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Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's second quarter 2018 operating result. [Operator Instructions] For your information, this conference call is now being broadcast here 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.
Thank you. This is Fu-Fu Shen, the Assistant VP of Chunghwa Telecom. Welcome to our second quarter 2018 results conference call. Joining me on the call today are Mr. Sheih, our President; and Mr. Kuo, our Chief Financial Officer. 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 QA session.
Now I would like to hand the call over to President Sheih. And please note our safe harbor statement on Slide 2. President Sheih, please go ahead.
Thank you, Fu-Fu and hello, everyone. Welcome to our second quarter 2018 earnings conference call. For the second quarter of 2018, the overall market remain competitive. In mobile business, the TWD 499 promotion plan launched in May for 8 days attracted 1.5 million sign-ups including a small amount in April for civil servants and this made our mobile subscriber net adds turn positive to further solidifying our mobile customer base.
In our broadband business, we are glad to see subscriber net adds continue to increase, which demonstrate the success of our strategy of promoting home-centric services led that bundled broadband, WiFi, MOD and IoT services. We are even more encouraged by the successful exclusive broadcasting of 2018 FIFA World Cup while MOD and Hami video. Our IPTV and OTT platforms, beginning in June, which boosted MOD subscribers to exceed 1.8 million. We believe that our outstanding viewership has made MOD become one of the largest video platforms significant for advertisement in Taiwan. Going forward, we will continue to expand the customer scale with exclusive contents to further drive our MOD revenue.
We are highly focused on enterprise customer segments. Our share of revenues from enterprise customers once again increased and thus we kept enhancing our capabilities to provide ICT-related solutions. Despite the decrease of ICT revenue year-over-year in the second quarter, which was due to some delays in project revenue recognition, we expect the ICT revenue will continue to grow in 2018 year-over-year. We are also pleased to report that with the support of our IoT platform, we have won most of that smart city projects in Taiwan since 2015, which have both showcased and laid a solid foundation for our IoT applications. In addition, during the second quarter, we roll out NB-IoT tariff plans for enterprise customers for applications including smart metering, smart parking, smart agriculture and so on.
Going forward, we will continue to leverage our strength in IoT, ITC, CDN and other capabilities to cater to growing demand for comprehensive ICT solutions.
Now I will walk you through each of our business lines.
On Slide 5, I would like to update you on our mobile business. As of June 2018, our total number of 4G subscribers has exceeded 8.7 million and our mobile Internet adopters continue to grow, reaching 87.5% of total postpaid subscription. Because of continued aggressive pricing of unlimited data plan from our peers, we also adopted TWD 499 unlimited data plan for a short period during the second quarter in order to solidify our subscriber base. We continue to guide a decline of mobile ARPU for 2018 year-over-year due to the expected competition from the foreseeable future.
Despite intense competition, we are delighted to see that mobile subscriber number net adds has turned positive in the second quarter due to improvements in our customer retention, many contributed from the TWD 499 promotion in May. Moreover, our mobile network was recently recognized by Speedtest as the fastest mobile network in Taiwan and by OpenSignal as the leader in 4G download speeds. Thus we are committed to providing our customers with the best mobile experience through ongoing network investments designed to meet their mobile demands.
Going forward, we will continue to enhance product portfolio by offering bundled plans, value-add service, handset insurance and other incentives for existing customers and especially for high-end plan adopters to enhance mobile business margin.
Slide 6 shows the performance of our broadband business. For the second quarter, we are encouraged to see our broadband subscriber net adds continue to slightly grow with 0.4% increase year-over-year. In addition, we continue to see a migration of our broadband subscribers to higher-speed fiber services. We are pleased with the number of users signing up for connection speeds of 100 megabits per second or higher, which grew by 10.1% year-over-year to 1.36 million in the second quarter. We expect to improve this number by upselling higher-speed offerings and differentiating our products by bundling value-added and digital convergence services.
Going forward, we will endeavor to stay ahead of our competitors by continuously encouraging higher-speed adoption and enhancing user stickiness of our network through smart home services that leverage our WiFi advantage as well as MOD and OTT offerings.
Let's move on to Slide 7. We are glad to report another robust quarter for the IPTV business. In the second quarter, our IPTV MOD platform continued to be the largest video platform in Taiwan with more than 1.8 million subscribers as end of June 2018, representing a 32.9% increase year-over-year. Our IPTV revenue continued its growth trajectory as well, with a 32.5% increase year-over-year, primarily driven by the healthy growth of IPTV and SVOD subscribers.
Starting from June, we exclusively broadcasted the 2018 FIFA World Cup, which significantly pushed up the overall MOD performance, compared with the previous World Cup game held 4 years ago. The new acquisition increased 141%, while a number of channel sign-ups and SVOD sign-ups increased 95% and 149%, respectively. What's also worth mentioning, the excellent viewership of MOD has made it the emerging video platform for advertisers with a 77% increase in accumulate and advertising revenue year-over-year.
Going forward, we will endeavor to continue the growth dynamics in video business by acquiring popular content, including exclusive rights to sport in eSports games in order to increase subscriber base and further grow our revenue in this segment.
Please turn to Slide 8 for an update on our ICT initiatives. In the second quarter of 2018, our ICT revenue decreased year-over-year owing to some delays in project revenue recognition. We roll out NB-IoT tariff plans in the second quarter with our IoT platform on both NB-IoT and Cat M1 networks to provide quality IoT services.
In addition, our highest-rated IDC in Banqiao enjoyed a 70% occupancy rate for its second phase rack installation and we are pleased to see an increase of the average contribution from each rack. During the quarter, we progressed to the third phase of establishment in order to meet the foreseeable demand. Going forward, we remain committed to leveraging our competitive advantages in network infrastructure, IDC and the CDN to offer reliable, customized and comprehensive ICT solutions.
We will continue to develop our leading-edge business such as information security, PKI, that means public-key infrastructure, and the smart cities. In order to maintain our leading position, we will also actively step into innovative emerging businesses, such as AI or blockchain-related services, in order to expand the market and revenue.
Now I would like to hand over the call to Mr. Kuo for our financial results.
Thank you, President Sheih. Now I will go through our financial results in details beginning on Slide 10.
Slide 10 provides you with highlights from our income statement. For the second quarter of 2018, total revenues decreased by 3.6% and our operating costs and expenses decreased by 4% year-over-year. Our income from operations decreased by 2.2% and our net income decreased by 5.6% year-over-year. In addition, our EBITDA margin increased to 37.31% in the second quarter from 36.54% in the same period of 2017.
Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the second quarter 2018 was mainly due to the decrease in voice revenue and the ICT project revenue, which offset the increase of handset sales revenue. The decrease of voice revenue was affected by market competition and the adoption of IFRS 15, while the increase of handset sales revenue was mainly due to the adoption of IFRS 15.
Next, moving on to Slide 12. Our operating costs and expenses decreased by TWD 1.75 billion or 4% year-over-year in the second quarter, mainly due to lower cost of goods sold and ICT project costs.
Slide 13 shows that cash flow from operating activities for the second quarter of 2018 increased by TWD 1.32 billion or 8.3% compared to the same period of 2017. This was mainly due to an increase of subscribers signing up for the promotional plans in May, which brought in contract cancellation fees. As of June 30, 2018, we have TWD 43.78 billion of cash and cash equivalents.
Slide 14 shows our operating results as compared to our guidance. In the first half of 2018, revenue was more than our first half guidance. Although we anticipate the ICT business will catch up in the second half, there will be more revenue recognized in the first quarter instead of the third quarter. Voice revenue decrease continued with the accelerated OTT and the VoIP substitution and fierce competition -- sales -- market competition. We expect the third quarter performance may be slightly lower than our guidance. However, with the continuous countermeasures adoption -- formation in our mobile page, we would like to see performance enhancement in fourth quarter, especially when new iPhone models are introduce.
Lastly, Slide 15. We have budgeted CapEx of TWD 33.1 billion for 2018. Going forward, we will continue to focus on investment in our core businesses including FTTx, 4G, IDC and our service platform, among others, under our precision construction principle.
Thank you for your time. We would now like to open the line for questions.
[Operator Instructions] Our first question is coming from Neale Anderson, HSBC.
Two questions, please. First one on broadband. Looking at Slide 6, the broadband access revenue. From what you said, the subscriber numbers are going up and also the migration to high-speed fiber seems to be pretty steady as well. At the same time, overall revenues are declining and ARPUs also coming down. So is that due to the regulatory question? Do you expect that to continue? Or will migration to fiber drive an increase over to the medium term? That's the first question.
I think about in the broadband side, we do have more subscription from mobile business and of course in some of them should be from the MOD business. So the -- so over speaking like the information about regulatory pressure, this is one thing because we -- I think started from Q2 '07, we continue to receive the mandatory tariff reduction from the regulator for the fiber, or for the broadband services. In the very beginning that's ADSO but from several years ago, it started from the pressures on the fiber side. So this impact will continue for sure. Sorry, what's your second question?
Yes, second question is related to ICT. Since -- is it timing issue there that is not expected there to pick up until the fourth quarter? So 2 questions there. Because the revenues are a little bit behind, does that mean you chase revenues harder and maybe give away some margin to win revenue? And also, I think it was last year, Chunghwa mentioned that it was looking at winning ICT contracts overseas, I think particularly in Southeast Asia. So could we get an update on that, please? Is that still a focus for the company?
For the ICT revenue portion, no. We mentioned about the first half because of the -- we have some pressure of the delay of the revenue recognition and always, usually, the second half is the high season for ICT business. But even in the third quarter, we continue to have this kind of impact we just mentioned about. So we see, the whole -- for the whole second half, should have some pickup, okay? So now with current pipeline, ICT business, you have some -- we will have some revenue injected especially in the fourth quarter. But you mentioned about Southeast Asia, that's still our focus. But currently, we don't really have too much performance now, but we are -- we will continue to focus in that area.
The next question is coming from Jack Hsu, SinoPac Securities.
I have 2 questions. First question is -- congratulation for the MOD increase. So I don't know, do we have any strategy of try to move the MOD customer? Also, I mean the content, the bigger content can also -- the MOD video content can also be by the MOD through -- also see by the mobile phone? I mean, can we just increase our MOD customers? Also, I'm changing the MOD customer tool -- the MOD customer to the mobile phone customers and we also can increase our -- the mobile phone revenue. Do we have any strategy to do this kind of [ statistic ] ? This is the first question. And my second question is about ICT. First of all, we have to calculate in the second quarter and we just mentioned also we'll have some impact in the third quarter. So how do we see the ICT revenue? Will the ICT revenue increase -- why was it increased in 2018? Or we need to reassess growth return in 2019?
First question about how to further expand our MOD subscribers. The priority is to enlarge customer base then enhance varied application service. Along with the launch of OTT service and continuous introduction of VOD programs on our MOD platform, we expect our subscriber number will continue to increase and the revenue sharing from OTT's service providers will also contribute to the revenue growth going forward. In the meantime, we aim to make MOD more open platform in the interest of consumers by acquiring local channels, including TV shopping channel, leading to launch MOD 4K trial service and enhancing MOD user interface. We also differentiating our products by acquiring international and local sports, including eSports in 4K quality. And we also expect our ICT revenue increase in 2018 and 2019, we expect it.
Our next question is coming from Gary Yu, Morgan Stanley.
I have 2 questions. First is on your 499 [ plan ], 1.5 million subscribers. What kind of customer mix are we seeing for customer migrating from other operators and customer migrating internally from other service brands? And related question is for the internal migration, what kind of ARPU dilution did we expect for the migration? Second question is related to CapEx. Could you share with us what kind of fiber to the home coverage or household coverage we have currently? And what kind of target do we have in light of the CapEx budget?
I think the major [indiscernible] the 499 program, the customer mix, right now from our information, from our data we understand that we acquired about a little bit above 10%, that's from the other operators. And the rest is actually the internal migration and, of course, the internal migration, we see some upsell but most of it is downsell. So about the magnitude, probably you can refer to our fact sheet for the March ARPU versus June ARPU. Because in April and May, we have this contract cancellation fee incurred. So the overall ARPUs actually increase but I think the most of -- some of the impact, you can actually calculate from the fact sheet ARPU presented for March and April. That's what the household coverage of fiber, I don't really have the data in hand. So probably can offer later.
Our next question is coming from Varun Ahuja, Crédit Suisse.
I've got a few questions. First, I want to go back to this 499 plan. I wanted to understand what is the strategy going forward and for this 499 plan. Are you going to focus more on subscriber numbers or profitability? Number first, even though as you mentioned only 10% of subscribers from outside, so I don't understand whether the subscriber addition would have helped you. And if your monthly net addition continues to be negative territory, should we expect the next few quarters some -- another plan 499, 399, just because subscriber numbers are dwindling? So just wanted to understand the strategy over the next 12 to 18 months. Is it subscriber profitability now this 499 plan fits into that strategy? Number two, I've been -- in your presentation slide this quarter, also in last few quarters, you've been saying that you'll be spending market resources on higher-end bundled plan. But over the last few months or so, I think the execution or what have we seen is on the other side. So I just wanted to understand how should we look at pricing? How do you plan to put market resources into higher tier plans and how should we think about affecting those into the financial numbers? Number three on IoT and smart nation initiatives. I think all 3 of your telcos in Taiwan are talking about it. I just wanted to understand how much is it of the total revenue it is right now? And how much it can be next 3 to 5 years in your view? Is it 2%, 3%, it can be 15% of the revenue? Just wanted to see how internally you are thinking about the size of the business.
Ahuja, I think that, to your first question, the 499 question. I think we mentioned many times that although Chunghwa was the first one in 4G service, we was the first one offer unlimited data plan back to many years ago. But that's above TWD 1,000. For under TWD 1,000, [indiscernible], we were never the first one. And so this one, 499 as you mentioned -- of course, I think customer base is something we're concerned but overall -- over the margin, everything is also one of our concern. But at this time I think in March, in April, in May, because the overall market -- the market competition is really 3 years. We -- I think after our -- previously, we launched this kind of service or they continued this kind of service, the whole market, this is actually nobody's activity. So we need to step to fiber, okay? So that's the reason why we did that, or why we launched 499 modestly in promotion campaign, just for a very short period. Of course, the customer number is a bit above our expectation. But as we say, because of the subscription, it's actually -- it was actually solidifying our total customer base, which is not -- which is good. You mentioned about spending marketing resources on high end bundled plan. I think the -- we actually talked about when we do the market team, we have to take care of both high-end and low-end. For low-end customer, we need to do some -- we have some strategy. But for high end, of course, this year, we would continue focusing more on strengthening efficiency. We are allocating more resource to the high-end bundled plan for sure, okay. As for the IoT smart city, on our slide we mentioned about, actually 80% of Taiwanese, or Taiwan -- our smart city kind of project was actually acquired by Chunghwa. As for the total revenue, we haven't disclosed a number. Because we believe this is kind of a showcase for our later IoT service. So we -- the revenue side probably not a big number at this moment. But just like you say, 3 to 5 year outlook should be good. But I'm sorry, we haven't provided any number for that one, not yet.
Just want to understand, so shall we expect some pricing improvement going forward? Or if you -- is that something you keep focusing on subscriber numbers, then you will see more of these plans? So what is the purpose of this over the next 12 months or so?
I think, just as I say, we seeing both to the market, okay? We cannot really -- because we really focus on the total efficiency, the margin. But I think the market's dynamic. I cannot give you a really firm answer for future.
[Operator Instructions] The next question is coming from Jack Hsu, SinoPac Securities.
I have 2 questions. The first question, we see the second quarter about the mobile phone sales increased Y-o-Y. Do we know the reason? Which kind of mobile phone or the mobile device have increased sales in the second quarter this year? This is the question. And where -- it will be the change in the second half in this year? This is the first question. And my second question is, we also see all CapEx. All CapEx in the first half of 2018 just TWD 11.2 billion and our target is about TWD 33.1 billion. So does that mean we will include -- we will double our CapEx in the second half of this year? Or we will change our CapEx target?
To answer your question #1. The handset sales revenue increased in the first half because of the IFRS 15 adoption. That means a percentage of same -- all the subscribers continue to churn up, which will result in less handset sales in the second quarter. Plus our adoption of IFRS 15, that's reflected a more difference when handset sales decreased year-over-year. The handsets sales are for the second quarter 2018 has smaller growth rate year-over-year. We will control our total CapEx in the second half. We will continue to enhance our network quality in the second half.
[Operator Instructions]
And at one point in your CapEx question, if that CapEx do have small increase year-over-year in 2018, but the total CapEx this year will slightly below our guidance.
[Operator Instructions] Our next question is coming from Jack Hsu, SinoPac Securities.
Sorry, just one follow-up question. Will we change our financial forecast, sir, in -- right now? Or will we still keep our financial forecast?
For the whole year 2018, we anticipate that total revenue may be slightly below our guidance. However, we will have a lot of cost control countermeasures. So as for tonight, our guidance is still unchanged.
[Operator Instructions] If there are no further questions, I will turn it back over to President Sheih.
Thank you for your attending. See you next time.
Thank you, President Sheih. Thank you for your participation in Chunghwa teleconference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the under the IR calendar section. You may now disconnect. Goodbye.