Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's third quarter 2020 operating results. [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'd like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead.

[Angela Tsai, executive]

Thank you. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom. Welcome to our third quarter 2020 results conference call. Joining me on the call today are Harrison Kuo, our President; and Vincent Chen, our new 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 the financial highlights. And then we will move on to the Q&A session. On Slide 2, please note our safe harbor statement.

Before I turn the call over to President Kuo, I would like to make a brief introduction of our new CFO, Dr. Vincent Chen. Dr. Chen earned his PhD degree in Accounting from the State University of New York at Buffalo. He was serving as professor of accounting at the National Chengchi University, as well as the IMBA Program Director. Previously, he was on the faculty of the National University of Singapore and was the Head of Accountancy Sector Research Centre at the Singapore Accountancy Commission, a statutory board under the Ministry of Finance of the Government of Singapore.

And now, I will turn the call over to President Kuo. President Kuo, go ahead please.

[Shui-Yi Kuo, executive]

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

Let's begin on Slide 4. In the third quarter of 2020, the number of 5G sign-ups grew as we expected and with the iPhone 12 models that launched in mid-October are expected to drive 5G service adoption. We are optimistic that we will exceed our annual target for 5G service adoption by the end of this year. In addition, construction of our 5G base station is ahead of schedule and we have established over 3,000 base stations nationwide by the end of the third quarter. Combined with the largest 5G spectrum resources on hand and efforts in 5G innovation development, we expect to obtain a significant portion of government subsidies for 5G network construction and Forward-looking Infrastructure Development, which will help to further accelerate our 5G deployment.

In addition, we have teamed up with various partners from different industry verticals as we develop 5G service via B2B2X models. Our focuses include smart manufacturing, smart transportation, smart agriculture, autonomous driving, smart healthcare and et cetera. We expect to see some promising results within the semiconductor industry in the near future and look forward to sharing our updates with you.

For our broadband business, we are pleased to see continued ARPU uplift as a result of the ongoing increase in higher price plan adoption. Subscriber migration to our broadband of 300 megabits per second or higher continued to increase by 80% year-over-year, contributing to year-over-year broadband revenue growth for the eighth month in a row. The number of Home Wi-Fi devices also increased 140% year-over-year. And MOD business experienced a slight ARPU uplift year-over-year in the third quarter, thanks to the growing stay-at-home lifestyle trend.

During the quarter, we continued to see the impact of the COVID-19 pandemic on business. Digital channel access and the transactions increased by 84% to enhance our service efficiency, while international mobile roaming revenue and prepaid card revenue continued to decline due to the ongoing ordered lockdown. We anticipate that this trend will continue in the next several quarters.

Now allow me to walk you through each of our business lines. Turning to Slide 5, you can see an update of our mobile service business. In the third quarter of 2020, we were pleased to maintain our leading market position as we saw a growth in mobile revenue and the number of subscribers with increases to 38% and 37% respectively. In addition, we are optimistic about the number of our postpaid subscribers, which has increased for 9 months in a row. This demonstrates our success in both existing subscriber retention and new subscriber acquisition, especially as a result of our back-to-school initiatives.

Regarding overall mobile performance, we are pleased to experience the smallest amount of decrease in mobile service revenue in comparison to our peers quarter-over-quarter. This was mainly due to our efforts in guiding subscribers to adopt higher price plans. Excluding ARPU dilution resulting from IoT subscription, we saw our postpaid ARPU increase slightly quarter-over-quarter. As the iPhone 12 rolls out in October, we expect that the bundled subscription at a higher price point will continue to enhance the overall ARPU.

Please turn to Slide 6 for an update on our broadband business in the third quarter. During the quarter, we were pleased by the ongoing ARPU uplift in our broadband business, which reflects our success in migrating subscribers to adopt higher speed services by providing attractive packages which bundle multiple home-centric applications. The number of subscription that signed up for connection speeds of 300 megabits per second or higher increased by 80% year-over-year, while VPN circuit revenue contributions from enterprise customers grew as well. Thus we are confident that we will maintain the overall upward trend in our broadband business, despite the ongoing decline in the number of low-speed subscribers quarter-over-quarter.

Slide 7 demonstrates our MOD business performance. In the third quarter of 2020, our MOD/IPTV platform continued to be the largest video platform in Taiwan and our business remained relatively resilient amid a growing market share. Subscription momentum decelerated due to a lack in popular sports events. However, we continued to drive ARPU growth by offering popular OTT services such as Netflix and Hami Video. In addition, we continued to sign upsell in our tiered-pricing channel packages and digital convergence packages. Overall MOD revenue in the third quarter increased slightly by 0.4% year-over-year.

Moving forward, we will continue to differentiate our products by enriching 4K content. We also expect the upcoming Tokyo Olympic Games to further drive MOD subscription and revenue by attracting subscribers with exclusive AR and VR viewing experiences.

Please turn to Slide 8 for an update on our ICT business. In the third quarter of 2020, overall ICT project revenue increased by 85% year-over-year due to revenue recognition of large projects in regards to solar farm building, smart schools, and COVID-19 pandemic. In addition, we continued to see an increase in overall ICT streaming revenue for several quarters, which we believe will further enhance our ICT revenue growth and stability.

We are also glad to see positive great results from our emerging ICT services. In the third quarter of 2020, IDC revenue increased by 8.8% year-over-year and we saw increasing occupancy in our highest-rated Banqiao IDC with strong potential demand, which has driven us to work on our next business expansion. Cloud revenue increased in terms of both project revenue and streaming revenue, which resulted in a 7.7% growth year-over-year. Information security revenue increased 19.2% year-over-year.

To further enhance our ICT business, we will continue to leverage our cutting-edge technologies to acquire 5G related opportunities, and continue to collaborate with our partners as we expand market share and profitability to strengthen overall performance in every sector.

At this time, I would like to turn the call over to Vincent, who will review our financial results.

[Vincent Y.S. Chen, executive]

Thank you, President Kuo. Good afternoon, everyone. Thank you for joining us. This is Vincent and it is my pleasure to meet you all. Now let me go through Q3 financial results with you.

So now let's look at Page 10 where we present the summary of our financial performance in 2020 Q3. As you can see, compared with Q3 2019, we had a very good quarter. Revenue increased by 2.6%. Income from operations and net income were up by 7.1% and 3.2% respectively. Earnings per share increased to 1.08 from 1.04, which is about a 3.2% increase. EBITDA and EBITDA margin also increased relative to same quarter from last year.

On Page 11, we provide a breakdown of revenue by business segments. In spite of weak revenues from handset sales, voice, and mobile services as a result of tense competition and the impact of COVID-19, our revenue increased by 2.6% on a year-over-year basis. The growth was mainly attributable to the increase of our ICT project revenue.

And now let's move to Slide 12. So from the table, we can see operating costs and expenses in Q3 increased by TWD 0.91 billion or 2.2% year-over-year. This was mainly due to the higher ICT project costs, which offset lower cost of goods sold and interconnection costs.

So on Slide 13, it shows that cash flows from operating activities for the Q3 2020 increased by TWD 0.77 billion or 3.9% compared to same quarter in prior year. This was primarily driven by an increase in the collection of accounts receivables. As of September 30, 2020, the balance of cash and cash equivalents was TWD 17.71 billion, a decrease of TWD 6.36 billion. This is about 26.4% relative to Q3 2019. The decline was primarily attributable to concession fee payment from the 5G frequency spectrum auction.

On Page 14, the table shows our financial results in comparison with our forecasts. So as you can see for Q3 2020, our performance measures including income from operations, net income EPS, EBITDA and EBITDA margin, all met and beat our forecasts. Revenue was lower than expected, which was attributed to weaker handset sales and voice mobile services revenue.

Okay. So now let's look at CapEx on Page 15. Our budget for CapEx in 2020 is TWD 30.7 billion. Since we launched our 5G services in late June, we have been making capital investments in connection to 5G networks. We expect the actual capital expenditure will remain the same by the end of the year and as a result of our efforts on precision, construction and procurement enhancement.

Thank you for your time. Now I 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 government subsidies, you mentioned for 5G rollout. Are you able to quantify how much those subsidies might be, you think? And the second one is on the improvement in the postpaid ARPU. What drives that, please? Is that early 5G or the stabilization in competition or perhaps stabilization in voices? It's just I'd be interested to get your thoughts on that.

[Vincent Y.S. Chen, executive]

The executive budget of TWD 95 billion for overall Forward-looking Infrastructure Development projects, includes TWD 49 billion is permitted to be used to accelerate 5G infrastructure construction, including construction of public infrastructure, bridging this digital divide and promoting digital public services, which are consistent with our 5G planning. Thus, we will actively acquire the subsidies to save our operating costs and expand the vertical application as well as helping mobile market development.

And the Executive Board actually granted to offer TWD 26.5 billion out of that TWD 49 billion to be offered to the telcos for 5G network construction cost subsidies for 5 years from 2021 to 2025. However, the budget is still needed to be approved in the Legislative Yuan in the upcoming session, although we believe the government would encourage telcos to deploy 5G network aggressively to see the 80% of the budget subsidies allocated in the first few years.

And the second question is about the postpaid improvement. We received our ARPU -- we observed the ARPU rate at Q-o-Q even with IoT dilution, which is encouraging. We expect this market to higher -- our customers to higher price packages. Another is the introduction of iPhone 12 and the high-end 5G handset models. And we observe our postpaid ARPU increased Q-o-Q basis, and we expect the momentum could continue.

[Operator]

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

[Jack Hsu, analyst]

I had a few questions -- I have 3 questions. My first question is about the -- we have showed our assets and also show our CapEx guidance, but I am interested in how to proceed the end of the quarter. So we are in the fourth quarter, but we still have easily see our target. We still have almost at least TWD 10 billion CapEx, we have about our CapEx in the fourth quarter. I'm interested in, well, will that be true or what our CapEx target in this year. And do we have any information about our CapEx guidance in next year in 2021? This is my first question.

And so I can still follow-up or continue or I need to break?

[Vincent Y.S. Chen, executive]

Yes, our CapEx in 2021, we will disclose early next year along with the guidance. And this year, our mobile CapEx forecast is TWD 9.8 billion and 75% were spent for 5G. Although we accelerate 5G infrastructure construction, we allocated our resources among segments. And the total CapEx spending this year will remain the same.

[Jack Hsu, analyst]

Okay. So I think so in the fourth quarter, that means wireless -- our wireless CapEx will be a major driver in the fourth quarter, is that correct?

[Vincent Y.S. Chen, executive]

We focused about the whole of our mobile CapEx will be a little bit higher than our initial forecast. But we will re-allocate our resources among segments. So the total CapEx of the company spending will remain the same.

[Jack Hsu, analyst]

Okay, I see. My second question is about -- we see our MOD revenue in the third quarter is a little bit down from second quarter. So I'm interested because we have -- I mean, the MOD revenue has been growth as I remember maybe in the 2018 or 2019. You think in 2020 it seems the revenue which of these segments is between the TWD 900 million and between the TWD 920 million. Do we have any guidance for our MOD revenue in the next year? Or will the MOD revenue will also in this segment or we are careful not big growth in the 2021?

[Vincent Y.S. Chen, executive]

Because the total guidance correspond to 2021, so the -- we expect the MOD revenue will increase next year. But the guidance will be released in early next year.

[Jack Hsu, analyst]

I see. So because it seems due to Olympic Games in the next year, so we can estimate that our MOD revenue will be growth in next year. Is that correct?

[Vincent Y.S. Chen, executive]

Yes. We think MOD revenue will increase in the next year because of -- it will have the Olympic Games.

[Jack Hsu, analyst]

Okay.

[Vincent Y.S. Chen, executive]

That will drive the revenue increase.

[Jack Hsu, analyst]

Okay. And my third question is about what you feel about ARPU especially the path is strong, collaborate with other peers. So do you think their strategy will affect to which segment of our Chunghwa Telecom is in fiber, fixed sign or wireless or will their collaboration will have no impact when we transfer Chunghwa Telecom.

[Shui-Yi Kuo, executive]

In compliance regulations, we are glad to see the cooperation among peers. And we anticipate that will help the telecom industry in Taiwan will be healthy.

[Jack Hsu, analyst]

I mean, their collaboration will put pressure for our ARPU, especially 5G ARPU recently or this year or the next year will have any effect to our ARPU?

[Vincent Y.S. Chen, executive]

Yes. As I mentioned earlier, the ARPU of our mobile service revenue we found that on quarter-over-quarter basis, we see that as we sell a little bit higher than the second quarter.

[Operator]

[Operator Instructions]. The next question is coming from Sara Wang, Morgan Stanley.

[Sara Wang, analyst]

I just have one question on mobile side. So it's glad to see that we have some ARPU recovery in fourth quarter -- in third quarter. So do we have any long-term view? So when do we expect our overall mobile -- for example, mobile service revenue to resume growth?

[Vincent Y.S. Chen, executive]

Well, we observed our postpaid ARPU increased quarter-over-quarter. And we expect the momentum could continue because of the iPhone 12 models will drive the ARPU to have the uplift side. And according to the bundle service revenue, we see that the higher price plan subscriptions are higher than before.

[Operator]

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

[Jack Hsu, analyst]

I have 2 questions about our ARPU and I will ask it -- it's just because I just want to clarify that. So because we see the ARPU has some improvement. But I'm interested because right now, the penetration rate of 5G, it seems it's not has a large portion of our subscribers. So are there any reasons about the improvement of the ARPU. Because right now, it seems that majority of the stock price is related with the 4G. So could you give us the reason why some improvement? This is my first question.

[Vincent Y.S. Chen, executive]

And as I mentioned earlier that we observed our post pay ARPU increase quarter-over-quarter basis, not a year-over-year basis. Yes and in the long term, it seems -- it takes time to have the uplift site to have the ARPU increase.

[Jack Hsu, analyst]

Well, I see it. But I'm interested in, are there any reasons about the ARPU improvement because we can really see for our quarter and the ARPU has grown. It's interesting for the ARPU because with 4G [ lined up ], we see that has stabilized just a little bit period in the fold up for several years. So it will -- this ARPU will grows for a period of time, I mean, maybe in the [4,000 version ]. And is that possible? And the facts of reason for this improvement is only the -- only the growth of IoT subscriber or are there any other reason to make the ARPU grow?

[Angela Tsai, executive]

I missed your question. I think the reason behind why ARPU improved, I think the major reason is that we're leading the customer to subscribe in a higher price package. And how we do that? It's -- I think, first of all, we have a quite handsome amount of mobile spectrum in hand. So we have much better quality mobile network versus our peers. I think that's -- and we have very quality mobile service provider for our customers. So we offer higher, a little bit higher package for customer to renew their contract. So we see this consecutive for 7 months. We see our postpaid customers when they renewed their contract. We can enjoy this increment on to, which is good. So that's why you see -- we can demonstrate this observation for you. The postpaid ARPU have some small increase. And I think that's the major reason for that. Hope this help you to understand that.

[Jack Hsu, analyst]

Okay. And my second question is about ICT revenue, when we see a growth in the third quarter as well. I mean just will the ICT revenue has -- will grow a lot in the fourth quarter or maybe the so postpaid is high in this year.

[Angela Tsai, executive]

I think in the third quarter, ICT revenue performance is pretty good versus last year -- that of last year. And it's actually will go into fourth quarter because we gave pretty good guidance for this year. So expecting this year, hopefully we can reach our guidance in terms of ICT revenue.

[Operator]

The next question is coming from [ Kang-Su Ma ], Fidelity.

[Unknown Analyst]

I have maybe now 2 questions. So first of all, for 5G, it looks ARPU is picking up nicely, right? But how should I think about the margin going forward? Maybe if you could give me an indication how your 5G EBITDA margin and also EBIT margin after G&A expenses will be doing versus 4G. Because what's happening in Mainland China is, ARPU is picking up, but margin is deteriorating, right? Therefore, their profit EBITDA is still down year-over-year. So how should I think about 5G, EBITDA and EBIT margin going forward?

[Vincent Y.S. Chen, executive]

We don't disclose the 5G-only EBITDA margin. And I think in the early stage of the 5G era, we should construct the network first and deploy the service then. So I think in the early stage, we should as quick as possible as we can, to deploy the 5G service. And so with any -- we think the margin in the initial stage of the 5G era will -- it takes time to improve gradually.

[Unknown Analyst]

So is it fair to assume -- so maybe from a revenue perspective, your mobile business may have bottomed out already, right, because ARPU should be improving sequentially. However, when it comes to profit, it still takes time for it to start recovering. Is that -- and in the meantime, your revenue driver is going to be like new ICT businesses such as data center. Is that fair understanding?

[Angela Tsai, executive]

Yes. Of course, on 5G, mobile, I think 5G in the first place, in the first place, we talk about like the existing level, this we would like to see a little bit more migration or faster migration, probably for the -- we allocate a little bit more resources for 5G from 4G. So that part, it's probably some passage. But going along with the popularity of the 5G, we will -- started to decrease the existing level. So I think this is part of operational part of strategy. And ARPU, of course, you're talking about the ARPU increase sequentially. Of course, it depends on the adoption in the upcoming the handset models, especially like iPhone now just coming and we believe with this new model, I think the President just mentioned about currently, we observed the high package, high price package adoption is quite satisfied. So we would like to continue to see that.

[Unknown Analyst]

Okay. And last quick question is, so I asked the same question 3 months ago, but just to confirm. So in Q3, your revenue mix guidance, but your profit was better than guidance, right? Why the margin wasn't better than expected? Is that because of a better revenue mix or a higher-than-expected cost cutting?

[Vincent Y.S. Chen, executive]

Yes. About our third quarter net income, an increase of 6.8% for the same period of last year, mainly due to the increase in income from operations and amortization expenses. One of the reason for the increase in income from operation is the increase in fixed broadband ARPU, which reflects our success in migrating subscribers to adopt higher speed service, as I mentioned earlier. Another reason is that our mobile postpaid ARPU increased slightly quarter-over-quarter, as I mentioned earlier, excluding ARPU dilution resulting from IoT subscription.

In terms of cost and expenses, we will construct precisely to meet demand and multiplying precisely by leveraging our big data capabilities. In addition, personnel expenses decreased due to the adjustment on the basis of our pension provision. Furthermore, the new iPhone's launch delayed led the decrease in mobile handset sales on which margin is lower.

[Operator]

[Operator Instructions]. The next question is coming from Ryan Chen from UBS.

[Ryan Chen;UBS;Analyst, analyst]

Ryan Chen from UBS here. Can I just ask on 5G? I know you have probably not disclosed this number, but can you share the level of 5G ARPU uplift versus the 4G package now? I know some telcos, they are guiding about 5% to 10% ARPU uplift. So I'm not sure about you guys. And related to that, can I also ask if this 5G ARPU uplift is going to rise with the iPhone 12 popularity in Taiwan?

[Angela Tsai, executive]

Yes. I think we do see ARPU uplift from 5G subscription. But I think we will keep it confidential now. It's had some uplift for sure. I feel the -- yes, I think that's our current strategy -- current thinking.

It's likely we just mentioned about the package for 1,399, well, because we just introduced the iPhone 12 Pro and iPhone 12 with some others for just one week. In the first week, we actually observed the 1,399 package adoption actually increased a lot versus last year, the fact of the matter is this package -- this price package subscription. So we're thinking it's -- this is pretty good for -- to help the ARPU injection or overall mobile service revenue injection in the longer term.

[Operator]

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

[Jack Hsu, analyst]

First question is about subsidy for iPhone 12 Pro. So could you give us some color on that, about subsidy for iPhone. This is my first question.

[Vincent Y.S. Chen, executive]

Yes, we mainly allocate our results and resource between 4G and the 5G handsets. And the subsidy level for 5G handsets could be higher to attract people to subscribe higher price plans. At the same time, our 4G handset subsidy may decrease gradually. However, the 5G subsidy will continue to decrease along with the popularity of the 5G service.

[Jack Hsu, analyst]

Okay. But it's in comparison with the iPhone 4G and iPhone 5G, will the subsidy is almost the same or be linked?

[Vincent Y.S. Chen, executive]

The subsidy level for 5G handsets could be higher than 4G because we should attract people to subscribe a high price plan.

[Jack Hsu, analyst]

Okay. I see. And then my second question is about the -- will we change our financial forecast in this year?

[Vincent Y.S. Chen, executive]

We will keep our financial forecast unchanged.

[Operator]

[Operator Instructions]. The next question is coming from Eddie, Citi.

[Eddie Liu, analyst]

I was wondering, regarding the ICT related business already or enterprise related business, is it -- in the third quarter, is it in line or ahead of our expectation? And what's the sales exposure exactly in the third quarter and year-to-date? And so far, how we see recovery from the pandemic in the first half from no matter government or enterprise segment? This is my first question.

[Angela Tsai, executive]

I think it's not really ahead of our expectation. I think in the beginning of this year, we already gave a large number for our ICT project sales. So it's not really ahead of it, okay? But we already -- in the first half, we already mentioned that the large project revenue recognition will be recognized in the second half. The third quarter actually have some coming. And fourth quarter there will be -- even larger number will be there, yes.

[Eddie Liu, analyst]

Okay. And the sales exposure, do you have the numbers?

[Angela Tsai, executive]

Excuse me?

[Eddie Liu, analyst]

The sales exposure for ICT related business?

[Angela Tsai, executive]

I'm sorry, we didn't give individual number for ICT. Sorry.

[Eddie Liu, analyst]

Okay. Sure, sure. And my second question is that for the 5G penetration. I know you -- this is still be confidential right now. But South Korea reaching 10% in 1 year. And how do we see Taiwan? Or how do you see from your business angle about Taiwan's penetration so far?

[Shui-Yi Kuo, executive]

Yes, we are gain, although 300,000 subscribers and by the end of this year.

[Angela Tsai, executive]

To start with, we're really targeting, last quarter, we mentioned about 300,000 5G subscribers by end of this year, right? But at this point, we believe the number -- the real number should exceed 300,000. We didn't give you another guidance for that.

[Operator]

The next question is coming from Kang-Su Ma from Fidelity.

[Unknown Analyst]

Just a quick follow-up on that. So how do you see your 5G market share? So maybe just too early to tell, you may not have that data yet, but do you think you're maintaining your mobile subscriber market share in the 5G or losing or gaining if you -- and are you happy with the penetration?

[Angela Tsai, executive]

Because NCC our regulator doesn't disclose any 5G market share, so we don't really know it. But of course, you're asking about are we happy with the penetration? I didn't know. So we understand that 5G migration actually now is kind of different from that of the 4G era. So I think it's so far so good, yes.

[Unknown Analyst]

Okay. Yes. Do you feel the competitive -- defined versus like 4G? Because APT announced the pricing but it's pretty much the same as big 3, right, when it comes to unlimited plants. So that means the only guy who is aggressive in the market out there is Taiwan Star, right? So in 4G, there were 2 price aggressors versus in 5G there is only one price aggressor. So do you feel that things can be different or not quite?

[Shui-Yi Kuo, executive]

Well, I think on the 5G market is totally different from the 4G market because there will exist more vertical applications and it takes more strategic partners to work together to deploy the 5G services. And so I think it's totally different from 4G service.

[Operator]

If there is no further questions, I will turn it back over to President Kuo. Mr. Kuo, please go ahead.

[Shui-Yi Kuo, executive]

Thank you for your participation. Goodbye, everyone.

[Operator]

Thank you. 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.