billion, consisting of $370 million in cash and $2.6 billion in undrawn credit. HKT accounted for about $1.8 billion of this liquidity. Core gross debt to EBITDA as of June 2022 was 3.97x and core net debt to EBITDA was 3.73x. And with the cash that we just see from the strategic partnership with Lenovo, we will -- we expect to pay down debt with that and as a result, improve the overall credit leverage. And that ends the presentation. Thank you.

That's the end of our presentation today. Thank you for watching.