3G squeezes SmarTone profits

March 6, 2005

SmarTone's strong operational performance continued during the 2004 /05 period with rising services revenue and ARPU amidst a highly competitive market. While the 3G costs have started to impact on financial results, the company is focused on creating longer term value using 3G.

Turnover increased to HK$1,831 million, representing a growth of 18% and 1% on the same period last year and the previous six months respectively. Earnings before interest, tax, depreciation and amortisation ("EBITDA") of HK$455 million increased by 2% on the corresponding period last year but decreased by 3% on the previous six months.

The launch of 3G-enabled services is a key milestone in SmarTone's quest for long-term revenue and profit growth through multimedia services. 3G allows much greater flexibility in delivering an enhanced customer experience and differentiation. SmarTone is well poised to extend its evolution of multimedia services with its strong customer propositions:

Differentiated content and services - For consumers, SmarTone iN on 3G offers the greatest breadth and depth of relevant content and services. With richer propositions, it provides customers a more compelling experience in key areas such as sports, news, music and games. In addition, the SmarTone iN on 3G portal offers a richer browsing experience and more sophisticated navigation system for easier access to favourite content and services.

SmarTone PC Connect is more than just a 3G / GPRS datacard, it comes with an on-screen console offering an intuitive interface to a range of services. Customers can enjoy high-speed and reliable access to the Internet, emails, company intranet applications, as well as news and travellers' information, without the need for a fixed line. Business travellers are now able to enhance their productivity while enjoying greater convenience when roaming abroad.

Best-in-class handsets - SmarTone offers a wide choice of handsets from the popular brands, as well as exclusive customised models from manufacturers. The company is extending its co-development partnership to a number of handset manufacturers for 3G to offer best-in-class handsets for targeted customer segments with relevant propositions and at different price points. The first SmarTone iN 3G handset, the Sanyo S103, has just been launched and will be followed shortly by the Sharp SX813, as well as other models from different brands.

Better value and transparent pricing - To encourage customer adoption and to strengthen its differentiated proposition, SmarTone has introduced a new pricing model for multimedia services. All SmarTone iN on 3G price plans are bundled with free access to a range of video and basic content, as well as free browsing within the SmarTone iN on 3G portal. Premium content charges are either event-based or time-based, without any additional per KB or per packet fee. These new price plans provide customers greater simplicity, transparency and predictability, and also better value.

Most reliable 3G network - SmarTone has extended 2G network quality to 3G. The network has provided territory-wide coverage since commercial launch in December 2004, and will offer 2G-equivalent coverage and quality by March 2005. Reliability and stability for voice and data services delivered by the network is unmatched in the market.

SmarTone has signed an exclusive partner network agreement with Vodafone and will re-brand its business in Hong Kong to SmarTone-Vodafone. Leveraging Vodafone's global footprint and expertise in mobile communications, SmarTone will enhance its customer propositions to all targeted customer segments, and deliver a wider range of products and services at shorter time-to-market and lower costs.

Prospects

Pressure on margins is expected to remain in the short term as revenue growth would be offset by higher handset subsidies and increase in costs due to 3G. The switch to 3G is set to accelerate in 2005, with the increasing availability of handsets and new services.