Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom's conference call for the company's first quarter 2020 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 has 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. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead.

[Angela Tsai, executive]

Thank you, operator. Hello, everyone, and welcome to our first quarter 2020 result conference call. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom.

During today's call, Mr. Harrison Kuo, our President and Chief Financial Officer, will provide an overview of our business achievements during the quarter and discuss operating highlights. He will be followed by Ms. Fu-Fu Shen, our Assistant Vice President of Public Affairs, who will provide financial highlights. We will also have a Q&A session.

Now I would like to hand the call over to President Kuo. And please note your safe harbor statements on Slide 2. Mr. -- President Kuo, please go ahead.

[Shui-Yi Kuo, executive]

Thank you, Angela, and hello, everyone. Welcome to our first quarter 2020 earnings result call.

During the first quarter of 2020, the COVID-19 pandemic continued to slow down overall economic activities. Our enterprise business and international roaming revenue were affected by social distancing and work-from-home policies, as well as many international borders have been closed, and many people are in lockdown.

However, we were fortunate to experience some anti-pandemic business opportunities in the areas of cloud service, enterprise conferencing and IPTV/MOD services. In general, as 5G services launch is coming and COVID-19 pandemic accelerates the development of digital application and the digital economy, we believe that with our leading spectrum resources, cutting-edge ICT technology and the leading market share in both enterprise and the consumer segments, we will result in a better position to respond to future competition and the business development.

In the first quarter of 2020, our mobile revenue and the subscriber market share continued to grow, reaching to 38.3% and 37.2%, respectively, which provides a solid foundation for the upcoming 5G service launch in the third quarter.

In the broadband business, we experienced ARPU growth and were encouraged to see that existing broadband subscribers continue to migrate to higher speed services. As mentioned earlier, the increasing demand of enterprise conferencing services and the online learning may bring in growth opportunities in this sector.

In addition, MOD business was also relatively resilient during the pandemic. In the first quarter, both MOD revenue and the subscribers increased year-over-year. Although the 2020 Tokyo Olympic Games will be postponed to 2021, we will continue to introduce attractive content, including on-demand and the OTT services, to enhance revenue and the subscriber numbers.

During the quarter, our ICT revenue decreased year-over-year, mainly due to a higher base line in the first quarter of 2019. We expect most ICT revenue to be injected in the second half of the year. However, we were glad to see a continued increase in streaming revenue contribution from our ICT business due to the success of our in-house developed services.

Now allow me to walk you through each of our business lines.

On Slide 5 is some updates on our mobile business.

In the first quarter, our IoT subscriber number continued to increase, and our back-to-school initiatives continue to add new bundled subscriptions at higher ARPU than blended ARPU. We continued to experience the smallest decrease in mobile service revenue among our peers quarter-over-quarter, mainly due to our efforts of encouraging subscribers to adopt higher-priced plans.

Slide 6 demonstrates the performance of our broadband business.

We were glad to see continued ARPU growth in the first quarter of 2020, which reflected our success of migrating subscribers to adopt higher-speed fiber services. As of March 2020, the number of users signing up for plans with connection speeds of 100 megabits per second or higher increased by 11.4% to 1.62 million from the prior year. And the number of subscribers signing up for connection speeds of 300 megabits per second or higher increased by 82.6% year-over-year.

Furthermore, as demand for work from home and the home-centric applications increased, we see potential opportunities for broadband service adoption and the higher-speed migration to mitigate the subscriber loss due to mobile Internet substitutions, and it's expected to further contribute to overall ARPU improvement.

Moving on to Slide 7.

We are pleased to report that in the first quarter, our IPTV/MOD platform remained the largest video platform in Taiwan, with more than 2.08 million subscribers. Revenue increased by 2.9% year-over-year. Even though the expected benefits from the 2020 Tokyo Olympic Games will be postponed to 2021, we remained to enhance overall MOD performance by accelerating 4K content offerings and OTT services, such as Netflix fully 4K channels and the VOD Hollywood films to strengthen subscriber numbers and the revenue. In addition, with growth opportunities from home-centric services, we are confident our IPTV business will maintain growth trajectory going forward.

Please turn to Slide 8 for an update on our ICT initiatives.

As we mentioned earlier, a large percentage of our ICT-related project revenue will be recognized in the second half of 2020. Major in-house ICT products such as information security, iEN and ITS are also expected to perform well in that period. In addition, due to COVID-19 driven lockdown, we saw increases in demand for IDC and the cloud services from the gaming industry and video conferencing applications. We will closely monitor and acquire related opportunities going forward.

At this point, I would like to turn the call over to Fu-Fu to review our financial results.

[Fu-Fu Shen, executive]

Thank you, President Kuo.

Now I will go through our financial results in details.

Beginning on Slide 10. Slide 10 provides highlights of our income statement.

For the first quarter of 2020, total revenues decreased by 6.2% and operating costs and expenses decreased by 8.1% year-over-year. Our income from operations and expenses -- our income from operations increased by 1.2%. Net income decreased by 0.4% year-over-year. In addition, EBITDA margin increased to 40.19% from 37.33% in the same period of 2019.

Please refer to Slide 11 for revenue breakdown by business segments.

The decrease in total revenue for the first quarter of 2020 was mainly due to decreases in handset sales revenue, fixed voice revenue, ICT project revenue and mobile service revenue. These decreases were partially offset by increases in data communication revenue and MOD revenue. The decrease in mobile service revenue was the result of market competition and VoIP substitution.

Moving on to Slide 12.

Our operating costs and expenses decreased by TWD 3.31 billion or 8.1% year-over-year in the first quarter, mainly due to lower costs of goods sold, interconnection costs and ICT project costs.

Slide 13 shows the cash flow from operating activities for the first quarter of 2020 increased by TWD 0.11 billion or 0.8% compared to the same period of 2019. This was mainly due to a decrease in income tax payment. As of March 31, 2020, we had TWD 16.59 billion of cash and cash equivalents, decreasing by TWD 20.64 billion or 55.4% compared to the same period of 2019. The decrease was mainly attributable to the payment of concession fee for the 5G frequency spectrum auction, which was partially offset by the increase in short-term bills payable.

Slide 14 shows our operating results as compared to our guidance. In the first quarter of 2020, revenue was lower than our first quarter guidance. However, our operating income, net income and EPS results exceeded our first quarter guidance.

Lastly, Slide 15.

We are budgeting CapEx of TWD 30.7 billion for 2020. We will continue focusing our CapEx spending on our growing and emerging businesses and solidifying our market position. Major mobile 5G CapEx will be spent in the second quarter and third quarter in 2020.

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]

Pardon. I was on mute. I had 2 questions, please. The first one relates to mobile roaming. Are you able to say what percentage of service revenue is made up of roaming revenue and how you expect that to look this year? And the second question is also on the mobile business. It's regarding distribution and retail channel. Are you planning to take much costs out of this -- out of distribution this year? And how will this impact EBITDA?

[Fu-Fu Shen, executive]

About the mobile roaming revenue, because the international -- just like we mentioned earlier in the presentation, because the -- a lot of nation border -- cross-border kind of lockdown, it's really a lot of international roaming. We have some contracts. That's a minimum guarantee type of stuff. We need to re-sign those contracts and that kind of stuff. That really have some impact. So we -- although the service revenue impact for international mobile -- international roaming revenue is kind of -- percentage not really high, but still have some impact to the overall number.

[Operator]

Mr. Neale Anderson?

[Neale Anderson, analyst]

Yes.

[Operator]

Okay. So I will put you back. Would you please hold on a second? Hold on. So the moderators are coming back soon. Hold on a second.

[Neale Anderson, analyst]

So the second question was on the potential to take costs out of the distribution network.

[Operator]

Okay. Neale Anderson, would you please hold on a second? So we are still waiting for the moderator coming back. Hold on a second. Mr. Anderson, I will put you back to the conference first. But later on, would you please dial 01 again? Thank you.

[Neale Anderson, analyst]

Okay. Thank you.

[Operator]

Thank you. Ladies and gentlemen, we are still in question-and-answer session. [Operator Instructions] Now I will hand it over to Neale Anderson.

[Neale Anderson, analyst]

Okay. I didn't hear anything after your response to the first question. So the second question related to the potential to take costs out of the retail distribution channel.

[Shui-Yi Kuo, executive]

Okay. Thank you for your asking. Our purpose to provide a digital shop is to give us -- give our customers the better experience and give a more convenient environment to access our services. Thank you.

[Operator]

The next question is coming from James Wang, UBS.

[James Wang, analyst]

So my question relates to the profitability of the ICT business. I just want to get a sense of how it compares to the traditional telecom business. So for example, if you look at the first quarter, revenues down but EBITDA is up. And I think you guys mentioned that part of it is because of lower ICT costs. So I just want to get a sense of the ICT profitability profile.

Second question is around the CapEx. So for the full year, you're guiding to CapEx to increase and yet in the first quarter, it's down. So I'm just wondering how much impact did the COVID-19 situation had in the first quarter CapEx. And is this going to result in a delay in your 5G launch by Q3?

[Fu-Fu Shen, executive]

You see in the first quarter, our ICT revenue was -- actually doesn't really meet our guidance, okay? So that is why we have a lower ICT costs than we expected, okay? So that's pretty much the case for the first quarter, yes. So you mentioned about how is the ICT profit compared with the traditional telecom business, right? I think there's quite a large gap out there because this is a totally different business. Yes. So that's why for Chunghwa, we've been -- for the past several years, we've been putting a lot of efforts, try to gauge that the difference, because we -- so we develop our in-house kind of solution products to -- injecting with the ICT projects, try to improve the overall ICT projects to improve the margin. So it's to improve the overall profits for ICT related...

[Operator]

[Operator Instructions] Mr. Wang, please wait online. Mr. James Wang, I'll put you back. And later on if you want to ask question, please press 01. The next question is coming from James Wang from UBS.

[James Wang, analyst]

Just wanted to -- I think Fu-Fu answered my question about the ICT profitability. I guess just to elaborate on my question. I just want to -- so Chunghwa has an overweight position in the enterprise ICT business, and I just wanted to get a sense whether your growth in that business is going to result in better net profit growth as well. And the second question is just around the CapEx in the first quarter that's down. So I'm just wondering how much impact the virus situation had in the first quarter and whether you will be ready to launch 5G by the third quarter this year?

[Operator]

I'm sorry, James Wang, hold on a second. We encounter some technical problems here. Would you please repeat your second question again?

[James Wang, analyst]

Right. So my second question is just around the CapEx in the first quarter. It's down even though for the full year, you're guiding to an increase. I'm just wondering how much impact the virus situation had and whether you'll be ready to launch 5G by the third quarter this year.

[Fu-Fu Shen, executive]

Are you asking about the enterprise ICT question?

[James Wang, analyst]

Yes. Also, whether profit margin is better for you as compared to the traditional telecom business?

[Fu-Fu Shen, executive]

Yes. I don't know if I -- I did answer your question about that. I don't know because the line doesn't really stable at the time. But I want to repeat that part, okay. I think the -- of course, ICT profitability always counting, actually is lower than the traditional telecom business for sure. So that's why Chunghwa, in the past several years, we've been working very hard try to improve that line by developing our in-house kind of product and our solutions, try to inject that part with our in-house -- with our ICT-related projects, to enhance overall margin. I think that will help the overall ICT...

[Operator]

Mr. James Wang?

[James Wang, analyst]

Yes?

[Operator]

Okay. So I'm sorry, we're -- our line is still unstable. So please remain online. Mr. James Wang, any other question for our today's speakers?

[James Wang, analyst]

Just whether you'll be ready to launch 5G by the third quarter this year?

[Operator]

Mr. James Wang, I will put you back to the conference first. [Operator Instructions]

[Fu-Fu Shen, executive]

Operator, can you hear me? Hello?

[Operator]

Yes. I can hear you. Yes.

[Fu-Fu Shen, executive]

Yes.

[Operator]

So we are now in...

[Fu-Fu Shen, executive]

Yes. Is anything in the conference room right now?

[Operator]

Yes. Yes. We are doing question-and-answer session now.

[Fu-Fu Shen, executive]

Yes. I'm sorry I think on our end, company end, we've been keeping dropping out of line. We really apologize for that. Okay. If anybody have any question to ask, we'll see you in the conference room.

[Operator]

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

[Jack Hsu, analyst]

I have 2 questions. My first question is about what's our goal of 5G subscribers in the end of 2020 and 2021? This is my first question. My second question is what's our -- your plan about the 5G? This is my questions.

[Fu-Fu Shen, executive]

I -- we don't have specific 5G subscriber share for 2020. But we believe since we're going to launch -- the schedule for 5G launch for this year is third quarter. And we believe that this year, it's -- the subscriber numbers should be kind of limited. The second year should be kind of major. But since the overall things, right now, you got the situation. So we don't see -- it still kind of depends on the upcoming kind of situation. We have been -- not found yet. Okay? And I think -- yes.

[Shui-Yi Kuo, executive]

About the 5G plan, for 5G pricing, we will refer to global first-movers model, future 5G application scenarios and our customers' demand to create customer value as our goal. And however, we all know that 5G applications is diversified, so as its pricing structure is not comparative to that of 4G.

[Operator]

The next question is coming from [ Hansen Ma ], Fidelity Singapore.

[Unknown Analyst]

Just a quick question on the cost side, right? So could you explain what is the main reason behind your relatively large 9% decline in operating costs as well as the 5% decline in marketing expense? And will this be sustainable throughout the year?

[Fu-Fu Shen, executive]

I think like we mentioned earlier, the first quarter -- because our revenue actually declined -- revenue doesn't really meet our guidance, especially the ICT revenue. And so we -- our cost expenses for -- especially for the ICT-related costs and -- so that cost side doesn't -- was lower than we expected. I think that's the major reason for that, okay? Yes. As for the -- throughout the whole year, since we expect the -- our major ICT revenue will be booked in the second half of this year. So when it happen, the related costs will also be happen accordingly. Yes.

[Unknown Analyst]

Yes. Just a quick follow-up on that. So your first quarter was better than your guidance, right? So is that maybe your ICT business is negative in terms of margin? I mean your revenue missed the guidance, right? But your profit is better, right? So yes, in simple term, my question is so what is the major driver behind about 5% to 8% beat in your profit, let's say, operating profit or net income? What is the major reason?

[Fu-Fu Shen, executive]

I think ICT is just part of the reason. Actually, I did mention about the handset sales. Handset sales in the first quarter doesn't meet the guidance. That's another reason for that. ICT, we still got margin. It's profitable. But handset sales it's good to know it's related to some handset subsidies, that kind of stuff. So that's part of the reason for that. So basically, revenue missed the guidance, but ICT still have margin.

[Unknown Analyst]

Okay. So you missed the revenue, but part of the revenue is loss-making because it's a handset subsidy, right? That is understandable. And that is a major reason for the first quarter profit beat. Is that fair understanding?

[Operator]

[ Mr. Hansen Ma ], please stay online. [ Mr. Hansen Ma, ] please repeat your question again.

[Unknown Analyst]

Sure. Yes. So I just want to confirm that the primary reason for the first quarter beat to your profit guidance is because your handset sales were lower than expected. And obviously, handset sales had a negative margin because of the subsidy. Is that a fair understanding? Or is there anything else that is affecting the first quarter profit beat, such as greater-than-expected cost reduction, et cetera?

[Fu-Fu Shen, executive]

Yes, exactly. I think the major -- the primary reason for the first quarter revenue guidance is handset sales revenue. And second, the ICT, that's the secondary part of the reason for that.

[Operator]

Our next question is coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

I have got two questions. The first one, I think you may have answered that. I'm not sure if I catched that correctly. So I just wanted to know the 5G schedule. So are you going to launch it in 3Q '19 (sic) [ '20 ] as planned? And is there any impact from the COVID-19 on the schedule of 5G rollout? That's the first question. Second question is, could you comment a bit on the current market competition in the fixed broadband segment? And the last question is around Internet revenue. Could you elaborate why it is flat?

[Shui-Yi Kuo, executive]

Okay. As I mentioned earlier, although the pandemic continue to impact the global economy, currently, we still continue our 5G network deployment, and we aim to launch our 5G service in the third quarter 2020. There's no change.

[Fu-Fu Shen, executive]

Your second question about the -- it's about fixed broadband market competition, right?

[Billy Lee, analyst]

Yes, yes.

[Fu-Fu Shen, executive]

Yes. Fixed broadband market, yes, fixed broadband market competition. Regarding fixed broadband market competition, it's -- I think right now, we will still facing the cable modem competition. That's still a continuous kind of competition. But for Chunghwa, if you look at our fact sheet, we continue to lose -- lost some customers. But the good thing is if you look at our broadband access revenue, we -- I think this quarter, we have some performance. We have some growth come back. That's because we -- I think one of the major reason we've been doing pretty good in migrating our customers to higher-speed service. And because of the COVID-19, we really see some opportunity, and we migrate people to higher-speed service. We see incremental ARPU happened. I think over speaking, this -- we defend the market pretty well. Yes. Let me put this way, okay?

As for your third question, the Internet revenue. Why it is flat? Of course, this is more -- most likely our emerging services supposedly included under this segment. This way it's -- for some emerging services, right now, some of them, we are still picking on it, like -- for example, like IDC, information security, cloud, most of them are still growing, but not the big, big one, but hopefully, it will be getting bigger and bigger lately.

So hopefully, this can happen. And of course, in this COVID-19, we do see some opportunity. But this is not just in this 1 or 2 quarters, it's going to happen in the future. And digital age is coming. We do see some opportunity, like our President presented in our overview page. We mentioned about the future opportunity. Hopefully, that we will inject more -- open new avenue for the -- in the future for that, especially that segment.

[Billy Lee, analyst]

I see. Just a quick follow-up. And I really want to understand that under the Internet revenue business, this large chunk of the business comes from broadband which is accounted under data communication?

[Fu-Fu Shen, executive]

You mean the -- yes, I think for Chunghwa we're talking about broadband business. It's -- broadband actually partially is broadband access, right? That's under our domestic fixed, that's broadband fixed. And another price is actually Internet, right, under the data -- we call the data communication, yes, on the Internet.

[Shui-Yi Kuo, executive]

Our broadband revenue is -- our performance from our broadband is very good in the first quarter. But some ICT projects from public sectors was postponed -- a little bit postponed to the second quarter or third quarter. So the Internet business segment revenue is -- was flat in the first quarter.

[Fu-Fu Shen, executive]

We will actually -- when you say the large chunk of business come from broadband, which is under data communication. But I would say that, actually, when we're talking about the application [indiscernible] on the Internet, that's actually the emerging business, especially we are looking at in the future.

So hopefully, this is something going forward, we would like to see it will continue to increase, okay? So that part -- probably this quarter, we have a small hiccup, but hopefully, we're really expecting though in the future, we have some growth in third quarter after.

[Operator]

Our next question is coming from Sara Wang, Morgan Stanley.

[Sara Wang, analyst]

So I just have one question on 5G pricing. So it seems currently, all big 3 operators are offering early bird 5G plans at around TWD 1,399, but there are some smaller operators offering much lower prices. So may I ask Chunghwa's strategy on the official 5G pricing? Or do we see any pressure to actually lower the price from the early bird pricing level here?

[Fu-Fu Shen, executive]

I think we are stick with our TWD 1,399 this kind of strategy. You see, for example, like we -- recently, when we launched Samsung S20, we actually included this kind of -- in the contract for customers subscribing with TWD 1,399, if -- and you can sign with us with the option with the 5G pacts. But out of -- 90% of our customers actually signed with 5G pacts, which means, once when we launch 5G service, those customer can automatically become our 5G -- migrate to 5G. So customers feel kind of interested in 5G service. So we believe this is still a good strategy. We will stay with this kind of things. So this is a 5G handset. So later on, if we have a good 5G handset, probably we will continue this kind of strategy. We will look into that.

[Operator]

[Operator Instructions]

[Fu-Fu Shen, executive]

Actually, I would like to add on something. Not only the TWD 1,399, I think for 5G, not only for the speed, for the data usage, we really would like to see some innovative applications to be included for user new experience when we migrate to 5G service. Thank you.

[Operator]

[Operator Instructions] The next question is coming from Amber Lee, Yuanta.

[Yufang Lee, analyst]

I think last time, Chunghwa mentioned that -- correct me if I'm wrong, you mentioned that for the full year 2020, you still expect decline in mobile service revenue as we have -- now as we have seen some 5G early birds offering in the market, if we look at the initial adoption pace and perhaps clients' feedback, do you still expect the service revenue to decline for this year? Or you can go back to growth trajectory from this year on?

[Fu-Fu Shen, executive]

We still expect the mobile service revenue in 2020 is a declining trend since, like we mentioned earlier, the subscription for 5G, in the first stage, still very limited, okay? So for -- especially for this year. So I think the early bird is -- this is just a trial, but we would like to maintain this kind of a high end -- retain our high-end customers and try to maintain this kind of experience and try to give this kind of experience.

So for this year, for the whole year, declining trend should address. Yes. So like we mentioned that next year, probably, hopefully, will be the year we expect 5G will have some kind of performance, hopefully. Yes.

[Yufang Lee, analyst]

Okay. And to follow up on Fidelity's first question, should we conclude that handset sales itself actually generate negative margins? Or it's just a lower-margin business instead of negative?

[Fu-Fu Shen, executive]

Margin itself, of course, net -- handset sales, of course, yes...

[Shui-Yi Kuo, executive]

I answer your question. Because under IFRS 15, the handset sales and our telecom service are under together, we should allocate revenue between our handset sales and the streaming service revenue. So the handset sales usually have a negative margin, but this is -- the number is not very big.

And I add one more information about your question number one. I think the 5G will take time to educate this market, and we will stimulate our customers to use 5G services. And I think our goal, we will aim to provide more and more innovative services and applications to customers. So I think in the long run, the 5G will booming. Thank you.

[Yufang Lee, analyst]

Another one for me on payout. I think this year, for 2019, we have seen a little uptick on the payout ratio as the EPS coming down. If the decline trend in earnings persists, should we expect potential uptick in payout ratio in the coming years?

[Operator]

Ms. Amber, would you please hold on a second?

[Yufang Lee, analyst]

Okay.

[Operator]

Okay, Ms. Amber Lee, would you please hold on a second. Okay, Ms. Amber Lee, would you please repeat your second question?

[Yufang Lee, analyst]

Yes. My question is on the dividend. This year the announced EPS implies a payout of roughly 100% compared to below 100% in the past, I think, over 5 years. If earnings continue to decline in the coming years, should we expect the new normal of payout to be above 100%?

[Fu-Fu Shen, executive]

Basically, our payout is not in line with the earnings, okay? So the ratio usually is depending on the -- it depends on the regulation. So it's related to the IFRS stuff. So it's really hard to say. Every year, we got some difference -- minor difference, okay? Sorry for that. So as for the payout, the dividend level still depends on we will kind of reveal every year. So we don't -- we cannot give you any firm answer for that. Sorry for that.

[Operator]

The next question is coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

Just one more from me. I have a question on MOD segment. I noticed that in the first quarter, you are seeing a Q-o-Q decline in the MOD revenue despite an increase in MOD subscribers. So does that mean there's an increased competition in the MOD segment? And what are you seeing there to justify such an interesting trend?

[Fu-Fu Shen, executive]

The fourth quarter, actually, we involved some of the advertising revenue kind of stuff. The first quarter has a little bit slower that part, but we actually have some [ review ] for the upcoming in the second quarter. We believe in the second quarter, we will back to the growth path. Yes. Thank you for that -- for the question.

[Operator]

If there's no further questions, I will turn it back over to President Kuo. Go ahead, please.

[Shui-Yi Kuo, executive]

Thank you for your participation. Goodbye, everyone.

[Operator]

Thank you. Thank you, President Kuo. Thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may now disconnect. Goodbye.