Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Second Quarter 2019 Operating Result. [Operator Instructions].

For your information, this conference call is now being broadcasted live over the Internet. A 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, the Director of Investor Relations. Ms. Tsai, please go ahead.

[Angela Tsai;Director of Investor Relations, executive]

Thank you. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom.

Welcome to our second quarter 2019 result conference call.

Joining me on the call today are Harrison Kuo, our new President; and Fu-Fu Shen, the Assistant Vice President of Public Affairs department. President Kuo assumed the position on May 8 and now remains our Chief Financial Officer as well.

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'll move on to the 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.

President, please go ahead.

[Shui-Yi Kuo, executive]

Thank you, Angela, and hello, everyone. Welcome to our second quarter 2019 earnings result call.

During the quarter, the overall mobile market remained competitive. However, we continue to hold the leading market position by both mobile revenue and the subscriber revenue -- numbers in this quarter with market shares of 36.2% and 37.8% respectively.

Going forward, we will continue enhancing customer relations -- retention incentives to solidify existing subscribers and further migrating users to bundled or higher price plans for incremental ARPU to mitigate the [ downfall ] that happened in 2018.

MOD subscribers continued to increase and reached 2.08 million. Revenue grew year-over-year as well.

We attribute this growth to our successful strategy of satisfying customers' demand with quality content including popular OTTs. Now over to the introduction of the free to choose channel plan, which allows customers to package in their own plan entirely based on preferences is expected to bring new experience for our existing and the new customers and further differentiate MOD from other video services in the market.

In our broadband business, we experienced a small subscriber loss since the beginning of this year,

mainly due to continuous mobile internet in substitution and the cable competition. To mitigate the impact, we are providing home-centric digital convergence plans. That's a bundle of services including broadband, Wi-Fi and the MOD/OTT services to satisfy our customer's needs.

For the ICT business, we aim to leverage our network advantage and the technology capabilities to strengthen project acquisitions and the business's progression.

Currently, digital finance is one of our areas of focus and that we continue to win major Fintech projects from the financial industry and the government.

I'm also glad to report that our strategic investment, the Next Bank, just won the Internet bank operation license from its competition.

We believe it will be one field where we can show our IT strength and Fintech capabilities.

Going forward, we will further develop capabilities in cutting-edge technologies such as MEC, AR and IoT to enlarge our ICT capacity in different verticals in the upcoming 5G era.

Now I will walk you through each of business lines.

On Slide 5, I would like to update you on our mobile business. In the second quarter 2019, we were impacted most by the relative higher revenue base in the prior year due contract cancellation fees for 499 promotions among the big 3.

Competition and down-selling remained in the market, causing overall market -- sorry, causing overall mobile performance to be relatively weak.

To further enhance mobile performance, we maintained our strategy of guiding subscribers to adopt higher price plans during this quarter. Higher-priced bundle plan subscription increased specifically for iPhone models quarter-over-quarter. However, given that the SIM-only adoption continues to increase and as the handset replacement cycle is becoming longer, we expect mobile ARPU to decline slightly for the whole year.

Slide 6 shows the performance of our broadband business. We are delighted to see a continuing migration of our broadband subscriber to higher-speed fiber services.

In the second quarter, the number of users signing up for plans with connection speeds of 100 megabits per second or higher grew by 10.6% year-over-year to 1.5 million.

The number of subscribers signing up for connection speeds of 300 megabits per second or higher increased by 120% year-over-year.

In addition, our VPN subscribers in medical field continued to migrate to higher price plan, which contribute incremental ARPU to enhance the overall broadband revenue this year.

Going forward, we will maintain our strategy of migrating customers to higher-speed services to capture incremental ARPU and mitigate the impact of the mandatory tariff reduction from the regulator.

But at the same time, we will also focus on developing smart home-related services, leveraging marketing tools such as [indiscernible] points and the package more popular plans to enhance overall broadband revenue.

Moving on to Slide 7. We are glad to report another robust quarter for the IPTV business.

In the second quarter, our IPTV MOD platform maintained its position as the largest video platform in Taiwan.

We reached 2.08 million subscribers, representing a 15.3% increase year-over-year.

In addition, our SVOD subscribers reached 1.3 million, maintaining its growth trajectory as well.

During this quarter, we continued to stay ahead of competitors in the video business.

Overall, IPTV revenue continued to grow with a 9.3% increase year-over-year.

To attract subscribers, we continued to enrich our content by introducing OTT services and exploring opportunities for original content investments.

Going forward, we will further focus on enhancing our platform capabilities to facilitate MOD to be more favorable to [ precise ] advertisements for commercial buyers to pave a new revenue stream for enterprise customers and to be able to provide better multiscreen user experiences for retails customers.

Please turn to Slide 8 for an update on our ICT initiatives. In the second quarter of 2019, overall ICT revenue increased year-over-year.

We are delighted that our IDC revenue for the first half continued to grow, gaining 18.8% year-over-year.

Cloud revenue increased 20.9% year-over-year and the information security revenue increased 9.4% year-over-year.

In addition, to maximize revenue and the opportunities, we will be more selective of our verticals.

Digital finance is one of our focuses since we have advantages in IDC, information security, Big Data analysis, blockchain, Fintech patents and the capabilities to link with international [ players ] resources.

In fact, we have acquired many Fintech projects in the financial industry.

Going forward, with our AI and IoT related capabilities, we will continue to reach out to other verticals such as smart industry, smart city and smart agriculture to enhance the overall ICT performance.

Now I would like to hand over the call to Fu-Fu for our financial results.

[Fu-Fu Shen, executive]

Thank you. Now I will go through our financial results in details, beginning on Slide 10.

Please note that all the comparatives are made over year-over-year basis unless otherwise stated.

Slide 10 provides you with highlights from our income statement.

For the second quarter of 2019, total revenues decreased by 6.6% and operating costs and expenses decreased by 4.3%.

Our income from operations decreased by 14.5% and our net income decreased by 13.1%. Our EBITDA margin increased to 38.1% in second quarter from 37.3% in the same period of '18, primarily due to the adoption of IFRS 16 in 2019.

Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the second quarter 2019 was mainly due to the decrease in mobile service revenue, which offset the increase of handset sales revenue and internet revenue.

The decrease in mobile service revenue was primarily because of market competition and VoIP substitution.

Moving on to Slide 12. Our operating costs and expenses decreased by NT$ 1.8 billion or 4.3%, mainly due to lower personnel and interconnection costs and the reverse of bad debt provision.

Slide 13 shows that cash flow from operating activities for the second quarter of 2019 decreased by NT$ 1.16 billion or 6.8%. This was mainly due to a decrease in accounts payable.

As of June 30, 2019, we had NT$ 36.58 billion of cash and cash equivalents.

Slide 14 shows our operating results as compared to our guidance.

In the second quarter of 2019, revenue was lower than our second quarter guidance, mainly due to lower handset sales, mobile service revenue and ICT revenue.

Furthermore, our operating income, net income and EPS were lower than our second quarter guidance.

Moving on to Slide 15. We are budgeting CapEx of NT$ 29 billion for 2019.

We will focus on investment in our core business, including FTTx, 4G, IDC and service platform under our precision construction principles.

Now we are open for QA session.

[Operator]

[Operator Instructions] The first question coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

I have a question on the competition...

[Fu-Fu Shen, executive]

Billy, could you approach the microphone closer? It's not really clear.

[Billy Lee, analyst]

Is it better now?

[Fu-Fu Shen, executive]

Just a little better. Could you do it again?

[Billy Lee, analyst]

How about now?

[Fu-Fu Shen, executive]

Better, I think. Please go ahead.

[Billy Lee, analyst]

Okay. So it's clear, right? Okay. I'll go on. So I have a question on the competition landscape in the mobile business. So I want to know what are the change in behavior you're...

[Fu-Fu Shen, executive]

I'm really sorry, Billy. It's really not clear. We cannot hear well. Could you...

[Billy Lee, analyst]

Is it better now?

[Fu-Fu Shen, executive]

Just a little bit. Yes, please go ahead.

[Billy Lee, analyst]

Yes. Let me try once more. Hopefully, it's getting better. I'll try speaking louder. So I have a question on the competition landscape in the mobile business. I am curious to know, are you seeing any change in behavior from the other big 2 operators as well as from the smaller 2 players?

[Fu-Fu Shen, executive]

Your question is about the mobile landscape. Is there any behavior change of the other operators?

[Billy Lee, analyst]

Yes, yes.

[Fu-Fu Shen, executive]

Okay. Yes, I think it's -- the overall landscape is continuously competitive for sure. But we -- since in last years, as you know, turbulence, I think, it's getting more stabilized. And the smaller one -- although they continue to have this low price plan, and I think totally they -- for the past quarters, they are seeking [ some tiers ] but very small, and overall speaking I think the whole -- overall market is getting more stabilized.

[Billy Lee, analyst]

Okay. And then as a follow-up question on that, what's your outlook in the second half of 2019? I mean how confident are you in achieving your guidance?

[Shui-Yi Kuo, executive]

Yes. For first half performance, our bottom line roughly met our guidance but the top line was still lower than the guidance. Since we expect the major revenue increase in 2019, it's ICT revenue, which usually is both -- more in the second half instead of first half. Additionally, we still anticipate the smart -- new models and the various mobile bundle promotion plans, we are careful of some revenue increase in the fourth quarter year-over-year.

[Operator]

The next question is coming from Jack Hsu, SinoPac Securities.

[Jack Hsu, analyst]

I have 2 questions. First question, could you give some color about the banking business, because we -- would you agree that you -- co-operator with the -- some bank and when you start your online banking business, could you give us about -- the color about this kind of online banking. How could we [ tackle it ], this kind of business? How much of this kind of business will count for our revenue? This is my first question. And my second question is about the -- we see our added value, the mobile added-value business, the growth rates, the SIMs shrink in the second quarter. Could we know what has happened in this kind of business, or just 1 quarter number doesn't mean too much information?

[Fu-Fu Shen, executive]

Jack, please repeat your second question.

[Jack Hsu, analyst]

Okay. My second question is, I want to know about our mobile added service business. We see the growth in the 6.9% year-over-year. And -- but in the first quarter, the growth was 30%, so I'm interested in what happened in that segment.

[Shui-Yi Kuo, executive]

To answer your first question, we aim to leverage our telecom Big Data analysis capability, information security advantage and Fintech patents to team up with our partners to develop digital finance in innovative businesses to increase our telco revenue as well as increased customer stickiness and the increased revenue by operating our smart digital financial services.

[Fu-Fu Shen, executive]

Jack, and about your second question, because you know we -- since we entered into 4G business, we didn't separate out the any mobile [ VS ] revenue. I don't know the number you just mentioned if we had guided. But from my standing, for the mobile business in second quarter, the overall revenues declining. The mobile service revenue declined, fortunately, we understand the competitive market, that's one of the reason, in the last year, the basis for last year, we still have this cancellation -- contract cancellation fee kind of increased in last year -- in fall in April and in May and of course and the overall service revenue trends is declining. I think that's the reason for mobile service revenue declining. But for our sales, hence our smart device sales, we are doing good in the second quarter, especially, I think, our [ presentation ] about -- in presentation, I think our iPhone bundle plan sales are doing fine versus that of the last year, and the -- so all those [ hitting ] the sales. Largely because -- you probably are understanding now -- agreeing that 499 plan, because is a SIM-only plan, not a bundle plan. So we have less handset sales for sure. So in second quarter, the explanation for the mobile business, it's just like combination. Hope this answers your question.

[Operator]

Your next question is coming from Neale Anderson, HSBC.

[Neale Anderson, analyst]

Two questions, please. The first one is [indiscernible] breakeven. We asked about this before and it seems to be quite decent growth there. Can you give us an update on when you expect break even in MOD segment? The second one is about mobile distribution. For several years, there was a very pronounced cycle of very popular handsets and I guess mobile operator distribution evolved to match them, so a lot of stores, a lot of agents. Do you think that's going to come back or have you got more cost you can take out of your mobile distribution stores, the agent, et cetera?

[Shui-Yi Kuo, executive]

Okay. Our MOD business [ got ] break even in first half 2019. However, we still need to monitor for the following quarters for the performance this year. We do believe MOD service will help us retain our broadband subscriber in the long run.

[Fu-Fu Shen, executive]

For your second question about mobile distribution, I think, you know, the -- of course for mobile, currently, we have many stores and -- but we are -- since last year, we are very focused on the Internet store. So we believe this is kind of trend in the future. So for the physical store, we review, and we -- for the location, for the manpower, we really review every month. We try to downsize, try to combine some location together. It all depend on the efficiency of individual store. We are working on this.

[Operator]

[Operator Instructions] The next question is coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

Yes, yes, okay. So I have a question on 5G. May I know what’s your latest thinking about the timeline of 5G development, particularly first on the spectrum auction as well as the second thing, the commercialization? And regarding the spectrum auction, what's the bidding strategy for Chunghwa Telecom? And do you have any expectation of budget in the upcoming auction?

[Shui-Yi Kuo, executive]

5G auction will be held in December of 2019. We expect it will be completed early next year. For deployment of revenues 3.5 gigahertz is better than 28 gigahertz. In addition, according to NCC's plan, the interfering section of 3.5 gigahertz will be cleaned up by April next year. So if any operator wins 3.5 gigahertz band -- spectrum, the service is likely to be launched in 6 months after license acquired.

[Fu-Fu Shen, executive]

Billy, your last question is about the strategy and budget for the auction, right?

[Billy Lee, analyst]

Yes, yes.

[Fu-Fu Shen, executive]

Strategy wise, of course -- first of all, for the price, this is a kind of internal kind of figures, we are not to disclose. Strategy wise, the bandwidth seems a bit limited for 5 players. We understand that part and internally, we are thinking about what's the optimal size for us. Yes, that's the current situation.

[Operator]

Your next question is coming from Amber Lee, Yuanta.

[Yufang Lee, analyst]

I have to -- first to follow-up on Billy's question. So how would you describe the competition landscape specifically on the spectrum auction? Do you think it's going to be more competitive than the 4G one, or it's going to be less competitive? Just try to map out how the auction costs is going to be like. And then secondly, I think over the past few months, there have been some countries starting to provide 5G services to just subscribers. If we take a look at how they're doing right now, do you think that would somehow affect your strategy on 5G including the timeline that I just mentioned or the amount of investment in -- or other aspects with that regard?

[Fu-Fu Shen, executive]

Sorry, can you be a little bit louder for the second question?

[Yufang Lee, analyst]

Okay. So the second one is that there have been a lot of countries starting to provide 5G services to their subscribers, and if we take a look at how they are doing by now, do you think that would somehow affect this overall timeline on 5G, say, we should take a more conservative tone on it or something like that?

[Shui-Yi Kuo, executive]

The first, we aim to acquire adequate bandwidth at a reasonable price for the upcoming 5G auction.

[Fu-Fu Shen, executive]

Yes, for your second question, Amber, you know, so we understand that in, like, Korea, they actually give some targeting for the operator for the 5G deployment. But after the service launch, the overall poor service quality has not meet the customer demand. So the regulating ask them to do a bit more for the coverage and everything. And of course, right now, we will follow the NCC's regulation because we already have a pre, kind of, detail regulation disclosed. So we will follow the regulation to do the deployment. So currently, we don't really have any comment on this.

[Operator]

[Operator Instructions] The next question is coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

Last question. Two actually. One is what's your dividend payout policy at the moment? And secondly, what CapEx will look like potentially going to 2020?

[Fu-Fu Shen, executive]

For dividend, of course, you know, I think you know it's -- though we don't really have dividend policy. Actually we have, according to our articles of corporation, we have to pay more than 50% of our earnings as dividend. But for the past years, the track record, we pay -- after we don't have to set aside the special [indiscernible]. We actually pay them -- how much we earn, we pay the whole -- close to 100% payout ratio. So this policy, I think this is not really a policy but I would say that you know every year, we have to submit it, our proposal, to the Board and to the AGM for approval. But most reasonably kind of guessing, we will continue [Audio Gap]

[Operator]

[Operator Instructions] The next question is coming from Billy Lee, Crédit Suisse.

[Billy Lee, analyst]

Sorry for asking again. I think there was some disconnection just now. Yes, I am sorry, I couldn't hear your response on the second question about the CapEx outlook into 2020.

[Fu-Fu Shen, executive]

Yes. I think I will restate the statement. The overall CapEx for our next few years will kind of stable versus of that of this year. Starting from 2020 to '24, we believe that the 5G CapEx peak will be between '22 to '24. That's our current expectation.

[Operator]

[Operator Instructions]

[Shui-Yi Kuo, executive]

If there is no further questions, thank you for joining us. Bye-bye.

[Operator]

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.