Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Analysis

Chunghwa Telecom Reports Record Revenue and Strategic Growth Initiatives

In Q3 2024, Chunghwa Telecom achieved a record revenue of TWD 55 billion, representing a 3.6% year-over-year increase, bolstered by its ICT business. Despite a slight decline in net income by 1%, driven by rising operational costs, the company maintains a strong EBITDA margin. Effective investments in 5G and rising subscriptions in mobile services fueled growth, with a notable 43% increase in 5G uptake. The enterprise segment's revenue surged by 22% year-over-year, further emphasizing Chunghwa's strategic focus on high-margin services. Additionally, free cash flow grew by 8.7%, enhancing financial flexibility for future opportunities.

Setting the Stage for Growth

Chunghwa Telecom's third-quarter earnings call reflects a company poised for growth despite certain headwinds. The management highlighted a remarkable leap in revenue, surpassing TWD 55 billion—an increase of 3.6% year-over-year, marking the highest figure seen in seven years. Significant drivers of this uptick stemmed from the burgeoning ICT (Information and Communications Technology) segment, signaling robust demand for tech-driven services. However, net income faced slight declines, indicating challenges ahead. The management aims to mitigate these through strategic investments in human capital and essential content expenditures.

Financial Health and Sustainability

Despite recording a decline of 1% in net income, Chunghwa Telecom emphasized that excluding last year's one-time government compensation, net income growth remains healthy. Earnings per share for the quarter were reported at TWD 1.16, reflecting the operational vigor of core functions. Notably, the EBITDA margin remained stable, reinforcing the company’s commitment to value creation. The balance sheet also illustrated prudence, with total liabilities down 4.7% compared to the previous year, maintaining a debt ratio that reflects financial stability—an essential factor for investors considering debt exposure.

Embracing Innovation: ICT and Network Development

The company reported a 22% year-over-year jump in ICT revenue, alongside notable advances in mobile and broadband services. Chunghwa Telecom maintained its leadership in 5G penetration, which has now reached a 43% increase, contributing to a stable growth in postpaid subscriber numbers. In the rapidly changing landscape of telecom, the company’s successful rollout of innovative services, including collaborations with leading tech firms like NTT Corporation, underscores a strong commitment to cutting-edge technology, enhancing prospects for sustained future growth.

Strategic Investments in Revenue Streams

Management outlined a multi-pronged strategy aimed at enhancing profitability and optimizing service offerings. Specific areas include a focus on high-margin products, operational efficiency improvements using AI-driven solutions, and continued investment in customer loyalty programs. 65% year-over-year growth was reported in bundled service packages familiar to consumers, showcasing effective cross-selling strategies. Such initiatives are expected to not only drive revenue but also strengthen customer retention in a competitive market.

Challenges and Opportunities Ahead

Despite impressive revenue growth in several sectors, Chunghwa Telecom faced increased operational expenditures, influenced by rising electricity costs and higher employee compensation—elements the company describes as strategic to ensure long-term success and service quality. The management is keenly aware of these challenges yet remains committed to fostering innovation that can offset these costs. Guidance for the upcoming quarters includes plans to achieve continued revenue alignment with forecasts following a solid start this year.

Market Position and Future Outlook

Chunghwa Telecom's efforts to expand internationally, coupled with solid growth in its existing markets, position it robustly for future endeavors. The segments that showed consistent growth included cloud and ICT solutions, bolstered by recent expansions into the European market. The management's commitment to environmental sustainability, including net-zero greenhouse gas emissions targets by 2045, aligns well with global trends and could enhance its appeal to socially conscious investors. Forward-looking, Chunghwa Telecom anticipates a positive growth trajectory underpinned by its strategic initiatives and innovative service offerings.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's Third Quarter 2024 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.

And now I would like to turn it over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms. Tsai, please go ahead.

[Angela Tsai, executive]

Thank you. I'm Angela Tsai, Assistant Vice President of the Finance Department for Chunghwa Telecom. Welcome to our third quarter 2024 results conference call. Joining me on the call today are Rong-Shy Lin, our recently appointed President; and Audrey Hsu, our new Chief Financial Officer. As usual, I would like to remind everyone to read our disclaimers and note the related forward-looking statements on Page 2.

Before I turn the call over to President Lin, I would like to briefly introduce our newly appointed President and CFO. President Rong-Shy Lin hold a PhD degree in Computer Science from National Chiao Tung University and has previously served as our Chief Business Officer, Chief Technology Officer and Chief Information Security Officer possessing comprehensive experience in business development and technology advancements in the telecom industry. Our new CFO, Audrey Hsu holds a PhD degree in accounting and finance from Lancaster University and was serving as Professor of Accounting at the National Taiwan University. She was associating of International Affairs and Director of GMB of National Taiwan University. We warmly welcome our new executives, President Lin and Dr. Hsu to the earnings conference.

And now I will turn the call over to President Lin for the business optics, who will be followed by Dr. Hsu for the financial highlights. Afterwards, we will move on to the Q&A session. President Lin, please go ahead.

[Unknown Executive]

Thank you, Angela, and hello, everyone. Welcome to our third quarter 2024 Results Conference Call. To begin, I would like to extend a warm welcome from [indiscernible] to our new CFO, Audrey Hsu. We are happy to have her join our executive team and participated in today's call. And now please flip to Page 3 for our recent strategic achievements.

In the third quarter, we are pleased to announce our continued success in expanding our lead in Taiwan's mobile market. According to the regulator of Communications in Taiwan, Chunghwa Telecoms blended the 5G penetration in the third quarter remained the highest among peers which has positively contributed to our continued growth in our postpaid subscriber numbers from this year. We are [indiscernible] Chunghwa Telecom continuing to outpass the industry in terms of subscribers growth. In addition, we achieved a new single quarter revenue record for the third quarter, the highest in the last 7 years. Meanwhile, we are especially pleased to see our total ICT revenue, which is third quarter high since 2022 when we transformed from our organization to a customer-centric structure.

Our proven success and effective strategy has driven our continued ICT industry leadership. Furthermore, putting us further ahead of our competitor. Going forward, we are confident in expanding our industry leader. Another area we are continuously developed is advanced networks and technologies. In the third quarter, we are proud to announce our successful collaboration with NTT Corporation in launching the world's first of photonic overtiming communication link between Taiwan and Japan. This delivers high-speed connectivity with ultra-low latency and power consumption perfectly shooted for the AI-driven future.

In addition, as the exclusive [indiscernible], we are happy to report that the coverage in Taiwan has reached 90% in the third quarter and expected to achieve 100% in the fourth quarter. This expansion enhances our network resilience and the contributors to related revenue. Furthermore, we are making progress in envisioning our [ core ] solution to liquid crude solution to support NVIDIA AI servers which will better enhance IDC's power usage effectiveness and also contributed to the offering of GPU as services. Lastly, in our true of ESG best practice, I am pleased to report that we have officially reviewed a recipient, SBTI verification for his next 0 greenhouse gas emission target. This achievement makes us the first operator in Taiwan to commit to realizing net 0 by 2045, ahead of the global subside 2050 road map.

In addition, we obtained a carbon footprint verification for all of our service centers nationwide, setting us apart as the only telecom company in Taiwan to achieve this milestone. Now let's move on to the business overview of the third quarter of 2024. We are pleased to report another quarter of market share gains in the third quarter of 2024. Our overall subscriber share of Taiwan's mobile market reached to 37.8%, a stable year-over-year increase we are even more excited to see our industry #1 5G subscriber market share, which reached to 38.8% better than that of overall mobile subscriber share.

In addition, our revenue share remained over 40%, [indiscernible] 40.3% as of the end of September. Continuously our subscriber shares to reflect our LC growth. As our postpaid subscriber net adds continued to outperform peers, along with growing 5G migration and steady international roaming contributions. Our mobile service revenue recorded a 2% year-over-year increase maintaining growth for 14 consecutive quarters. In the third quarter, we are glad to see the average [indiscernible] uplift from 5G migration, exhibit a 43% uptick, maintaining healthy momentum.

Let's move on to the Slide 6 for an update of our outperforming fixed broadband business. In the third quarter, we expanded our cross tier upgrade promotion package to include 1 gigabit per second service offering. As a result, our subscriber net adds of 1 gigabit per second service doubled during this quarter. Moreover, the number of subscribers with speed of 300 megabits per second and above, increased by 20% year-over-year, maintaining double-digit growth and the total number of fixed broadband subscribers also rose. Thanks to our successful speed upgrade strategy. Our fixed broadband revenue and ARPU continued to increase by 3.4% and 1.5% over the year, respectively, effectively contributing to our overall performance.

Now let's get a closer look at the performance of our business group. Page 8 presents our performance of our Consumer business group. In the third quarter, total CPG revenue increased by 2.1% year-over-year driven by several factors, including the increase of mobile service revenue due to 5G migration and is in postpaid subscribers. The steady growth of fixed broadband revenue and the increase of OTT revenue generated from our exclusive forecast of the Paris Olympic Games. In addition, the launch of iPhone 16 series during this quarter further dropped up the sales revenue by 1.3%, and we anticipate that this momentum will continue into the fourth quarter. Although CBG delivered a positive revenue growth in the third quarter is income before tax slightly decreased year-over-year, mainly due to the onetime forecasting rights fee of the Paris Olympic Games.

Slide 9 further illustrated our CBG highlights. In the third quarter, our multiple play packages which combine mobile, fixed broadband and WiFi services altogether, continuing to deliver outstanding year-over-year growth of 65%, thanks to our high-quality networks. In terms of applications, our video business demonstrated significant growth due to our exclusive broadcast of the Paris Olympic games during this quarter, subscription to our video platform comprising of MOD and Hami video successfully succeeded 3 million, maintaining the largest video platform in Taiwan compared to the total Olympic Games, new signs up for Hami Video increased 60%, while advertising revenue more than doubled. Overall, video business related revenue in the third quarter delivered double-digit year-over-year growth, highlighting the success of our content investment. Other than video applications, our consumer cybersecurity subscription increased by 16% year-over-year in the third quarter.

Please turn to Slide 10 for an overview of our Enterprise business group performance. In the third quarter, EBG's total revenue increased by 5.9% year-over-year, mainly driven by our robust growth in ICT business which saw a 22% year-over-year increase in revenue, mainly fueled by the strong performance of our emerging services. In terms of EBG coal services, although we see the ongoing 5G migration and the fixed broadband speed upgrades provided some positive momentum to drive up mobile data revenue and broadband data communication and the assets revenue. If it was not enough to fully offset the revenue decline of mobile voice and fixed line voice in the third quarter. Constantly, the decline of voice services also resulted in the year-over-year decrease of is income before tax.

Slide 11 provides a detailed picture of our enterprise business highlights. We are excited to report that our ICT emerging business outperformed in the third quarter, with revenue increasing by 30% year-over-year. All our major applications demonstrated that strong double-digit and even triple-digit year-over-year growth. Notably, 5G private network revenue search due to the 5G [ ORAN ] project, while Big Data analysis revenue doubled, thanks to smart government initiatives. For our IoT cloud and IDC business, we are delighted to see year-over-year revenue increase of 44%, 24% and 21%, respectively. The gains were mainly due to the completion of AIoT projects in smart energy, smart surveillance and smart transportation as well as the continued growth in recurring revenues cloud and IDC business.

Cybersecurity revenue also achieved a 24% growth on year, making the 11 consecutive quarters of year-over-year increase. It is worth noting that in the third quarter, we successfully developed the first 5G private network backpack, a smaller and lighter 5G private network, capable of receiving satellite signals are quite useful in the remote area and fully complementing our overall network resilience. Additionally, we secured a flagship project to help a leading franchise franchised retail in Taiwan to integrate network and equipment and offer services such as surveillance cybersecurity and cloud solutions, et cetera. We value not only the secure revenues, but also the recurring contributions from maintenance and consulting services of the world.

Lastly, in this quarter, we won another AMI smart energy construction project and further strengthened our position as the leading AMI project operator with the largest market share of AMI services we are well positioned to develop and deliver related maintenance and application service going forward.

Slide 12 illustrates our international business performance. In the third quarter, IBG's total revenue and income before tax increased year-over-year by 1.4% and 11%, respectively, mainly due to the vibrant demand for cloud and ICT solution in the international as well as contributions from our Japan subsidiary. Excitingly, our European subsidiary in Germany began operations on July. This milestone underscores our efforts in the European market. Our strategy is to collaborate with European telecom operators and ICT service provider to promptly offer ICT solution to both Taiwanese and the European enterprise. We have already secured ICT projects from the high-tech industry in the European market. In August, we also joined the IoT World Alliance, opening up potential opportunities in the Internet of vehicles and other translational IoT projects.

Now I would like to turn the call to Audrey for our financial highlights.

[Unknown Executive]

Thank you, President. Good afternoon, everyone. I'm pleased to share a summary of our financial results for the third quarter of 2024. Starting with our income statement highlights on Page 14. In the first 2 columns, you will see that for the third quarter of 2024, our revenue exceeds TWD 55 billion marking a 7-year high for this period. This is a 3.6% increase from the same quarter last year. This was primarily driven by the significant growth in our ICT business. Our income from operations and net income saw slight declines of 0.8% and 1%, respectively. It is important to note that these shifts were largely due to 2 main factors.

First, higher main power costs have impacted our income. This expense reflects our strategic investment this year in maintaining a skill and motivated workforce which is essential for sustaining our operational momentum and driving future growth. Second, we experienced increased broadcast right fees for the Olympic Games. Secure valuable content is a critical step in enhancing our service offerings and supporting our long-term growth objectives. Despite this higher cost, our earnings per share for the quarter stood at 1.16, showcasing the underlying strength of our core operations.

Now, we moved to column 5 to 7 of the table. You look at the first 9 months of 2024. Revenue grew by 2.1% year-over-year driven by continued strong performance in ICT, mobile and broadband services. Income from operations and net income decreased by 1.9% and 1.5% year-over-year mainly due to the high base from last year's onetime government compensation related to ST2 satellite. Additionally, higher manpower, which were also noted earlier, underscore our investment in maintaining a talented workforce. And as you all know, utility costs have also raised the notably impacted by the Taiwan government's decision in April to raise electricity price. The increase has contributed to our higher operational expense.

If we exclude the onetime government compensation related to satellite last year, you will find that the net income growth remains positive year-over-year underscoring the healthy momentum of our core and ICT operations. The continued growth in revenue reaffirms the importance of strategic investment in future growth such as investing in our employees and expanding content offerings. For the first 9 months, our earnings per share reached 3.64 and the EBITDA margin remained stable demonstrating our resilience and commitment to long-term value creation.

Now moving on to Page 15 for a review of our balance sheet highlights. First, as of September 30, 2024, total assets decreased by 2.7% compared to the year-end of 2023. The decrease was largely a trade to the decline in property, plant and equipment. Next, total liability decreased by 4.7% relative to the year end of 2023 primarily due to the decrease in accounts payable accrual and current tax liability. Additionally, our debt ratio continued to reflect a strong financial position. The debt ratio decreased slightly and net debt over EBITDA remains at 0. This conservative debt position aligns with our company policy of minimizing financial risk and ensuring financial flexibility. A low debt level not only underscores our commitment to fiscal responsibility, but also enhancing our resilience against economic uncertainties position us for long-term value creation.

So turning to -- now let's turn to Page 16, which provides the summary of our cash flows. First, cash flow from operating activities saw a slight decrease by 0.3% year-over-year. This was primarily due to the timing of the income mix payment of with a significant portion of income tax being deferred to the fourth quarter of last year. So this is purely because of this tax issue. And if we go to the capital expenditure, CapEx, it declined by 15.1% year-over-year, reflecting our strategic focus on disciplining spending and prioritization of high-impact investment. The reduction is part of our approach to optimize capital allocation, ensuring that resources are directed towards projects that yield the highest return.

Notable, the free cash flow increased by 8.7% compared to the previous year, highlighting the strength of our operational efficiency and effective financial management. The robust free cash flow enhancing our financial flexibility, enabling us to pursue strategic growth opportunities and it can support shareholder return and reinforce our long-term sustainability.

Now let's move on to Page 17. Let's turn to the table summarize our operating performance relative to our guidance. In the third quarter of 2024, revenue closely met our target for the period. Key performance indicators, including income from operations, net income and EBITDA were all in line with our forecast, showcasing our ability to achieve consistent results. Looking at the first 9 months of 2024, revenue remained aligned with our expectations. Importantly, income from operations, net income, EBITDA and EBITDA margin outperformed our guidance. This stronger-than-expected results were driven by steady growth in our core business and improved profitability in our ICT operations, reinforcing the effect of our strategic initiatives. So now I conclude my financial review for the third quarter and our prepared remarks. So thank you for your attention, and we are now pleased to open the conference call for questions.

[Operator]

[Operator Instructions] Our first question will be coming from Sara Wang, UBS.

[Xinyi Wang, analyst]

So actually, I have 2 questions. First is that I understand that the high base last year from [indiscernible] subsidy and also higher electricity actually put pressure on our net profit growth. But I just want to be more specific that why profit before tax declined for consumer and enterprise segments, any other like sector-specific reasons? This is my first question. And then second is on the Enterprise segment. The emerging enterprise application revenue is growing quite fast. And then what's the contribution to the total enterprise revenue?

[Unknown Executive]

So for your first question, I think if my answer is correct, you asked whether by the profit reduce and revenue increase. As I mentioned that there are a couple of reasons. The first reason, I mean that I think the compensation of the satellite is the main -- one of the main reasons. And other than that, I think, as you know that our policy this year that we -- the corporate have a new decision to improve the talent pool. So the employee cost increased dramatically. So it's across all segments. So this is the second main factors.

And the third factor, as you already know, that electricity costs is a major portion in our company, particularly in like data center or determine a lot of the -- across the enterprise segment. I think that the utility cost also takes -- compared to last year, I think it also represents a [indiscernible] portion. So -- and the fourth one is that I think for Consumer segment, Olympics video content also represent another reason that as I mentioned that the investment in the video content is also our company's strategic purpose. And so as you know, that most of the long-term investments will end up in expense, in income statements.

So that is the reason that when you read the income statement, you may see the profit reduced a bit but to us, we do not take it as a low expense. We take it as a strategic investment for the future. Thank you.

[Xinyi Wang, analyst]

Got it. Very clear. And then just a quick question, like the emerging enterprise application revenue, like what's the percentage contribution to total enterprise revenue?

[Unknown Executive]

About the enterprise emerging application revenue and the total ICT revenue, we do this separately announced the percentage of our enterprise emerging application revenues versus the ISP total revenue.

[Operator]

[Operator Instructions]

[Unknown Executive]

I think I can present a question we received from our platform. The question is about that how the company can -- what's the company's strategy to increase the revenue or the revenue increase strategy for going forward. And another question is about the net profit decreased the 3 sectors. About the sectors, the net profit decreased. The reason for the decrease for the CPG and EBG, I think our CFO just answered the question. So now we will discuss our revenue strategy revenue increase strategy.

I think there are a couple of -- I think, again, that as one of the purpose of the cooperation is to maximize shareholder return. And I believe that the profit is always the fundamental main purpose. So our executive team have already have worked hard to focus on a couple of the areas to improve our profits in the future. So the number one is that we try to focus more on high-margin products or service. So in the future, that we will try to discontinue or scaling back low-margin offerings, which reduced revenue but improved profits. And so this is one area where we will try to focus, and we will exit from nonprofit markets or customer segments.

And secondly, as you know that our -- the size of the company is quite huge. So streamline operation is also an important strategy for our new CEO and President. So our company will undertake an efforts to improve operational efficiency such as automating process incorporating AI renegotiated supplier contract, et cetera. So try to streamline operation is quite important to help us to improve our profitability. And third, for the revenue part, as you can see for our mobile segment, we keep going -- continuing to grow year-on-year. And one main reason is because we launched a couple of the programs something like points and rewards redemption. And as you see, loyalty points is quite important to allow customers to reverse over time. And this can often be redeemed for discounts on their bills, and this can help improve the customers -- users.

And second, we will have a lot of the bundling package. Many loyalty program will bundle additional services such as streaming subscription music, cloud storage or even IoT device into a single plan to create more value for the customer. And third, as you know that we have a lot of -- we launched the iPhone 16. So the discounts and subsidies on 5G device. So we believe that there is still a big potential for CHG to increase the 5G [ generation ] rate. So if we continue to implement the strategy in this loyalty program or the bonder service, we believe that we can keep increased revenue and also [indiscernible]

[Operator]

[Operator Instructions]

[Unknown Executive]

There is another question about what kind of the low profits of the service that will be launched. As you know, that most of the iPhone sales revenue is low -- is negative profit, right? Because it is under the bundle program because one of the main purpose is not just it is under the bundle the program. So it is not -- you may see -- so it is not really low profit. I mean that under the IFRS 15. We look at on the contract basis. We do not look at on the separate basis. So if we don't really launch any low profit. So what I want to emphasize is that for most of our Enterprise segment and consumer segments, we will try to streamline operations and to see if there is any product that we can improve the operations and to reduce the cost, and we believe there is a lot of potential.

[Operator]

[Operator Instructions] If there are no further questions, I will turn it back over to President Lin. Thank you.

[Unknown Executive]

Okay. Thank you very much for your participation. Thank you very much. See you.

[Operator]

Thank you, President Lin. And ladies and gentlemen, we 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. Thank you, and goodbye.