Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's second quarter 2020 operating results. [Operator Instructions] For 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 our website, www.cht.com.tw/ir under the IR calendar section.

Now I want 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. Welcome to our second quarter of 2020 results 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'll also have a Q&A session.

Now I would like to hand the call over to President Kuo, and please note your safe harbor statement on Slide 2. President Kuo, please go ahead.

[Shui-Yi Kuo, executive]

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

Today, I would like to begin by highlighting our 5G service launch, which took place on June 30. We expect the launch of 5G service as a trend to this mobile market toward sales growth. So far, we have seen evidence of a significant increase in adoption of our high-priced mobile plan amidst the 5G launch. We believe 5G is a chance to make telecom operators to provide services beyond that of standard operators by delivering services via our B2B protect business model. We will actively create innovative 5G services by acquiring, building or collaborating with partners from different verticals.

In addition, we aim to provide a seamslesss broadband connect environment to satisfy customers. We believe our advantage of the largest mobile broadband spectrum can result in [indiscernible] network infrastructure and the availability of net WiFi are the key reasons for us to achieve the goal and stand out.

Now I will provide the key highlights of the second quarter of 2020. I am pleased to say our 300 megabits per second broadband migration increased more than 30% year-over-year in the second quarter. Our [ virtual ] private network service offerings provided to enterprise customers, continued to grow to contribute to total revenue.

In addition, our paid Home WiFi subscription increased 120% year-over-year. We were glad to see the healthy growth of our core business.

During the quarter, we also continued to see the impact of the COVID-19 pandemic on our overall business. We saw the growth in fixed broadband, cloud and IDC services due to increased demand for work and study from home. MOD business and was relatively resilient, thanks to the growing stay-at-home lifestyle trend.

In addition, digital channel assets and transactions increased 92% year-over-year, enhancing our overall channel funding and performance. However, international mobile enrollment revenue continues to be affected due to the ongoing border lockdown and we expect this trend will continue over the next several quarters.

Now allow me to walk you through each of our business lines. On Slide 5 is an update of our mobile business. We are pleased with our continued leading-- market leading by both mobile revenue and subscriber numbers during the quarter.

In addition, we are encouraged by our postpaid subscriber number, which has been increasing for 6 months in a row, showing our success in both existing subscriber retention and the new subscriber acquisition, especially from back-to-school initiatives.

In overall mobile performance, we are pleased to continue to experience a small decrease in mobile revenue -- mobile service revenue among our peers quarter-over-quarter. This was mainly due to our efforts of guiding subscribers to adopt higher priced plans.

Slide 6 provides an introduction of 5G services. As the largest 5G spectrum holder with [ better ] locations in Taiwan, we anticipate offering to our customers' quality 5G service offerings with cloud gaming, Ultra HD video streaming and the VR or AR-related applications at the highest speed and low latency. We aim to acquire more than 1 million 5G subscribers over the next year.

In addition to retail consumers, we will also leverage our 5G network to support innovations from enterprises, making net connections, such as smart transportation, medical applications, smart inspection and other vertical applications. We value our large enterprise customer base and expect the percentage of revenue contribution from enterprise in the 5G era to increase meaningfully in the medium term.

Slide 7 shows our 5G network construction plan over the next 2 years. As of June 30, when we launched our 5G service more than 2,000 base stations covered all cities and counties in Taiwan. We provide 5G service on the 2.1 gigahertz and 3.5 gigahertz bands.

By leveraging 5G, our 4G networks and 4-carrier aggregration enhancement, we are confident that we will be the front-runner in Taiwan in terms of 5G speed and the coverage.

By the end of this year, we plan to complete more than 4,000 base stations to ensure 5G full coverage in major metropolitan cities and the important transportation hubs along high-speed rail and the mass rapid transit lines.

By [ 2020 state ], more than 8,500 base stations are expected to further expand coverage nationwide. The key 5G rate is expected to reach 2 gigabits per second, with support from 5G -- our 4G network and 5-carrier aggregation technology.

Please turn to Slide 8 for an update on our broadband business in the second quarter. During the quarter, we are encouraged by the continued ARPU update in our broadband business, which reflects our success in migrating subscribers to adopt higher speed services. The number of subscribers signing up for the convention speeds of 300 megabits per second or higher increased by 81% year-over-year amidst the growing VPN [indiscernible] revenue contribution from enterprise customers. We are confident in overall growth in business, even though lower speed subscriber number continues to decrease quarter-over-quarter.

Slide 9, demonstrates our MOD business performance. In the second quarter of 2020, our IPTV and multi-platform continued to be the largest video platform in Taiwan with more than 2.08 million subscribers.

In spite of the delay of the 2020 Tokyo Olympic games, which decelerated subscription momentum, overall, MOD revenue continued to increase 2.1% year-over-year, mainly from the increase in VOD revenue.

Although our SVOD subscription number decreased year-over-year owing to the program adjustments made during the quarter, we continue to see upsell in our tier pricing channel packages continue to be the most popular, which actually upsold.

Going forward, we believe our IPTV MOD platform, which carries VOD channels and OTT services will continue to be relatively resilient as the cable market is being eroded by OTT and threatened by low price competition.

Please turn to Slide 10 for our ICT business update. In the second quarter of 2020, overall ICT project revenue has increased 6.8% year-over-year, mainly due to revenue recognition of some large projects and the increase of mobile ICT revenue. Because of COVID-19 pandemic continues to affect enterprise consumers and customers' business decisions, we will closely monitor business opportunities in the enterprise market and the aim to enhance ICT training revenue contribution to stabilize overall ICT business performance.

In terms of emerging ICT business and services, in the second quarter of 2020, ICT revenues increased 4.2% year-over-year, and the information security revenue increased 30.7% year-over-year. Cloud revenue decreased 15.8% year-over-year due to its higher base of project revenue in the second quarter of last year. However, we are glad to see that cloud streaming revenue continues to grow year-over-year.

To maintain our leading position in this emerging services, we will continue to collaborate with our subsidiaries and departments to expand market share and profitability to strengthen overall performance in every sector.

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 greater detail.

I will begin with Slide 12, which provides highlights from our income statement. For the second quarter of 2020 on a year-over-year basis, total revenues decreased by 4.6%, and operating costs and expenses decreased by 6.6%. Income from operations increased by 3%, and net income remained the same year-over-year.

In addition, our EBITDA margin increased to 40.5% from 38.1% in the same period of 2019.

Okay. Please refer to Slide 13 for a revenue breakdown by business segment. The decrease in total revenue for the second quarter of 2020 was mainly due to the decrease in fixed voice revenue, handset sales revenue and mobile service revenue. The decreases were partially offset by increases in other revenues contributed by our subsidiary through Chunghwa Precision Test.

Moving on to Slide 14. Our operating costs decreased by TWD 2.61 billion or 6.6% year-over-year in the second quarter, mainly due to lower interconnection costs, cost of goods sold and maintenance and material expenses.

Slide 15 shows that cash flow from operating activities for the second quarter of 2020 decreased by TWD 2.78 billion or 17.5% compared to the same period of 2019. This was mainly due to an increase in accounts receivable.

As of June 30, 2020, we had TWD 19.17 billion of cash and cash equivalents, a decrease of TWD 17.38 billion or 47.6% compared to the same period of 2019. The decrease was mainly attributable to the payment of concession fees for the 5G frequency spectrum option, which was partially offset by an increase in short-term [ bills ] payable.

Slide 16 shows our operating results as compared to our guidance. In the second quarter of 2020, revenue was lower than guidance, mainly due to lower handset sales in mobile service revenue. On the other hand, our operating income, net income and EPS exceeded guidance.

Lastly, Slide 17, we are budgeting CapEx of TWD 30.7 billion for 2020 as we started 5G service on June 30. 5G-related CapEx has been spent and will be executed according to our plan. We will also continue to focus our CapEx spending on our growing and emerging business to enhance overall performance.

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 from HSBC.

[Neale Anderson, analyst]

I have 2 questions, please. The first relates to the cost outlook. And I see marketing expenses have been coming down, I think, down by about 4%. How do you expect that to trend now that 5G has been launched and if we go into the second half with more 5G handset. So really, that's my first question about cost impact of 5G, and whether you can take costs out to offset that.

And then the second question was really, could you give us an update on mobile competition? Has there been any big change in the quarter? What you see the outlook is?

[Fu-Fu Shen, executive]

For your first question about entering to the second half, if the 5G related to the marketing expenses. Of course, we understand [ actually most seriously ] we'd like to see the 5G migration to speed up a little bit in the second half. So the -- with the encouraging resource, we allocate all our resources. For example like the handset subsidies amount in 4G and 5G, we will set aside in a little volume for 5G. So of course, for the marketing spend which for 5G will be spend a little bit more. So in the second quarter -- into the second half, that part will increase with it, for sure.

Your second question, would you repeat that?

[Neale Anderson, analyst]

Sure. It's really on the general state of mobile competition. Have there been any changes recently? Have you seen any price changes in the market?

[Fu-Fu Shen, executive]

Actually, the -- I think 3 major already launched 5G services. The [indiscernible] business is still a very early stage. And for 4G, I think quality we know, the competition we know is quite stable. So I would say that the overall mobile competition is relatively stable. So we don't really see any big change in this quarter.

[Operator]

[Operator Instructions]

The next question is coming from James Wang from UBS.

[James Wang, analyst]

I've just got a really quick question. I just wanted to find out for those customers that are taking up 5G plans. What sort of increase are you seeing on the ARPU? Or are they mostly high-value customers that are moving in parallel in terms of ARPU to 5G?

[Fu-Fu Shen, executive]

Sorry, could you repeat your question? It's not very clear.

[James Wang, analyst]

Yes. So I just wanted to know whether you are seeing any ARPU improvement for those customers that are taking up the 5G plan.

[Fu-Fu Shen, executive]

Yes, ARPU -- [indiscernible], we [indiscernible] HKD 499, that's one of the plans. In the 5G model [ uplifted to another ] [indiscernible]. And so I think that's -- in the past several months, we've been working on the -- through our civil servants and the teacher [indiscernible] that HKD 499 program. And that program already completed very smooth, and we are quite happy with the results and we see more than 90% of our customers be about -- will [indiscernible] described [indiscernible] will subscribe [ not only that ] program, they renew the contract and we see the overall results, actually, we -- it's positive. So we are quite happy with that. So we like to copy that result to the upcoming Mother's Day, that package, which is supposed to be completed by November this year. It's already on the ongoing part of process. It's already in process at the moment. And that's one part.

And the other part, we mentioned we've been doing pretty good in the -- for the student package. And the student package, the ARPU, we are also quite happy with that. So even though the overall ARPU is not really -- still see some downward but in different sectors, we see still working very hard to try to upsell part of it. So we would like to see with the injection, with the high priced plan for 5G together in the future, along with the 5G migration becomes faster and faster. We do expect to anticipate expecting in foreseeable future the overall ARPU do have the chance -- can have chance to help cost have uplift in future. Of course, probably not in very near future, but do have this kind of possibility.

[Operator]

And the next question is coming from Amber Lee from Yuanta.

[Yufang Lee, analyst]

Two questions here. First, since your guiding was [ TWD 50 billion ] of CapEx for this year with your target of building out 4,000 base stations by the end of the year and for next year, if you're expecting the 8,500 -- more than 8,500 base stations, should we expect to see a significant increase in your CapEx for 2021? That's my first question.

And secondly, can we have a ballpark on the initial adoption rate of 5G plans? Whether it's percentage-wise or as number of subscribers.

[Shui-Yi Kuo, executive]

4,000 base stations by the end of this year, and it will over 10,000 base stations in 3 years. We are confident to stay ahead in the number of base stations, but we do not emphasize an arms race but to meet customer needs and provide customers with a good experience. Thank you.

[Yufang Lee, analyst]

And should we be expecting a significant increase in CapEx for the next year? Or it's more flattish trends.

[Fu-Fu Shen, executive]

Could you repeat your second question because it's not really clear.

[Yufang Lee, analyst]

That was the follow-up of my first question because it's CapEx outlook for the next year. And then second question is the ballpark number of 5G subscribers. Either percentage-wise or the number of subscribers for the initial adoption since the 5G service of Chunghwa has launched for about a month now. Just want to see the initial adoption trend.

[Fu-Fu Shen, executive]

I guess your question is related to the CapEx if the increase of the base station, will the CapEx continue to increase. Of course, I think you know we actually were budgeting the CapEx for the later [indiscernible] base station build-out for next several years, for sure. So this is kind of in order. We have some kind of claim in order for sure, yes. Just like our presentation above this -- we have plans but it still depends on the customer demand. We will be adjusted by that.

[Yufang Lee, analyst]

Then can we have the number of 5G for percentage?

[Fu-Fu Shen, executive]

About the adoption rate of 5G or coverage in [indiscernible], it's still in the very early stage. Sorry, I think we will not disclose the number.

[Operator]

[Operator Instructions]

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

[Peter Milliken, analyst]

Just one question. Your net profit is about 5% ahead of where you expected it to be. Is that -- is there not one main reason for that? Like would it be marketing costs came in low? Or is it something else that's driving the better-than-expected performance?

[Fu-Fu Shen, executive]

I think margin increased -- of course, you have to look at the revenue side, okay. In the second quarter, our revenue actually decreased, part of the revenue like in the handset sales, which is really low-margin revenue in the -- like the international core revenue, again, it's low-margin revenue. This kind of revenue increased, which actually bring a lot of the cost down, so resulting in the -- a lot of costs down. So they come out the margin will uplift a lot. I think probably this can explain the question.

[Peter Milliken, analyst]

Right. Yes, I can see that that's why both revenue and cost went down because you were selling fewer handsets. But would that -- does that also explain why profit was higher than expected? Or was service revenue better than you thought?

[Fu-Fu Shen, executive]

Sorry, I really didn't follow you. I think it's not really clear. Could you say it again, please?

[Peter Milliken, analyst]

Yes. Would you say that service revenue was higher than you expected?

[Fu-Fu Shen, executive]

No, no, no. I'm thinking about the handset sales actually lower in the -- because of the border lock down, so the international call, the revenue-related revenue also lower and this 2 types of revenue, usually it's low margin, and it's related to the heavy cost. So that's resulting in the overall the cost, heavy cost decrease resulting the margin, better margin. So that's how I explain why we see good margins for second quarter. Hope this answers your question.

[Operator]

[Operator Instructions]

The next question is coming from [ Brian Wang ] from [indiscernible].

[Unknown Analyst]

I have 2 questions. First, can you compare the average payment of those new 5G subscriber to their original payment? We know this first quarter may be a very high payment contributor in 4G period. So can you compare their monthly payment in 5G and right now?

And the second question is, we see the subscriber of your MOD is flat and keep at slightly above 2 million subscribers for several quarters and U.S. subscriber of VOD significant decline this quarter. But we see your broadband business, the revenue of the broadband business is slightly climbed these few quarters. So does it mean your MOD business had some impact from the competition from like Netflix or the IGE? These 2 questions.

[Fu-Fu Shen, executive]

For your first question, okay, about the MOD. I think your question is that you're asking about our 5G customer return to, their ARPU compare their ARPU [indiscernible] about 4G customer, right?

[Unknown Analyst]

Yes.

[Fu-Fu Shen, executive]

I think we do see uplift for sure, yes. So we are encouraged by that. We see uplift. So we are encouraged. That's pretty, pretty firm about that part, okay? That's the answer to your first question.

And for your second question about the MOD, I think, yes, our MOD customer base continue to be quite simple and have a little bit slower and has a little bit dropped down a little bit because we are lacking in recent 2 years, we are lacking both major sports events. But for Chunghwa, I think we are happy to see that we had -- last year, we had this tier type of channel selection of program introduction so that we can upsell some of the program. And also, you see the overall MOD revenue had some increase, okay, even though we have some customer loss. So the overall business doesn't have too much impact. And at the same time, OTT service, although have some impact to our SVOD, that should -- since we can get share. So we thought we share with you OTT service. We have showed revenue, which is also helpful for our overall business.

So I think we adopt very good strategy. So we have Netflix. We have other OTT services together on our platform.

So overall MOD, I think compared with the cable guys this service are much more resilient in terms of video [indiscernible] in Taiwan.

[Operator]

The next question is coming from Billy Lee from Credit Suisse.

[Billy Lee, analyst]

I just have a couple more on the answer that you gave to previous questions. So on the cost, operating cost, especially, I guess you are seeing that the lower handset COGS and independent and other various product costs have decreased because of lower sales. But when I look on the [indiscernible] on page 14, the operating cost is down 7.6%. So does that contain the majority of the items that you just mentioned? So that's a question for now.

[Shui-Yi Kuo, executive]

From our operating costs and the expenses decreased about 6.7% year-over-year in the second quarter, mainly due to lower interconnection costs, cost of goods sold, you mentioned that handset sales decreased and maintenance and the material expenses. That's the 3 major items.

[Billy Lee, analyst]

Yes, yes. Okay. Got it. So it's not [indiscernible]. And then another follow-up on previous questions on the CapEx, particularly for 2021. I know probably the CapEx guidance is not helpful for next year yet, but could you just give us in what direction of the CapEx in next year -- because I think judging by the base station number, there's obviously more than double increase in [ in the target ]. So just wondering how big a jump do you expect with the [indiscernible] CapEx.

[Shui-Yi Kuo, executive]

Okay, in the [ immature ] stage of 5G and the non-stand alone architecture is interoperable with 5G networks. And we collect -- collocate the low medium and the highest frequency bands to expand our 5G coverage year by year. We expect our 5G CapEx peak will still be the period between 2020 to 2023.

[Billy Lee, analyst]

I'm sorry, can you repeat your last comment about 2021. I didn't catch that [indiscernible]. Could you repeat that.

[Shui-Yi Kuo, executive]

2021 to 2023 -- 2023, yes, 2021 to 2023.

[Billy Lee, analyst]

I mean could you like -- I hear the year 2021, 2023, what -- were you just saying about the 2 years? I didn't catch that. Sorry.

[Fu-Fu Shen, executive]

We were talking about the -- probably the spending for 5G will be the peak for spending 5G CapEx will be located between 2021 and 2023. Yes, that's what we would like to elaborate.

[Operator]

[Operator Instructions]

The next question is Amber Lee from Yuanta.

[Yufang Lee, analyst]

With the margin in the first quarters being higher than this guidance, do you expect...

[Angela Tsai, executive]

Could you approach your microphone a bit closer? It's not really clear.

[Yufang Lee, analyst]

Okay, sure. Can you give us your margin outlook for the next 2 quarters -- for the -- sorry, second half of the year it's adding in the 5G launch with potential market and expenses.

[Shui-Yi Kuo, executive]

Yes. Please see our forecast announced in the beginning of the year. And that in the second half, the amortization cost will be higher because of the 5G launch. So it might be a little bit lower than the first half of this year.

[Yufang Lee, analyst]

That's EBITDA margin?

[Shui-Yi Kuo, executive]

Yes.

[Yufang Lee, analyst]

Just a little bit lower.

[Fu-Fu Shen, executive]

And actually, when we announced our divisional forecast early this year, we're already set-in the order of 5G, all these kind of factors, so through to [ 3/30 ] okay.

[Yufang Lee, analyst]

So with the upside coming from the first half of the year, you would expect to see off-site also in the second half of the year.

[Fu-Fu Shen, executive]

Sorry, it's not really clear. Your question is -- could you say it again?

[Yufang Lee, analyst]

With the margins being higher than your guidance in the first half of the year, do you expect it to also be higher than your guidance for the second half of the year?

[Fu-Fu Shen, executive]

So we won't change our guidance at the moment. So I think it's [indiscernible], okay. I'm sorry.

[Operator]

[Operator Instructions]

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

[Billy Lee, analyst]

Can I ask another question too. [ I know ] what are the most exciting new 5G application trends. I just want to get a sense of any potential, huge potential 5G opportunities are coming up and we are seeing very good traction so far.

[Fu-Fu Shen, executive]

Everything is in the early stage, not in really no -- so nothing really excited, okay, at the moment. So I think we are still cultivating the behavior at the moment. Sorry for that.

[Operator]

[Operator Instructions]

The next question is coming from Jeff [indiscernible] Security.

[Unknown Analyst]

I have a question about will we change our forecast -- a new forecast because we see the forecast of treatment rate is about 40%. So will we draw our expectations for year -- full year expectations now or will it keep the new expectation?

[Shui-Yi Kuo, executive]

Yes. Our forecast EBITDA margin is between 37%.

[Unknown Analyst]

Yes. I mean, the achievement rate, only 40%, especially right now, it has happened here. So we changed our annual expectation or we will keep?

[Fu-Fu Shen, executive]

No, we won't change the full year kind of forecast. As you know, the 5G is coming for the second half. All the healthy fees or the marketing, everything is coming in the second year. So for sure, the margin for the second half [ would ] be like 40%. So we will remain our original forecast.

[Unknown Analyst]

Okay. So another question is about when will we have the new iPhone according to the -- I mean according to the plan, will we -- partner, will we have the new iPhone is in the fourth quarter or in the so-called [ original cap ] the new iPhone, especially the 5G new iPhone.

[Fu-Fu Shen, executive]

I think everybody is still waiting for Apple to confirm for that.

[Operator]

[Operator Instructions]

If there is 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, President Kuo. Thank you for your participation in Chunghwa Telecom's Conference. There will be a webcast replay within an 1 hour. Please visit www.cht.com.tw/ir under the IR calendar section. You may now disconnect. Goodbye.