Chunghwa Telecom Co Ltd

TWSE:2412

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's Fourth Quarter 2019 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 would 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 fourth quarter 2019 results conference call.

Joining me on the call today are Harrison Kuo, our President and Chief Financial Officer; and Fu-Fu Shen, the Assistant Vice President of Public Affairs Department.

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.

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

[Shui-Yi Kuo, executive]

Thank you, Angela, and hello, everyone. Welcome to our fourth quarter 2019 earnings results call.

During the fourth quarter of 2019, we were pleased that we maintained our leading market position as we experienced the mobile revenue and the subscriber growth increased to 36.5% and 37.9%, respectively, which we believe provides a solid foundation for the upcoming 5G service deployment.

As the first phase of 5G spectrum auction has concluded, though the final price was beyond our expectation. We intend to focus on our efforts on the launch of 5G service in the third quarter of 2020.

In our broadband business, we continued to experience a modest subscriber loss during the quarter mainly due to ongoing mobile Internet substitution and the cable competition. However, we are still encouraged that existing broadband subscribers continue to migrate to higher-speed service resulting in an incremental increase to our ARPU.

For the fourth quarter, our number of MOD subscribers were 2.5 -- 2.08 million, and the revenue also increased year-over-year, attributable to our successful strategy of providing various better quality content. In addition, since we rolled out tiered pricing channel packages for our subscribers to freely choose channels this past September, we were pleased to report that our highest-priced package remained the most popular. We believe this will help strengthen our overall MOD business performance in 2020.

In our ICT business, both enterprise customer revenue and the ICT revenue continued to increase year-over-year due to our new business deployment efforts. Additionally, our focus on enhancing ICT project margin by increasing sales developed services and strengthening our large project management capabilities also paid off in 2019. As our portion of enterprise customer revenue continued to increase, we will also continue this strategy in 2020 to further drive overall ICT performance.

Now allow me to walk you through each of our business lines.

On Slide 5 is some updates on our mobile business. In the fourth quarter, our IoT subscribers continued to increase. And our back-to-school initiative rolled out over the summer holidays continued to add new bundled subscriptions at higher ARPU levels than blended rate. However, we experienced some postpaid customer loss as a result of some Double 11 promotion activities undertaken by our peers.

As many people anticipated the 5G service rollout in 2020, we also expect to review our brand-new user experience and innovative services for subscribers to appreciate the benefits and the value of 5G service offering going forward.

Slide 6 demonstrates the performance of our broadband business. In the fourth quarter of 2019, the number of total broadband subscribers decreased slightly year-over-year. However, we were delighted to experience a continued migration of our broadband subscribers to higher-speed fiber services, which augmented ARPU growth by 8% compared to the prior year period. Our number of users signing up for plans with connection speeds of 100 megabits per second or higher increased by 11.3% to 1.58 million from the prior year. And the number of subscribers signing up for connection speeds of 300 megabits per second or higher increased by 103% from the prior year.

Going forward, we intend to maintain our strategy of migrating customers to higher-speed services to capture incremental ARPU and to mitigate the impact of mobile Internet substitution and cable competition. We will also focus on developing smart home-related services, leverage marketing tools such as Hami Point and package more popular brands to secure customers and enhance overall broadband revenue.

Moving on to Slide 7. We are pleased to report the robust performance in our IPTV business. In the fourth quarter, our IPTV/MOD platform remained the largest video platform in Taiwan. Our total number of subscribers reached to 2.08 million, representing a 3.6% increase year-over-year.

We remain confident in the trajectory of our IPTV business and measured by subscribers and revenue growth. During the quarter, overall, IPTV revenue grew by 10.6% year-over-year, and the VOD revenue continued to increase in spite of this small decrease in SVOD subscriptions.

Channel subscription revenue continued to increase, thanks to free-to-choose channel packages that continued to result in customer upsells as well as enhance overall ARPU.

Going forward, we plan to leverage popular sports events such as the upcoming Tokyo Olympic Games this summer to further boost subscription and the revenue and the expected advertising revenue to grow based on the enlarging subscription base.

Please turn to Slide 8 for an update of our ICT initiatives. In the fourth quarter of 2019, overall ICT revenue increased year-over-year due to the recognition of revenue from some large projects regarding smart surveillance, data center and big data analysis. The accumulated revenue for year 2019 also got back to the growth trajectory on a year-over-year comparison basis, which we expect to grow further in 2020.

We continued our focus on expanding our in-house developed services and solutions, including IDC, information security, cloud services and big data analysis, to enhance our project margin and the individual segment market share. We were also delighted that the streaming revenue coming from these services continued to grow and were a meaningful contributor to our consolidated revenue in 2019. We expect similar growth trend of ICT business to continue in 2020.

Going forward, we intend to further specialize the technologies and the Fintech capabilities in the areas of AI and blockchain, among others, to maximize our potential in project acquisitions in selected industry verticals, notably the financial industry.

At this point, I would like to turn the call over to Fu-Fu to review our financial results.

[Fu-Fu Shen, executive]

Thank you for joining our call today. I would like to review our financial results in detail, beginning on Slide 10. Please note that all financial comparisons are made on a year-over-year basis, unless otherwise stated.

Slide 10 provides you with highlights from our income statement. For the fourth quarter of 2019, total revenues decreased by 0.5%, and operating cost/expenses decreased by 0.6% year-over-year. Our income from operations decreased by 2.4%, and the net income decreased by 7.3% year-over-year. In addition, EBITDA margin increased 120 basis points to 34% in the fourth quarter from 32.8% in the same period of 2018.

Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the fourth quarter 2019 was mainly due to a decrease in fixed voice revenue, mobile service revenue and handset sales revenue that was offset by an increase in ICT revenue. The decrease in mobile service revenue was primarily a result of market competition and VoIP substitution.

Moving on to Slide 12. Our operating cost/expenses decreased by TWD 0.26 billion or 0.6% year-over-year in the fourth quarter mainly due to lower interconnection costs.

Slide 13 shows that cash flow from operating activities for the fourth quarter of 2019 increased by TWD 3.39 billion or 16.8% compared to the same period of '18. This was mainly due to the decrease of accounts receivable. As of December 31, 2019, we had TWD 34.07 billion of cash and cash equivalents.

Slide 14 demonstrates our operating results compared to our financial guidance. In the fourth quarter of 2019, our revenue, operating income, net income and EPS were lower than our fourth quarter guidance.

Now moving on to Slide 15, which shows our 2020 consolidated guidance. Our total revenue for 2020 is expected to increase by 3.2% -- I'm sorry, by 3.2% to 3.7% to TWD 214.10 billion to TWD 215.29 billion. The increase in revenue is expected to come from the expansion of enterprise ICT business, Internet value-added service, handset sales and MOD service, which is an offset to the decrease in voice revenue and mobile service revenue. Operating cost/expenses for 2020 are expected to increase by 5.3% to 5.5% to TWD 175.51 billion to TWD 175.83 billion due to the increase in ICT project costs, cost of goods sold and depreciation expense in 5G equipment and amortization expense for 5G transition. Given this projection, we expect a 1% to 5.7% year-over-year decrease in EPS.

Lastly, Slide 16. We are budgeting CapEx of TWD 30.7 billion for 2020. The anticipated CapEx increase in 2020 year-over-year is mainly due to our focusing on 5G network deployment and accelerating of retiring traditional PSTN to IP-based network.

Thank you for your time. We would now like to open the line for questions.

[Operator]

[Operator Instructions] Our first question is coming from Peter Milliken, Deutsche Bank.

[Peter Milliken, analyst]

My question is about the auction. The pricing got very high. Why do you think it got so hot? For example, does the #4 and 5 see this as a life and death issue, which it doesn't need to be given the increasing flexibility around sharing of spectrum?

And the second question is, is there anything on the time line of the NCC for further spectrum, say, 4,500 or 4,600 megahertz?

[Fu-Fu Shen, executive]

For your first question about why the auction price for the first stage went so high, I think we really have no comment on this, okay? As for the time line for the rest of the year, the spectrum, currently, we don't have any idea at the moment. Sorry.

[Operator]

The next question is coming from Neale Anderson, HSBC.

[Neale Anderson, analyst]

I have a question on the guidance and specifically the cost guidance. So now it's -- very roughly, it's about TWD 2 billion higher than the increase in revenues that you're looking for, for this year. Now it looks as though about TWD 1 billion of that might be related to the amortization depending on when you launch. But can you give more guidance as to where the other cost increase comes from, please? I would have thought that increase in cost of goods sold should be matched by revenue, so I'm intrigued as to where the rest of the increase in costs comes from.

[Fu-Fu Shen, executive]

Basically now, the renewal for our guidance for this year we -- you see that the revenue will increase for several percentage, but the bottom line actually decreased. The reason for that, the increase, the major portion of the increase of the revenue rely on the ICT project -- ICT-related revenue, which means once we have injection for ICT project revenue, we need relatively comparable ICT costs for that. So I think that also answer your question for why we see the increase of the cost, expenses. Hope this answered your question.

[Neale Anderson, analyst]

Yes. So just a little bit more on the ICT margin. So would it be correct to think that in the early stages, say, year 1, maybe year 2 of winning a project, it might be negative -- have a negative impact on margins it would be money-losing at that point, but over the life of the project, you'd expect to come out with a decent margin? Is that the right way to think about it?

[Fu-Fu Shen, executive]

Since this year, we really guided a pretty certain amount of the ICT revenue increase. Part of it come from the onetime government-related project -- ICT project. So that -- the margin, of course, from government project will be relatively low. So that's -- but since that's a onetime. But for us, we still believe this can -- by execution of this kind of project can demonstrate Chunghwa's ICT capability. It's still a good thing to do.

So this -- anyway, any project we accept, we acquire, should be profitable. It's just depending on how low the margin is, but still we got margin, so it won't have any negative impact for sure. Well, of course, the overall margin probably have some drag in that because traditional telecom service margin usually higher.

[Operator]

[Operator Instructions] The next question is coming from Danny Chu, Bank of America.

[Wai Kit Chu, analyst]

I just got 2 quick questions. First, on Slide -- Page 16, you provided us with a CapEx guidance for 2020, and I saw, like I mean, TWD 9.8 billion CapEx for mobile. Within that, how much is specifically for 5G rollout this year? And also related to that is how many 5G base station are we talking about to be deployed this year by the company in 2020. That would be my first question.

And second question is could you help us to better understand this, like I mean, for the consumers, I would assume that, like I mean, for 5G, when you launch the service, you are going to charge the customers again based on how much data they consume. But for the enterprise customers, what kind of business model down the road we should expect Chunghwa will be using to charge the enterprise or the industrial customers using 5G service? Is it also just based purely on how much data they consume? That would be my second question.

[Shui-Yi Kuo, executive]

For 5G pricing, now we will refer to global first movers model. Further 5G application scenarios, our customer demands to create customer value as our goal. However, we all know that 5G application is diversified, but its pricing structure is not comparative to that of 4G.

[Fu-Fu Shen, executive]

As for the CapEx for mobile this year, you mentioned the TWD 9.8 billion. That's for the overall mobile CapEx this year. But roughly like more than 70% will be spent on the 5G network deployment. As for the number of base station, I think the regulator have some kind of requirement for that. But for us, right now, we -- I think we have no comment on that, how much -- how many we're going to deploy. Sorry.

[Operator]

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

[Jack Hsu, analyst]

I have 2 questions. My first question is about could you give us about the reason why the fourth quarter's result is below expectation, if that is mainly from the competition on the -- about the mobile service? Or do we have -- are there any other reasons? So this is the first question.

And my second question is about the 5G. When we -- if we -- I mean I just want to know what kind of the revenue can only come from the 5G. And this kind of revenue can -- how long this kind of revenue can provide or give us the profit?

[Fu-Fu Shen, executive]

For your first question why 4G -- why -- the reason for the fourth quarter our performance below the expectation, I think the question now, for the quarterly guidance for last year, we -- I think basically, the reason for our performance, if you know the guidance is, firstly, the iPhone handset bundled plan sales and our subsidiary's handset sales as well as the government-related ICT project revenue recognition were not as expected. I think that are the -- were the major reasons for that.

As for the second question, what kind of revenue can only come from 5G. I think 5G, like we mentioned, is -- 5G is going to be very -- the application going to be quite different from that of 4G. I think we still try to figure out the -- which -- for the enterprise side or the consumer side, what kind of application can really make value for our customers. I think this is something we're still trying to work on.

[Jack Hsu, analyst]

Just only one follow-up question. Could you give us how your dividend policy expectation? Because, right now, the bid -- I mean the auction is very high. And so what's the -- could you give us -- talk about some color on your dividend policy will change in the policy in the future?

[Fu-Fu Shen, executive]

As usual, our dividend we review on a yearly basis. So I think either we get a kind of lower guidance for this year, how much can -- the payout ratio, what the payout ratio will be, still reaching -- seeing what the Board, the final decision in the beginning of next year. I think we really have no comment at this early stage.

[Operator]

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

[Billy Lee, analyst]

I have 3 questions. The first question is, can I know what's your view on Taiwan Star's bidding strategy? Like with the -- with 40 megahertz basically means we will see an increase in competitive intensity going forward in the 5G era? This is the first question.

And the second question is about the Phase 2 auction. So we know we have done the Phase 1, so what do you think the outcome would be like in Phase 2? Are we going to bid again? What's the likelihood that we will bid further, in your opinion?

And the last question is on the ARPU in general going into 2020. So last year, so we have been seeing a decline in ARPU for some time, right? So are we going to have any chance to see an improvement in ARPU outlook? And why do you think so?

[Shui-Yi Kuo, executive]

The 5G spectrum second phase, the location phase auction date has already set by NCC in the afternoon of February 21, which means if the letter of intent [ suppose ] study was submitted by 4 bidders in the morning of 20 -- 21, could not resolve the location issue, then we need to enter into the second phase auction. For Chunghwa Telecom, we are always open for 5G bandwidth and the network sharing as well as roaming mechanism. So we are flexible for cooperation among operators and would be pleased to see location issue be finalized in the morning of 21st.

[Fu-Fu Shen, executive]

As for your third question, I think we -- for ARPU, since we did 5G, we plan to roll out 5G service in the third quarter this year. So in the first half year, we still see the -- we still believe that the 4G service, mobile service competition will continue even if [ it is a bit ] compared with last several quarters. But the ARPU, since we assume though forecast ARPU will have slightly decline over quarter -- quarter-over-quarter. And chance to improve, maybe we have to wait until 5G service come. But the reason why you asked, of course, we would like to see some new service for 5G, the pricing strategy in the future and the new cellular application, which you'll have to wait to see. Currently I will -- really have no special kind of specific comment on that.

But for your first question about the bidding strategy, [ 50 megahertz ]. I'm not sure about 50 megahertz. Currently, we acquire 90 megahertz. And some of our peer, they acquire 60, 40. For Chunghwa, we acquire 90. And 90, currently it's with the -- currently we actually have discussion with our vendors, potential vendors. And we have in-house labs, have internal research people altogether. For 90%, currently, the equivalent is everything, you know, currently can support. So it's no problem for the future deployment. So I think that's pretty much the current situation. I don't know, is this your first question? Or you want to restate that?

[Billy Lee, analyst]

I actually -- my question is do you Taiwan Star's entrance will actually increase the competitive intensity in the industry overall because, in the past, we mainly have the 3: Chunghwa Telecom, Taiwan Mobile and Far EasTone, right? Given that Taiwan Star this time has acquired 40 megahertz, do you think that would change the landscape of the competition structure?

[Fu-Fu Shen, executive]

It's actually still too early to say because the rationale for 5G spectrum auction, from the regulator side, they would like to see the operator can really cooperate together to build overall a network for the country. And of course, there's still a lot of things need to get done before the second phase or at the second phase kind of auction. So this -- that is now at the moment, so I think everything is still too early to say.

[Billy Lee, analyst]

Okay. Got it. And one follow-up question on the ARPU outlook in general. So why do you think the ARPU in 4G will continue to decline? Are you seeing increasing competitive intensity across the industry? Because in the past, you talked about the TWD 499 plan has kind of been -- like it stopped rolling out anymore, stopped -- stop. So any color on why do you think it's still going to have a decline in ARPU?

[Fu-Fu Shen, executive]

Of course, the TWD 499, we try not to reoffer this TWD 499 offering again. But in this market, I think our peers, they continue to have some kind of -- periodically have some kind of campaign introduced in the market. And sometimes, we need to fight back. But most of the time, we would like to maintain the level kind of ARPU. But honestly speaking, the TWD 499, the unlimited plan, actually we are

[Audio Gap]

the low level unlimited plan will kind of continue in this market. So we try to maintain our high ARPU customers, try to be more successfully. So that's something we have to do. And if -- for the overall speaking, if you look the quarterly kind of performance, probably from -- starting from 2 quarters before, previous 2 quarters, the decline rate started to decelerate, okay? So it's getting better and better. But anyway, this market -- mobile market is still competitive. It's not really a benign market, so we still forecast for the first and second quarter of this year, still have small kind of ARPU decline, but it's not a big one.

So -- but hopefully, in the third quarter, we have this 5G rollout. But even the 5G rollout, it's in the first stage, in the beginning stage. Probably you wouldn't see a big performance. It's quite unlikely. So I think we need time to monitor for the whole market.

[Operator]

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

[Sara Wang, analyst]

This is Sara from Morgan Stanley. So I have 3 questions. So the first one is still on the mobile competition. So regarding our revenue guidance next year -- sorry, this year, so within that, are we assuming mobile revenue still -- service revenue still declining? And by how much of the scale?

And second question is about Slide 8. So it's about the accumulated revenue on ICT revenue. So that number seems to be lower than what we're reporting in third quarter. So I just want to check if any -- there's any more details management could share with us.

And then finally, the third question would be the CapEx for 2020. So I mean I ask if the increase in CapEx are more according to our schedule, or are there any kind of delays from 2019 which resulted in a higher CapEx for this year.

[Fu-Fu Shen, executive]

Okay. I think you know the -- our assumption for the -- with mobile revenue for this year still have small decline. Yes, that's true. Yes, because like I say, for the first half, this is still -- we have this 4G market competition continue. And even entering into the second half, I think most of the customers still sit on the 4G network. 5G migration won't be that fast, okay? So that pretty much answer your first question.

As for the Slide 8, you mentioned about ICT revenue. Yes, I think ICT revenue for the fourth quarter, the number seems to be lower than -- Slide 8. Let me check the Slide 8. Okay. I -- this is -- I'm sorry, this is Slide 8, this is ICT revenue. Yes, this is [ the growth ] trajectory, that's true, for the overall, for the whole year kind of number. But actually, for the accumulated revenue, ICT numbers, yes, I think the third quarter number -- basically, ICT -- our ICT revenue in the fourth quarter, the recognition revenue is larger than that in 3 -- in the third quarter. But even it's larger than third quarter, still below our expectation. That's the reason for the whole thing. Well, that's for the whole -- that's why when somebody asks about fourth quarter guidance, why we're below -- why our performance is below guidance, one of the reasons is ICT revenue recognition is below our guidance, but even its -- the recognition number is higher than that in third quarter.

As for the third question, CapEx for 2020 increase -- is increased according to schedule. I mean, put it this way, okay, some -- for delay for the previous years, usually, we have some delay. That's kind of a usual -- a general case. Sometime you have some delay. Sometimes, you have something you decided not to -- you budgeted it but you decided not to execute it. It's happened.

But the resulting for the higher CapEx for 2020 still because of the -- we would like to -- we decided to accelerating the deployment of 5G network. We would like to -- I think we like -- still, we like to lead our 5G -- yes. Yes, we would like to -- 5G, I think for 5G service, we still would like to lead the market. So we would relatively accelerate some 5G network deployment.

Another issue is the PSTN-IP upgrading. That's another issue we would like to accelerate again. Before, we're talking about 2020 -- before, 2026. But for PSTN-IP upgrading, but now we accelerate to 2024. So that's the issue now every year. For now, we have to add on some CapEx for domestic CapEx, okay? So that's another part.

The third part is we -- you see we are doing pretty well on our IPTV service. Our IPTV platform, we need to get a replacement, and that would also happen this year. So that will incur some of the CapEx, okay? So that's the major -- the 3 major reasons for why the CapEx for 2020 will have some increase compared to the real spending for 2019.

[Sara Wang, analyst]

I see. So just one small follow-up on the enterprise ICT. So maybe for now, do we have a rough number regarding how much of the revenue that the enterprise ICT contribute as a percent of total revenue?

[Fu-Fu Shen, executive]

Put it this way, okay, let me give you a number -- percentage for the total ICT revenue. For total ICT revenue, I think we disclosed that percentage. The year before last year, in 2018, at the time 10.7% -- I'm sorry, that time, it's roughly about 10 -- sorry, hold on.

[Shui-Yi Kuo, executive]

[Foreign Language]

[Fu-Fu Shen, executive]

[Foreign Language] Okay. For 2019, our total ICT-related revenue grows about 5.2%, okay? But actually, in 2018, because that year, we -- I think we become more selective in the ICT project acquiring. So the year-over-year kind of a number decreased 5.7%. That's in '18. But even further to the '18 and '17, the year-over-year increase is roughly about 10%. So that's why we mentioned about we would like to see our ICT-related revenue get back to the growth trajectory this year, including we have some major government-related ICT project will get recognized this year. So the overall growth part of it will be on ICT, yes.

[Operator]

The next question is coming from Amber Lee, Yuanta.

[Yufang Lee, analyst]

This is Amber. So I got 2 questions here. First one, what's your expectation on the time line of 5G commercialization?

And second one, for the CapEx guidance of this year of roughly TWD 31 billion, could you kind of give us a direction of how should we be looking at the CapEx level of 2020 and beyond -- for 2021 and beyond?

[Shui-Yi Kuo, executive]

We will have deployed our 5G service in the third quarter.

[Yufang Lee, analyst]

Okay. So it's more towards the end of third quarter or like the beginning of the third quarter?

[Shui-Yi Kuo, executive]

It's the beginning of the third quarter.

[Fu-Fu Shen, executive]

Yes. For your -- for the CapEx guidance, that TWD 31 billion, thinking for beyond this year, the CapEx level, looking for now, I think next year, we have some figure in hand, should be quite similar to what we have for this year, yes. But beyond 2021, I really have no comment at the moment.

[Yufang Lee, analyst]

Okay. Great. And another one, does the guidance for this year only factor in the first stage of the spectrum auction? Or it also includes maybe some of your estimates on the second stage of the auction?

[Shui-Yi Kuo, executive]

Our guidance is based on the TWD 50 billion.

[Yufang Lee, analyst]

TWD 50 billion?

[Shui-Yi Kuo, executive]

Yes, TWD 50 billion.

[Yufang Lee, analyst]

Okay. Okay. And sorry, I have the last one. For the fact that Chunghwa is still expecting to be a leader in the 5G era, does that kind of contradict with your willingness of collaboration of your peers -- I mean with your peers? Or that's not the way we should be looking at it?

[Fu-Fu Shen, executive]

As we mentioned, we're always open for the cooperation. No matter the network sharing, bandwidth sharing or roaming, this kind of mechanism, I think this is no contradictory to any of this.

[Operator]

The next question is coming from Shuo Yang, Goldman Sachs.

[Shuo Yang, analyst]

I have 3 questions. First one is regarding our 2020 revenue guidance. So I understand part of our projected growth come from the 5G handset sales. So excluding that part, could you give us some color on the direction of the service revenue growth into the next -- in this year?

And my second question is would service EBITDA margin continue to decline due to the higher growth of ICT business, which has lower EBITDA margin?

And then third question is also in your 2020 guidance, have you factored in the additional revenue and the cost of running 5G services such as the higher electricity costs and higher network maintenance costs?

[Fu-Fu Shen, executive]

I think the projection for the increase of handset sales, of course, we all know that this year will be the 5G service launch for this year. And from our understanding currently, the 4G handset sales become staggered. So that means -- which means the -- for the 5G service launch should have a cycle for the new 5G handset replacement, okay? So I think we would like to take the opportunity to encourage our first mobile customers try to -- high-end customers try to adapt -- subscribe our 5G handset bundle services, which will help to boost our handset sales at the time. I think that's the rationale behind that.

As for your second question, service margin continues to decline because of growth of ICT business. I think that's, of course, part of the reason we -- because in voice, voice revenue always have high margin. And currently, ICT business is kind of different. So that's, of course, the major reason for that. Of course, the competition, also another reason for that.

As for your third question, costs for 5G service, of course, the -- our guidance for 2026, we're going to launch our 5G service in the third quarter. So the -- so any cost for 5G, like the amortization costs or any other promotional costs, will altogether factor into our guidance, for sure.

[Shuo Yang, analyst]

Okay. Got it. And a follow-up question on 5G as well. Would you expect the pickup speed of 5G subscribers to be similar versus the 4G era or to take place at a faster speed?

[Fu-Fu Shen, executive]

Yes. I think you know we acquired 90 megahertz, which means the theoretical speed will be much, much higher than current 4G speed. But Chunghwa, I think the network quality is always something we are pretty much focused. So we believe the take-up speed should be higher than what we can offer for 4G customers.

[Operator]

The next question is coming from Eddie, Citigroup.

[Eddie Liu, analyst]

I have 2 questions. So one is that since the 5G will be rolling out in the third quarter and the contributions from 5G from revenues will now be significant from this year, of course. But do we see looking forward to 2021, the ARPU, we're going to be -- ARPU, ROI growth, we're going to stabilize or be slightly up during a full year of the 5G contribution from the revenue side on driving the ARPU? This is the first question.

And the second question is that regarding the adoption of the 5G network's rollout, I think this year, do we expect the nonstand-alone solution or stand-alone solution for the 5G base station this year and the years going forward? And what's the potential impact of switching from both of which and the impact?

[Fu-Fu Shen, executive]

Of course, we would like to see ARPU get stabilized or up during the full year 5G contribution. But of course, this is a scenario we'd like to see. But currently, still kind of too early to really give any comment. So it's all depending on the later adoption, migration kind of situation. So we have no comment on your question. And as for the second question, I think in the first phase, we adopt nonstand-alone kind of approach to deploy our 5G network. So that's the original thinking, we will deploy this way. So the impact of switching, I'm not sure about your question about the impact of switching. Could you elaborate that part?

[Eddie Liu, analyst]

I think it's -- as of the first year will be the nonstanding alone. And so what's going to change after the second year or going forward, whether you choose to migrate to the stand-alone, so what will be a major difference from switching nonstand-alone to stand-alone in the future?

[Fu-Fu Shen, executive]

I think at the end of the day, of course, we have to switch to the stand-alone. So finally, we need to switch our core network for stand-alone. So this -- which means we will have this kind of duel -- I don't know how to say. It's kind of temporary. The first one, we have nonstand-alone; then later, we will switch our core network to stand-alone; then later, migrate to the overall stand-alone kind of situation. But the base station can adapt it to both. So that's the -- from our engineer, how they told us.

[Operator]

[Operator Instructions] If there's no further questions, I will turn it back over to President Kuo. Go ahead, please.

[Shui-Yi Kuo, executive]

Thank you for your participation, and Happy Chinese New Year. Thank you, everyone.

[Operator]

Thank you, President Kuo. Thank you for your participation in Chunghwa Telecom conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may disconnect now. Goodbye.