ADVANCED INFO SERVICE PLC. 1Q10 Management discussion and analysis OVERVIEW - 1Q10 result reflected an ongoing momentum in economic recovery since 4Q09. Total Service revenue ex IC improved 5.9% YoY and 3.1% QoQ. Recovery has shown in better domestic revenue (Voice&Non-Voice) which rose 6.2% YoY and 2.7% QoQ, while international revenue (IR&Others) increased 2.6% YoY and 7.1% QoQ.Overall revenue guideline is maintained at 3% for full year 2010. - Data revenue continued to mark a solid 36.6% YoY growth, driven by smart phones, social-networking and mobile internet. Number of data users rose to 5.7mn from 5.3mn in 4Q09 and 4.7m in 1Q09. The contribution of mobile internet rose to 33.9% of overall data revenue from 24.5% in 1Q09. Also, a plenty of new smart phones that flooded into Thai market with more affordable prices helped increased data penetration. Booming contents such as social-networking and news alert subscription are becoming more familiar to Thai consumers. - Seasonally low marketing spending drove EBITDA margin to 48.1%, the highest one for the last 3 years. Marketing spending was only 1.1% of total revenue, compared to the target 3% for full year spending. The spending is normally highest toward the end of the year in response to festive season. Network OPEX (excl. A&D) declined 8.2% YoY and 7% QoQ. Cash OPEX (Network OPEX + SG&A excl. A&D) also declined 8.3% YoY and 18.6% QoQ. - Free cash flow (EBITDA-CAPEX) was Bt12,157mn in 1Q10 which increased 42.7% YoY due to strong EBITDA growth and low CAPEX. 1Q10 CAPEX was Bt805mn or 13% of the Bt6.2bn full year guideline. Cash (incl. specifically-designated bank deposit) increased by Bt10,518mn in 1Q10 to a level of Bt35,685mn before dividend payment in April. Free cash flow for full year is expected to grow 12%, supported by solid cash generation with controlled CAPEX amidst the uncertainty of 3G 2.1GHz license. While NTC has formed a full team, the official timeframe for 3G is not yet announced and another public hearing could be expected before pursuing 2.1GHz license auction in our view. OPERATIONAL HIGHLIGHTS Subscriber Total subscribers achieved 29.5m from strong net addition of 694k prepaid subscribers and 42k postpaid subscribers. Significant increased in prepaid subscribers came from the economic recovery together with the "2425" promotions. Strong net additions was also supported by growth of Net SIM subscriber which increased to 400k in 1Q10 from 270k in 4Q09 and 58k in 1Q09. ARPU Prepaid ARPU was Bt198 in 1Q10, decline 2.5% YoY but flat QoQ. With the same trend, postpaid ARPU was Bt617 in 1Q10 decline 2.7% YoY, but flat QoQ. The YoY declining trend started to stabilize since 4Q09 from domestic usage improvement and strong data consumption. MOU As a result of continuing economic recovery in 1Q10, blended MOU increased to 289 minutes or 6.6% YoY and 2.1% QoQ. Higher MOU came from prepaid segments which increased 8.2% YoY to 263 minutes from 243 minutes in 1Q09 and rose 3.1% QoQ from 255 minutes. However, postpaid MOU decline to 523 minutes or dropped 1.5% YoY and 2.1% QoQ. SIGNIFICANT EVENTS 1) Impairment loss from DPC goodwill of Bt390m recognized in 1Q10 - In 1Q10, the AIS Group recorded in the income statement for the period a Bt390m impairment loss of goodwill on DPC, a subsidiary operating mobile service on GSM 1800MHz. Such item is not tax deductible, unrecoverable and is non-cash expense. The effect on the AIS Group's consolidated financial statements ending 31 March 2010 as following: - Recognized impairment loss on DPC goodwill of Bt390mn on the income statement, by discounting expected future cash flow method and compared with its carrying value of Bt3,102mn. - Outstanding DPC goodwill booked under intangible asset as of 31 March 2010 was Bt2,712mn. 2) Reclassification of service revenue from 1Q09 to date - AIS reclassified the breakdown of service revenue in new definition below. Please note that total service revenue remained unchanged, only the breakdown of revenue was reclassified. - Voice revenue includes any domestic and international voice usage generated by postpaid, prepaid subscribers and corporate subscribers - Non-voice revenue includes SMS, MMS, GPRS, content, enterprise data, mobile advertising, WAP, JAVA, ringback tone. - International roaming revenue is accounted for inbound roaming revenue only (revenue generated by foreign roamers using AIS network). - Other revenue includes international call (IDD) and other telecommunication services under subsidiaries. 3) Reclassification of cost from 1Q09 to date - Some costs related to call center was reclassified as cost of services from previously booked under SG&A (Administrative expenses). The revision was made to the consolidated income statement ending 31 March 2009 and 31 March 2010. FINANCIAL RESULT Table 1 - Revenue* (Bt million) / (% to total reclassified of breakdown service revenue excluded IC) 1Q09 4Q09 1Q10 YoY QoQ Voice revenue 16,230 79.0% 16,210 76.8% 16,429 75.5% 1.2% 1.4% Postpaid (voice) 4,401 21.4% 4,422 21.0% 4,422 20.3% 0.5% 0.0% Prepaid (voice) 11,830 57.6% 11,788 55.9% 12,007 55.2% 1.5% 1.9% Non-voice revenue 2,627 12.8% 3,272 15.5% 3,588 16.5% 36.6% 9.7% International roaming 734 3.6% 698 3.3% 683 3.1% -6.9% -2.1% Others (IDD, other fees) 954 4.6% 921 4.4% 1,050 4.8% 10.0% 14.1% Total service revenue excl. IC 20,546 100.0% 21,100 100.0% 21,751 100.0% 5.9% 3.1% Total sales 2,033 1,372 1,728 -15.0% 25.9% Table 2 - Interconnection (Bt million) / (% to total revenue) 1Q09 4Q09 1Q10 YoY QoQ Interconnection revenue 3,721 14.1% 3,511 13.5% 3,486 12.9% -6.3% -0.7% Interconnection cost 3,447 13.1% 3,390 13.0% 3,428 12.7% -0.6% 1.1% Net interconnection 273 1.0% 122 0.5% 58 0.2% -78.8% -52.4% Table 3 - Cost of services ex IC and sales (Bt million) / (% to total revenue) 1Q09 4Q09 1Q10 YoY QoQ Network amortization 4,597 17.5% 4,829 18.6% 4,689 17.4% 2.0% -2.9% Base station rental & utility 651 2.5% 654 2.5% 694 2.6% 6.6% 6.1% Maintenance 428 1.6% 282 1.1% 306 1.1% -28.5% 8.4% Other cost of services 965 3.7% 1,082 4.2% 877 3.3% -9.1% -18.9% Cost of sales 1,988 7.6% 1,151 4.4% 1,444 5.4% -27.4% 25.5% Total cost of services ex IC and sales 8,629 32.8% 7,998 30.8% 8,010 29.7% -7.2% 0.1% Table 4 - SG&A (Bt million) / (% to total revenue) 1Q09 4Q09 1Q10 YoY QoQ Marketing expense 519 2.0% 906 3.5% 302 1.1% -41.7% -66.6% General administrative & staff cost 1,692 6.4% 1,865 7.2% 1,727 6.4% 2.1% -7.4% Bad debt provision 182 0.7% 202 0.8% 158 0.6% -13.5% -22.0% Total SG&A 2,393 9.1% 2,973 11.4% 2,187 8.1% -8.6% -26.4% % Bad debt to postpaid revenue 3.5% 3.6% 2.8% Table 5 - EBITDA (Bt million) / (% to total revenue) 1Q09 4Q09 1Q10 YoY QoQ Operating Profit 6,849 26.0% 6,477 24.9% 7,984 29.6% 16.6% 23.3% Depreciation of PPE 765 2.9% 894 3.4% 816 3.0% 6.7% -8.8% Amortization 4,075 15.5% 4,186 16.1% 4,115 15.3% 1.0% -1.7% (Gain)/Loss on disposal of PPE -1 0% 2 0% 93 0.3% Management Benefit -17 -0.1% -23 -0.1% -20 -0.1% 19.0% -13.5% Other financial cost -20 -0.1% -17 -0.1% -27 -0.1% 37.9% 55.4% EBITDA 11,652 44.3% 11,520 44.3% 12,961 48.1% 11.2% 12.5% Table 6 - Financial cost (Bt million) / (% to total revenue) 1Q09 4Q09 1Q10 YoY QoQ Interest expense 488 1.9% 427 1.6% 404 1.5% -17.2% -5.3% Other financial costs 20 0.1% 17 0.1% 27 0.1% 37.9% 55.4% Total financial cost 508 1.9% 444 1.7% 431 1.6% -15.0% -2.9% Revenue Voice revenue continued to recover from the last quarter, grew 1.2% YoY and 1.4% QoQ from the bottom of the latest economic downturn. By segment, prepaid voice revenue grew 1.5% YoY and 1.9% QoQ from improvement in overall usage while postpaid voice revenue relatively flat 0.5% YoY and 0% QoQ from continued acquisition of quality subscribers from the Mix & Match program. Non-voice revenue surged 36.6% YoY and 9.7% QoQ. The key driver was mobile data (EDGE/GPRS usage) which grew strongly by 88.8% YoY and 13.7% QoQ, and represented the largest portion at 34% of total non-voice revenue. Mobile data subscribers reached 5.7mn in 1Q10 from 5.3mn in the last quarter and 4.7mn in 1Q09. The growth reflected continued rising demand for mobile internet connectivity and growing popularity of social networking. This resulted in 1) surging Net SIM users to 400k from 270k in 2009 thanks to wider consumers' adoption as AIS is penetrating through IT channels, 2) continuing built-up of Blackberry subscribers reaching 140k as of 1Q10 from 100k in 2009, in line with the 200k target for 2010, 3) increasing data package subscription as well as more viewers and higher usage of TV on Mobile during political unrest period. Content was also a key growth contribution with 63.3% YoY and 17.6% QoQ particularly serving demand for horoscope and news alert as a result of political turmoil. SMS grew 5.4% YoY and 28.3% QoQ from the New Year greeting season together with economic recovery. International roaming revenue dropped 6.9% YoY and 2.1% QoQ which was soften from discount request from foreign operators. The IR revenue in March obviously declined from lower inbound tourists due to political unrest. Others service revenue mainly comprised of international call (IDD), increased 10% YoY and 14.1% QoQ from promoting of "00500", a new IDD service offering cheaper alternative to the original "005" service. Sales revenue Although the sales revenue dropped 15% YoY due to change in Nokia's distribution policy, the sales margin increased to 16.4% from 2.2% in 1Q09 from more sales proportion of air cards and Blackberry. On QoQ basis, sales revenue improved to Bt1,728mn, 25.9% thanks to smartphones and air-cards boom. Net IC continuously decreased to Bt58mn, 78.8% YoY and 52.4% QoQ. This resulted from higher outgoing calls to other operators as AIS has been promoting flat rate charges, while incoming calls from other operators were also lower due to their on-net campaign. Cost of Service and Sales Revenue sharing expense increased 7.5% YoY and 4% QoQ from higher service revenue in this quarter. Network amortization slightly increased 2% YoY from shorter BTO contract time remaining. However, the amortization relatively decreased 2.9% QoQ as some of asset fully amortized. Goodwill impairment was recorded at Bt390mn in 1Q10 for impairment of DPC goodwill. In 4Q08, the DPC goodwill of Bt3,553mn was once impaired so that the DPC goodwill left on the balance sheet was Bt3,102mn. After impairment of DPC goodwill in 1Q10, the remaining DPC goodwill is Bt2,712mn and is expected to be impaired quarterly from now until the end of BTO contract in 2013. The DPC impairment was from the shorter remaining time of BTO contract of DPC. Maintenance cost decreased 28.5% YoY from cost control program started since 2Q09. However, the maintenance cost increased 8.4% QoQ because of a reversal of spare-part write-off in 4Q09. With common size assessment, current maintenance cost was kept at 1.1% of total revenue which was flat compared to 4Q09 but declined from 1.6% in 1Q09. Base rental and utility cost was at Bt694mn in 1Q10, relatively higher 6.6% YoY and 6.1% QoQ. This increment came from higher number of cell sites, despite of limited network expansion, which reached 15.4k in 1Q10, compared to 14.8k in 1Q09 and 15.3k in 4Q09. Expense Marketing expense decreased to Bt302mn by 41.7% YoY as AIS had huge campaign on corporate icon "Oon Jai" in 1Q09 and lower-than-expected "Oon Jai redemption point". On QoQ basis, marketing expense dropped 66.6% from seasonal high expense in the fourth quarter. YTD marketing expense to total revenue ratio was only 1.1%, compared to the budget 3% spending for full year. The spending is normally highest toward the end of the year following festive seasons. Administrative expense was Bt1,727mn, consisting of staff cost and general administrative expense, increased 2.1% YoY from higher staff cost. On QoQ basis general administrative expense declined 7.4% due to lower staff cost. Bad debt provision expense was Bt158mn decreasing 13.5% YoY and 22% QoQ from improved quality of postpaid subscribers over time. Bad debt to postpaid revenue was 2.9% in 1Q10 better than 3.6% in 1Q09 and 3.5% in 4Q09. Interest expense decreased to Bt404mn or 17.2% YoY and 5.3% QoQ. Outstanding interest bearing debt was down to Bt35,639mn compared to Bt39,084mn in 1Q09 and Bt35,654mn in 4Q09. The lower interest expense came from lower outstanding debt. Result EBITDA was higher at Bt12,961mn, increased 11.2% YoY and 12.5% QoQ. This increment came from 1) 2.5% YoY and 3.8% QoQ higher revenue, 2) lower overall cost of services and sales 1.6% YoY but slightly increased 1.5% QoQ, 3) lower SG&A 8.6% YoY and 26.3% QoQ. Foreign Exchange posted a net loss of Bt66mn due to a strong Baht currency appreciation against USD and Euro on foreign currency deposit. AIS normally keeps a small amount of foreign currency deposit incurred from international roaming revenue received from foreign operators for natural hedge purpose i.e. hedging against foreign currency procurement. Interest income was Bt103mn in 1Q10 decreased 14.9% YoY from lower interest rate despite of higher cash position. However, the interest income increased 46.8%QoQ from higher cash deposit. Net income was Bt4,972mn in 1Q10 increased 8.9% YoY and 21.1% QoQ. Excluding special items, normalized net income was at Bt5,362mn, increased 17.4% YoY and 23.9% QoQ. Higher revenue and lower expense contributed to higher profit margin at 18.4% compared to 17.4% in 1Q09 and 15.8% in4Q09. Table 7 - Consolidated Where 1Q09 4Q09 1Q10 YoY QoQ (Bt million) Net income 4,567 4,106 4,972 8.9% 21.1% Add:Impairment of DPC goodwill Impairment loss - - 390 Impairment loss on ADC asset Impairment loss - 222 - Normalized net income 4,567 4,328 5,362 17.4% 23.9% BALANCE SHEET STRUCTURE Total asset increased 6.1% from the last quarter to Bt132,653m due to higher cash offset by lower on network and PPE. Cash rose to Bt35,685m from strong free cash flow generation. Interest bearing debt was relatively the same at Bt35,639m. Bt 493mn debt repayment, due in 2010, will be paid in 2nd and 4th quarter. Average cost of debt was remained at 4.8% with all foreign debt fully hedged. Equities increased 7.1% from the last quarter from higher retained earning. Unappropriated retained earning of 1Q10 was Bt51,119mn compared to Bt46,146mn of 4Q09. Table 8 - Balance Sheet (Bt Million) /(% to total asset) 4Q09 1Q10 Cash 25,167 20.1% 35,685 26.9% ST investment 44 0.0% 1,954 1.5% Trade receivable 5,773 4.6% 5,604 4.2% Inventories 629 0.5% 759 0.6% Others 1,958 1.6% 2,097 1.6% Current Asset 33,571 26.9% 46,099 34.8% Networks and PPE 69,715 55.8% 65,774 49.6% Intangible asset 6,286 5.0% 5,806 4.4% Defer tax asset 10,052 8.0% 9,997 7.5% Others 5,402 4.3% 4,977 3.8% Total Assets 125,026 100.0% 132,653 100.0% Trade accounts payable 2,729 2.2% 3,448 2.6% CP of LT loans 497 0.4% 482 0.4% Accrued R/S expense 3,070 2.5% 4,280 3.2% Others 10,287 8.2% 11,555 8.7% Current Liabilities 16,583 13.3% 19,764 14.9% Total interest-bearing debt 35,654 28.5% 35,639 26.9% Total Liabilities 53,215 42.6% 55,762 42.0% Total Equity 71,811 57.4% 76,890 58.0% Liquidity in term of current ratio as at 1Q10 was relatively the same as at 4Q09. On Y-o-Y basis, current ratio was improved from 1.73 in 1Q09 to 2.33 in 1Q10. Higher cash and lower current portion of long-term debt were the main factors for the higher current ratio. Capital structure remained strong with total liability to equity at 0.73. Plenty of cash enhanced company into net cash position. The net cash position will be changed once the company pay dividend of Bt8.30 per share on April 30th, 2010. Table 9 - Key Financial Ratio 1Q09 4Q09 1Q10 Debt ratio 0.43 0.42 0.42 Net debt to equity 0.12 0.15 0.00 Net debt to EBITDA 0.19 0.23 0.00 Total liabilities to equity 0.76 0.74 0.73 Current ratio 1.73 2.02 2.33 Interest coverage 14.0 15.2 19.7 DSCR 5.6 14.6 17.3 ROE (%) 23.4% 22.9% 25.9% Table 10 - Debt Repayment Schedule (Bt Million) Debenture Long term loan 1Q10 - - 2Q10 - 246.5 3Q10 - - 4Q10 - 246.5 2011 4,000 9,978 2012 5,000 493 2013 8,000 493 2014 2,500 2,939 2015 - 493 2016 - 493 2017 - 493 2018 - 247 CASH FLOW For 1Q10, AIS cash flow position remained solid. Free cash flow (EBITDA-CAPEX) was Bt12.2bn compared to Bt8.5bn in 1Q09, improving 42.7% y-o-y, supported by lower capex coupled with higher EBITDA. Capex significantly declined by 74.3%yoy from Bt3.1bn in 1Q09 to Bt805mn in 1Q10 out of the Bt6.2bn target for 2010. The use of Bt6.2bn capex is subject to customer needs particularly an increasing demand for data usage. Moreover, the company continued to generate sustained operating cash flow before change in working capital at Bt13.1bn in 1Q10 which increased from Bt12.3bn in 1Q09. Table 11 - Source and use of fund : 1Q10 (Bt. Million) Source of Fund Use of Fund Operating CF before change in working capital 13,136 CAPEX & Fixed assets 805 Interest received 85 Finance cost paid 376 Share capital and share premium 77 Cash increase 10,443 Changes in working capital 339 Payment of finance lease 7 Investment related 2,006 Total 13,637 Total 13,637 FY2010 MANAGEMENT OUTLOOK & STRATEG FY2010 Guidance Free cash flow (EBITDA - CAPEX) 12% y-o-y Service revenue +3% excluding interconnection revenue EBITDA margin 44% Capex Bt6.2bn cash capex (including 3G 900MHz) Telecom industry in FY2010 is expected to grow 3% following economic recovery domestically and globally. Domestic usage is expected to improve as consumption slightly recovers while agricultural sector will again this year, similar to 2008, see a positive turn from rising farm prices which will also increase the spending from the upcountry market. International roaming traffic, majority of which comes from foreign roamers, is also expected to increase as tourist forecast rises. International call however will experience a more aggressive pricing pressure as already been witnessed during the 4Q09. Data service becomes a key growth driver while voice growth remains stagnant. Overall penetration wil be over 100% with market net additional subscribers of 3-4m for 2010. With merely 5% subscriber growth, competition on voice market is hence expected to be relatively benign. Market of data or non-voice service has shown its potential rising demand particularly for personal mobile internet connectivity. Data revenue is expected to grow 20% y-o-y from increasing number of active subscribers as well as higher usage per subscriber. Key drivers are the trend of online/mobile social networking as well as the limited availability of landline internet access. (more)