Chunghwa Telecom Co Ltd (CHT) 2007 Q1 法說會逐字稿

[Welcome to the Chunghwa Telecom] conference call for the company first quarter operational results 2007. During the presentation, all lines will be in listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question and answer session.

Now, I would like to turn it over to President Lu, the host of the conference. Thank you.

Good evening, everyone. This is Shyue-Ching Lu, President of Chunghwa Telecom. I would like to thank you all for joining our first quarter 2007 earnings results conference call. First of all, let me introduce Mr. [F T Feng], our Senior Vice President, responsible for business operations to all of you.

Mr. Feng has been with the company for more than 30 years and was the head of our international and mobile business groups, thus he is quite familiar with all our businesses. We'll begin today's call by having Dr. Shieh and Mr. Feng will take you through a view of our financial results and business operations. Following that, I will take you through our company strategy. At the end of the presentation, we will be happy to take your questions.

Before we begin, please note our Safe Harbor Statement on this page.

Before entering into our financials, let me give you some highlights of the company's operations for the first quarter this year. On a segmental basis, because our global subscriber number and brought in excess revenue keeps increasing. Internet data segment continued to drive revenue growth. We will continue our strategy to migrate ADSL subscribers to higher speed service, including FTTB. Reflecting our effort to migrate ADSL subscribers to use FTTB, subscriptions of FTTB have shown substantial increase over the last several quarters. This paves the way for our future offering of [radio] services which require high transmission speed.

As the only integrated telecom operator in Taiwan, Chunghwa is best positioned to offer bundle solutions. We not only provide bundle services to enterprise customers, but also to residential customers. These bundle services are well received and help strengthen customers' loyalty.

Our proposal to increase capital through transfer of certain amount of (capital surplus to capital, and the [conduct] capital reduction afterwards was approved in the Board meeting held on April 24. We expect to carry out the plan after the proposal is further approved in the annual shareholders' meeting to be held in June this year. With this program, shareholders will be distributed cash of NT$0.909 cents for each common share. We will continue exploring possible methods to improve our capital structure.

As a listed company in both Taiwan and the New York Stock Exchange, we are strict and stringent on following the safe practice for corporate governance. This year, in a survey conducted by Commonwealth magazine regarding corporate social responsibilities, Chunghwa was selected the number one among Taiwan's major corporations in the category of corporate governance. Also, our practice in corporate governance [earned] the CD6002 certificate by the Corporate Governance Association in Taiwan, and was praised in the Asset Corporate Governance Awards, 2007.

Moreover, Chunghwa won Platinum award, the highest ranking in the category of telecom service in 2007, Readers Digest Asia trusted brand. Our company has been awarded the prize from Readers Digest for four consecutive years, attributed to our quality network and customer service. We'd like to share the [decoration] and honor to all of you.

Now let me hand it over to Dr. Shieh, our CFO.

Thank you, President Lu. Now let's move on to financial results for first quarter 2007. First, I would like to explain the different US and ROC GAAP accounting treatments found in our first quarter 2007 results. Since we acquired 7% ownership of Chief Telecom in September last year, and as part of our Yellow Page business early this year, we are required to report consolidated financial statements quarterly under US GAAP.

This is not the case under ROC GAAP. ROC GAAP requires only semi-annual and annual financial reports of consolidated numbers. Thus, the operating results we are reporting at this time for first quarter 2007 under US GAAP are consolidated, while those on ROC GAAP are not.

In addition, under US GAAP, we set aside 10% for anticipated earnings tax and our anticipated after tax earnings, and the recognized employee bonus, remuneration for directors and the supervisors, and the discounts for employees, staff subscription, as expenses.

ROC GAAP reporting requirements do not withhold these items. Moreover, compensation for early retirement program is recognized as a personnel cost under US GAAP, while it is categorized as other expenses under ROC GAAP.

The different accounting treatments lead difference financial results that we have represented in the following slides. Again, I would like to emphasize that we use ROC GAAP to calculate our dividends.

We'll turn to page 4. You view our following along with the slides, on the right-hand side of the slide, on the page 4, we provide financial data under ROC GAAP which we believe to be more relevant to our operations. Under ROC -- excuse me, under US GAAP, total revenue for first quarter 2007, were NT$45.78 billion, which is 1.7% increase year-over-year. This was mainly driven by continued growth in the Internet and data, and the mobile business.

EBITDA for the first quarter 2007 increased by 9.9% year-over-year to NT$25.1 billion, operating results increased by 20.5% year-over-year to NT$15.0 billion, and the net income increased by 19.6% year-over-year to NT$11.1 billion. The growth was a result of increase in revenue and the decrease in operational costs and expenses. We will elaborate more on the following slides.

On slide 5, we take a look at our individual business units. Under US GAAP, Internet revenue and data revenue increased in first quarter 2007, year-over-year, by 8.8% and 9.1% respectively. Internet revenue benefited from increased broadband subscriber numbers and the successful initiatives to upgrade customers to higher speed ADSL and FTTB services.

Mobile revenues increased by 0.7%. This was mainly resulting from the 2.8% growth in minutes of usage, the [mitigation] in decline of fixed to mobile calls, and the spike in revenue of value added service of 13.4%.

In the fixed line business, local revenues decreased by 4.5% year-over-year, mainly due to mobile and broadband subscriptions. Domestic long distance revenues decreased by 9.4% year-over-year due to mobile subscription and WIP.

International long distance revenues increased by 2.6% when compared to first quarter 2006, due to the sale of international prepay cards, especially for foreign labels, and the increase in wholesale revenues. Business segment revenues, based on ROC GAAP, are also presented on the right-hand side of this page for your reference.

Please turn to page 6. Under US GAAP, total operating costs and expenses for first quarter 2007 decreased by 5.6% year-over-year. This was primarily because the compensation for the ERP incurred in first quarter 2006, which was not the case in first quarter2007. However, as we completed another ERP in April this year, we (inaudible) compensation will be reflected in our financials for the second quarter this year.

Depreciation and amortization also increased -- decreased, and they decreased by NT$310 million, representing a 3.1% decline YOY. This was because our capital expenditure started to fall in 2002. On the right-hand side, we provide data under ROC GAAP for your reference.

CapEx for first quarter 2007 decreased by 22% over first quarter 2006. This was due to a decline in spending and [mobile] by NT$1.9 billion. Going forward, our CapEx may increase due to investments focused on our core business and the migrate mobile and the data customers to higher revenue [performance] including [FTDX], IP-based NGN, 3G and 3.5G systems, and xDSL.

Our management had promised to reduce our personnel expenses through headcount reductions. We have implemented a early repayment program in three years. The program of this year is about to finish. We believe we have achieved our target of near reduction of 3,000 employees.

Summing up the results of the three year ERP we had 4,452 employees left the company. We also hire 1,091 new [bloods] in total during 2005 and 2006. This year we are bringing some recruits as needed. The early retire program is expected to produce continued long-term cost savings in year 2008. We expect to save approximately NT$6 billion personnel cost as compared with that before preparations.

Now I will hand over to Mr. Feng for our business review.

Thank you Dr. Shieh. I will take us to the revenue for first quarter '07. It was NT$45.8 billion an increase of 1.7% compared to the first quarter last year. On left side of this page, the pie chart shows our revenue breakdown in first quarter 2007. As you can see, fixed line revenue as a percentage of the total was 32%, mobile revenue was 39% and the Internet data was 27%. In the meantime as the only integrated telecom service provider in Taiwan, we continue to be the dominant player in the fixed, mobile and the Internet and data market.

To the end of the first quarter this year our broadband subscriber number amounted 4.1 million, and those who with speed higher than 2 megabits continue to [prepare] the large portion of the totals subscriber base reaching 65.3%. On the right-hand side of this slide our broadband excess revenue for first quarter this year reached NT$5 billion, growing 10% from that for first quarter last year. We expect the growing trend to continue reflecting our successful efforts to promote our broadband services.

On slide 12, we present our effort to transition customers to higher access speed and the progress of our fiber deployment. By the end of March this year our broadband subscribers with 8 megabits reached 954,000 representing 23.2% of total broadband subscribers. Furthermore, we continue to increase our fiber penetration rate by deploy our fiber network, in residential buildings, campus and the commercial buildings allowing more opportunities to access and adopt a variety of Internet value added services. In addition I would like to emphasize that the 11,000 commercial buildings with service represent a market share of 95%.

As you can see on the right side of this page, the average bandwidth per user continued to increase over last few years, while the number of Fiber subscribers also showed strong growth into second half of last year. Going forward we expect the trends to continue.

Now I would like to move on to the mobile business on slide 13. Chunghwa Telecom maintains number one market share position. At the end of March this year we had 8.5 million mobile subscribers which include 1.29 million 3G customers. You can observe that the 3G subscriber number as a percentage of total mobile subscriber base keeps increasing since ARPU for 3G subscribers is significantly higher than that of 2G. The trend is healthy for our operation.

During last year, we have seen successful mobile value added service growth led by our exclusive platform Emome. Among these services total value added service and mobile Internet exhibited 13.4% and 19.9% year-over-year growth respectively. Therefore, data revenue as a percentage of mobile revenue increased to 5.6% in the first quarter this year.

Moving to slide 14, 3G deployment has proven to be as successful as our GSM service. We have more than 1.29 million 3G subscribers at the end of Q1 this year, of which 45% are with 3G handsets. In addition 3G ARPU was 63% higher than 2G ARPU primarily as a result of our innovative 3G strategies for customized handsets and the promotions of mobile office services. For instance we launched (inaudible) handset last year, [CHD9000] series which have mobile office functionality like push mail, can do list and so on. So far we accumulated 34,000 total (inaudible) [CHD9000] series users and ARPU for each reached [NT$21,746] out of which 21.5% is from valued added service.

There are new handset mobile to come included Nokia E65 and HuaWei U526. Commercial will have more choices. Please refer to the chart on the left-hand side. For fixed value added service subscriber for ringback tone increased significantly for last several months; 'til the end of March this year we had 172,000 fixed line ringback tone customers compared to 56,000 by the end of last year.

On the right-hand side of this page you can tell that our continuous efforts maintain our fixed line market share and that for IOD especially increased substantially as compared to last year. Other income, we did a very good job at defending our fixed line market share and our confident that our strong market position will continue in the future.

As an integrated telecom service provider Chunghwa is in the best position to offer bundle solutions. For enterprise customers we'll provide customer solutions such as VPN and ICT as well as integrated network services. Furthermore, we also bundle our broadband and mobile service in order to form a seamless telecommunication network. For individual and families, we'll offer program plus MOD consolidated invoice, store value card available for all services, friends and family, and mobile energy [pair] with [exclusive] rates. I would like to report to you that the subscribers of friends and family grew 12.4% year-on-year.

Operating results of (inaudible) plan was also outstanding with ARPU for it reaching NT$1,475 and the subscriber grew 14.7% quarter-over-quarter.

Following the certification of MOD open platform by NCC in January this year, Chunghwa will launch MOD [as a] telecom service. We have a steady stream of new content provider to reach our content channels, so attract more customers and will continue to [inject] more content onto our open platform. By the end of March this year, there were 285,000 MOD subscribers compared to 118,000 a year ago.

That's all for our business overview. I will now turn it to Mr. Lu.

Thank you Mr. Feng. In conclusion, we believe our strategy is quite clear. It has highlight the key aspects of our new term strategy. First in our core businesses, we will speed up the adoption of our strategy and the VA service and work then HSDPA coverage to attract more mobile Internet users. We intend to continue to grow our broadband subscriber base by migrating high end customers to fiber. We will also focus on promoting our MOD service through alliances with high quality content providers.

Going forward we will invest in the next generation network construction which will ultimately decrease our network costs over time. Furthermore we strengthen our data [mining] capabilities to offer (inaudible) services to selective customer segments and consolidate our customer service systems to enhance service efficiency. We will also offer rewarding plans across our major businesses to increase customers' loyalty and we will reinforce e-invoice service to save costs.

In addition we are preparing to apply for wimex (inaudible) to complement our wireless data services. Second point, we are promoting convergence through bundled service offerings including integrated enterprise solutions and the mobile plus fixed, mobile plus broadband and the digital home bundled services.

Certainly we streamlined some of our operations. In first quarter this year the company consolidated our (inaudible) and southern Taiwan business group to enhance the operating efficiency. We also merged operations offices in (inaudible) and (inaudible) to streamline the operation. Of course on M&A we acquired a 31.5% ownership of SENAO in January this year to enhance business channels and distribution capabilities especially for handsets. Moreover the exclusive service stores expected to accompany SENAO service hours under enhanced sales to [youngsters]. Additionally we acquired a 70% ownership of [CHI] Telecom in fourth quarter of the year to improve our ITC services.

The fifth point in the aspect of business alliances, we are now working on joint market research and promotion on digital home services with Intel. We have completed with Google on mobile search. We also formed a co-marketing alliance with (inaudible) Financials to attract more customers,. Sixth point; we will focus on driving cost savings. The [over and] early retirement program in this month and we will hire new (inaudible) as needed. Besides personnel savings we will monitor our CapEx carefully in order to control the record depreciation expenses. We will also decrease rates of international settlements, and control marketing, inventory and the maintenance expenses.

Finally we remain fully committed to maximizing value for our shareholders. We intend to continue to maintain our high dividend payout policy. We will continue exploring opportunities to enhance shareholders' return through capital management. Although contribution from property (inaudible) is still small we expect it to grow and that we will make best usage of these assets to enhance returns.

That conclude our presentations. Now we are happy to take your questions.

Now we are going to the question and the answer section. (OPERATOR INSTRUCTIONS). Here are the first questions. Go ahead please.

Yes hi, evening, my name is Anand Ramachandran and I'm calling from Citigroup. Thank you so much for taking this time to do this call with us. I have three quick questions. Question number one, I noticed your full year forecast, I just wanted to check what assumption you have there for the ERP expense for 2007?

My second question would be on your capital management policy, are you still working on trying to raise the capital surplus limit to 30% and would you have any idea on how long you think this would take?

And my last question was on the personnel savings you mention of NT$6 billion in 2008. I just wanted to check you are at NT$38 billion or NT$39 billion right now for the last two years, should we expect this falling to NT$32 billion to NT$33 billion in 2008? Thank you.

Okay let me try to answer your question. The early retirement program for this year, our target number is about 1,600 to take this package and our estimates for the cost or the expense is about NT$1.7 billion.

Your second question is about capital management whether there are still opportunities to raise 10% cap to 30%. We are still working on this in our revision of past potential opportunities to revise this to a higher percentage, but for now we stick with the current regulation of 10%. And this is what has been approved in the Board meeting of 24th of this month. It's about last week, one week ago, yes.

And on the personnel savings this deserves some elaboration okay? We made this statement very carefully, it's the comparison on the personnel expense before privatization or upon privatization. And our statement is that if none of this ERP proven [up rates], none of this takes place, then the personnel expense would be certain value, certain number of because of these early retirement programs. We take the privatization stakes of reference [dates], so the [fixed premium] is against that number on personnel expense. Maybe our CFO Mr. Shieh -- Dr. Shieh could add more light on this.

Yes I think for the [fixed premium] deduction, as our President just mentioned is, we estimate in the year 2008 which is next year compared to before (inaudible) is about 204. So we provide early retirement program for last three years since -- for instance 2005 we offer about 800 more than that, and the 2006 about -- close to 2,000 and this year about [1,600]. So every year we hire new [bloods], but since we save those net reductions. For instance on 2005 we saved some costs from the net reduction and 2006 we enjoyed 2006 reduction plus 2005's reductions accumulative, and in 2007 we also enjoyed 2007 plus 2006 net reduction in 2005. So the fixed premium number is come from this situations. Thank you.

Thank you, so can I just quickly follow up? Would it be too presumptuous to just make things simpler and check as to if I were to look at the 2006 base how much more of the NT$6 billion saving is to be reflected do you think?

Excuse me you are asking what the --?

If I look at the 2006 personnel expenses they were NT$39.1 billion per ROC GAAP. How much of the NT$6 billion has been reflected in that particular number?

It's about NT$6.9 billion being reflected in that NT$39.1 billion personnel costs for '06, yes. I'm sorry it is point, I'm sorry I made a mistake in this billion and 100 millions, yes, NT$0.69 billion, okay? I'm sorry.

Okay so basically by 2008 the balance NT$5 billion should reflect. Would that be correct?

For '07 the accumulated, the net impact on personnel expense would be NT$3.5 billion. Accumulated, it's accumulated over the years.

Okay, thank you very much. Okay understood, thank you so much.

Thank you.

Next question, go ahead please.

Hello.

Yes please go ahead.

This is Danny Chu from Lehman Brothers. Thank you for the conference call. I've just got two quick questions. Can you elaborate a little bit more on the company strategy on wimex?

And the second question is with regards to potential overseas expansion opportunities. Can you comment on what are the potentials out there and with regards to previous news flow that Chunghwa may make investment in Vietnam, can you clarify? Thank you.

Okay, let me answer the second question first. For us this is relatively simple because we have not identified targets for overseas expansions. We have not any specific targets at this point.

And our strategy on wimex, as we explained in our strategy for the near future, we intend to apply for a wimex license because Chunghwa Telecom is incumbent and also full service providers. So from our assessment we believe is to the best interest of Chunghwa to participate in obtaining wimex license. And we have not yet set the priority of whether to apply for the north or southern region wimex license. We still have some time to evaluate.

Okay thank you.

Thanks.

(OPERATOR INSTRUCTIONS). You are on the line. Go ahead please.

Hello?

Yes please.

Thank you for the call this is [Terry Chang] from Credit Suisse. Can you please give us some update about your property development project and what level of profit or revenue do you expect to book in this year or next year?

My second question is, is improving the ROE of the company the management's long-term goal going forward? Thanks.

Okay so you are asking about our property development right?

Yes.

Yes we do have a -- we currently have identified several, six locations to be further developed and we also are planning to form a subsidiary to focus on developing our properties. And currently we have about NT$150 billion book value on our buildings and our land and we will develop those probably gradually and for next three years I think we anticipate about NT$21 billion book value asset can be developed, but we need to go gradually. And hopefully this year we can incur about NT$600 million to be non-operating income revenues into our income statements.

And your second question about our return equity?

Yes, do you see any chance to do more capital reduction to improve the ROE maybe in the coming three years?

Yes definitely, as we mentioned earlier, we continue exploring all possible ways to further reduce our capital. We realize we have a huge amount of capital surplus and so we will try to make proposal to our Board meeting for the following years. But I cannot tell you completely about when will be the timing and how much we are going to reduce because current regulation only 10% of the capital stock as weighted this year annually. But unless we can have some (inaudible) on regulation otherwise we are pursuing [accordingly]. Okay.

And about ROE, I think currently our ROE is about 11.5% to 12% and we believe that we can make further reduction on capital size, definitely we can improve the ROE. Thank you.

Thank you.

You are on the line, go ahead please.

Hi, this is Kathy Chen from Goldman Sachs. I have three questions and just a follow-up again on this capital management update, can you just share with us the process of the talks with the MOEA and FSC in terms of any clarity on perhaps why the timing was delayed or currently on when you think there could be more talks?

And they're saying in Taiwan obviously the political calendar is getting a bit more active towards the end of '07 and into the presidential elections in '08. So would it be more possible that, is still larger size capital reduction is more likely a second quarter or later '08 issue? And then on the same topic, can you remind us again what kind of long-term leverage you're comfortable with?

My second question is on the 2007 earnings outlook. It looks like earnings are expected to be down slightly year-on-year. I think the original guidance was that your earnings could maybe be flat or up slightly because there should be NT$1 billion of [DNA] that's coming down in '07. Can you give us some more clarity on what assumptions are in there and also what type of EBITDA margin is expected for '07?

And then the last question is on the regulatory side. Can you give us an update on where the NCC is in determining the cost basis for local unbundling and also the requirement of how many exchanges you will need to have in '07 and '08. Thanks.

Okay for the capital reduction for the next three years definitely we are, as I mentioned, we keep pursuing all possibilities and there are several ways we can go forwards. We can continue a petition to FFC, try to loosen the 10% cap; that's one possible way. And I think this is more likely way, but so far there is no regulation changes. And about the [out and in] guidance for this year our guidance under assumption of -- actually it's not assumption, it's already happening, because our mobile telephone tariff reduction in cost by the NCC, I think they require all the three major operator have to -- all the marketplace are going to have to reduce their mobile tariffs and then we (inaudible) [tough line limiting] size. But on the middle side on our cost basis I think we try to save cost and hopefully we can reduce some costs from the marketing and from some other cost controls.

So on the bottom line we anticipate that the bottom line is very close to the earning we made in year 2006. And on the regulatory --

Let me add that the management is determined to exercise or to mobilize all our resources to increase our sales, so that hopefully we can be much better in our day-in day-out in our guidance. So on the top line we hope through all the efforts we will be a little bit better than in the number of (inaudible) stated, okay. And as Dr. Shieh our CFO mentioned we control our costs and we do this very, very -- it's one of the priorities. While we return some benefits to customers through rate reduction we also try to save some of our marketing expense. And I have mentioned this before and this is something of importance in our priority item to save costs. So we would like to see our bottom line maintained or a little bit better.

On the regulatory side, other than what's been discussed on the rate changes, the [you] mention about local loop. NCC has classified local loop as bottleneck facility and NCC has recently decided to make use of the historical cost structure for local loop, and we are in the stage of preparing our cost data to NCC. So NCC has not yet determined on what the price for local loop under this bottleneck regulation.

And since NCC also in some kind of early stage of their transition because their term is about to expire, less than a year, and they had made it clear that their agenda this year is to amend all those telecom and media related regulations. So I believe it's a big, big job and probably they are very busy with preparing all these revisions of regulations.

Okay, I guess just one follow-up then on the cost basis, for the historical cost structure I think in the past you had said that the historical cost is actually somewhere to the current unbundling rate, is that right?

Yes. You are right.

Okay. Alright, thank you.

Thank you.

You are on the line, go ahead please.

Hi, it's Shirley Tse for UBS. Thank you very much for the call. I just have one or two quick questions. First, I note that [CHI] Telecom has recently been granted a VoIP Licence. I was wondering how you are planning to position that business? And do you see that could potentially directly compete with your fixed line operations?

And secondly, another follow-up on the capital reduction front, could you just remind us what your considerations in not just directly reducing the paid in capital in performing capital reductions?

Yes, for the (inaudible) reduction from our capital surplus under current regulation has difficulties, and we haven't got a consensus from all the regulatory agencies, so for this year it is impossible to do that. So the 10% reduction is all by our best efforts so far.

And on direct reduction on paid in capital potentially?

Well, you know, since we -- the company has huge amount of capital surplus and the regulations require us -- set the ceiling on the percentage of paid in capital that we can transfer from capital surplus to paid in capital. So we better maintain this pace for the transfer. So this is our strategy to maintain staple paid in capital.

Okay, the first question, excuse me your -- please?

On the [CHI] Telecom having obtained a VoIP license --?

The -- ?

For the 070 license?

The 070, yes?

Yes.

Okay, we have applied to NCC for a block of numbers for 070 service, but we have not yet received approval. But our subsidiary, [CHI] Telecom has already received a certain block of 070 numbers, so we are in cooperation with [CHI] Telecom to see how we go about offering such a service.

Do you see that could potentially compete with your fixed line business? Or it could be a new revenue source?

This is a very complicated issue and we are assessing how we should respond to this new development because if we didn't do well, it could cannibalize our own revenue on fixed line. So we are very careful -- we are studying this very carefully. Thank you for your observation.

Understood. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) If there are no further questions I will turn over to President Lu.

Thank you very much for your participation in this first quarter 2007 conference call. Thank you so much.

Thank you, President Lu. That's all for today. (OPERATOR INSTRUCTIONS) We would like to thank you all for your time and thank you for using Chunghwa Telecom audio conference service. You may disconnect your line. Goodnight.

Goodnight.

Goodnight.