Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's first quarter 2019 operating result. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit CHT IR website, www.cht.com.tw/ir, under the IR Calendar section.

Now I'd like to turn it over to Ms. Fu-Fu Shen, the Director of Investor Relations. Ms. Shen, please go ahead.

[Fu-Fu Shen, executive]

Thank you. This is Fu-Fu Shen, the Assistant VP for Chunghwa Telecom. Welcome to our First Quarter 2019 Results Conference Call. Joining on the call today are Mr. Sheih, our new Chairman and CEO, who assumed the position on April 22 last week; and Mr. Kuo, our chief -- our CFO. Mr. Sheih will remain present until a successor has been identified.

During today's call, management will begin by providing an overview of our business during the quarter, followed by a discussion of operational and financial highlights. And then we will move on to the Q&A session.

Now I would like to hand the call over to Chairman Sheih, and please note our safe harbor statement on Slide 2.

Chairman, please.

[Chi-Mau Sheih, executive]

Thank you, Fu-Fu, and hello, everyone. Welcome to our first quarter 2019 earnings result call.

During the quarter, the overall market remained competitive. Our peers and smaller players took turns to roll out low-price unlimited mobile data plans to acquire more customers. However, we continue to anticipate mobile pricing stabilization with our quality mobile network.

In this quarter, we continued to hold the leading market position by both mobile revenue and subscriber shares. In fact, our revenue share increased slightly and the subscriber share remained the same. We also continue migrating mobile customers to handset bundle or higher-priced plans for incremental ARPU in order to mitigate the downfall that happened in 2018.

In our broadband business, we are pleased with the steady migration of our broadband subscribers to higher speed services. Due to market competition and mobile substitution during the quarter, we experienced a small subscriber loss. However, our MOD subscribers continue to increase and reached to 2.05 million in the first quarter of 2019.

We attribute this growth to our successful strategy of satisfying customer demands with popular content which includes OTT services, like Netflix. In addition, in January, our regulator, NCC, allowed us to package MOD channels freely to fulfill our diversified user demands. We believe that this freedom gives us a more favorable market environment in which to operate and to further grow our MOD business.

We are also delighted to see that our ICT revenue increased year-over-year. We continue to strengthen our core capability in selected areas to provide a more focused ICT-related solutions. We were also streamlining our ICT product platform for better positioning and competitive pricing.

The upcoming 5G service launch and potential regulatory changes may change the competitive landscape. As a result, we roll out a customer-centric value-creating transformation plan this year to take our business to the next level and to return to a growth trajectory. Under this plan, we will strengthen core business, deploy emerging services, optimize our cost structure and further enhance fundamentals, including next-generation network, IT infrastructure and human resource training.

Now I will walk you through each of our business lines on Slide 5. I would like to update you on our mobile business. In the first quarter of 2019 despite the intense competition and down-selling across the overall market, our mobile service revenue continued to be the [ most ] effective compared to that of the other major providers. We maintain our strategy of pricing subscribers to adopt higher-priced plans to enhance mobile performance.

As SIM-only adoption continues to increase and as the handset replacement cycle becomes longer, we expect mobile ARPU decline to persist. However, we will continue to roll out handsets or CP-bundled plans, value-added offerings and other incentives to boost service revenue, enhance margins and avoid further price drops.

Slide 6 shows the performance of our broadband business. We are delighted to see continued migration of our broadband subscribers to higher speed fiber services. In the first quarter, the number of users signing up for plans with connection speeds of 100 megabits per second or higher grew by 10.5% year-over-year to more than 1.4 million. The number of subscribers signing up for connection speeds of 300 megabit per second or higher increased by 160% year-over-year.

Going forward, we will maintain our strategy of encouraging higher speed service adoption, especially fiber services to offset the mandatory tariff reduction required by the regulator. We will also leverage our other advantages, such as Wi-Fi, MOD and OTT offerings, and smart hardwares to enhance user stickiness on our network. Our smart speakers, which launched last week, allow our customers to enjoy smart home and other AI-related services.

Moving on to Slide 7, we are glad to report another robust quarter for the IPTV business. In the first quarter, our IPTV MOD platform maintained its position as the largest video platform in Taiwan. We reached more than 2 million subscribers, representing a 20.2% increase year-over-year. In addition, our SVOD subscribers reached 1.31 million, maintaining its growth trajectory as well.

Overall, IPTV revenue continue to grow in the first quarter with a 15.7% increase year-over-year. We continue to enrich our content by introducing OTT services, investing in eSports company and original content production. We believe that a portfolio of quality content is beneficial to our overall subscriber acquisition and it will enable us to stay ahead of our competitors in the realm of video services.

Please turn to Slide 8 for an update on our ICT initiatives. In the first quarter of 2019, our ICT revenue increased year-over-year, and we continue to see ICT project opportunities in our pipeline. In particular, our IDC revenue continued to grow with a 69% increase year-over-year. Our IoT revenue increased 68% year-over-year. And information security revenue increased 23.5% year-over-year. We will continue to leverage popular international ICT and pass solutions with our core capabilities to provide integrated ICT solutions to our customers to increase ICT revenue.

We are also committed to strengthening our sales development products and services where we have a clear advantage in the market, such as our IDC, cloud computing, big data analysis, smart services and AI applications to increase ICT project margin.

Now I would like to hand over the call to Mr. Kuo for our financial results.

[Shui-Yi Kuo, executive]

Thank you, President Sheih -- I'm sorry, thank you, Chairman Sheih. Now I will go through our financial results in detail, beginning on Slide 10. Please note that all comparisons are made on a year-over-year basis unless otherwise stated.

Slide 10 provides you with highlights from our income statement. For the first quarter of 2019, total revenues decreased by 4.3% and operating costs and expenses decreased by 4.0%. Our income from operations decreased by 5.0% and our net income decreased by 4.3%. Our EBITDA margin increased to 37.3% in the first quarter, from 35.3% in the same period of 2018, primarily due to the adoption of IFRS 15 in 2019.

Please refer to Slide 11 for revenue breakdown by business segment. The decrease in total revenue for the first quarter 2019 was mainly due to the decrease in mobile service revenue and handset sales revenue, which offset the increase of Internet revenue. The decrease of mobile service revenue was primarily because of multi competition and the Voice-over-IP substitution.

Moving on to Slide 12. Our operating costs and expenses decreased by TWD 1.7 billion or 4.0%, mainly due to lower cost of goods sold.

Slide 13 shows the cash flow from operating activities for the first quarter of 2019, increased by TWD 5.9 billion or 80.6%. This was mainly due to a legal requirement to make our cash contribution to the pension fund. There was also a decrease of inventory year-over-year. As of March 31, 2019 we had TWD 37.6 billion of cash and cash equivalents.

Slide 14 shows our operating results compared to our guidance. In the first quarter of 2019, revenue was lower than our first quarter guidance, mainly due to lower handset sales and mobile service revenue. However, our results of operating income, net income and EPS have met our first quarter guidance.

Moving on to Slide 15. We are budgeting CapEx of TWD 29 billion for 2019. We will focus on investment in our core businesses, including FTTx, 4G, IDC and service platform under our precision construction principle.

Lastly, on Slide 17, I would like to provide an update on regulations. The Transportation Committee of the legislation finished reviewing the Telecommunications Management Act and the Digital Communications Act on March 14, 2019. The tariff covers the following key areas: first, reduced barrier of entry for the telecom markets by changing the original concession or approval system to the registration system; second, general market players shares have only original applications to a minimum necessary extent, dominant market players will be subject to more stringent control measures. In addition, the market will open for domestic domain, frequency transferring, frequency leasing, frequency lending of our sharing mechanisms. We anticipate several impacts from these changes. For example, multi competition would increase by reducing entry barrier.

Operators are able to share resources, which might change the competition landscape. In addition, we would like to -- we will likely be regarded as a dominant player in specific telecom markets. We will gain a clear picture of these impacts when the detailed regulations is available before 5G spectrum option.

Thank you for your time. We would now like to open the line for questions.

[Operator]

[Operator Instructions] Our first question is coming from Neale Anderson, HSBC.

[Neale Anderson, analyst]

I have 2 questions, please. The first one on the mobile performance, as you pointed out on Slide 5. The percentage trend is better than your peers. Why do you think that is, please? What's your view on the reason? And secondly, on IPTV, so you -- this is supposed to be growing steadily. Are you able to give any idea in terms of margin either currently or where you would expect that to be in a couple of years' time?

[Fu-Fu Shen, executive]

For the IPTV, currently, no, we feel this business is still not pretty, not yet. But for the first quarter this year, we really see the breakeven kind of situation. We still have to monitor the marketplace for the rest of the months, rest of the year, to see if we can reach. But we -- internally, we expect probably will take like for the whole year kind of breakeven should be a bit of like 1 or 2 years later will be more likely. But we monitor, we'll see what happen for the rest of the year. For the first question, you mentioned about the mobile performance. You mean the reason for the -- I mean the reasons why we are -- we have least affected kind of surge revenue impact among the peers, is this your question?

[Neale Anderson, analyst]

That's the question, yes.

[Fu-Fu Shen, executive]

Okay. Okay. So I think, like we always mention about -- for Chunghwa, we always like -- you see, if you look at the market in our position for subscriber share versus revenue share, we always have a bit of higher revenue share, which means we are more cautious about the customer contribution, but we operate this business.

[Neale Anderson, analyst]

Sorry, Fu-Fu, I don't quite understand. More cautious because you have large revenue share?

[Fu-Fu Shen, executive]

Actually, no. We always would like -- our principle for -- you understand, this is a competitive landscape, the mobile market. Our peers, including smaller players, they always like to use a low-priced plan to acquire customers. So for Chunghwa, we would like to find the balance for this. We were -- of course, on one side, we will compete for the market, for subscribers. But at the same time, we would like to retain our existing high-contribution customers. And we offer a good kind of a package for the -- or the benefits for the -- our VIP or general -- the regular customers to retain the high level kind of ARPU, try to mitigate the overall market competition.

[Operator]

Our next question is coming from Peter Milliken, Deutsche Bank.

[Peter Milliken, analyst]

Look, my question is on the Telecommunication Draft Act. Two questions, one is do you think that Far EasTone and Taiwan Mobile would also be considered dominant, given that they have almost as much mobile share as Chunghwa? And secondly, what do you think is the government's goal there? Is it to make -- is it to give more flexibility to the #4 and 5 operators to build a network out, which is kind of more economically efficient?

[Fu-Fu Shen, executive]

Basically, you have to understand, NCC would always like to increase the competition. I think that's the idea, okay? So you mentioned about the more economic efficiency for the smaller players. I think we have to understand the regulatory smart set. That's the answer for the second question. As for -- you mentioned a price on for 4G. I would say that none of the operators right now is dominant player according to NCC. So yes, that's it.

[Operator]

[Operator Instructions] The next question is coming from Jack Hsu, SinoPac Securities.

[Jack Hsu, analyst]

I have 2 questions. My first question is could you [ speak up ] more about the next commercial [indiscernible] the financial statements in the future? This is my first question. And what the -- this kind of bidding process, how will we do and how do we evaluate the contribution of our cash and the cash equivalent in the future? And then my second question is about the target of MOD subscribers in 2019. What's our target? And how will we do in 2019? We did very well in 2018, but how will we do in 2019?

[Chi-Mau Sheih, executive]

About the question of our web-only band application, our Internet-only band consortium started to operate in October last year. While 4 major strategic shareholders from financial industries and logistics industries were all in place, currently, we continue to hire more talent and preparing for the license bidding, which is expected to finish by mid-July 2019. Our board approved that, and -- on January 29 that we will invest 4.5 billion, at the most, to acquire more than 40% of the shares of the Next Bank, depending on the final shareholder composition and expect to be the largest shareholder to actively lead the team of license building. We aim to leverage our telecom big data analysis capability, information security advantages. And I think that patents to team up with partners to develop digital financial innovative business, to increase telco's value as well as increase customer stickiness and they increase revenue by offering smart digital financial services. We estimate that we're the only bank may not breakeven soon, but we'll be profitable once its scale is large enough that we expect the long-term return of the investment is posted.

[Shui-Yi Kuo, executive]

And the protective value contribution of cash and cash product information will not be disclosed right now, sorry.

[Fu-Fu Shen, executive]

As for the MOD subscriber target in 2019, we put 2.2 million. And I think we would continue doing well this year.

[Operator]

[Operator Instructions] If there are no further questions, I will turn it back over to Chairman Sheih. Go ahead, please.

[Chi-Mau Sheih, executive]

Thank you for your participation. See you next time.

[Operator]

Thank you, Chairman Sheih. Thank you for your participation in Chunghwa Telecom's conference. There would be a webcast replay within the day. Please visit cht.com.tw/ir, under the IR Calendar section. You may now disconnect. Goodbye.