ADVANCED INFO SERVICE PLC. 2Q10 Management Discussion and Analysis OVERVIEW 2Q10 service revenues, excluding IC, grew 7% YoY during the continued economic recovery but declined 1.9% QoQ due to seasonality. The recovery was evident in slightly improved voice revenues, which grew by 2.3% YoY, while non-voice (data) services continued to strongly develop. Political unrest during April and May only affected international revenues. International roaming dropped 26.1% QoQ, but grew 13.9% YoY from the bottom line in 2Q09. For 1H10, service revenues, excluding IC, improved 6.4% YoY. A key revenue driver was data services, which posted a very strong 36% YoY growth due to the increasing popularity of social networking, increased content variety and high-value smartphone, especially BlackBerry and aircard. BlackBerry subscribers reached 185k, while Internet SIM subscribers reached 630k. The strong growth of Internet SIM was not only limited to Bangkok, but was also evident in rural and other urban area markets. Non-voice revenues contributed 17% of total service revenue, excluding IC, an increase 13.5% from 2Q09. Non-messaging data revenues (excluding SMS and ringback tone services) attracted a significant portion of all service revenues, representing 11.2% of total. 2Q10 EBITDA was Bt12,639mn, from strong revenue growth and lower cash opex, a YoY growth of 12%. EBITDA margins also improved to 47.7% but were lower QoQ because of seasonally soft revenues and higher marketing expenses. Cash OPEX (Network OPEX + SG&A excl. A&D) continued to decline as part of tighter control over cost efficiency. With a stable market environment, the strong EBITDA and low capex helped support a solid free cash flow (EBITDA-CAPEX) of 23.3bn for 1H10. This is expected to grow 18% for the full year. 2010 guidance was revised up to echo the strong upturn in 1H10 and better 2H10 prospects. Free cash flow is expected to grow 18%, supported by higher service revenue growth, excluding IC, which has been raised to 5% YoY. Data growth has been revised to 25-30% YoY. The EBITDA margin has been revised to 45%, in line with revenue revision and expected lower marketing spending. Capex guidance has been maintained at 6.2bn. A healthy balance sheet has been maintained in preparation for the upcoming 2.1GHz license auction, which is expected to take place in September 2010. OPERATIONAL HIGHLIGHTS Subscriber Total subscribers reached 30m from 2Q10, a net addition of 478k prepaid subscribers and 20k postpaid subscribers. Net additions were softer than 1Q10, but remained stronger than 2Q09, and were also supported by the growth of Internet SIM subscribers, which have started to grow well in regional areas. ARPU Prepaid ARPU was Bt190 in 2Q10, a falling off of 3.1% YoY, due to the acquisition of low-end users and Internet SIM, which also dropped 4.0% QoQ due to seasonality. Postpaid ARPU was Bt613 in 2Q10, an improvement of 1.3% YoY, but a slight drop of 0.6% QoQ. MOU Prepaid MOU improved to 273 minutes and grew 14.2% YoY and 3.8% QoQ from usage-stimulus programs, such as buffet plans. Postpaid MOU declined to 508 minutes, a softening of 3.6% YoY and 2.9% QoQ due to seasonality. SIGNIFICANT EVENTS 1) Impairment loss from DPC goodwill of Bt350m recognized in 2Q10 In 2Q10, in the income statement for the period, AIS Group recorded a Bt350m goodwill impairment loss on DPC, a subsidiary operating mobile service on GSM 1800MHz. Such an item is not tax deductible, is unrecoverable and is a non-cash expense. The effects on the AIS Group's consolidated financial statements ending 30 June 2010 are as follows: - Recognized impairment loss on DPC goodwill of Bt350mn on the income statement, by discounting expected future cash flow and comparing with its carrying value of Bt2,712mn. - Outstanding DPC goodwill booked as an intangible asset - as of 30 June 2010 - was Bt2,362mn. 2) 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 June 2009 and 31 June 2010. FINANCIAL RESULT . Table 1 - Service Revenue (Bt million) / (% to total service revenue excluded IC) 2Q09 1Q10 2Q10 YoY QoQ Voice revenue 15,957 80.1% 16,429 75.5% 16,322 76.5% 2.3% -0.6% Postpaid (voice) 4,287 21.5% 4,422 20.3% 4,442 20.8% 3.6% 0.5% Prepaid (voice) 11,670 58.5% 12,007 55.2% 11,880 55.7% 1.8% -1.1% Non-voice revenue 2,684 13.5% 3,588 16.5% 3,643 17.1% 35.7% 1.5% International roaming 443 2.2% 683 3.1% 505 2.4% 13.9% -26.1% Others (IDD, other fees) 848 4.3% 1,050 4.8% 867 4.1% 2.2% -17.4% Total service revenue excl. IC 19,932 100.0% 21,751 100.0% 21,337 100.0% 7.0% -1.9% Table 2 - Sales (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Sales revenue 1,644 6.5% 1,728 6.4% 1,814 6.8% 10.4% 5.0% Cost of Sales 1,599 6.3% 1,444 5.4% 1,510 5.7% -5.6% 4.6% Net sales 45 0.2% 284 1.1% 305 1.1% 584.1% 7.4% Table 3 - Interconnection (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Interconnection revenue 3,621 14.4% 3,486 12.9% 3,371 12.7% -6.9% -3.3% Interconnection cost 3,302 13.1% 3,428 12.7% 3,363 12.7% 1.9% -1.9% Net interconnection 319 1.3% 58 0.2% 8 0.0% -97.4% -85.9% Table 4 - Cost of services ex IC (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Network amortization 4,734 18.8% 4,689 17.4% 4,627 17.4% -2.3% -1.3% Base station rental & utility 679 2.7% 694 2.6% 679 2.6% -0.1% -2.1% Maintenance 350 1.4% 306 1.1% 369 1.4% 5.2% 20.5% Other cost of services 976 3.9% 877 3.3% 409 1.5% -58.1% -53.4% Total cost of services ex IC 6,740 26.7% 6,565 24.3% 6,083 22.9% -9.7% -7.3% Revenue sharing expense 4,849 19.2% 5,355 19.9% 5,259 19.8% 8.5% -1.8% Table 5 - SG&A (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Marketing expense 658 2.6% 302 1.1% 623 2.3% -5.3% 106.0% General administrative and staff cost 1,443 5.7% 1,668 6.2% 1,635 6.2% 13.3% -2.0% Bad debt provision 196 0.8% 158 0.6% 179 0.7% -8.7% 13.6% Depreciation 69 0.3% 60 0.2% 53 0.2% -23.3% -11.1% Total SG&A 2,366 9.4% 2,187 8.1% 2,490 9.4% 5.2% 13.8% % Bad debt to postpaid 3.8% 2.8% 3.1% revenue Table 6 - EBITDA (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Operating Profit 6,342 25.2% 7,984 29.6% 7,818 29.5% 23.3% -2.1% Depreciation of PPE 836 3.3% 816 3.0% 773 2.9% -7.5% -5.3% Amortization 4,146 16.5% 4,115 15.3% 4,097 15.4% -1.2% -0.4% (Gain)/Loss on disposal of PPE 0 0% 93 0.3% -1 0.0% -362.8% -101.4% Management Benefit -16 -0.1% -20 -0.1% -30 -0.1% 83.2% 50.1% Other financial cost -18 -0.1% -27 -0.1% -18 -0.1% -2.7% -35.6% EBITDA 11,289 44.8% 12,961 48.1% 12,639 47.7% 12.0% -2.5% Table 7 - Financial cost (Bt million) / (% to total revenue) 2Q09 1Q10 2Q10 YoY QoQ Interest expense 478 1.9% 404 1.5% 417 1.6% -12.7% 3.2% Other financial costs 18 0.1% 27 0.1% 18 0.1% -2.7% -33.8% Total financial cost 497 2.0% 431 1.6% 435 1.6% -12.4% 0.7% Revenue Voice revenue was Bt16,322mn, an increase of 2.3% YoY but a decrease of 0.6% QoQ. Prepaid voice revenues were Bt11,880mn, so grew 1.8% YoY due to the ongoing economic recovery, but softened to 1.1% QoQ because of seasonality. Postpaid voice revenues were Bt4,442mn, and grew both YoY and QoQ at 3.6% and 0.5% respectively. For 1H10, voice revenue grew 1.8% YoY mainly due to the continuing economic recovery. Non-voice revenue was Bt3,643mn, surged 35.7% YoY and 1.5% QoQ. Non-voice revenues represented a 17.1% contribution of service revenues, excluding IC, compared to 13.5% in 2Q09. Key growth of non-voice revenues came from non-messaging services (non-voice revenue excluding SMS and ringback tone) which contributed 11.2% of service revenues, excluding IC, compared to 7.6% in 2Q09. This data growth was supported by: 1. The popularity of smartphones e.g. BlackBerry which had 185k subscribers, 2. Mobile internet usage, especially via USB aircard indicated by 630k Net SIM subscribers. The growth of Net SIM was not only in Bangkok but also started to gain momentum in many regional areas, particularly the areas with 3G 900MHz service ie. Chiang Mai, Chonburi, Hua Hin, 3. Social networking such as group instant messaging, 4. Increased contents subscription, especially on news, sports and lifestyles. For 1H10, data revenue rose 36.2% YoY. International roaming revenue was Bt505mn, an increase of 13.9% YoY, reflecting the ongoing economic recovery, but a decrease of 26.1% QoQ from lower number of foreigner arrivals. For 1H10, international roaming revenue increased 0.9% YoY. Others service revenue, mainly comprised of international call (IDD), increased 2.2% YoY but decreased 17.4% QoQ from lower foreigner arrivals and political unrest. For 1H10, other service revenues increased 6.4% YoY. Sales revenue was Bt1,814mn, an increase 10.4% YoY and 5.0% QoQ from higher unit sales of handsets and aircards. On a quarterly basis, sales margins were maintained at 16.8% in 2Q10 from 16.4% in 1Q10, but increased from 2.7% in 2Q09, because of the contribution made by higher margin smartphones. Net IC declined to Bt8mn, from Bt319mn in 2Q09 and Bt58mn in 1Q10. IC revenue was Bt3,371mn, which decreased 6.9% YoY and 3.3% QoQ due to higher on-net promotions from the other operators, while IC cost was Bt3,363mn. IC cost increased 1.9% YoY, but decreased 1.9% QoQ because of all network promotions by AIS. Cost of Service and Sales Revenue sharing expenses were Bt5,259mn, and increased 8.5% YoY, but decreased 1.8% QoQ in line with the change in service revenues. Network amortization was Bt4,627mn, and decreased 2.3% YoY and 1.3% QoQ because some assets were fully amortized and small new investments were added. Foreign Exchange loss was Bt10mn, and improved from a Bt66mn loss in 1Q10. Risk of foreign exchange was reduced by derivative instruments. Other operating incomes were Bt140mn, and increased 1.7% YoY from higher interest income, but decreased 20.9% QoQ from lower cash outstanding due to dividend payment. Maintenance costs were Bt369mn, and increased 5.2% YoY and 20.5% QoQ. The increase was a result of an additional preventive maintenance cycle. For 1H10, maintenance costs reduced 13.3% YoY. Base rental and utility costs decreased 0.1% YoY and 2.1% QoQ, despite a small increase in the number of cell sites, which was 15.5k, compared to 15.4k in 1Q10 and 15.3k in 2Q09, Energy saving programs, e.g. smaller equipment, changing air conditioning to natural air, helped to control utility expenses. For 1H10, the base rental and utility costs increased 3.2% YoY. Other cost of services reduced 58.1% YoY and 53.4% QoQ from Bt360mn, a one-time reversal item related to network. Normalized other service costs were Bt769mn, which still reduced 21.2%YoY and 12.3%QoQ. Expense Marketing expenses were Bt623mn, and decreased 5.3% YoY, but increased 106% QoQ due to marketing events, particularly during the world cup football festival. As a percentage of total revenue, marketing expenses were 2.3%. For 1H10, marketing expenses were 1.7% of total revenue, and so remained below the full year guidance range of 2% to 2.5%. Administrative expenses were Bt1,688mn, and increased 11.7% YoY from higher staff costs, but declined 2.3% QoQ from lower general administrative expenses. For 1H10, administrative expenses increased 6.6% from higher staff costs. This administrative expenses include depreciation expense. Bad debt provision expenses were Bt179mn, and decreased 8.7% YoY, but increased 13.6% QoQ. The higher bad debt was due to the recent political unrest, which made it difficult for customers to travel to pay their bills. Bad debt to postpaid revenue ratio remained under control at 3.1% in 2Q10, which was better than 3.8% in 2Q09, but slightly higher than 2.8% in 1Q10. For 1H10, bad debt provision expenses reduced 11% YoY. Finance costs were Bt435mn, and decreased 12.4% YoY due to lower outstanding debts, but increased 0.7% QoQ due to the step-up of interest rate on a Bt4bn debenture. For 1H10, finance costs declined 13.6% YoY due to lower outstanding debts. Goodwill impairment was recorded at Bt350mn in 2Q10 (DPC). After impairment of DPC goodwill in 2Q10, the remaining DPC goodwill is Bt2,362mn. The DPC goodwill is subjected to an impairment test at the end of each reporting period. The DPC impairment was due to the shorter remaining time of the BTO contract of DPC. Results EBITDA was Bt12,639mn, and increased 12% YoY due to strong revenue growth and lower cash OPEX. However, EBITDA decreased 2.5% QoQ due to higher marketing expenses. For 1H10, EBITDA rose 11.6% YoY due to strong revenue growth and lower costs. Net income was Bt4,879mn, and increased 16.2% YoY, but decreased 1.9% QoQ. Normalized net income was Bt5,229mn which increased 24.6% YoY, but decreased 2.5% QoQ. The YoY increase was mainly due to revenue improvement, while at the same time costs were relatively stable. The QoQ decrease resulted mainly from seasonally lower service revenues and higher marketing expenses. For 1H10, normalized net profit improved 20.8% YoY Table 8 - Consolidated Where 2Q09 1Q10 2Q10 YoY QoQ (Bt million) Net income 4,197 4,972 4,879 16.2% -1.9% Add:Impairment of DPC goodwill Impairment loss - 390 350 Impairment loss on ADC asset Impairment loss - - - Normalized net income 4,197 5,362 5,229 24.6% 2.5% BALANCE SHEET STRUCTURE Total assets decreased 14.4% from the last quarter to Bt113,497mn due to lower cash outstanding from dividend payment. Cash dividends (both regular and special dividends) were of Bt24.6bn was paid out in April. Interest bearing debt lowered to Bt35,392mn in 2Q10 due to a Bt247mn repayment in 2Q10. Remaining debt - to be repaid in 2010 - is Bt247mn, and is due in 4Q10. Average cost of debts remained at 4.8%, while all foreign debts remain fully hedged. Table 9 - Balance Sheet (Bt Million) / (% to total asset) 1Q10 2Q10 Cash 35,685 26.9% 19,728 17.4% ST investment 1,954 1.5% 4,974 4.4% Trade receivable 5,604 4.2% 5,189 4.6% Inventories 759 0.6% 1,011 0.9% Others 2,097 1.6% 2,097 1.8% Current Asset 46,099 34.8% 32,999 29.1% Networks and PPE 65,774 49.6% 62,152 54.8% Intangible asset 5,806 4.4% 5,341 4.7% Defer tax asset 9,997 7.5% 9,978 8.8% Others 4,977 3.8% 3,027 2.7% Total Assets 132,653 100.0% 113,497 100.0% Trade accounts payable 3,448 2.6% 2,615 2.3% CP of LT loans 482 0.4% 481 0.4% Accrued R/S expense 4,280 3.2% 6,129 5.4% Others 11,555 8.7% 10,690 9.4% Current Liabilities 19,764 14.9% 19,914 17.5% Total interest-bearing debt 35,639 26.9% 35,392 31.2% Total Liabilities 55,762 42.0% 56,282 49.6% Total Equity 76,890 58.0% 57,215 50.4% Equities decreased 25.6% from the last quarter due to lower retained earnings after dividend payment. The unappropriated retained earnings - as of 2Q10 - were Bt31,380mn compared to Bt51,119mn as of 1Q10. Liquidity represented by current ratio as at 2Q10 was 1.66, and dropped from 1Q10 because of dividend payments. On a YoY basis, the current ratio improved from 1.61 at 2Q09. Higher cash and lower current portion of long-term debt were the main factors for the higher current ratio. Capital structure remained strong as indicated by net debt to equity ratio at 0.27 and net debt to EBITDA at 0.31. Total liability to equity was 0.98. These gearing ratios were kept low for 3G investment flexibility. Table 10 - Key Financial Ratio 2Q09 1Q10 2Q10 Debt ratio 0.45 0.42 0.50 Net debt to equity 0.16 0.00 0.27 Net debt to EBITDA 0.26 0.00 0.31 Total liabilities to equity 0.82 0.73 0.98 Current ratio 1.61 2.33 1.66 Interest coverage 13.25 19.7 18.7 DSCR 5.42 17.3 16.5 ROE (%) 23.2% 25.9% 34.1% Table 11 - Debt Repayment Schedule (Bt Million) Debenture Long term loan 1Q10 - - 2Q10 - 247 3Q10 - - 4Q10 - 247 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 Free cash flow (EBITDA-CAPEX) of 1H10 was Bt23.3bn, an increase of 37.2% YoY, compared to Bt16.9bn in 1H09. The increase was supported by lower capex and strong operating revenues. Capex significantly declined by 61.6% YoY from Bt5.9bn in 1H09 to Bt2.3bn in 1H10. The Bt6.2bn capex guidance was subject to customer needs, particularly an increasing demand for data usage. The company continued to generate a solid operating cash flow of Bt26bn in 1H10, which had increased from Bt23.6bn in 1H09. During the period,the company also made a dividend payment of 24.6bn. Table 12 - Source and use of fund : 1H10 (Bt. Million) Source of Fund Use of Fund Operating CF before change CAPEX & Fixed assets 2,288 in working capital 26,012 Interest received 181 Dividend payments 24,618 Sale of property and equipment 23 Finance costs paid 859 Share capital and share premium 104 Repayment of LT borrowing 243 Cash decreased 5,419 Changes in working capital 1,113 Payment of finance leases 13 Investment related 2,605 Total 31,739 Total 31,739 FY2010 MANAGEMENT OUTLOOK & STRATEGY - REVISED FY2010 Guidance Free cash flow (EBITDA - CAPEX) 18% y-o-y (from 12%) Service revenue +5% excluding interconnection revenue (from 3%) EBITDA margin 45% (from 44%) CAPEX Bt6.2bn cash capex (including 3G 900MHz) Telecom service revenue is expected to grow 5%, higher than the previous 3% forecast, following a strong 6.5% growth in 1H10, which reflected both a general solid economic recovery and a strong momentum of data growth. Domestic usage is expected to improve from better sentiment and recovered consumption. Mobile penetration has already reached 100%; this trend continues to move upwards from a surge in internet SIM and some organic growth from rural and other urban markets. Voice competition remains benign. International roaming traffic - mostly contributed by foreign tourists - is expected to increase as tourist forecast rises, despite some hiccups from the political unrest in 2Q10. However, international calls will experience more aggressive pricing pressure, as already witnessed during the 4Q09. Data continues to be the focus of growth, driven by a surge in mobile internet usage through smart phones and data cards. The data or non-voice service market has shown its potential rising demand, particularly for personal mobile (more)