Management's Discussion and Analysis Overview For the first quarter year 2004, the Company and its subsidiaries (the Group) had the total of 13,864,200 mobile phone subscribers, comprising of 2,083,500 subscribers on GSM Advance and GSM 1800 and 11,780,700 subscribers on 1-2-Call!. The subscriber base grew 625,000 or 4.7% from the end of 2003. During 1Q04, the Company launched promotion campaigns and marketing activities for GSM Advance and 1-2-Call! services and continued its creative approach focusing on market segmentation in order to serve different customer lifestyle. Introduction of electronic refill during 4Q03 and small denomination refill (Baht40 and Baht50 card) during 1Q04 allow more frequent refills and, hence, increase network usage. Moreover, service innovations have increased service quality and enhanced variety of service such as Calling Melody (personalize ring back tone). The service, very popular among 1-2-Call! subscribers, allows callers to hear music or audio instead of normal ring tone as they wait for receiver to answer. The Company recorded a net profit of Baht 5,030 million for 1Q04, rose by 26.9% compared to 4Q03 as a result of the subscriber growth and higher usage. On the other hand, lower marketing expense and bad debt expense have also helped. When compare to 1Q03, the net profit increased 9.2%. Operating Results Table 1: Selected financial information Amount in Million Baht 1Q04 % Change % Change from 4Q03 from 1Q03 Total Revenue 24,078 7.4% 6.2% Total Cost 12,955 6.1% 2.7% Gross Margin 11,123 8.9% 10.5% SG&A 2,675 (29.2%) (12.1%) Net Profit 5,030 26.9% 9.2% Earning per 1.71 share (Baht) Total Revenue The Group generated total revenue Baht 24,078 million in 1Q04, up 7.4% from that of 4Q03 and 6.2% from that of 1Q03 as a result of: - Revenue from services and equipment rentals The mobile service revenue was a majority part of revenue from service and equipment rentals. In 1Q04, mobile service revenue increased 7.4% from that of 4Q03 to Baht 20,834 million. The increment was mainly due to higher prepaid service revenue. The rise on prepaid revenue came from larger subscriber base as well as higher usage. Success from segmentation offering plans, called Freedom Plans, introduced in 4Q03 has carried their strong momentum into 1Q04. AIS also introduced small denomination refill cards with Baht 40 and Baht 50 to allow more convenient refills. Postpaid subscriber base shrank at a slower rate while usage increased making postpaid revenue rather stable as opposed to falling in the past few quarters. Compared to 1Q03, revenue from mobile service increased 16.9%, as a result of higher revenue from larger subscriber base especially prepaid service. - Revenue from sales Handset and accessory sales were major components in revenue from sales. In 1Q04, sales were Baht 3,243 million, increased Baht 225 million or 7.4% compared to 4Q03. The increase in handset sales came from larger s ales volume with lower average selling price. Compared to 1Q03, sales decreased by Baht 1,607 million or down 33.1%. Total Cost Total cost was Baht 12,955 million in 1Q04, increased 6.1% from that of 4Q03 and 2.7% from that of 1Q03 as a result of: - Cost of services and equipment rentals Cost of services and equipment rentals was Baht 5,392 million in 1Q04, rose by 4.7% or Baht 243 million. Compared to 1Q03, the cost rose by Baht 634 million or 13.3%. The increment was principally owing to higher network amortization resulting from continuous expansion of mobile service network. - Concession fee and excise tax Concession fee and excise tax was Bath 4,926 million in 1Q04, increased 6.9% from that of 4Q03 and 15.3% from that of 1Q03. The increase in concession fee and excise tax was in-line with the rise in revenue from mobile services. - Cost of Sales Cost of sales was up 7.5% from Baht 2,452 million from that of 4Q03 to Baht 2,637 million in 1Q04, in-line with sales growth. Compared to 1Q03, the cost decreased 26.4% or Baht 943 million due to lower sales volume and gross margin. The Group earned a gross profit of 18.7% from sales in this quarter, slightly decreased from 18.8% in 4Q03 and down from 26.2% in 1Q03 as mainly resulted from lower average selling price. Selling and Administrative expenses Total selling and administrative expenses (SG&A) were Baht 2,675 million or fell by 29.2% from 4Q03 and 12.1% from that of 1Q03. The change of SG&A was principally because: 1. Marketing expense decreased Baht 410 million from that of 4Q03. The Group still carried on marketing activities to create relationships with customers and distribution channels. Compared to 1Q03, the expense was up Baht 303 million. 2. Bad debt expense fell by Baht 91 million from that of 4Q03 and Baht 457 million from that of 1Q03. The decrease was mainly due to the Group's efforts in strengthening collection performance. 3. In 4Q03, The Group wrote off Baht 598 million worth of mobile phone network equipment in a subsidiary "DPC". The write-off was related to site preparation and installation costs of network base station that were no-longer in operations as a result of network optimization. 4. In 1Q03, The Group wrote off Baht 294 million worth of mobile phone network equipment as a result of technology obsolescent. Income Tax In 1Q04, corporate income tax was Baht 3,031 million, jumped by 41.5% from that of 4Q03. Compared to 1Q03, it increased Baht 1,194 million or up 65.0%. Apart from rising pretax profit from stronger operations, effective tax rate rose from the past as The Group has fully utilized tax shield from loss carried forward in a subsidiary in year 2003. Moreover, sharp rise in scratch card sales during 1Q04 caused taxable income (which records revenue base on sales of scratch card) relatively larger than pretax income in financial report (which records revenue based on usage). Net Profit As aforesaid, net profit in 1Q04 rose Baht 1,067 million or 26.9% from that of 4Q03. Compared to 1Q03, the net profit rose by Baht 423 million or 9.2%. Financial Position 1. Assets At the end of this quarter, total assets were Baht 131,827 million, up by Baht 6,878 million or 5.5% from YE03. As a percentage of total assets, current assets and non-current assets accounted for 20.7% and 79.3% respectively. Table 2: Major assets component 31 March 2004 31 December 2003 Million % of Total Million % of Total Baht Assets Baht Assets Current 27,284 20.7% 17,896 14.3% Assets Plant, 11,850 9.0% 12,120 9.7% Property and equipment, net Assets under 76,708 58.2% 78,549 62.9% concession agreements, net Other non 15,985 12.1% 16,384 13.1% current assets - Current Assets As at March 2004, current assets considerably increased Baht 9,388 million or up 52.5% from YE03 by the major items: 1. The increment from cash and cash equivalent was from Baht 8,637 million to Baht 17,099 million at end of 1Q04 came from operating cash flow after netting from investing and financing activities in this quarter. 2. A rise in inventory from 1,027 million to Baht 1,649 million at 1Q04 in YE03 was to support expected higher sales volume in coming period. 2. Liabilities Total liabilities were Baht 67,071 million at end of 1Q04, increased Baht 1,748 million or 2.7% from YE03. This was mainly due to an increase in corporate income tax payable. Table 3: Major liabilities component 31 March 2004 31 December 2003 Million % of Million % of Baht Total Baht Total liabilities liabilities Other 17,952 26.8% 15,913 24.4% Current Liabilities Concession 8,036 12.0% 6,810 10.4% right payable, accrued concession fee ] and excise tax1 Long-term 41,069 61.2% 42,585 65.2% borrowings and debentures, net2 Other non-current 14 0.0% 15 0.0% liabilities 1 Concession right payable, Accrued Concession fee and Excise Tax including current-portion within 1 year and portion over 1 year 2 Long-term borrowings and debentures, net including current-portion within 1 year and portion over 1 year - Current Liabilities As at March 2004, current liabilities grew Baht 2,039 million or up 12.8% from year ended 2003 mainly due to higher corporate income tax payable of Baht 2,620 million offset by a fall of Baht 300 million in accounts payable-trade. - Concession right payable, accrued concession fee and excise tax As at March 2004, the concession right payable, accrued concession fee and excise tax divided into current-portion within 1 year Baht 6,953 million which was up by Baht 1,368 million or 24.5% and portion over 1 year Baht 1,083 million which fell down by Baht 142 million. The increment was primarily due to higher revenue from mobile service. - Long-term borrowings and debentures, net During the first quarter of year 2004, the Group made total repayments of Baht 1,539 million, comprising of long-term debentures of Baht 1,500 million and Baht 39 million for financial leasing liabilities. As at March 2004, total long-term debentures and borrowings were Baht 41,069 million of which Baht 12,084 million was current portion within 1 year and Baht 28,985 million was portion over 1 year. 3. Shareholders' Equities As at March 2004, the Group had total equity of Baht 64,755 million, grew up by Baht 5,129 million as a result of Baht 5,030 million increase in the retained earnings. Moreover, during this period the Company had additional issued and fully paid-up shares from exercise of ESOP totaling 2.3 million shares worth Baht 83 million. 4. Liquidity In 1Q04, the Group's operating cash flow decreased from Baht 14,324 million in 1Q03 to Baht 12,722 million. The decrease was primarily due to higher cash out from marketing spending and concession fee and excise tax from higher scratch card sales. In the meantime, cash flow from investing activities decreased from Baht 4,509 million to Baht 2,804 million while cash flow required from financing activities reduced from Baht 6,416 million in 1Q03 to Baht 1,457 million due to smaller repayment of debenture & financial lease liabilities. Thus, net cash flow for this quarter increased Baht 8,461 million.