Chunghwa Telecom Co Ltd (CHT) 2010 Q3 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's Q3 2010 operating results. During the presentation, all lines will be played on listen only mode. When the briefing is finished, directions for submitting your question 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 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. Thank you. Ms. Shen, please go ahead.

Thank you. This is Fu-Fu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our third quarter 2010 results conference call. Joining me on the call today are Dr. Lu, Chairman and the CEO; Mr. Chang, President; and Dr. Yeh, CFO.

During today's call, management will discuss business, operational and financial highlights for the third quarter of 2010. This will be followed by Q&A. Before we continue, please note our Safe Harbor statement on slide one. Now I would like to turn the call 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 third quarter 2010 earnings results conference call.

Despite another mandated tariff reduction from the NCC, which was effective as of April 1st of this year, we have delivered a solid performance for the third quarter due to the continuing economic recovery and our successful marketing efforts.

The increase in consolidated revenue for the third quarter of 2010 was mainly driven by the increase in mobile VAS, Internet services and the broadband excess revenues.

Our prudent cost management initiatives have resulted in stable operating income, which -- with net income growth due to a reduction in tax rate from 25% to 17% starting this year.

Moving on to slide number three, we remain committed to our shareholders as you can see from this slide, which shows our cash return over the past four years.

Cash dividends for 2009 were approximately TWD39.4b, which was paid out in September.

In addition, the schedule for the fourth round of capital reduction was approved at yesterday's Board Meeting. The payment of around TWD19.4b will take place on January 25th, 2011.

Now I will hand over to President Chang for the business overview.

Thank you Chairman Lu. Now let me take you through our business performance.

Slide five shows the result of our broadband service data. On September 30th this year Chunghwa had 4.3m broadband subscribers. In August of this year we provided free speed upgrades for ADSL customers who were using low speed service in order to strengthen customer loyalty in view of our competition from cable operators. The initiative has so far proved to be very effective.

Although our total broadband subscriber number has remained relatively flat, our initiative to encourage FTTx migration has yielded solid results, with FTTx subscribers, as a percentage of total broadband subscribers, increasing from 31.2% at the end of September last year, to 45.2% at August of this year.

In the third quarter of 2010, FTTx revenue reached 60% of total broadband access revenue.

The overall upward trend in ARPU that we have seen over the last few quarters continued in the third quarter. The broadband ARPU significantly increased to TWD789 from TWD776, in the second quarter this year.

The [central] customer from 761 in the third quarter last year as a result of our successful customer upgrade programs.

We also achieved the Internet service revenue growth, which amounted to 6 points year over year for the first three quarters.

Moving on to slide six, which shows the recent boost we have seen from MOD subscribers growth. For the third quarter this year new subscriptions represented 7.3% of the sequential growth and the total number of subscribers reached 750,000.

We will strengthen our MOD offering in terms of content, marketing and interactivity. And we will continue to offer additional, popular HD channel and will better cater to our customers' preference and enrich their viewing experiences. By the end of the year we expect to have 17 HD channels and 110 SD channels.

Increasing fiber coverage facilities our capability to offer HD services to more customers. We will continue offering additional HD channels and the programs to meet our customers' needs. This effort has resulted in steady growth in MOD ARPU. Our target is to have 900,000 MOD subscribers and 200,000 to subscribe to family packages by year end.

We also expect the total MOD revenue to increase by 25%, year-over-year, during this year.

Turning to slide seven, we continue to be Taiwan's leading mobile operator with the lowest churn rate and a solid year over year subscriber growth of 4.3%, bringing the total network subscribers to around 9.6m at the end of September this year.

3G customers, as a percentage of the total, has continued to increase.

For the first nine months of this year, mobile VAS revenue increased by 29.2% year over year and now accounts for 14.6% of our mobile service revenue.

Mobile Internet demonstrated the highest year over year growth of 80%.

SMS shows a solid year over year growth rate of 7.4% and they remained the largest contributor of VAS revenue. We expect to continue growth in mobile VAS, as we focus on executing our VAS strategy to enhance user experience, create a value-added service and customize and integrate the service over a quality network.

Slide eight shows the success of our mobile strategy. Our smartphones, which leverage a variety of applications, are increasingly penetrating the premium customer segment. Smartphones accounted for 23% of the total handsets offered in the first nine months and we expect that to reach 25% by the end of this year.

As of September 30th this year, mobile Internet subscribers, including mPro and the data card users, also grew to 653,000, a 101% increase compared to a year ago.

On the ARPU side you can see the smartphone ARPU is 125% higher than blended ARPU.

We offer a comprehensive smartphone portfolio, supporting all mobile operating systems and spanning in most world class brands include iPhone and HTC.

In addition to devices, we have been broadcasting our enriched content by customers value added services, including information service, life application services.

In May we launched the Hami F, which supports the android perform. There are currently over 500 Hami F applications. We believe our effort to enhance content will further expand our customer base, and this solidifies by our leading market position.

On slide nine, I would like to share with you our new business initiative to drive further growth.

First, we have initiated a convergence service to meet growing customer needs. We are integrating internal resources to conduct across platform service over our MOD mobile and high net performance. Single sign-on over the three platforms will be available in December this year.

To support this development, we continue to expand our fiber customer base to facilitate the promotion of digital coverage and services.

Second, we are focusing on our corporate ICT business, including services such as iEN, ITS, information security, PBX, call centers and IDC, as well as the Internet [theme].

Third, we have developed a cloud computing service. We are building the largest cloud computing data center in Taiwan in anticipation of growing needs for the services. With our experience in the leading market position and the continued investment in technology, Chunghwa is well positioned to further solidify its leading position as an information and communication service provider.

As show on slide 10, overseas development is another future growth initiative towards HD.

South East Asia and China are two major areas we are focusing on. Our joint venture with Viettel to establish the largest IDC company in Vietnam marked our first overseas endeavor.

Replicating our experiences in call center service, we also initiated a joint venture Sertech in Xiamen to capture growing local businesses' ICT needs.

Moreover, we will establish wholly owned subsidiary in China and Vietnam. We expect these two subsidiaries to function as the ICT-related solution providers and leverage our ICT competence.

In order to expand our international services to overseas markets, we have established subsidiaries in America, Hong Kong, Singapore and Japan. Through these four subsidiaries we can provide a quality, competitive service, including international private leased circuits, IP-VPN, IP transit, voice and data wholesale services, as well as type I and type II services to multinational corporate customers.

Turning to slide 11, I'd like to show you our continuous proven CapEx plan. The total CapEx for the third quarter this year amounted to TWD6.2b, a 1.4% decrease year over year. The decrease was due to the slight delay in CapEx budget execution. Of the TWD6.2b CapEx, 52.8% was used for the Fixed and Internet business, 27.4% of our spend on the Mobile business and the rest went on other capital expenditure.

Our annual CapEx guidance remains at 15% of revenue, which we believe it is a healthy CapEx level for long-term, sustainable growth. With that, I would like to turn the call over to Dr. Yeh for a review of our financial results. Thank you.

Thank you President Chang and good evening everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 13.

Slide 13 shows our income statement on a consolidated basis and provides a comparison on a year over year basis. Total revenue for the third quarter this year increased 1.6%, to TWD50.9b. Despite an NCC tariff reduction that became effective on April 1st this year, the Company did its best to maintain its growth pattern.

I will review the revenue by business segment later.

Operating costs and expenses grew 1.5% to TWD36.4b.

Income from operations for the third quarter this year increased 1.8% to TWD14.4b mainly due to the revenue growth.

Net income for the third quarter of this year grew 9.5% to TWD12b, reflecting the income tax rate reduction from 25% to 17%.

EBITDA for the third quarter of this year decreased 1.2% to TWD22.9b mainly as a result of the mandated NCC tariff reduction and our changing cost structure.

Slide 14 shows our revenue for each business segment for the third quarter of this year. In the Domestic Fixed Line business, local revenue decreased by 2.1% year over year mainly due to the mobile and the VoIP substitution. The 17.1% decline in DLD revenue also was due to mobile and the VoIP substitution and the mandated tariff reduction.

Broadband access revenue, including ADSL and FTTx, increased by 3% year over year. Although ADSL access revenue decreased as more ADSL subscribers migrated to fiber solution, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 1% year over year mainly due to the growth in mobile VAS revenue related to our smartphone promotion and the handset sales.

Internet revenue increased by 10.2%, mainly due to Internet service growth, which was driven by the increase in broadband subscribers and the migration of ADSL subscribers to fiber solution.

International Fixed Line revenue decreased by 1.9% mainly due to VoIP substitution and the market competition. That was partially offset by growth in leased line revenue.

Moreover, revenue of ICT and the corporate solution across our business segments, increased by 121% year over year, to TWD0.8b, due to our innovative service offering.

Slide 15 shows the breakdown of operating costs and expenses. The increase in operating costs and expenses was due to the increased cost of corporate ICT service and corporate solutions and the performance based bonus accrual relating to net income growth. Overall, we saw a decrease in our other costs and expenses, mainly due to lower depreciation expense.

As shown on slide 16, cash flow from operating activity was TWD19.5b during the third quarter this year. We were in a strong cash position on September 30 this year with cash and the cash equivalents amounting to TWD67.4b.

On slide 17 show our fourth quarter forecast. Fourth quarter this year revenue is expected to decrease year over year by TWD0.64b, or 1.35%, to TWD46.8b. The decrease is due mainly to lower corporate ICT and corporate solution revenue and adverse effect of the mandated tariff reduction effective April 1st this year, which is expected to be partially offset by growth in mobile value added service revenue and the broadband access revenue.

Operating costs and expenses are expected to decrease year over year by TWD0.48b, or 1.4%, to TWD33.97b, due primarily to lower corporate ICT and corporate solution costs and the lower depreciation, which offset the increase in cost of the sales due to the anticipated higher demand for smartphone.

Operating income is anticipated to decrease slightly by TWD0.16b year over year, mainly due to lower revenue.

Pre-tax income is expected to be TWD0.62b, or 4.7% lower than that for the quarter last year. The decrease in pre-tax income is because non-operating income and the expenses are expected to be TWD0.46b lower due to anticipated losses on asset disposal and on evaluation and the disposal of financial instruments.

Net income is expected to increase by TWD75m to TWD10.65b due to the tax rate reduction, while EBITDA is forecast to decrease by TWD0.7b, or 3.2%, also due to lower revenue.

Now that's all for our financial overview. I will now hand over to Dr. Lu for our management highlights.

Thank you, Dr. Yeh. In summary, Chunghwa Telecom is the strong market leader in Taiwan's stable telecom market. Our solid performance is driven by a steady growth in mobile VAS and the broadband services. At the same time, we are maintaining our focus on cost control in order to ensure operational efficiency.

We are committed to a sustainable dividend payout, a strong balance sheet and the prudent capital management. Our innovative service offerings, including ICT services and the leading edge technology, position us to capitalize on growth opportunities at home and abroad.

This concludes our presentation. I would like to open up for questions.

Thank you. We will now begin our question and answer session. (Operator Instructions). The first question is Neale Anderson from HSBC. Please begin.

Thank you. Good evening. My question was regarding slide nine and particularly the Corporate ICT business. The growth from 3Q '09 to 3Q '10 has been quite strong. Can you give any further guidance as to how you expect this to develop? Is it likely to be a smooth appreciation of revenue or do you see the business as quite lumpy, so it will be up and down quarter by quarter? Thank you.

About the ICT services, as we mentioned before, that is a new area we developed. So this year, total revenue amounted -- ICT for Chunghwa Telecom is about less than 10% for the total revenue. We expected this area will grow gradually and maybe in three years, we are up to 3% total in Chunghwa Telecom.

Let me -- we initiated this area of new business only within these two years and so last year, in the third quarter is a relatively small number. And as we exert more of our effort in instituting innovative ICT solutions, we are able to do better, and we believe in the long run this Corporate ICT business is going to grow.

Great. Thank you very much.

The next question is Ken Goh from GIC. Please begin.

Hi. Thanks very much for the call. I realize this could be a little sensitive, but there was some news I think of some of the members of the Transportation Committee of the Legislative Yuan expressing concerns over Chunghwa Tel's capital management policy. I just wonder whether you had a view on that, whether that actually does have implications for your future capital management policy or not.

The second question is just on your margins going into the -- into 2011. Thank you very much for the forecast for the fourth quarter, but 2011 outlook for margins, your expectations of where the trend in that goes in next year? Thank you.

Okay. Yes. You just mentioned in the Sub-Committee of Transportation and Communications in our Legislative Yuan, some small number of legislators, they propose that they would like to see how we conduct our capital management in the future. This kind of a solution has not been finalized yet and we believe there are certain issues that need to be dealt with before the subcommittee or even the whole House make their final decision on this. So we would like to talk to them and to see if there is a way out on this. So it's not finalized yet. We are very much concerned about this kind of move in our Legislative Yuan.

All right.

As to the margin for next year, we will offer probably a full year guidance next year in April, March, okay. The guidance will be in March next year.

Okay. All right. Thank you.

(Operator Instructions). The next question is Leping Huang from Nomura.

Hello. This is Leping Huang from Nomura Hong Kong. Thank you, management. So I have two questions. The first question is about this mobile data service. So can you elaborate what is the iPhone 4 sales situation in Taiwan, especially from September and from -- what is the current status and what is the impact on your top line and EBIT margins?

And the second question, should I ask all questions or -- hello? Can you hear me?

Yes, yes. Please continue your question.

Okay. The second question is about your broadband service, about -- I see this FTTx development is quite good in this last quarter and this improve your broadband ARPU. So what is the current -- what is the short- or long-term plan of the FTTx migration development? And we see also the cable TV operator in Taiwan, the ownership has changed in basically the largest and the second largest change ownership. What is the impact? Were the cable operators ownership change will have an impact on your FTTx or broadband service -- will it change the broadband service competition landscape?

And the second question -- and the third question is also about this new business development. You mentioned that you target for this roughly 3% of the ICT service and in -- I think within three years. What will be the CapEx -- the required CapEx to be spent on this new business initiative you are considering? Yes. That is three questions from me.

Let me answer the first question about iPhone 4. Actually, we still have a waiting list about the iPhone 4 so I think it is very popular in here. And the impact -- about the top line, I think while it is not a very big impact of our top line because -- the ARPU is over the same way as iPhone 3GS. And the EBITDA margin for the iPhone 4, the subsidiaries is almost the same with before I think.

So in Taiwan, still, there is not enough iPhone supply to be sold -- or there is not enough supply you can get from Apple? Is it the situation we are facing now?

Well, we believe -- we are in a good position, you know, to offer iPhone 4 to our customers, yes. And there are demands -- a strong demand for this and as our President just mentioned, the iPhone 4 in our marketing sales strategy is similar to what we did for iPhone 3GS and so the impact on top line, on ARPU, on EBITDA margin is similar to what we had in iPhone 3GS, yes.

Your second question on broadband FTTx deployment, yes, we will continue migrating our customers from lower speed to higher speed. As we move above 10 megabits per second download speed, we need fiber solution so we will continue deploying fibers because all this infrastructure is moving fast to higher, higher speed. So this will make us in a good position to capture market share and increase our subscribers.

The cable TV landscape, as you said, that deal I believe has not been finalized yet. Still pending on some final -- I don't know. I'm not involved in their business, okay. But we would like to maintain our competitiveness in our fiber solution and try to maintain our broadband access market share, okay.

Do you think their ownership change will have any impact on your business, or intensify the competition, or basically, there is no direct competition between their broadband service provided by a cable TV operator and your FTTx service?

Well, probably you have heard from the other side of --- our peers on their business. Cable operators, as they improve or migrate their infrastructure to digital ones, they will be able to offer broadband access services and so that presents a challenge to us. But as I said, Chunghwa Telecom would like to maintain our competitiveness and to maintain our profitability in this business.

The ICT solution in general, requires less CapEx as compared to our telecommunication centric business. That is the case and we will incur in all the CapEx required for our core or ICT business in our CapEx plan.

What roughly, if you are targeting 3% or 5% in three years, what roughly should be spent on this ICT-related CapEx because it is a new service, I guess, you need to--?

Well, ICT solutions, tends to be more software related in the development from the company. And if it is hardware related, it's the pattern will come from our clients.

Okay.

[Multiple Speakers] yes.

Thank you.

Thank you.

Your next question is Marvin Lo from Daiwa Capital Markets. Please begin.

Hi, I just have a quick question about the SMS. According to my understanding, SMS is not very popular in Taiwan and one of the reasons could be a way to input the Chinese characters a bit troublesome. However, with the continuous penetration of the smartphone, which I believe a lot of them you can do handwriting just on the screen, so would that actually help to improve the SMS traffic for Chunghwa Telecom and what would be the impact on the mobile voice revenue going forward?

You mentioned about the SMS is not so popular because of the Chinese input method. With the smartphone penetration goes higher, but today, most of the customer using the SMS is more like the young people and the smartphone -- the price of smartphone is still high. So most of the high end customer are using smartphone. So if the price of smartphone goes down quickly, and the penetration goes high, then I think it will help our SMS traffic.

Thanks. And so do you expect there is a cannibalization to the mobile voice revenue in that case?

Well, let me -- as the economy recovers in Taiwan, we see a bounce back of growth in traffic volume -- voice volume in mobile service. So I don't think the SMS really has that much impact on our voice traffic.

The SMS is still growing in this market but not as much in quantity as compared with other markets. For example, in other markets, you see SMS accounted for above -- even very high percentage of their revenue. But here, it remains this kind of situation.

I believe it's more -- has to do with our people would like to talk more than write more, yes. So conversation is very, very handy. I believe it's one of the communication method that god gave us. And our SMS growth rate is about 8% year over year.

Okay. Thank you.

Thank you.

The next question is KC Chen from CLSA. Please begin.

Hi. Thanks for taking my question. I'm just wondering could you please give us some color on the progress of IFRS and also the potential impact? Thanks.

Okay. I think we are preparing the documents and the systems and so far, I think the most significant one we are looking at is the one you guys pay attention to is our -- how to value the assets particularly real estate assets of our Company. And so far, as I say last time, our research indicated most companies are -- they use cost basis for the asset in operation and most of our land are held for operational purpose. So it sounds like we probably will do as other people do. Okay, thank you.

Okay. Thanks.

(Operator Instructions). Our next question is Leping Huang from Nomura. Please begin.

Thank you for taking my question again. So could you elaborate what -- regarding to his capital reduction discussed in the Legislative Yuan and what is the issue now under discussion and what will be the -- I guess it's quite difficult to ask. Will it create any problem for the future capital reduction or because can you elaborate what is the background which -- about this issue? Thank you.

Well, as I said earlier, that the issue has not been finalized. So our discussion here is just based on the written document that we have received from the Deputy and the Subcommittee of Transportations.

You know their concern basically, our interpretation of their concern is about the government ownership, whether this kind of capital management will reduce government ownership okay. And so they would like to see if -- in the future, you know, not related to the already been finalized capital management for this year. They would like to see in the future if there is any such increase in capital or decrease in capital that need to report to the Legislative Yuan and with their approval, then we move forward.

That is the kind of the statement that they put up for the solution, yes. And let me repeat again that the issue has not been finalized and still get to be discussed further, yes.

Okay. But now, the order capital management does not affect the government ownership. Is my understanding right? From now on, that why this issue has been raised this time or--?

You know, we argue with them on that -- and many type of capital management will not change government ownership.

Yes.

But somehow, they would like to see if they have the right to get involved in this kind of decision making, yes. But we are doing some legal assessment and there are areas that need further discussion.

Dr. Yeh would like to add somewhat a little bit on this.

I think the key concern of some of the legislator is if Chunghwa returned capital now and if in the future, Chunghwa need to raise capital, the government might not have budget for that and it might dilute. So basically want us to be careful about our capital management program so to take care interest of all shareholders. Thank you.

Thank you. Yes. So it means that you can -- so capital reduction is okay, but whenever you raise capital, it should be approved by the government, is it your interpretation of?

Well, our position is better not have this kind of solution.

Okay. Yes. Thank you very much.

Our next question is Ravi Sarathy from Citibank. Please begin.

Good evening, gentlemen. Congratulations on a solid and stable set of results. I have two questions if I may. Looking at slide number eight, the first question is really a question of clarification. You mentioned that smartphone customers account for 23% of the total handsets offered in the first nine months of 2010. Specifically, are you talking about the 23% of net additions or gross additions or are you talking about 23% of the total postpaid subscriber base the number that you expect to reach 25% for 2010?

The second question I have is around the smartphone ARPU number of TWD1,456 that you note on the same slide. I just wanted to clarify my understanding number one, that that is not including Symbian. You know, it's a substantial premium which implies that it is Android plus iPhone.

And the second question associated with that is what would the difference be between an iPhone user and an Android user? I guess global benchmarks would suggest an iPhone user has structurally higher ARPUs than a comparable Android user?

First, I can explain why the difference between an iPhone user and an Android user. Actually, as we understand, the iPhone is a very closed system. So with Apple provide their system, their handset and their platform, so it is very closed. And actually, it becomes an iconic symbol of high end smartphones. So that is the difference with Android because Android is a multi-vendors and the handset varies, so you cannot identify the handset directly if it is iPhone or it is an Android phone. So that I think is quite different.

And as I just mentioned, the iPhone customer is a high end user so their ARPU is quite high. So today, our iPhone ARPU is almost 1,800 per month compared to the smartphones. It's about [4,000] so that is the difference between iPhone and Android.

And the 23%, the base for this 23% is the number of handsets offered this year from Chunghwa Telecom, yes. The total number of handsets from our sales.

So that would be postpaid contract subscriptions? Would that be right?

Yes.

Or new postpaid contracts...

[Technical difficulties] customer postpaid in Taiwan.

I'm sorry, say again?

I mean more than 90% customers are postpaid.

Yes, so the 23% is of your gross additions?

Gross sales.

Right.

Yes, for this -- during this period, yes. The nine month period, yes, okay. Suppose, you know, let me just take a number you know, which may not be the real number of total sales this -- of handsets this first nine months. Suppose it's 100,000, okay, the 23% of that 100,000 handsets we offered to our customers this year.

Yes. Completely understood. Thank you very much.

Including those who -- the price, they are all handsets with the new handsets. Okay, now the smartphone definition for that TWD1,456 smartphone includes Symbian 6.0 handsets.

Understood. Thank you very much.

Okay. Thank you.

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

Okay. Thank you very much for joining our third quarter 2010 results conference call. Thank you very much. Good evening everybody. Good night.

Thank you Chairman. 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 In Focus section. You may now disconnect. Goodbye.