Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Analysis

Strong Financial Performance and 5G Expansion Drive Growth

In the first quarter of 2024, total revenue reached $55 billion, marking an eight-year high. Driven by growth in mobile, ICT, and broadband services, revenue increased by 1.4% year-over-year. However, income from operations and net income saw slight declines of 2.2% and 2.6% due to high bases from government compensations last year. Mobile service revenue and ARPU rose by 5.1% and 3.4%, respectively, benefiting from 5G migration. Fixed broadband also saw revenue growth of 3.8%. Strong cash flow generation, up 26.1%, positions the company for continued investment in AI, cloud services, and international expansion.

Financial Performance Overview

In the first quarter of 2024, Chunghwa Telecom achieved its highest total revenue for this period since 2017, amounting to NT$55 billion. The income before tax also set a record since 2016 when excluding a one-time government compensation in the previous year. Compared to last year, the revenue increased by 1.4%, propelled by higher mobile service revenue, growing ICT business revenue, and broadband service revenue. However, income from operations and net income decreased by 2.2% and 2.6% respectively, attributed to the previous year’s high base.

Mobile and Fixed Broadband Business

The company continued to maintain its lead in Taiwan’s mobile market, with its subscriber share growing to 37.7% and revenue share reaching 40.4%. This growth was driven by a 5.1% increase in 5G migration and a 3.4% rise in international roaming. The fixed broadband segment also saw accelerated growth, with revenue and ARPU rising by 3.8% and 2% respectively. This was due to successful speed upgrade strategies and the popularity of high-speed services, which grew by 29% year-over-year.

Consumer and Enterprise Business Groups

The Consumer Business Group (CBG) witnessed a revenue increase of 1.7%, primarily due to a 4.2% rise in mobile service revenue. The Enterprise Business Group (EBG) showed a slight revenue decline of 0.9%, but excluding one-time items, EBG revenue grew by 1.9%. ICT business revenue in EBG increased by 3.3%, driven by big data services, cybersecurity, AIoT, and cloud services, all of which reported mid to high single-digit growth.

Emerging Applications and International Business

Emerging enterprise applications showed promising results, with a notable 71.6% year-over-year growth in big data analysis due to new smart energy projects. Cybersecurity revenue grew for the ninth consecutive quarter, and AIoT revenue increased by 6.5%. The international business group reported double-digit growth, with income before tax and total revenue increasing by 23.5% and 13.3% respectively. This was largely due to the growing demand for overseas ICT projects.

Cash Flow and Investment

The company generated strong cash flows from operating activities, which grew by 26.1%. Capital expenditures (CapEx) declined by 6.9%, with mobile-related CapEx decreasing by 50% and non-mobile CapEx increasing by 9.1%, primarily for FTTH deployment. Free cash flows increased significantly by 56.9% year-over-year, highlighting the company’s solid balance sheet.

AI Initiatives and Content Expansion

Chunghwa Telecom is investing heavily in AI infrastructure to capitalize on the AI megatrend. The company is deploying computing resources closer to customers and plans to establish AI data centers and develop GPU as a service. Furthermore, it continues to invest in quality content to attract subscribers, winning the exclusive broadcasting rights for the 2024 Paris Summer Olympic Games.

Sustainability and ESG Achievements

The company has made significant strides in sustainability, reducing carbon emissions by 14% from 2020 to 2023 while increasing revenue by 5.7%. Chunghwa Telecom received top ESG awards and committed to transitioning 100% of its corporate fleet to electric vehicles by 2030, demonstrating its commitment to long-term sustainable development.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, welcome to Chunghwa Telecom conference call for the company's first quarter 2024 operating results. [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 would like to turn it over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms. Tsai, please go ahead.

[Angela Tsai, executive]

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Departments for Chunghwa Telecom. Welcome to our first quarter 2024 result conference call.Joining me on the call today are our Chairman, Harrison Kuo; President, Ivan Lin; and Vincent Chen, our Chief Financial Officer.During today's call, management will begin by providing chairman's message and our business overview in the first quarter, followed by a discussion of our segment performance and the financial results. After we'll move on to the question-and-answer portion of the call. On Slide 2, please read our disclaimers and notes concerning forward-looking statements. Now I will turn the call over to Chairman. Chairman Kuo, please go ahead.

[Shui-Yi Kuo, executive]

Thank you, Angela, and hello, everyone. Welcome to our first quarter 2024 results conference call. In the first quarter we proudly announced our success in expanding our lead in Taiwan's telco market amidst the robust 3-player landscape. Our revenue share in Taiwan's mobile market continue to steadily grow, climbing from 40.3% to 40.4% quarter-over-quarter, while subscribers share enjoying an increase from 37.6% to 37.7%. Maintaining the growth trajectory after the market consolidation completed last quarter.Our financial performance also speaks for our business success. Total revenue in the first quarter hit a new high for the same period since 2017. Income before tax also reached a record high for the same period since 2016. On the basis of excluding the one-time item of the government compensation for ST-2 satellite recognized in the first quarter last year. To invest our leadership and the long term growth we have been establishing AI infrastructure to enhance our operations and seize opportunities in the AI megatrend. Our AI-powered network solution has been successfully used to predict network degradation and the optimized energy consumption to enhance our network efficiency and contribute to cost reduction.In addition, generative AI is another technology that we leverage problem shooting to enhance service quality, response time and the cost efficiency in operations, particularly in relation to network maintenance and the customer service. To capture AI expansion opportunities, we actively deployed [ compu ] utility across cloud edge and the terminals to bring computing resources closer to our customers with an intent to access AI applications.We also plan to establish AI data centers and develop GPU as a service, empowering industries to complete their AI transformations. To achieve this goal, we will team up with local and the global ICT partners to establish ecosystems for the AI power the future. Another value added deployment lies in the expansion of content investments. In addition to network and the platform strengths, we have been continuously investing in quality contents to win subscribers over and [indiscernible] to form the largest video platform in Taiwan.We are glad to announce that recently we have acquired exclusive broadcasting right of the 2024 Paris summer Olympic games, and the belief that this will significantly enrich our content, broadcasting our content portfolio in the incoming quarters. Moreover, following the announcement made last December, we officially set up Chunghwa Digital Culture and the Creative Capital, CDCCC, in the first quarter to scale up our investment in video content and intellectual property management. In February, our board of directors further approved the investment in fund of cultural content industry managed by CDCCC. This fund will work as an important vehicle to upgrade cultural content industry and further integrate our network platform and the content IP to deliver quality content to users.Last, I'd like to share that we were saddened by the serious earthquake that happened in Taiwan in April. And in response, we offered complimentary communications to help disaster relief [indiscernible] by successfully leveraging low Earth orbit satellite, LEO.Going forward, in addition to GEO, the geostationary orbit and the LEO, we also plan to add MEO, the medium Earth orbit to our satellite portfolios this year to continuously strengthen our network resilience and further provide services to enterprise and the government customers.Now let me hand the call over to Ivan for the business updates on the first quarter of 2024.

[Chau-Young Lin, executive]

Thank you, Chairman, Kuo, and hello, everyone.Now please seek to Page 5 for an update on our performance in the mobile business. As mentioned by Chairman Kuo, we maintain our leading position in the Taiwan mobile market in the first quarter of the 2024 with the largest subscriber share of the 37.7%. Meanwhile, our revenue share continue to stay above the 40%, hitting 40.4% by the end of the March. Further widening our leading against our peers. Our exceed revenue to share over the subscriber and share was 2.7% due to the exciting progress of the subscriber share gains.In addition 5G, the migration and international roaming continued to driving up our mobile service revenue and postpaid ARPU and recording a 5.1% and 3.4% year-over-year increase respectively. And mobile service revenue and ARPU also continued to maintain their goals for [indiscernible] and consecutively the month and the 12th consecutively the quarterly, the respectively. As 5G continue to penetrate [indiscernible] average monthly fee uplift from customer who migrate from the 5G to -- from the 4G to the 5G group to the 14.5% in the first quarter. And it's repeating and spreading upward trajectory.Let's move on to the Slide 6 for an update of our fixed broadband business. In the first quarter, we are great to see the accelerated growth in the fixed broadband sector due to our successful strategy to encouraging speed upgrade. And fixed broadband revenue and ARPU increased by 3.8% and 2% respectively on year-over-year basis. And both expanded year-over-year growth margin compared with light of the previous quarter. Our size up of the service of the 300 megabit per second or the higher continue to be popular among our mix with the 29% year-over-year increase in the first quarter. Maintaining is the double digital goals.Now let's move on to the performance of our consumer [indiscernible] business group. Slide 8 presents the performance of our CBG groups. In the first quarter, income before tax of the CBG increased by 3.7% year-over-year, mainly due to sustained growth of the telecom service on a year-over-year basis. Total CBG revenue increased by 1.7% mainly driving by the healthy 4.2% increase of our mobile service revenue. Owing to the continued 5G migration postpaid subscriber increased and roaming revenue. And fixed broadband performed. Whereas the revenue growth increased to 4.6%, offset by the revenue decrease of the fixed voice. Sales revenue decreased 1.5% mainly due to the higher base in first quarter last year, owing to the deferred demand resulting from the supply chain issues.Slide 9 further illustrate our Consumer Business Group highlight. In the first quarter, our multiple-play package continued to support CBG's growth momentum. The subscriber numbers of the mobile and fixed broadband and Wi-Fi service all together demonstrate a 23.3% quarter-over-quarter growth, which achieved [indiscernible] of the double-digit quarter and over quarter growth. This is attributable to the well-received promotion package and value-add service bundles.In terms of the individual and home-centric applications, we remain the largest video platform in Taiwan as the subscriber number of our video service [indiscernible] notably we [indiscernible] acquired the exclusive broadcasting right for the 2024 Olympic game in April, which we believe will bring in a subscription and revenue increase of MOD and Hami Video. In addition, we are also exciting to see a 17% year-over-year increase in our CBG cybersecurity service and [indiscernible] in the first quarter and mainly due to the increased demand from the service to avoid fishing website and block malicious connection. In addition, our service for filtering out adult content on the Internet and setting time limit on the Internet surfing has also been popular among the families and driving up the popularity of our cybersecurity service. We expect the growth trend will continue and further contribute to our CBG performance.Please turn to Slide 10 for an overview of our Enterprise Business Group performance. In the first quarter, the EBG revenue slightly decreased by 0.9%, primarily due to the recognition of the [indiscernible] and compensations in the same period last year. Excluding the onetime item, EBG revenue increased by 1.9% on-year. Additionally, our ICT business revenue increased by 3.3%, mainly driven by the business expansion of the big data service cybersecurity and AIoT and cloud service, all of which report a mid to high single-digit year-over-year growth or higher.Going forward, we will continue our B2B2X model to build up the ecosystem with key partners and further boost ICT performance. Furthermore, EBG mobile service revenue also demonstrated strong growth at 3.7% on year, mainly prepared by the continuing of 5G upselling as well as the growth of the international roaming revenue. We observed [indiscernible] also turned positive on yield due to growing enterprise marketing demand. Although the fixed lines revenue slightly decreased, data communication revenue and [indiscernible] revenue continued to grow which offset the fixed voice decline. Owing to the fixed voice decline and a higher basis -- higher base of the aforementioned onetime item recognition last year, EBG reported a 13.4% year-over-year decrease of the income before tax. However, excluding the onetime effect, EBG's income before tax decreased [indiscernible] to 1.5% year-over-year.Slide 11 illustrates our Enterprise Business highlights. In the first quarter, we will get -- we are glad to see our total enterprise emerging application revenue increased by 5.2% on year-over-year basis. Notably, big data analysis that delivered a significant 71.6% year-over-year growth. Due to the smart energy project injection and cyber security revenue included year-over-year for the ninth consecutive quarter. And additionally, the AIoT business experienced a 6.5% growth on yield, driven by revenue injection from the green energy project. And our cloud service revenue increased by 5.8% with sustained growth of the international public cloud recurring meriting revenue at 36.8% on-year.Although our IDC revenue decreased on a year basis due to the recognition of onetime [indiscernible] in the same period last year we are glad to report our recurring revenue of IDC service delivered a stable growth in the 7.6%. This quarter we successfully expand our national expertise into the global market with the position of our first overseas data center construction project. Furthermore, we are proud to announce that we are the first company in Taiwan to successfully introduced an automatic vehicle identification, AVI, and vehicle detection with the system to monitor overtime packing in the few service area, which we believe is [indiscernible] the success like could be an extend to other [indiscernible].Then Slide 12 illustrates our international business performance. In the first quarter, both the income before tax and total revenue for the IBG report positive and double-digit growth on a year basis at 23.5% and 13.3% respective. And the impressive growth was mainly fueled by the growing demand for overseas ICT project as our trends. Expand our global footprint and which offset the year-over-year decrease of the fixed line revenue, the result from the service portfolio change. During this quarter, we partnered with EXATEL, a poland telecom operator to launch the 5G Zone in Warsaw, where our innovative 5G smart application are showcased to attract business opportunities also service as the foundation for local touch and business expansion in Europe.In addition, we [indiscernible] the 2024 Smart City Innovation Application Award for our smart transportation solution and [indiscernible]. We also won a 2024 system integration award in Kaohsiung Smart City Expo for our successful overseas smart healthcare solutions, proving our successful in the Internet of the medical things globally.Now I would like to turn the call to Vincent for our financial highlights.

[Vincent Y.S. Chen, executive]

Thank you, President, Ivan. Good afternoon, everyone. Now I will present a financial summary of our first quarter results in 2024. Let's begin with Slide 14, income statement highlights.During the first quarter in 2024, revenue was about $55 billion, which hit an 8-year high for the same period. Compared to the same quarter last year, revenue increased by 1.4%, primarily driven by higher mobile service revenue, growing ICT business revenue and broadband service revenue. Income from operations and net income decreased by 2.2% and 2.6% on-year respectively, mainly due to the high base from last year as a result of government compensation related to ST-2 satellite. Excluding this onetime item, year-over-year changes in income from operations and net income remained in positive territory, which demonstrates the healthy growth momentum of our core and ICT businesses. EPS for Q1 is $1.21. EBITDA and EBITDA margin remained steady.Now moving on to Page 15 for balance sheet highlights. As of March 31, 2024, total assets increased by 0.9% compared to the year end of 2023. This increase was mainly caused by the increase in current assets and long-term investments, which offset the decrease in property, plant and equipment. Total liabilities decreased by 4.1%, primarily attributable to the decrease in accounts payable. Additionally, debt ratio decreased by 1 percentage point, and the net debt over EBITDA remained 0.Page 16 provides a summary of our cash flows. For the first quarter in 2024, we generated solid cash flows as cash flows from operating activities grew by 26.1% compared to the same quarter last year. The increase was mainly attributable to a decrease in settlement of accounts payable and payments for inventory. Regarding capital investment, the amount of CapEx declined by 6.9% on-year, of which mobile-related CapEx decreased by 50%, while nonmobile CapEx increased by 9.1%. The latter was primarily due to FTTH deployment and asset vitalization. On top of that, free cash flows increased by 56.9% on-year. Taken together, we maintain solid balance sheet and keep generating strong operating cash flows, most of which are underpinnings to support our business expansion and [indiscernible] digital opportunities.On Slide 17, let's turn to the table that presents operating performance against our forecast. In the first quarter of 2024, revenue was about in line with our estimate. For performance measures, income from operations, net income, EPS and EBITDA all beat our forecast by a modest margin. The better-than-expected performance was primarily driven by the steady growth of core business and improved profitability of ICT business.That concludes the first quarter financial results. Let me turn the call over to Chairman Harrison.

[Shui-Yi Kuo, executive]

Thank you, Vincent. On Slide 18 you can see our awards and ESG achievement highlights from the first quarter of this year. First, I'd like to report that relative to 2020, our revenue of the parent company increased about 5.7%, while the carbon emissions experienced a downward trend by decreasing 14% in 2023. The inverse relationship between revenue growth and the carbon emission trend highlights the effectiveness of our dual-track approach to operations and sustainable development.Moving forward, we will intensify our carbon reduction efforts by enhancing energy efficiency with innovative technology and the usage of renewable energy. Additionally, we are the first telecom company in Taiwan to receive approval from EV100 and committed to transitioning 100% of our corporate fleet to electric vehicles by the year 2030. Besides we once again ranked in the top 5 of companies in S&P Global's Sustainability Yearbook 2024 and was honored with the highest leadership level. The A-ranking recognition in both the CDP climate change assessment and supplier engagement rating.In addition, we were the leading telco in Taiwan receiving top awards for most committed to ESG and the best Investor Relations from finance issue. This [indiscernible] attests to our position as an international industry leader with outstanding performance in all aspects of sustainable development.Furthermore, we clinched the first price for overall ESG performance for 3 consecutive years from Global Views Monthly one of the most prestigious ESG awards in Taiwan, which exempted us from competing in the same category for the next 3 additions. This outstanding outcome demonstrates a track record of long-term and stable performance in ESG evaluations and its future on the annual honor role. This concludes our prepared remarks. Thank you for your attention.At this time, I would like to open our conference call for questions.

[Operator]

[Operator Instructions] The first question, Neale Anderson of HSBC.

[Neale Anderson, analyst]

I had a few questions relating to Slide #11, please, the emerging enterprise applications. So with the percentage numbers, it's a little bit hard to get a sense of the absolute contribution and growth in these business areas. So would it be possible to give us any more detail and say which is the largest one on an absolute basis and where you -- which business area you think has the capacity to be again larger in a few years time again on an absolute basis rather than percentage-wise. And the other question is relating to the revenue and the margin trends in the data center and the cloud business because we're getting something of a mixed picture from other telcos in this area. So it would be great to get your views on that. Thank you.

[Vincent Y.S. Chen, executive]

Okay. Thank you, Neale, for your questions. So regarding the contribution of the emerging application revenues. So basically, we don't disclose detailed information. What we will share is that the IDC contributed the most and followed by cybersecurities and AIoT. So these are the key pillars. This is just for the first quarter. Yes. And for the revenue and margin trends on data center, okay? So what we say the revenue trend, what we see because for the IDC, right, sometimes we will have the onetime setup service revenue, but we focus more on the recurring revenues. And we attach a greater weight on this. So what we can share is that for the recurring revenue of our IDC, the growth has been increasing. As we mentioned, now the recurring revenue of IDC for this quarter year-over-year change is almost 8%. And we think -- actually, the recurring revenue makes up a big chunk of the total IDC revenue, and it's on a healthy trajectory.

[Neale Anderson, analyst]

Any comment on the margin side or competition in the IDC and the cloud area, please?

[Vincent Y.S. Chen, executive]

Okay. So basically, for the margin, for the data center -- actually, when we see IDC business, we take a holistic view [indiscernible] because for clients using our data center normally they will use our services. So when we look at the profit, we will take as a holistic view. This is unlike our competitors. And because their main advantage is or their main business is on data center per se, but they don't provide integrated services to the clients. So what we'll see is together with our subsidiary, Chief Telecom, actually we are still the largest IDC service providers, and we are way ahead of our competitors, and we are very confident that we can maintain our lead in this line of business. Thank you.

[Operator]

[Operator Instructions].

[Angela Tsai, executive]

Okay. Maybe we have the first question from the platform. [Indiscernible] as the government announced the policy of raising the electricity fee, could Chunghwa Telecom management share the impacts to Chunghwa Telecom?

[Shui-Yi Kuo, executive]

Okay. Thank you. We don't anticipate a significant impact from the increase in electricity fees as we have continued to invest in energy efficiency. For example, our centralized RAN architecture and the retirement of 3G networks are all constantly contribute to energy savings. In addition, we have take some countermeasures to response to the electricity cost increase as well. For the energy-intensive services like IDC, we have factored the electricity fee issue into our service contracts, including transferring the markup of the electricity fees to our clients. Thus for us, the electricity fee increase is generally manageable. In the long run, we will still continue to invest in the initiatives of carbon emission reduction, aiming to control the overall energy cost as well as to response to ESG goals. Thank you.

[Operator]

[Operator Instructions] And ladies and gentlemen, we thank you for your questions. If there are no further questions at this point, I'll turn it back over to Chairman Kuo for closing comment. Thank you.

[Shui-Yi Kuo, executive]

Thank you for your participation. Goodbye.

[Operator]

Thank you, Chairman Kuo. We 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. Thank you, and goodbye.