1Q09 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW 1Q09 result reflected a slight improvement from the weak 4Q08 which was affected by political tension and airport closure. Service revenue excluding IC grew 1.6% q-o-q while margin improved from lower seasonal expenses. Y-o-y trend nevertheless remained weak from the slowdown in economy and dampened consumer sentiment. The revenue growth guidance remained at 3-4% despite of the slowdown in 1Q09 as recovery is expected in the second half of the year when the overall economic activities should be rising following the government stimulus packages. However, AIS is highly keen on controlling operational expenses this year amidst the weakness and uncertainty of external factors. Maintaining financial flexibility and generating strong cash flow from opearation will be essential to weather the economic downturn. Subscriber acquisition during the quarter was targeted for the quality of revenue the subscribers will generate. Dealers are provided with renewed incentives to support company's strategy of quality subscription. Meanwhile, price competition was relatively stable, no significant aggressive price plans that created disturbance to price stability. Rather, competition was focused on retention of existing customers to protect usage in a weak consumer spending atmostphere. Key organic growth of subscribers remained from the upcountry market, in particular the Northeastern region. Brand activities to carry the communication of new corporate icon (Oon-jai) were continued during 1Q09, as well as the refreshment of postpaid brand under the concept "GSM Advance Smart Life". The price plans launched for postpaid product were also designed following the new concept "Mix and Match" while prepaid price plans focused on freedom to customers calling behavior. Campaigns in the growing upcountry market were as well significant, targeting localized price plans and content. One of the key success rural campaigns in the past two years and is carried on this year is "Sawasdee Luk Tung Tour Thai", an organized nationwide concert of upcountry music catering several popular upcountry singers in each geographical region of Thailand. AIS kept its cash outstanding on balance sheet at exceptionally high level of Bt30bn. This high level of cash came from solid cash generated from operation of Bt12bn, as well as the issuance of Bt7.5bn new debenture in January. The purpose to maintain high cash level earlier in the year is to secure the cash need throughout the year and provide the highest flexibility for the company to weather any possible economy slowdown. The resolution from the annual general meeting of shareholders also approved the issuing and offering of debenture amounted not exceeding Bt15bn in preparation for the potential upcoming 3G license which would require an increase in capex and bidding fee. OPERATIONAL HIGHLIGHTS Net additions of 272k for 1Q09, slowdown with the acquisition strategy focused on quality ARPU and Usage continued to declined y-o-y but was more stable q-o-q Subscriber recorded 27.6m, representing 0.27m net additions for the quarter which slowed down from 0.54m in 4Q08 and 0.98m in 1Q08. The slowdown in subscriber addition reflects the company's strategy this year to focus on gaining quality subscriptions that would generate more sustainable ARPU while high subscriber growth during 2007-08 was heavily driven by multi-SIM users. Rural market was the key driver for subscriber additions and remains as strong growth area for organic penetration. ARPU & MOU was more stabilized as a result of improved quality of subscription, with both ARPU and MOU being flat q-o-q but continued to decline y-o-y. Blended ARPU was flat q-o-q at Bt241 but down 14% y-o-y from Bt280 while blended MOU was flat q-o-q at 271 minute/sub/month but down 6.6% y-o-y. SIGNIFICANT EVENTS Revised guidance for FY09: please refer to page 6. Change in financial reporting: in accordance to the announcement by the Department of Business Development, Ministry of Commerce Profit & Loss Statement Previous reporting New reporting Management benefit Directors' remuneration Directors'remuneration + other management benefit Financial cost Interest expense Interest expense + other financial cost SG&A SG&A (includes other Selling expense (marketing management benefit and expense) other financial cost) Administrative expense (i.e. staff cost, bad debt, depreciation) FINANCIAL RESULTS Service revenue excluded IC fell 4.1% y-o-y from weak usage affected by slow economy EBITDA fell 5% y-o-y but improved in margin from lower sales and higher net IC Net profit of Bt4,567m fell 11% y-o-y from higher amortization Service revenue 1Q08 4Q08 1Q09 y-o-y q-o-q excluding IC (Bt million) Voice revenue 16,330 76.2% 15,458 76.4% 15,422 75.1% -5.6% -0.2% Postpaid (voice) 3,786 17.7% 3,740 18.5% 3,674 17.9% -3.0% -1.7% Prepaid (voice) 12,543 58.5% 11,718 57.9% 11,747 57.2% -6.3% 0.2% Non-voice revenue 2,681 12.5% 2,930 14.5% 3,168 15.4% 18.1% 8.1% International roaming 1,147 5.4% 678 3.4% 832 4.0% -27.5% 22.7% Others (IDD, other fees) 1,268 5.9% 1,157 5.7% 1,125 5.5% -11.3% -2.8% Total service revenue excl. IC 21,426 100.0% 20,222 100.0% 20,546 100.0% -4.1% 1.6% Service revenue exclude IC in 1Q09 was Bt20,546m, grew 1.6% q-o-q from the weak 4Q08 as a result of airport closure. The q-o-q growth was supported by strength of non-voice service and the partly recovered international traffic from foreign roamers. On y-o-y basis, service revenue excl. IC declined 4.1% y-o-y driven by weaker usage on voice call reflecting softness in consumer demand following the economy slowdown. Also, international roaming and international call were affected by lower number of tourists following the political impact. Voice revenue declined 5.6% y-o-y as both prepaid and postpaid voice usage continued to soften. Compared to 4Q08, voice revenue slightly fell by 0.2% q-o-q due to weak postpaid usage while prepaid was stable. Pricing was relatively stable during the quarter with price plans targeted to retain subscriber usage. Non-voice revenue was the main contributor to the overall growth, guarding against softness in voice revenue. It continued to grow 18% y-o-y and 8.1% q-o-q mainly from strong subscriber growth and usage on mobile internet (EDGE/GPRS) which grew 41% y-o-y and contributed 24% of total non-voice revenue in 1Q09. Content revenue also grew 37% y-o-y driven by more variety of content particularly the music-related ones. The q-o-q growth was driven by SMS traffic which picked up during the festive (New Year greetings) season. Interconnection (Bt million) 1Q08 4Q08 1Q09 y-o-y q-o-q Revenue 4,256 3,854 3,721 -12.6% -3.5% Cost 4,139 3,507 3,447 -16.7% -1.7% Net Interconnection 117 347 273 133.8% -21.2% Cost of service excl.IC (Bt million) Amortization 4,380 4,569 4,596 4.9% 0.6% Base station rental & utility 611 652 651 6.6% -0.1% Maintenance 425 472 428 0.6% -9.4% Others 945 945 944 -0.1% -0.1% SG&A (Bt million) Marketing expense 642 1,269 519 -19.1% -59.1% Administrative expense 1,894 1,967 1,896 0.1% -3.6% SG&A expenses 2,535 3,235 2,415 -4.7% -25.3% %marketing to total revenue 2.2% 4.8% 2.0% %bad debt to postpaid revenue 2.5% 3.9% 3.6% %SG&A to total revenue 8.9% 12.3% 9.2% International roaming (IR) were down 28% y-o-y as the political situation plunged the tourist arrival. However, when compared to 4Q08 that faced airport closure, the traffic during the quarter improved resulted in 23% q-o-q increase in roaming revenue. Other revenue declined 11% y-o-y and 2.8% q-o-q mainly from the weak in international call (IDD) also affected from lower tourists. Net interconnection (IC) was Bt273m declined from Bt347m in 4Q08 but increased from Bt117m in 1Q08. Both outgoing and incoming traffic continued to decline while outgoing traffic was 48% and on-net traffic was 77%. Sales revenues for 1Q09 declined 32% y-o-y and 7.8% q-o-q due to weaker demand for new handsets as consumer spending contracted. Sales margin fell to 2.2% from 7.6% in 1Q08 but increased from -0.2% in previous quarter when there was stock clearance. Cost of service exclude IC rose 4% y-o-y from higher network amortization which increased 5% y-o-y as new investment is amortized over a shorter remaining period of BTO contract. Utility also rose 6.6% y-o-y following the higher number of base stations (currently 14,900 BTS compared to 12,800 in 1Q08). On q-o-q basis, cost of service was relatively stable at -0.3% as amortization slightly increased 0.6% and utility was flat at -0.1% while network maintenance declined 9% q-o-q. Marketing expense fell 19.1% y-o-y and 59% q-o-q from the usually high seasonal marketing spending in 4Q. While brand activities on both corporate icon (Oon-jai) and postpaid GSM advance continued in 1Q09, marketing spending was only 2% of total revenue, significantly below the 3% budget for the full year. Administrative expense was flat y-o-y but declined 3.6% q-o-q due to lower staff cost. Bad debt provision (booked under admin expense) was 3.6% of postpaid revenue, a level that reflected reasonable growth of new postpaid subscription. The figure appeared high when compared to 2.5% in 1Q08, the period when the issue on low quality subscribers was just resolved. On q-o-q basis, bad debt was lower from 3.9% in 4Q08. Other income declined 4.1% y-o-y to Bt184m from 192m in 1Q08 and fell 26% q-o-q from Bt249m in 4Q08 as there was one-off gain from a long outstanding payable in 4Q. EBITDA (Bt million) 1Q08 4Q08 1Q09 y-o-y q-o-q Operating profit 7,714 5,869 6,849 -11.2% 16.7% Depreciation PPE 755 759 765 Network amortization 3,846 4,054 4,075 Gain (loss) on disposals of PPE 0 5 -1 Management benefit -33 -17 -17 Other financial cost -20 -30 -20 EBITDA 12,277 10,640 11,652 -5.0% 9.5% EBITDA margin 42.9% 40.5% 44.3% Financial Cost 1Q08 4Q08 1Q09 y-o-y q-o-q Interest expenses 374 440 488 30.4% 11.0% Other financial costs 20 30 20 -1.7% -34.4% Financial cost 394 469 508 28.8% 8.2% EBITDA was Bt11,652m fell 5% y-o-y from the decline in both service revenue and sales. EBITDA margin nevertheless improved to 44.3% from 42.9% in 1Q08 due to improvement in net IC receipt as well as the lower proportion of handset sales which usually contributes minimal margin. On q-o-q basis, despite of flat revenue, EBITDA rose 9.5% while EBITDA margin also improved by 380bpsdue to lower marketing spending and staff cost. Financial cost rose 29% y-o-y and 8.2% q-o-q, due to increase in outstanding debt to Bt39bn from Bt26bn in 1Q08 and Bt34bn in 4Q08. Net profit was Bt4,567m in 1Q09 improved from Bt420m in the previous quarter mainly due to the goodwill impairment of Bt3,553m in 4Q08. Normalized net profit declined 11.1% y-o-y as revenue fell and amortization increased. On q-o-q basis, normalized net profit grew 14.9% from Bt3,973m in 4Q08 as a result of lower SG&A expense. Consolidated (Bt million) Tax Where 1Q08 4Q08 1Q09 y-o-y q-o-q deductible Net income 5,124 420 4,567 -10.9% 986.3% Add: Impairment of DPC goodwill No Impairment - 3,553 - loss Goodwill write-off* No SGA 15 - - Normalized net income 5,139 3,973 4,567 -11.1%14.9% * Recognized in 1Q08 from sales of equity stake in a subsidiary, ADC Balance sheet structure Bt million 4Q08 %to total 1Q09 %to total asset asset Cash 16,325 12.7% 30,053 21.8% ST investment 140 0.1% 20 0.0% Trade receivable 5,790 4.5% 5,094 3.7% Inventories 1,593 1.2% 1,266 0.9% Other 3,048 2.4% 2,536 1.8% Current Asset 26,896 21.0% 38,968 28.3% Networks and PPE 81,189 63.4% 79,318 57.6% Intangible asset 6,538 5.1% 6,529 4.7% Defer tax asset 10,075 7.9% 10,075 7.3% Others 3,383 2.6% 2,753 2.0% Total Assets 128,081 100.0% 137,644 100.0% Trade accounts payable 4,263 3.3% 3,826 2.8% CP of LT loans 7,038 5.5% 3,889 2.8% Accrued R/S expense 2,719 2.1% 4,058 2.9% Others 10,839 8.5% 10,781 7.8% Current Liabilities 24,860 19.4% 22,553 16.4% Total interest-bearing debt 34,329 26.8% 39,084 28.4% Total Liabilities 54,646 42.7% 59,596 43.3% Total Equity 73,436 57.3% 78,048 56.7% Total asset in 1Q09 was Bt137,644m, increased from Bt128,081m in 4Q08, caused by sharp increase in cash to Bt30,053m from Bt16,325m in 4Q08 as AIS issued Bt7.5bn debentures during the quarter. While networks, property and equipment dropped 2.3% q-o-q as amortization of assets was higher than new capex. Liquidity As cash significantly built up during 1Q09, the Company has higher level of liquidity with increased current ratio to 1.73 from 1.08 in 2008. Current liabilities also declined as the Company repaid Bt3.2bn of long-term loan and debentures, resulted in reduction of current portion of long-term loan to Bt3,889m from Bt7,038m in 4Q08. Debentures and loans increased to Bt39,084 from Bt34,329 at end of 2008. AIS issued 3.5-year and 5-year debentures in total of Bt7.5bn during the quarter. This drawdown was prepared to replace the upcoming retired debentures for 2009, Bt3.2bn of which was due in March and another Bt3.4bn to be due in September. In addition, AIS also got shareholder's approval for additional Bt15bn debenture this year in preparation of investment in 3G. Average cost of debt during 1Q09 was 4.8% while all foreign debt was fully hedged. Capital structure Despite of higher debt, net debt was lower to Bt9,031m from Bt18,005m. Capital structure therefore remained strong with debt ratio (total liabilities/total assets) stable at 43% while net debt to equity fell to 12% from 25% in 4Q08. Balance Repayment Repayment Unit: million 1Q09 3Q09 2010 2011 2012 2013 2014 Long term loan(1) 16,189 460 457 9,938 449 447 2,886 Debenture(2) 22,895 3,427 - 4,000 5,000 8,000 2,500 Total debt 39,084 3,887 457 13,938 5,449 8,447 5,386 Bt million 4Q08 1Q09 Debt ratio 43% 43% Net debt to equity 25% 12% Total liabilities to equity 74% 76% (1) includes swap contract; (2) includes bond issuing cost Cash Flow Cash flow position remained strong to supported both CAPEX and debt repayment. For 1Q09, the Company generated operating cash flow of Bt12bn, which slightly decreased from Bt12.5bn in 1Q08. Despite of the strong operating cash flow, the drawdown of Bt7.9bn long-term loans and debentures was to repay Bt3.2bn of debts, as well as financed CAPEX of Bt3.1bn. Most of cash generated from operation was therefore kept on balance sheet resulted in the sharp increase in cash of Bt13.8bn. This high level of cash is expected to provide flexibility to the Company for future cash need including dividend payment in 2Q09 (AGM in on April 10th approved payment of Bt3.3/share) and the upcoming retirement of Bt3.4bn debentures in 3Q09. Source and use of fund: 1Q09 1Q09 Bt. million Source of Fund Use of Fund Operating CF before change CAPEX & Fixed assets 3,131 in working capital 12,030 Share capital and share premium 44 Finance cost paid 510 Interest received 73 Cash increase 13,761 Investment 96 Repayment of LT borrowing 3,206 Disposal of property and equipment 4 Proceed from LT borrowing 7,961 Changes in working capital 400 Total 20,608 Total 20,608 FY2009 MANAGEMENT OUTLOOK & STRATEGY Market subscriber forecast 5m net additions for the market Market share Maintain revenue market share Service revenue 3-4% service revenue growth Marketing expense 3% of total revenue (equivalent to 3.5% of total revenue excluding IC) Network amortization 8-10% rise (network amortization and depreciation as booked under cost of service only, exclude PPE depreciation in SGA, and amortization of operation right) EBITDA margin 41-42% (equivalent to 48-49% exclude IC) Capex Bt13-15bn cash capex (including 3G on 900MHz) Net IC revenue Bt400-700m The telecom market growth is expected to significantly slow down during 2009, following the weakness in economic growth. AIS expect to grow its revenue at 3-4% supported by (1) continued penetration in the upcountry market where consumers are still relatively well-off from the agricultural sector; (2) benign competition with competitive focus gearing toward customer experience, retention program, and quality subscribers rather than aggressive price play; (3) outperforming non-voice service but with slower growth of 10-15% compared to 28% growth in 2008, reflecting lower consumer spending. In addition, handset sales revenue is also expected to slowdown in 2009 following softer consumer demand. The mobile penetration is expected to reach over 100% in 2009 with overall market net additions on the more organic growth of 5 million, unlike the hype of multiple SIMs in 2007-08 which drove net additions to 8-10 million per year. Since multiple SIMs impact is mostly prevalent in the urban area, the rural market is estimated to remain only 50-60% penetrated and therefore posts opportunity for organic subscriber growth. AIS's strength in rural network coverage, premium quality and distinctive brand presence will be the key to win in these markets and will serve the aim to maintain overall revenue market share. The interconnection regime helped bring in price rationality and stability reflected in benign price competition during the past six consecutive quarters. Since the new industry structure was in place, the industry players have been adjusting tariff structure and pricing accordingly to balance between revenue growth and the cost of interconnection. The trend is expected to continue with competition moving away from price-driven/aggressive acquisition strategy toward quality, segment-campaigns, and customer loyalty. Less irrational pricing will translate into less excessive demand on capacity and hence lower burden on capex requirement. Operating expense will also be less pressured as incentives will be toward better quality of revenue, and the right mix of marketing activities to ensure the quality growth amidst a mild-spending mentality of consumers. With AIS's large-scale advantage, the focus of operation in 2009 will be to control its cash operating expense with an aim to deliver stable margin. Mobile data service will be the key growth driver in the next 3-5 years. The higher speed of data provided in 2008 through EDGE technology was the main supporter of 28% growth. 2009 will be challenging without 3G as consumer demand will be softer, hence the data revenue is expected to grow only 10-15%. The positive side of this projected growth is that even during the heighten inflation in mid-2008 and the weak sentiment in 4Q08, non-voice revenue was still delivering outperforming growth over 20%. 3G license will be the key milestone this year as AIS is working closely on all fronts to ensure highest possibility of attaining the new license which (more)