Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's second quarter 2021 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 CHT IR website, www.cht.com.tw/ir under the IR Calendar section.

Now I'd like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Mr. Tsai, please go ahead.

[Angela Tsai, executive]

Thank you. This is Angela Tsai, Director of Investor Relations for Chunghwa Telecom. Welcome to our second quarter 2021 results conference call. Joining me on the call today are Harrison Kuo, our President; and Vincent Chen, our Chief Financial Officer.

During today's call, management will begin by providing an overview of our business from the quarter, followed by a discussion of operational and financial highlights. After, we will move on to the question-and-answer session. On Slide 2, please note our safe harbor statements.

Now I'll turn the call to -- over to President Kuo. President Kuo, please go ahead.

[Shui-Yi Kuo, executive]

Thank you, Angela, and hello, everyone. Welcome to our second quarter 2021 earnings call. In the second quarter of 2021, 5G and stay-at-home opportunities under COVID-19 Label 3 alert continue to enhance our overall business performance. In our mobile business, we are pleased to report that our accumulative number of 5G sign-ups exceeded 1 million by the end of the quarter, which is ahead of schedule and expect to meet our guidance of 2 million sign-ups by the end of this year. We expect to maintain the growth churn as we go out a variety of mid to low end 5G handsets, continue to develop 5G innovative applications and introduce our 5G enterprise network and vertical peers.

As expected, our postpaid ARPU turned positive on a year-over-year basis in the second quarter, mainly due to the continued growth of postpaid mobile subscribers and 5G contributions and customers who renewed contracts to adopt 5G services contributed an average of 21% uplift to their monthly fees.

Moreover, to provide quality 5G services, we have accelerated our 5G deployment and have more than these 8,000 base stations at this time, and we expect to approach 12,000 base stations by the end of this year. According to the first-ever Taiwan 5G experience award report in July, we received extensions of 5G and best mobile coverage in the first quarter and the second quarter this year. We will endeavor to maintain our leading status in Taiwan's mobile market.

Next, COVID-19 also drove up demand for fixed broadband service in the second quarter. Our sign-in subscriber net adds turned positive on a year-over-year basis in the second quarter as a result of increased demand for work from home and online learning capabilities. Broadband ARPU continued its uplift. Subscriber migration to our broadband of 300 megabit per second or higher continued to increase by approximately 52% year-over-year. The number of home Wi-Fi devices increased by 650% year-over-year to support the popularity of our home-centric applications. The number of MOD subscribers also increased quarter-over-quarter. As we continue to introduce cutting-edge technologies to enhance viewing experience.

In July, forecasted -- the Tokyo Olympic Game was 4K quality on our MOD platform, and we exclusively delivered the first-ever VR simulation on Hami video. Our VR plus 5G bundled services enable efforts to further engage in doing contests building VR headsets, and we have demonstrated the performance of our 5G technology for multi-angle broadcasting during the event. We expect our video services to continue to grow in the digital convergence.

Now allow me to walk you through each of our business lines. Turning to Slide 5. You can see an update of our mobile business. In the second quarter, we continue to maintain our leading position in the mobile market with a 48.8% of the revenue market share and a 36% of the subscriber market share, excluding IoT SIMs. During the quarter, our mobile customer net adds and the post-payment adds are both highest among the big 3 majors, and our churn rate remains the best among peers. The increase of our mobile service revenue turned positive year-over-year, which contributed with increasing postpaid revenue and the value-added application revenue. We expect the relatively reasonable competition to continue, which we believe can further enhance our overall mobile performance.

Please turn to Slide 6 for an update on our broadband business in the second quarter. We were pleased about our broadband ARPU increased by 3% year-over-year, which replaced our success in migrating subscribers to above higher-speed services and other benefits stemming from stay-at-home opportunities in the new normal. The number of subscribers that set up for connection fees of 300 megabits per second or higher increased by 52% year-over-year. Our VPN service revenue contributions from enterprise customers grew as well. In addition, we were encouraged to see that our Hami subscriber net adds has begun to turn positive after years of decrease.

In response to customer demand for innovative applications requiring higher speed connection, we expect to roll out 2 gigabit per second service in the third quarter, coupled with the ongoing demand for digital transformation we observed under the new normal. We are confident that we will maintain the overall upward trend in our broadband business.

In the second quarter of 2021

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Slide 7 illustrates our mobile business performance. In the second quarter of 2021, subscriber numbers for both multi-IPTV platform and Hami video increased quarter-over-quarter as a result of growing demand for digital service under COVID-19 alert, and we successfully continue to maintain our leading status as the largest video platform in Taiwan. In addition, during the first week of broadcasting at the Tokyo Olympics Games, the viewership and the expected advertising revenue in Taiwan has hit a record, exceeding that of 2018 FIFA World Cup, which is encouraging.

MOD ARPU achieved 2% increase year-over-year as well, mainly due to the successful upsell in both VOD and channel services. Our SVODs ALL PASS package sell-up number almost doubled quarter-over-quarter and 89% of our tiered price channel subscribers choose the highest price packaging.

Moving forward, we will continue to enhance video content and bundled our video services, including multi and home video, with fixed broadband and 5G service to drive our home-centric business performance and create revenue stream.

Please turn to Slide 8 for an update on our ICT business. Overall, ICT project revenue in the second quarter increased by 10% year-over-year, mainly because of the recognition of revenue from public sector and

[Audio Gap]

in terms of emerging ICT services. ICT revenue and cloud revenues continue to grow by 11% and 27% year-over-year, respectively. Cyber Security revenue decreased by 7% year-over-year due to some project revenue delays. However, we expect to catch up during the second half of this year. Going forward, we will continue to enhance our overall ICT technology capabilities to cater for more emerging digital opportunities and be more selective to further increase project profit revenue and margin.

Now I would like to turn the call over to our CFO, Vincent Chen, who will review our financial results. Chen, please go ahead.

[Vincent Y.S. Chen, executive]

Thank you, President Kuo. Good afternoon, everyone. I will now review our second quarter financial results. Please turn to Slide 10, which provides highlights from our income statement. For the second quarter of 2021, on a year-over-year basis, total revenues increased by 3.8% and operating costs and expenses increased by 3.2%. Income from operations increased by 5.9%, and our net income increased by 4.1%. In addition, our EBITDA margin increased to 41.9% from 40.5% in the same period of 2020.

Slide 11 provides a breakdown of revenue by business segment. In the second quarter of 2021, total revenues increased by 3.8% year-over-year, mainly due to the increase in handset sales revenue, mobile service revenue and fixed broadband revenue, which offset the decrease in voice revenue as a result of VoIP substitution.

Moving on to the Slide 12. Our operating costs and expenses in the second quarter increased by TWD 1.18 billion or 3.2% year-over-year mainly due to the increase of depreciation and amortization expenses, cost of goods sold and marketing expenses.

Slide 13 shows that cash flows from operating activities for the second quarter of 2021 increased by TWD 4.75 billion or 36.1% compared to the prior year period. This was mainly attributable to an increase in the collection of accounts receivable and the increase of accounts payable. As of June 30, 2021, the balance of cash and cash equivalents was TWD 32.14 billion, an increase of TWD 12.99 billion or 67.8% relative to June 30, 2020. The increase was primarily due to the issuance of corporate bonds and an increase of cash flows from operating activities.

On Page 14, you may find that table that compares our financial results with forecasts. As you can see, for Q2 2021, our revenue almost met our second quarter guidance and the performance measures, including income from operations, net income, EPS, EBITDA and EBITDA margin all exceeded our expectations.

Please turn to Slide 15. For 2021, we budgeted TWD 43.1 billion in CapEx, including spending our business focuses in 2021, such as accelerating the construction of 5G network, IDC and submarine cable. In the second quarter of 2021, our 5G capital spending was on track and in line with our schedule of 5G base station deployment. Therefore, we maintain our forecast that 2021 is our 5G investment peak.

Now I would like to turn the call over to President Kuo to introduce our awards and recognitions.

[Shui-Yi Kuo, executive]

Thank you, Vincent. Next, Slide 16 illustrates our awards and recognitions from the second quarter. Highlighting speed, mobile coverage, corporate governance and our distinction in sustainability and social responsibility. Going forward, we will continue to leverage our infrastructure advantage to provide integrated services with our quality network to meet customer demand.

Now we are open the floor for questions.

[Operator]

[Operator Instructions] The first question is coming from [Shalila] from HSBC.

[Unknown Analyst]

This is [Shalila] from HSBC. So I would like to ask about the target of base stations, 5G base stations. So in your -- annual report mentioned that the target should be at 10k by the end of the year, so now you have increased the target. Is it?

[Shui-Yi Kuo, executive]

Yes. And thank you for your asking. On the original 5-year construction will be completed within 3 years. It is expected that about 12,000 base stations will be completed by the end of this year. Now we have more than 8,000 base stations. Thank you.

[Operator]

The next question is coming from Lisa Chan from [indiscernible].

[Angela Tsai, executive]

Yes. Sorry, I think I need to -- back to the HSBC's question about the original target for the 5G base stations for this year. I think that our original target, I think we were not really clear about the question. I want to clarify the question. I think your question is about the original target for the -- our 5G base station number this year, right? I think that the original number was 10,000. And now we are thinking about -- we will approach 12,000 by end of this year.

[Operator]

Now we are having Lisa Chan from [indiscernible].

[Unknown Analyst]

We just have one question for -- could you give us more color for third quarter or fourth quarter of this year's outlook?

[Shui-Yi Kuo, executive]

Okay. Thank you for your question. So the second half of the year because despite the outbreak of pandemic, but we still see a very exciting results from our mobile services revenues, also the broadband revenues. So although we will expect some turbulence ahead in the second half, but we are confident that our revenue generation stream will -- on track, and we'll keep the momentum going, and we are confident that we can meet our forecast for the second half, yes, also for the full year.

[Operator]

The next question is coming from Sara Wang from Morgan Stanley.

[Sara Wang, analyst]

I have 3 questions. So first question is that is there any change in our full year, say, revenue or profit guidance? And then the second question is that regarding the 5G base station target numbers, so we previously target 10,000, now 12,000 but the total CapEx budget remain unchanged. So may I ask if there's a change in the CapEx structure or the price proposition is lower than expected? And then my third question is on ICT. So would you -- management, would you please provide some outlook on ICT, say, in terms of revenue growth or as a percentage of the revenue contribution for, say, next year or -- next 1 or 2 years?

[Shui-Yi Kuo, executive]

Okay. Thank you, Sara, for asking. So for the first question regarding the full year revenue profit guidance, we still maintain our forecast at this point. So we tend -- although our performance is better than expected, but because of the uncertainty of the pandemic. So we still want to stay in a more conservative manner make our -- making our forecast. But we'll provide updates if we make any changes.

So for your second question on the 5G base station, right, and also our CapEx budget, so although we increased our target of the number of base stations from 10k to 12k, we don't revise our CapEx for 5G, because for the 5G equipment, right, as time goes by, the cost will be lower. Yes, and also the construct, we deploy our 5G network in a more precise manner, we use the big data. So now we'll save some money and some capital expenditures.

[Angela Tsai, executive]

As for the third question about the IPTV MOD services, I think the recent Tokyo Olympics Games, I think we [experienced] pretty good. And our close -- our second quarter MOD services revenue, I think, is also pretty -- ICT, okay, I'm sorry. I talked about ICT business, okay? I think the outlook for ICT, I think there's growth, you mentioned about the percentage of ICT contribution. So this year, we already mentioned earlier, I think in the early quarter, we mentioned about this year, the percentage having -- compared to last year is a little bit lower, but just -- yes, for the next year and for the year after next year, we believe it will continue to increase, for sure. Yes. Last year, because we have some big public and government projects, so the number -- the revenue size is a bit large, but continue -- for the next coming years with the ICT side, the business will continue to grow. And so the percentage for -- accounted for our consolidated revenue should be -- should increase. I think this is -- should be out of question. But percentage for -- accounted for double digit, for sure. Yes.

[Sara Wang, analyst]

Sorry, just to clarify, this double-digit is further growth rate, right?

[Angela Tsai, executive]

So the growth rates not really for -- let me check, for the growth rates, we are already double digits for the second quarter, yes, for the second quarter. For the whole year, also double digit. Yes.

[Sara Wang, analyst]

And then what's the percentage?

[Angela Tsai, executive]

But let me say that I think for the -- this year, I think in the original -- this year, we mentioned about this year, our budget in ICT total project revenue formation in our guidance already mentioned about the project revenue, which budget is even lower, compared with the -- compared with that of last year because last year, we had government number -- government project. So this year, the total consolidated revenue for the ICT revenue should be around like -- we were talking about the gross number should be like double digits, for sure. I'm not talking about gross number. I think the -- accounted to like 12% for the total consolidated revenue. But the gross number -- the small gross number should be a little lower than that of the -- total ICT revenue number should be lower than that of last year. If you exclude the large project happened last year, the number should be gross, okay? I think that we already explained earlier this year. I hope this explain your question.

[Operator]

And ladies and gentlemen, we are now in our question-and-answer session. [Operator Instructions] The next question is coming from Neale Anderson from HSBC.

[Neale Anderson, analyst]

Just a question on the mobile revenue outlook, please. Presumably, you saw some benefit year-on-year from roaming being weaker also last year in the second quarter. So from here on, how do you see the outlook for 5G revenue under mobile revenue? Do you think that will continue to improve? Do you think it will accelerate or stay fairly steady?

[Shui-Yi Kuo, executive]

Thank you for asking. And the 5G revenue, we anticipate the growth momentum will continue.

[Neale Anderson, analyst]

So on a percentage basis, can you give any indication of where you think that might reach? Or currently 3% year-on-year growth, is it possible to give any indication of where you think that will be by the end of this year?

[Shui-Yi Kuo, executive]

To answer your question, this information is proprietary, and we don't want to introduce any irrational competition if we disclose such information.

[Operator]

Currently, we don't have 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 hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may now disconnect. Goodbye.