Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's third quarter 2018 operating result. [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. Fu-Fu Shen, the Director of Investor Relations. Ms. Shen, please go ahead.

[Fu-Fu Shen, executive]

Thank you. This is Fu-Fu Shen, Assistant VP of Chunghwa Telecom. Welcome to our third 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.

[Chi-Mau Sheih, executive]

Thank you, Fu-Fu. And hello, everyone. Welcome to our third quarter 2018 earnings call. During the third quarter of 2018 the overall market remained competitive. But we are delighted to see our successful solidification of our customer base in major segments.

In the mobile business we saw the trend of active subscriber net adds persist from the second quarter. We also noted that the back to school promotion plan that was launched in August brought in new subscribers and upselling for existing customers which help further solidify our mobile market share and optimize the customer profile.

In our broadband business we are glad to see an increase in subscribers which demonstrates the success of our strategy of promoting home-centric services that bundle broadband, WiFi, MOD and IoT services.

We are even more delighted to report that MOD subscribers exceeded 1.9 million in the third quarter. We believe that MOD subscribers will continue to increase and exceed 2 million by the end of this year and that this represent increasing advertisement opportunities on our IPTV platform.

Going forward, we will continue the strategy of increasing customer scale with exclusive content to further drive up MOD's revenue.

For ICT projects we continue to see increasing demand of new applications and business from enterprise customers. Despite the decrease of ICT revenue year-over-year in the third quarter which was primarily due to increasing selectiveness for the projects that we have acquired we continue to strengthen our core capabilities in selected areas to provide more focused ICT-related solutions and to enhance margins in ICT's businesses.

For our IDC business we are encouraged by the increase of both revenue and customer traffic volume and have thus proceeded with the third phase of construction of our highest rated IDC in Banqiao. Moreover, following the successes of large smart city projects that we won in Taiwan which showcased our IoT application capabilities we continue to win smart school projects national-wide in 2018.

Going forward, we will further enhance collaboration between our sales force, research capacity and product development to enlarge internal synergies as well as continue to leverage our strengths in communication technologies, IoT, IDC, CDN and other capabilities to cater to the 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 September 2018, our total number of 4G subscribers has exceeded 9 million, accounting for 86.1% of total mobile users. However, we continue to guide a decline of mobile ARPU for full year 2018 over 2017 due to expected competition in the foreseeable future. Despite intense competition we are delighted to see that mobile subscriber net adds continue to stay positive in the third quarter due to improvements in customer retention and acquisition.

In mid-August we rolled out back to school promotion plan to attract young users which resulted in an increase in average monthly student subscription as well as higher percentage of new student customers acquired quarter-over-quarter.

Going forward, in addition to expanding our existing product portfolio, including our offerings of bundled plans, value-added services, handset insurance and other incentives, we also aim to expand new services to enhance overall mobile revenue. The NB-IoT and Cat M1 network we are developing now for IoT applications will be one area of focus.

Slide 6. The performance of our broadband business. For the third quarter we are encouraged to see our broadband subscriber net adds continue to slightly grow with 0.5% 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 megabit per second or higher, which grew by 10.6% year-over-year to 1.4 million in the third quarter.

We expect to improve this number by upselling higher speed offerings, especially the fiber services and differentiating our product 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 on our network through smart home services that leverage our WiFi advantage as well as MOD and OTT offerings.

Moving on to Slide 7. We are glad to report another robust quarter for the IPTV business. In the third quarter our IPTV MOD platform continue to be the largest video platform in Taiwan with more than 1.9 million subscribers at end of September 2018, representing a 32.3% increase year-over-year.

Our IPTV revenue continued its growth trajectory as well with a 37% increase year-over-year, primarily driven by the healthy growth of IPTV and SVOD subscribers.

Moreover, to leverage our subscription base and the excellent viewership we will strive to expand revenue via advertisement. As of the third quarter of 2018 accumulated advertising revenue increased 76% 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 third quarter of 2018 our ICT revenue decreased year-over-year due to our being selective for the projects that we acquired. We continue to see our IDC revenue increase. And year-over-year growth during the third quarter was 23.4%. Traffic volume generated by customers, especially by some major international content providers increased 1.5x year-over-year which is encouraging.

Going forward, we remain committed to leveraging our competitive advantages in network infrastructure, IDC and CDN to offer reliable, customized and comprehensive ICT solutions. We will continue to develop our leading-edge business, including information security, big data analysis and smart cities in order to maintain our leading positions in those areas. We will also actively step into innovative emerging business in order to expand our market and revenues.

Now I would like to hand over the call to Mr. Kuo for our financial results.

[Shui-Yi Kuo, executive]

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 third quarter of 2018 total revenues decreased by 6.6% and the operating costs and expenses decreased by 3.9% year-over-year. Our income from operations decreased by 16.1%. And our net income decreased by 16.2% year-over-year. In addition, our EBITDA margin decreased to 34.9% in the third quarter from 35.8% in the same period of 2017.

Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the third 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 primarily because of Voice over IP substitution and market competition while the increase of handset sales revenue was mainly due to the adoption of IFRS 15.

Moving on to the Slide 12. Our operating costs and expenses decreased by TWD 1.7 billion or 3.9% year-over-year in the third quarter mainly due to lower cost goods sold and ICT project costs.

Slide 13 shows that cash flow from operating activities for the third quarter of 2018 increased by TWD 2.4 billion or 12.4% compared to the same period of 2017. This was mainly because the line of provisional payment of income taxes was postponed to October 1, 2018. As of September 30, 2018, we had TWD 20.3 billion of cash and the cash equivalents.

Slide 14 shows our operating results as compared to our guidance. In the third quarter of 2018 our revenue, operating income, net income and the EPS were lower than guidance for the third quarter, mainly due to the decrease in mobile revenue which resulted from the Voice over IP substitution and the market competition. We continued to enhance operational efficiency to offset the revenue loss. However, for the fourth quarter we expect the decreases in cost to be unable to offset that decrease in total revenue mainly due to lower-than-expected mobile revenue in the ICT project revenue. Thus our fourth quarter performance is expected to be below guidance.

Lastly, Slide 15. We are budgeting CapEx of TWD 33.1 billion for 2018 and expect the actual spending would be lower than the budget by more than 10% due to our execution of precision construction and the ongoing improvement in our operation. 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]

[Operator Instructions] Our first question is coming from Neale Anderson, HSBC.

[Neale Anderson, analyst]

I have 2 questions, please. I'm referring to Slide 11. And as you explained, weaker-than-expected mobile performance means that you're likely misguiding for the fourth quarter. In addition to voice, I guess there is couple of parts to this question, do you expect the voice decline to continue or is there some point where it starts to level off maybe supported by enterprise customers? And then secondly you're also seeing declines in mobile value-added services. And I believe that's related to the heavy competition in data pricing. Given the overall outlook and the fact that you're now forecasting lower than guidance for the full year, do you think its time to maybe change strategy with the mobile pricing and then lead prices higher for the overall market?

[Fu-Fu Shen, executive]

For your first question about the voice, will voice continue to decline, is there any enterprise kind of parts that can really support that. We believe in according to the trend the minutes, mobile minutes continue to trend down. And we don't really expect even that enterprise part will -- can really support to compensate for the loss of the general consumer minutes usage. As for the second question, you mentioned about the pricing strategy. I think we have to emphasize that even though we -- I believe you mentioned about lower unlimited price, I don't think that's really part of our strategy. It's just countermeasures to the overall, getting more and more fierce market competition. And our strategy is we would like to see some increase of the pricing trend for, like for example, like recently we had this mobile, the iPhone high-end handset available in the market. So we tried to -- for example, like the 499 customers, the price plan, people [ sit ] on the 499 price plan in May. We tried to increase that -- their plan by offering them some -- we actually don't collect the cancellation -- contract cancellation fee. We would like to encourage them to use new iPhone and have their price plan to increase a bit, okay. I think that's one of the measures we are doing, try to push people up a little bit from that 499. But generally speaking, as long as we have high-end customers, high-end kind of handsets, we will do this. And at the same time, for example like the, even though we promote the [indiscernible] plan. We also would like to see some increase of the price with some subsidies that can encourage people to actually migrate from low price plan to higher. I think that's the answer to your question.

[Neale Anderson, analyst]

Okay, thank you. Perhaps I could just follow up on the mobile side. So you mentioned that iPhone sales is pretty good and you continue to take cost out of the marketing. But net-net you're still looking at a decline in mobile family for this year. Do you think that decline is going to continue or can you see that [indiscernible] around and returning to growth say next year? Perhaps you could share your views on the more medium-term outlook, that would be great.

[Fu-Fu Shen, executive]

I think that the decline it's -- I would say that ARPU decline it's inevitable because of the market competition. But for Chunghwa I think we try to retain customers and we try to acquire new customers, change our customer profile. I think this is all our strategy. You can see some evidence in last two quarters. Our net add, customers for mobile continue to be there, okay.

So the -- even though we see some -- we saw the ARPU decline a bit, the decline decreased but with some new -- with new customers acquired and with the retained our existing customers we still can maintain certain level of the revenue. But for next year you asked about any likely we can return to the growth. I think it's probably too soon to comment on that. But we feel probably we'll forecast the ARPU will continue to decline even through next year. For now this is our view.

[Operator]

Our next question is coming from Jack Hsu, SinoPac Security.

[Jack Hsu, analyst]

I have 2 questions. The first one. Due to our, the third quarter result little bit lower than the forecast but at -- will we change our forecast 2018? This is the first question. And my second question is, how we see the -- our tariff plan in the following quarter like the second half 2018 and for second half 2019.

[Fu-Fu Shen, executive]

Jack, could you repeat your second question?

[Jack Hsu, analyst]

Sorry. My question is, what will -- what kind of the tariff plan will be implement in the second half 2018 and the first half 2019?

[Shui-Yi Kuo, executive]

Thank you for your asking. We will not change our forecast. However, as mentioned -- as I mentioned earlier, our -- we expect the fourth -- sorry. Okay, well, we expect -- we expect the continue -- sorry. Okay. For the fourth quarter we expect the decrease in cost to be unable to offset the decrease in total revenue mainly due to a lower-than-expected mobile revenue and ICT project revenue. The fourth quarter of our -- the fourth quarter performance is expected to be below our guidance.

[Fu-Fu Shen, executive]

I think we don't need to change our forecast for 2019. As you know, according to the authority, likely say 20% kind of difference lower, but for us we just forecast we have -- we just expect to have a small miss -- okay, slightly miss, okay. So this is not really not our concern. And according -- to your second question, you -- I think probably your question is, you know, it's what kind of plan -- you mentioned about the -- are you talking about the pricing, the plan for mobile. I think mobile plan is, we usually offer various plans to cater to different group. This is the strategy we will continue for sure. But because the market is kind of dynamic we have to be nimble to change our strategy anytime. So I think that's the answer for your question.

[Jack Hsu, analyst]

Yes, thank you. Thanks for your response. And just one follow-up question. What's our plan or what will we do for our enterprise customers in the 2019? Yes, because it is -- I think this is more important for the enterprise customers in the future especially for us to walk and to be stronger in the 5G. So what -- could you share some of your plan or strategy for -- with enterprise customer in 2019?

[Shui-Yi Kuo, executive]

Thank you for your asking. We'll release the 2019 guidance in next January. And well, we will let you know what our guidance.

[Fu-Fu Shen, executive]

Since we are seeing there's more and more enterprise, when we look at our revenue profile we understand that for the past several years the percentage for our enterprise revenue is getting larger and larger. So that's why we think it's really -- it really is something we have to understand, what kind of emergent services we can offer to our customers. So that's why we've been developing our emergent services like Big Data, like information securities, like our IDC, high-rated IDC, cloud services altogether. So I think we have all this planned for the -- for our customers, especially for the enterprise customers in -- for the year to come.

[Operator]

Our next question is coming from Amber Lee, Yuanta.

[Yufang Lee, analyst]

I have 2 questions. They are about iPhone plan. Since this year you've lowered the unlimited data to our [ cell ] to 999 from 1399. Do you see an increase in demand for these plans comparing to prior years? And the second question, do you the have a ballpark figure on how much percent of the 499 users have upgraded to the iPhone plan?

[Chi-Mau Sheih, executive]

As for iPhone plan, since [ Apple i X ] is much more expensive to them iPhone 8, the sales volume is lower, but overall sales volume is higher tier recently. And 10% of 499 users that upgrade to the iPhone X. And we expect that iPhone X, will have been -- sales will be good.

[Fu-Fu Shen, executive]

And I think that [indiscernible] the handset cycle becomes lengthy and the ecosystem of handset sales channel change this year, we can see that demand for display -- maybe about iPhone plan first, demand for plans out there, but if you compare to the -- to the prior years we put this way, okay, we found that the -- for the overall iPhone including the X models and the new models altogether, the overall handset sales actually increased. But in terms of the number of new iPhones sold this year versus that of the last year, the number is decreasing, okay. So the -- I think overall environment had some change.

[Operator]

[Operator Instructions] The next question is coming from Neale Anderson, HSBC.

[Neale Anderson, analyst]

I'd like to ask on the MOD service please. I have 2 questions. You mentioned possible investments in content including eSports. Is it possible to give any idea of budget for that investment? And secondly a sort of bigger picture. Telcos elsewhere, my experience is the telco IPTV, the maximum EBITDA margin is around 10%, 15%, is that your view as well? In which case you're obviously seeing good growth. But it would seem that the upside from the MOD services is capped. So could you give a view on what your strategy is? Is it sell bundled services to high-end customers to other Chunghwa services or something else?

[Fu-Fu Shen, executive]

Regarding the sSport, you mentioned about sSport investment, right? We do investment in local eSport games for commerce. But I think that the investment amount is quite minimum. Back to your second question about the IPTV max margin, it's 10% to 15%. I think the current, our IPTV business still not breakeven yet, okay. But of course, we do anticipate, you probably notice that our number of customers increase a lot year-over-year for 2018 and relatively the -- relative the ARPU also increase a bit. So we do expect in next -- next year probably in certain months it can get breakeven in that months. But for the whole year breakeven probably have to wait a bit later. But of course, you mentioned about strategy for bundled services, I think our pricing -- in the very beginning we mentioned about we bundle IPTV with our WiFi, our broadband services altogether, so try to promote for the different business. And of course we also invite OTT service -- services on top of our MOD IPTV platform to increase the revenue and margin as well.

[Operator]

Our next question is coming from Varun Ahuja, Credit Suisse.

[Varun Ahuja, analyst]

I got 2 questions. First, looks like 2018 is going to be a miss on your guidance. And obviously the performance is little bit disappointing. I think the part of the reason, as you mentioned, has been the competition and that also stems from the fact that subscriber market share has been the focus of the participants in this market. So do you think going forward in 2019 will you start focusing more on revenue and pricing or still subscriber numbers remain the key focus area for the management over the next few years? That's number one on mobile. And number two, can you -- I heard that the iPhone performance, I didn't get that part, has iPhone performance this year been below expect -- below what was there last year? Is it -- is it -- are you seeing more upgrades than you saw previous years? Because it's been a long cycle since we have seen customers move -- move, changing their iPhones being, I think, I don't think iPhone 7 or 8 was that successful. Are you seeing some change in behavior compared to previous year where you are selling lot more iPhone brands? That would be helpful. These 2 from my side.

[Fu-Fu Shen, executive]

First question. Yes, we do expect we're going to miss guidance, for a cycle we miss guidance this year. But [indiscernible] mentioned about we pretty much focused on our market share, is there any kind of -- any kind of possibility we will change our strategy for next year, I think no. Market share is something we focus but margin also is something we focus okay? So for Chunghwa, I think we -- like we mentioned our strategy, we try to have people bundled with handset and we try to upgrade student plan to a bit higher, try to migrate people, the 499 people to higher price plan upon the new higher model available in market, okay. I think we will continue this kind of strategy. But of course we need to review the overall strategy from time-to-time to make sure it is effective. As for the iPhone performance, we have to understand that this year we mentioned about the iPhone performance, the number of handset we sold for new models this year is kind of lower than we said the number of handsets we sold last year in the first phase because we had to understand this time the availability of the handset is one issue. And another thing is the channel, the channel because the -- I mentioned about the handset, smartphone -- smartphone life cycle, it gets lengthy. So that -- which means usually we bundle people with, I think at most 30 months before. Roughly in the very beginning it's 24 months, 2 years, but now we increase to 36 months. This is to try to meet the -- try comply with the current situation. But the -- of course the things in -- there's more people than before try to get handset-only instead of bundle, I think that's the situation we face in this market.

[Varun Ahuja, analyst]

Okay. Lastly, has the competition improve since May for -- after the 499 mania? You think the competitive environment has improved or it's still the same?

[Fu-Fu Shen, executive]

In the competition, has the -- has the competition been improved since May? I think May probably as you know it's one of our peers they try to lower the unlimited data plan and this is hard to sell to the general public. But I think after May every operator actually get back to no more. We try to sell to, kind of a no price plan, we sell to specific target group. But this is, like I say, the market is dynamic. You don't know what your peers will offer, what kind of -- what kind of -- the services, okay, or plan. So we need to keep watching the market all the time.

[Operator]

[Operator Instructions] Our next question is coming from [ Johnny Chan ], [ CLSA ].

[Unknown Analyst]

Just 2 quick questions here. First one just on dividend. Can the company I guess reconfirm to us that the payout ratio and how do you guys think about potentially paying maybe over 100% in 2019 for 2018? The second question is with regards to Apple eSIM push. And with the new 12.1 iOS update available today I'm hearing that some of your competitors, specifically the smaller players like APTG is actively testing out the eSIMs on the market. So I've seen on some of the blog sites that they are already pushing sSIMs to a few particular -- maybe some of the users. So I just wanted to know what your view is and where is Chunghwa Telecom at the moment in terms of rolling out eSIM versus everybody else. Presumably this will be somewhat negative if people start to adopt eSIM with lower-tier plan or whatever from your competitors, so I just wanted to know what the impact you guys think will be for Chunghwa Telecom.

[Shui-Yi Kuo, executive]

Thank you for your asking. Our dividend payout depends on the operational performance and CapEx spending, and the final decision up to the board's approval. The additional dividend distribution is also up to the board. Currently there is no discussion internally.

[Fu-Fu Shen, executive]

For the Apple eSIM, yes, I think we already -- we are about announcing just now. We're going to -- we're going to -- the eSIM going to be available for our customers starting from November 7, okay? So there was -- I think this we're going to have some kind of setting, setting fee in the beginning. But we're going to reach that part, okay. Yes.

[Unknown Analyst]

Okay, so you -- sorry, I mean you guys anticipate -- I mean, have you guys -- are you guys getting a lot questions regarding [ lease ] adoption and so on and so forth and any potential impact to your, I guess, earnings forecast at the moment? Or maybe a bit too early?

[Fu-Fu Shen, executive]

Sorry, you say regarding the eSIM any impact on earnings -- earnings forecast?

[Unknown Analyst]

Yes -- yes, you said there will be -- you guys might think about charging a setting fee or so on and so forth. I'm just wondering, is that -- did you guys any -- make any sort of forecast at the moment or is it still too early?

[Fu-Fu Shen, executive]

I think still too early. I think in the first wave we're going to waive that fee, okay. So this -- I think you need further discussion for the -- are we going to charge in future. Yes, I think it's still uncertain, yes.

[Operator]

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

[Jack Hsu, analyst]

I have 2 questions. My first question is could you elaborate if our -- if the result is a little bit lower than our guidance or what were -- what kind of vision -- I mean what -- what vision is the major -- the major result? It's the mobile or the fixed line. This is the first question. And my second question is we have introduced the AWS Direct, so could you give some view or some color for this kind of business. And what's our strategy for the -- on the AWS Direct service in Taiwan?

[Shui-Yi Kuo, executive]

Okay, thank you for your asking. Our net income and EPS was -- were lower than guidance for the third quarter many due to the decrease in mobile revenue, so the mobile business profit is lower than our guidance.

[Fu-Fu Shen, executive]

For Amazon web services, AWS Direct service, I think we are currently under discussion and we -- once we're ready, we will announce soon.

[Jack Hsu, analyst]

So are there any customers right now -- are there any customers right now that started to subscribe AWS Direct services through Chunghwa Telecom?

[Fu-Fu Shen, executive]

Because the service is not ready yet, so I think we don't have existing customer right now, but we do believe that we'll have huge potential customers.

[Jack Hsu, analyst]

So could we -- so we have this kind of -- will we introduce this kind of services in 2019?

[Fu-Fu Shen, executive]

Yes, roughly early next year.

[Operator]

As there's no further questions, I will turn it back over to President Sheih. Go ahead, please.

[Chi-Mau Sheih, executive]

All right. Thank you for your attending. See you next time.

[Operator]

Thank you, President Sheih. 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.