Chunghwa Telecom Co Ltd (CHT) 2010 Q1 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's first-quarter 2010 operating results. During the presentation all lines will be on listen-only mode. When the briefing is finished directions for submitting your questions will be given in the question and answer session. For your information this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cht.com.tw/ir, under the in-focus section. Now I would like to turn it over to Fu-fu Shen the Director of Investor Relations. Ms. Shen, please go ahead.

Thank you. This is Fu-fu Shen, Investor Relations Director of Chunghwa. Welcome to our first quarter 2010 results conference call. Today we have Dr. Lu, our Chairman and CEO, Mr. Chang, our President and Dr. Yeh, our CFO to speak to you and answer your questions. On today's call Mr. Chang will review our business operations, then Dr. Yeh will review financial results and, finally, Dr. Lu will review our business outlook. At the end of our presentation we will be happy to take your questions. Before I pass to Dr. Lu, please note our Safe Harbor statement on slide one. Now I would like to hand over to Chairman Lu, please.

Thank you, Fu-fu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first quarter 2010 earnings results conference call. Now let's start the presentation.

On slide number two, building sustainable shareholders' value is our primary focus. In order to achieve this goal we tend to differentiate ourselves competitively on several factors, including wide customer base, high-quality product and services, brand name, advanced network and strong financial position. In addition, our strategic execution is focused on three areas, including satisfying Mobile customers' usage demand for high quality access and services, investing in next-wave Broadband development, transformation and innovation to become an information and communications technology operator, as well as stepping up our commitment in preserving environment and social responsibilities.

Moving on to slide number three, again, as part of our commitment to our shareholders, you can see our cash return for the last four years. We have been maintaining high dividend payout ratio and intend to continue this policy. Our Board of Directors just approved a cash dividend for year 2009 of approximately TWD39.4b, representing 90% of payout ratio. In addition, the fourth round capital reduction, which will reduce 20% of Chunghwa's existing paid-in capital equivalent to approximately TWD19.4b, was also approved by our Board in the previous meeting. We have conducted three rounds of capital reduction in the previous years and returned cash to shareholders in aggregate of TWD38.5b. Both the 2009 cash dividend and the capital reduction proposal will be submitted to AGM on June 18 of this year for final voting from our shareholders.

Now I will hand over to President Chang for business review.

Thank you, Chairman Lu. Now let me take you through the business overview. Starting slide five, our consolidated revenue for the first quarter this year was TWD49.6b. And we were able to maintain our leading market position in each of our business segments. Now moving to slide six. For the first quarter this year we continue to maintain a stable market share for local, DLD and ILD businesses. As an incumbent we were successful at defending our Fixed Line market share, and are confident that our strong market position will sustain in the future.

Next, slide seven shows our Broadband subscriber data. At the end of the first quarter this year Chunghwa had 4.3m Broadband subscribers, accounting for 82.7% of the market share. The Fiber customer accounted for 40.4% of our total Broadband subscribers. As already mentioned, we plan to split up our Fiber deployment. We are providing even higher speed FTTH service, including HDTV, remote surveillance and so forth to meet the high-end customer segment demand. In addition we will also co-promote our Broadband and the wireless Internet service at a favorable rate. Moreover, we will continue to promote Internet value-added services, which are the fundamental growth drivers for our Internet business.

The accumulated Internet VAS revenue as percentage of total Internet revenue increased from 9.2% to 9.8% year over year in the first quarter this year. As more ADSL subscribers upgraded to Fiber solutions, Broadband ARPU grew by 1.8% year over year in the first quarter. We expect this Broadband ARPU to continue growing as we continue to upgrade ADSL subscribers to Fiber solutions.

Please refer to slide eight. By the end of the first quarter this year we accumulated 665,000 IPTV subscribers. ARPU increased 3.9% year over year in the first quarter. Total MOD revenue increased by 1.6% in the first quarter year over year. In addition, we just began our Family Package with enriched content, and have about 8,000 customers for this currently.

We have been strengthening our IPTV strategy in terms of content, marketing and inter-activity. We will continue aggregating popular HD channels to better cater to our customer preferences. Currently we have 103 SD channels and eight HD channels, and there are nine new channels under negotiation. In addition, to enhance the functionality we simplified the user interface and our partners have repackaged the channels that our customer preferred.

We target 900,000 IPTV subscribers by the end of this year and expect that the IPTV revenue will increase 50% year over year for this year. We are committed to our IPTV strategy and we'll continue to execute in order to complement our existing services.

Now slide nine. We are the market leader in the Mobile businesses with the largest subscriber base of 9.4m. Moreover, we had the lowest churn rate in the market which is a strong testament of our subscribers' recognition of our high-quality services. Mobile VAS revenue as a percentage of total Mobile revenue increased year over year by 40.2% at the end of the first quarter. We will continue our Mobile business strategy to increase Mobile VAS revenue by offering customized and integrated Hami service with mPro tariff plan on quality network. Additional sales channel from 3C stores and the hypermarkets are also added recently to strengthen our sales capability. Mobile Minutes of Usage and the revenue for this quarter increased by 5.2% and 2% respectively.

On the left-hand side of slide 10 you could see our performance on Mobile Data operations, including our Data revenue percentages. Smartphone customers' base, mPro package growth and the VAS usage all these metrics were improved year over year for the first quarter this year. We foresaw the popularity of Smartphones and have been very dedicated in leveraging these devices as part of our handset strategy.

We promote Smartphones with various applications to increase premium customers' subscriptions. The Smartphones promoted by Chunghwa were embedded with diversified platforms supporting MAC OS, Android and Windows Mobile. The most popular models included those from Apple, HTC and Garmin-Asus. We expect that Smartphone customers will account for 20% of the total handsets we offer this year.

Moreover, to satisfy diversified customer demand and the increased usage we will continue to offer attractive 3G VAS, especially over Smartphones, as more customers switch from Voice-only products to Data centric devices.

As shown on slide 11, to cater to customers' growing demand for convergence we will integrate internal resources to conduct cross-platform service operations, including marketing and advertising. Through this initiative we expect to better facilitate the acquisition of the attractive content, increased usage and enhanced ARPU. Meanwhile, customer could view multi-media content via our three screens; over IPTV, Internet and Mobile platforms.

For example, the 2010 Winter Olympics was broadcasted live on these three platforms. We have also acquired the broadcasting rights for the upcoming World Exposition in Shanghai, FIFA World Cup and the Taipei International Flora Exposition this year. In the future we will improve the convergence service further by offering four-screen service, including touch panel phone sets for smart homes. Additional applications for smart homes also include the video, micro payment, advertisement and personal information.

As shown on slide 12, our Corporate ICT and Corporate Overseas business revenue amounted to TWD992m and TWD1.2b for the first quarter of 2010, representing a year-over-year increase of 9.3% and 37.8% respectively. Moving forward we expect this service revenue to continue to grow.

In addition to the traditional telecom services we plan to expand our corporate business scope and focus our ICT businesses to include government project. For example, we won the bid to providing the integrated taxation information system. And the total revenue associated with the project is expected to be about TWD3.1b from 2010 to 2012. Furthermore, we will also explore opportunities to expand our Corporate Overseas businesses, such as international Data and wholesale services.

Next, on slide 13, the total CapEx for the first quarter this year amounted to TWD4.2b, an 11.4% decrease compared to that for the same period in 2009. The decrease was due to the slight delay of the CapEx budget execution. Of the TWD4.2b CapEx, 80.6% was used for the Fixed and Internet business, 17.8% was for Mobile business and rest of it was for the other capital expenditure.

That's all for our business operations. Now I'll hand it over to Dr. Yeh, for our financial overview.

Thank you, President Chang, and thank you all for joining our first-quarter earnings conference. Slide 15 show our income statement highlights on a consolidated basis.

Our total revenue for the first quarter was TWD49.6b, representing 1% increase year over year. The main reason for the increase was economic recovery and our marketing efforts. In addition, EBITDA increased by 0.9%, income from operation increased by 5.3% and the net income increased by 11.8% year over year. The EBITDA increase was primarily due to the revenue increase. The net income growth was mainly because of revenue increase and the decreased income tax due to the income tax rate adjustment.

Slide 16 shows the revenue performance for each business segment for the first quarter this year. The Mobile revenue increased by 2.1% year over year, mainly due to the growth of Mobile Data revenue as well as the handset and the Data card sales. Growth for both Mobile Data revenue and sales revenue were primarily attributed to our successful promotion of Smartphones, along with Mobile Internet service. The overall economic recovery also helped boost the handset sales and the Data revenue.

Internet revenue increased by 2.0%, mainly attributed to the HiNet and the Internet VAS revenue. The HiNet revenue growth was driven by the increase of Broadband subscribers and the migration of ADSL subscribers to Fiber solution. For Internet VAS revenue growth, the growth from land administrative service, online music and advertisement service contributed the most.

In the domestic Fixed Line business local and DLD revenue decreased by 2.5% and 10.6% year over year respectively. The decrease of local revenue was mainly due to the Mobile and the VoIP substitution. Broadband access revenue, including ADSL and FTTx, increased by 1.1% year over year. Although ADSL access revenue decreased as more ADSL subscribers migrated to Fiber solution, the decrease was fully offset by the FTTx access revenue growth. As customer demand bandwidth over [time] we project the upward migration to continue and the Broadband revenue to increase.

International Fixed Line revenue increased by 9.3%, which was mainly due to the growth of ILD and the Lease Line revenue. ILD revenue growth was driven by economic recovery, while Lease Line revenue growth was because of our expansion of overseas Data wholesale service and the increased sales to multinational companies.

As shown on slide 17, total operating cost and expense for the first quarter was TWD34.7b, a decrease of 0.7% compared to the first quarter of 2009. This was due to the decrease in depreciation expense.

In terms of our cash flow shown on slide 18, for the first quarter our cash flow from operating activity decreased by 2.2% year over year, to TWD15.7b. This was primarily due to the increase in other monetary assets. Our free cash flow for the first quarter of 2010 increased by 1.5% compared to the same period of 2009, mainly due to the decrease in capital expenditure.

Our cash and cash equivalents amount to TWD79.2b as of the end of the first quarter this year. This represents 14.5% increase compared to the same period last year. This increase was mainly because of the lesser capital reduction distribution amount in February of this year compared to March of 2009.

Slide 19 shows our forecast for the second quarter this year. Please be advised that the forecast is only for Chunghwa, the parent Company. Chunghwa currently estimates that the total revenue for the second quarter this year will increase 0.1% year over year. This is mainly attributable to the anticipated growth of Fiber value-added service, as well as the handset sales, and is offset by the expected decline in Fixed Line and Mobile service that were adversely affected by the NCC tariff reduction that became effective on April 1 this year.

The decline rate of income from operations and the EBITDA will be similar for the second quarter, mainly due to the estimated growth of Smartphone handset sales, resulting in increase of handset sales cost compared to the second quarter last year. However, net income will be flat compared to the same period last year, mainly because of the decreased income tax resulting from income tax rate adjustment.

That's all for our financial overview. I will now hand it over to Dr. Lu.

Thank you, Dr. Yeh. I'd like to recap some points regarding our operation. First, as the economy recovers we expect to be benefited from this trend and will take a more aggressive approach to promote our services. Second, our FTTx and the Mobile Internet subscribers continue to grow, illustrating solid customer demand for versatile multimedia services and ubiquitous services. We believe this trend will continue and potentially result in higher ARPU for corresponding services.

Third, ICT service as a new revenue stream is one of our key focuses. The integrated taxation information system project we won from the government we expect to bring us TWD3.1b revenue over the coming three years, evidencing customers' affirmation of our outstanding technology and system integration capability.

Finally, the tariff reduction mandated by NCC began on April 1. Although this will impact our revenue, we have factored this into our business plan, and will do our best to mitigate the impact by exploring other revenue streams.

On slide number 21 our mid-term strategy is solid in advancing network deployment, enhancing innovation, expanding on ICT services, exploring Mainland China and overseas opportunities, and implementing CSR. I will now take two examples to illustrate our implementation of these strategies.

The first, we are now focusing on not only Internet of people, but also Internet of things. We have provided inter-section monetary service for the police agencies, accumulating more than 20,000 ADSL subscriptions, which account for about 1% of our total ADSL subscriber base in 2009. The subscription of inter-section monetary service effectively utilized reduced capacity attributable to the migration of ADSL subscribers to FTTx solutions. In addition we offer remote surveillance and home care services, which are also examples of Internet of things.

The second example is on innovation. Recently we offered a free multimedia content service named HiFree over our HiNet platform to our customers. We believe this will effectively increase customers' loyalty and encourage them to migrate to higher-speed service in order to enjoy even better quality content.

We will persistently follow and implement these strategies and are confident that we will report better performance in the future.

That concludes our presentation. Now we will be happy to take your questions.

Thank you. We will now begin our question and answer session. (Operator Instructions). The first question is from Nomura's Danny Chu.

Hi, thank you for the presentation. I have three quick questions. The first question is, is it possible to quantify the expected revenue impact from the NCC tariff cut for your Mobile business, as well as the figure on your Fixed Line business? And a related question to this is, you mentioned that the Company will try to compensate the impact on this tariff cut by exploring other revenue stream. What kind of other revenue stream you are referring to? That's question number one.

And then question number two is on you IPTV business. If I catch it clearly, early in the presentation you mentioned that for this year-end target you expect to grow the IPTV subscriber from current base to 900,000. What specific strategies you'll be implementing in order to grow the subscriber base so quickly?

And the then the final question will be what is the intended CapEx to sales ratio for this year 2010? Thank you.

Regarding your first question, the NCC's tariff cut impact on our business we have already factored this in into our forecast for the second quarter, and we will do the same for our forecast in the subsequent quarters. So it's already being considered for Q2, okay.

And exploring other revenue streams, yes, we are working very hard on finding new opportunities, i.e., introducing or exploring ICT business opportunities. And also, of course, we would like to grow our Mobile and also Broadband access customers and the revenues.

From our presentation I believe you have already seen the figures that are rather encouraging. For example, by migrating ADSL customers to Fiber solutions, the increased revenue from FTTx customers actually compensate -- offset those resulted the tariff cut for the ADSL. And also in our strategy to introduce more Smartphones also resulted in growth of revenue for about 2% during the first quarter of this year. And we have already mentioned to you in our some success in introducing our ICT solutions.

Your second question is on how do we increase IPTV or MOD customers. Well, as we mentioned during the presentation that we have just finished introducing new user interface to -- on this MOD service, which is now much simpler and more consistent, much easier for customer to select or to pick their favorite channels. And we have also simplified our infrastructure. For example, we are now only one model of set-top box in the field, so this simplifies much of the complexity in maintaining uniform quality of service to our customers.

Of course, the most important is to have a very good package to our customers. The newly-introduced Family packs, TWD100 up to TWD299 per month, the other package at TWD209 per month, are attractive and within about two weeks we are able to acquire about 8,000 customers for these new packages. And the presentation -- in our presentation we have also emphasized in this year there are many important events that we have already secured our rights to broadcast or to offer this in our MOD services.

For example, the FIFA's football game, World Game, and also some contents from the Shanghai Symposium or exhibitions will also be available, the flowers exhibition for the year, towards the end of the year. All these are available. And in addition to this we are working to acquire more attractive channels and also more HD channels. So these are the areas we have been working very aggressively to enhance the value we bring to our customers.

On the CapEx to sales ratio we always mention that the guidance -- guideline for our CapEx to sales ratio is around 15%. And it depends on the development in the market, but occasionally we may increase our CapEx to reflect the needs to accelerate some of the deployment of our network elements. So for this year we are in the period of increasing CapEx to revenue ratio maybe slightly 1 or 2 points above this guideline. So for this year maybe you can count on about 17% of our sales ratio for CapEx.

I guess, if I may follow up with that, is on page 19, since you mentioned that for the forecast for second quarter you already take into account the impact of the tariff cut. So on page 19 for the net revenue decline from Q1 to Q2, how much of that amount is attributable to a tariff cut for your Mobile service and how much is attributable for the tariff cut for your Fixed Line service? Thank you.

We have a number but, however, you know that this number's also -- was affected by the change of users because the reduced tariff. So we would rather to see what is going on and not release the number.

Okay, thank you.

Thank you. Our next question is from Goldman Sachs' Kathy Chen.

(Technical difficulty) question, I have three questions. Firstly, on the second-quarter guidance, could you share the guidance on Mobile service revenue growth that you're assuming in the second quarter? And also how much do you expect the handset sales cost to rise by on year-on-year basis?

The second question is a follow up on the MOD service. Could you share with us the current ARPU level and what kind of ARPU growth do you expect this year?

Last question is on the regulation side. I think recently the NCC has announced some fixed-to-Mobile tariff adjustments. Could you share with us how much you expect this to benefit Chunghwa by in 2011 and onwards? Thanks.

Let me answer your third question first, okay. You mentioned about the recent developments in NCC. Yes, from the news we are aware of NCC's -- their internal meeting. They have approved a proposal to return the tariff-setting right for local to Mobile calls back to Fixed Line operators beginning next year.

Details of this proposal is yet to be finalized, after public hearing organized by NCC. So we do not have exact content of the proposal, so it seems a little bit early for us to comment on the impact to our operation if this is implemented. So later on if we obtain more clarity on details of this proposal we would be happy to share it with you.

On your second question, the ARPU for MOD service for this year we expect to increase to about TWD117.

Okay, what's the current level?

Okay. It's currently about TWD117, and we believe at the end of the second quarter the ARPU for MOD service will be higher than this. Because, as I said, more people are taking our package offerings.

The Mobile revenue we forecast -- okay, Dr. Yeh will answer this.

Okay, the Mobile revenue compared with last year we expect there will be like a 0.6% increase. And the sales cost is about the same as the last quarter. The sales cost of our Mobile segment is about the same as last quarter and it's higher than last year of the same period.

Sorry, can you just clarify for the Mobile revenue, is that service revenue or including handset sales?

It's including handset revenue.

Could you share just the service revenue part?

Service revenue from Mobile we believe, because of the impact from the tariff cut, this -- our estimate is coming down a little bit in single -- low single digit.

Okay, great, thank you.

As we indicated in this presentation that during the first quarter the usage do go up, and Q1 we reported about 2% increase in Mobile revenue, which is good. And we would like to see the same happening during Q2.

Great, thanks very much.

Okay, thank you.

thank you. (Operator Instructions). Our next question is from RBS' Arthur Pineda.

Hi, thanks for the call. I have two questions. Firstly, could you elaborate a little bit on what are your drivers to the lower margins in the second quarter on your guidance? Is this more of a scale issue due to the price cuts, or are you also seeing escalation in costs on subsidies?

Second question I had is with regard to your IPTV service. Could you talk a little bit about this? What are the margins that you generate for this business and what critical mass do you need in order to turn this profitable? Thank you.

Okay, thank you. The driver for the a little bit the relatively lower margin is mainly due to the price cut, yes. And as I said we will to do our best to increase usage.

And the subsidy, as Dr. Yeh just mentioned, the subsidy remains about the same for Q2 as compared with Q1.

The IPTV, well, it's still -- we are still in trying to promote the use of our MOD service and it's a little bit early to tell you the margin. But we have forecasted the need for the number of subscribers and ARPU to bring this business sustainable, and it's much better from today's standpoint. Because we used to mention to you that we -- it requires around 2m subscribers and a higher -- much higher ARPU to balance all the operational cost and expenses. But now it's much lower in these numbers and we are reviewing all this from time to time and I'm a little bit in hesitation to disclose all these numbers for IPTV operation.

Thank you. If I could just revert to the first question I had on the drivers for the margins. You mentioned that there's no increase in subsidies. It seems to me that based on the language put out by your competitors that everyone's looking to raise the subsidy levels. Are you not seeing any rising competitive intensity on this front?

Arthur we're talking about the q-on-q number probably remains stable, Q2 versus Q1. But, of course, if you reverse it the one-on-one number, of course, it's increased a little bit.

No, the reason I referred to that was because the iPhone for your competitors were only really launched in March and I suppose a lot of them will be trying to roll it out even further in 2Q and 3Q. So are you not seeing any pressure on a sequential basis?

Arthur, you have to remember the iPhone actually launched -- I mean for the other two operators they actually launched in March. But for Chunghwa we've been having iPhone for more than one year already, so the comparison probably needs further review.

So no worsening, okay, thank you.

Thank you. Our next question is from CLSA's Dee Senaratne.

Hi, guys, I've just got three questions. The first one was on Fiber coverage. I know you've got a target of 85%, by 2014, I think it was in the presentation. Just wondering where you are right now as of today, basically, in terms of Fiber coverage of Taiwan?

And then the second question also relates to the Fiber network, in terms of how much have you actually spent to date on rolling out Fiber to the curb in Taiwan. And then how much more have you got to spend? So I guess, basically, where are we on the CapEx cycle on that front?

And then, finally, one question just on the Fixed Line business. I thought a pretty resilient effort, given, obviously, the substitution trends, but the domestic long distance revenue down 10%. I'm just wondering what do you think the driver is there. Is it substitution toward VoIP or Mobile? That was quite noticeable versus the other Fixed Line categories. Thanks very much.

Arthur, let me answer the first question about the Fiber. Okay, the Fiber coverage at the end of last year the household coverage is up to 73%. We are targeting 77% by year end.

Okay, thank you.

The CapEx required for rolling out the Fiber solutions is already included in our CapEx plan. And the Fixed Line CapEx account for majority of our CapEx.

Your third question is the -- yes, the DLD is declining at around 10% year over year. The reason for this is as you said, from VoIP and also from Mobile, yes.

Okay. Thanks very much, then. Thanks, guys.

(Operator Instructions). If there are no further questions I will turn it back over to Chairman Lu.

Yes, thank you very much for joining our first quarter of this year's earnings results conference call. And it's really just an update of what we had conducted just one month ago. So thank you very much for your participation. Thank you. Good night.

Thank you. Thank you, Chairman Lu. Thank you for your participation in Chunghwa Telecom's conference call. There will be a Webcast replay within an hour. Please visit www.cht.com.tw/ir, under the in-focus section. You may now disconnect. Goodbye.