Chunghwa Telecom Co Ltd (CHT) 2010 Q4 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's 2010 annual operating results. (Operator Instructions). For your information, this conference call is now being broadcast live over the Internet. A 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. Thank you. Ms. Shen, please go ahead.

Hello?

Please go ahead.

This is from Chunghwa Telecom. Can you hear me? Hello.

Yes. Please go ahead.

Okay, let's go ahead.

Okay. I'm sorry for some interruption in the operation of the conference calling system.

Okay, let me start again from slide number two. We are pleased to report another year of solid performance. Total unaudited consolidated revenue for 2010 amounted to TWD202.5b. The increase in consolidated revenue was mainly driven by an increase in mobile VAS, handset sales and internet services.

We have several major achievements in year 2010. The popularity of the smartphone and the economic recovery resulted in higher traffic volume, which in turn boosted the momentum of telecom industry growth. In addition to our traditional telecom service offering, we successfully launched selected ICT services and were awarded major contracts. We also introduced new initiatives relating to ICT and the converged services, and were able to configure cloud computing services for customers and consolidated and repackaged solutions for customers.

Turning to slide number three, in addition to our strong operating results, we were also encouraged by the recognition we received in the form of several domestic and international awards relating to service quality, corporate governance and corporate social responsibility. I attribute these accomplishments to the efforts of our employees and I'm proud of this public recognition of their dedication to excellence.

Moving on to slide number four, we remain committed to our shareholders, as you can see from this slide, which shows our cash return over the last four years. Cash dividends for 2010 were approximately TWD49.1b, including a regular dividend of TWD39.4b and a capital reduction cash return of TWD9.7b. We completed the fourth round of our capital reduction program in January this year and paid out TWD19.4b in cash.

Now I will hand over to Dr. Yeh for our financial results.

Thank you Dr. Lu and good day everyone. Thanks for joining us today. I will review our financial results in detail, beginning with the slide number six.

Slide number six shows our income statement on an unaudited consolidated basis, and provides a comparison on a year-over-year basis. Our total revenue for 2010 was TWD202.5b, a 2.1% increase compared to 2009. Despite the NCC tariff reduction that became effective on April 1, 2010, the Company did its best to maintain its growth. I will review revenues by business segment later.

Operating costs and expenses grew 2.2% to TWD145.1b and income from operations increased 1.7% to TWD57.4b. Net income for 2010 increased 9% to TWD47.7b, reflecting the tax rate reduction from 25% to 17%. EBITDA for 2010 decreased 1.4% to TWD91.4b, mainly as a result of the mandated NCC tariff reduction and the higher cost of handsets sold.

Slide seven shows our revenue for each business segment for 2010. In the Domestic Fixed-Line business local revenues decreased by 2.9% year over year mainly due to mobile and the VoIP substitution. The 10.2% decline in DLD revenues was also due to mobile and the VoIP substitution as well as reflecting the mandated tariff reduction. Broadband access revenue, including ADSL and the FTTx, increased by 2.1% year over year. Although ADSL access revenue decreased as more ADSL subscribers migrated to fiber solutions, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 2.9% year over year mainly due to growth in mobile VAS revenue related to our smartphone promotion and handset sales. Internet revenue rose by 3.5% mainly due to Internet services growth, which was driven by the increase in broadband subscribers and the migration of ADSL subscribers to fiber solutions. International Fixed-Line revenue increased by 2.6% mainly due to the growth in leased line revenue.

Slide eight show the breakdown of operating costs and the expenses. The increase in operating costs and the expenses was mainly due to the higher cost of handsets sold and the performance-based bonus accrual not related to net income growth. The remainder of costs and expenses in total declined mainly due to the decrease in depreciation expense.

As shown on slide nine, cash flow from operating activities was TWD84.6b during 2010. We were in a strong cash position on December 31, 2010 with cash and cash equivalents amounting to TWD90.9b.

Slide 10 shows our 2011 unconsolidated forecast. Total revenue for 2011 is expected to increase by 1.9% to TWD190b primarily due to increased fixed line revenue resulting from the shift in the pricing right of a fixed-to-mobile call from mobile operators to fixed network operators. Additionally, mobile internet, broadband services, corporate ICT and cloud-computing services will continue to be areas of growth.

Operating costs and the expenses for 2011 are expected to increase mainly due to the rise in interconnection cost and the transition fee resulting from the shift in pricing right of fixed-to-mobile calls. We also anticipate a rise in handset subsidy for smartphones as they become increasingly popular. However, in the meantime, the expanding smartphone subscriber base should drive growth of mobile internet and VAS usage and translate into a reasonable level of quality revenue. To facilitate traffic transmission and improve user experience we will continue to invest in improving network quality and increasing capacity.

As a result of the aforementioned reasons, income from operations and EBITDA is expected to decrease as compared to 2010. We expect non-operating income to grow this year due to an increase in reinvestment proceeds and the disposal of property.

That's all for our financial overview. I will now hand it over to President Chang for our management highlights.

Thank you Dr. Yeh. Now let me take you through our business performance. Slide 12 shows the results for our broadband services. By the end of 2010, Chunghwa had about 4.4m broadband subscribers. Our strategy is to continue the migration to FTTx for incremental ARPU and offer differentiated services, such as hifree, high-definition MOD programs and cloudbox storage service to add value for customers. Since August 2010, we have provided free speed upgrades for ADSL customers who were using lower speed services in order to strengthen customer loyalty in view of competition from cable operators. This initiative has so far proved to be effective.

Although our total broadband subscribers number has remained relatively flat, our initiatives to encourage FTTx migration have yielded solid results, with FTTx subscribers as a percentage of total broadband subscribers increasing from 38.1% at the end of 2009 to 46.8% at the end of 2010. In the fourth quarter of 2010 FTTx revenue reached 61.7% of total broadband access revenue. Broadband ARPU increased to 789 from 773 in the fourth quarter last year as a result of our successful customer upgrade programs. We also achieved growth in internet service revenue which amounted to 3.5% year-over-year.

Moving on to slide 13, which shows the recent boost we have seen from MOD subscriber growth. For the fourth quarter 2010 new subscriptions represented 9.2% of sequential growth and the total number of subscribers had reached 810,000 by the end of 2010. We are strengthening our MOD offering in terms of content, marketing and interactivity, and we will continue to offer additional popular HD channels to better cater to customer preference and enrich viewing experiences. By the end of this year we expect to have 33 HD channels and 115 SD channels.

Increasing fiber coverage facilitates our capability to offer HD services to more customers. We will continue offering additional HD channels and programs to meet customer needs. These efforts have resulted in steady growth in MOD revenue. Our target is to reach 1m MOD subscribers at the end of this year. As the NCC gave us approval in early January to help aggregators package quality channels for our MOD services, we expect new package with versatile content will continue to be introduced and therefore anticipate that the MOD subscriptions will increase significantly and that relevant ARPU will rise this year.

Turning to slide 14, we continue to be Taiwan's leading mobile operator with the lowest churn rate and solid year-over-year subscriber growth of 4.4%, bringing the total number of subscribers to around 9.7m at the end of 2010. 3G subscribers as a percentage of the total has continued to increase and we expect to have 10m mobile subscribers at the end of this year. For 2010 mobile VAS revenue increased by 30.8% year-over-year and now accounts for 15.1% of our Mobile service revenue. Mobile internet showed the highest year-over year growth, of 82%, making it the largest contributor to VAS revenue.

We expect continued growth in mobile VAS as we focus on executing our VAS strategy to enhance user experience and to create value-added services. We are integrating the 3G and WiFi network to improve network efficiency and facilitate VAS usage. We increased the number of WiFi access points to reach 10,000 at the end of 2010, and we expect to add an additional 10,000 by the end this year.

Slide 15 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 25% of total handsets offered in 2010 and we expect that the percentage to reach 35% to 45% depending on the market dynamic for 2011. As of December 31, 2010, mobile Internet subscribers, including mPro and the datacard users had grown to 809,000, a 92% increase year-over-year. We anticipate that we'll have 1.2m mobile internet subscribers by the end of this year. On the ARPU side, you can see that smartphone ARPU is about 100% higher than blended ARPU.

We offer a comprehensive smartphone portfolio supporting all mobile operating systems and spanning most world-class brands including iPhone and HTC. We recently signed an MOU with HTC to form a strategic partnership to work together on customized handsets and share marketing resources.

In addition to devices, we have been focusing on enriching content via customized value-added services including information services and daily life application services. In May, we launched the Hami Apps, which supports the Android platform. There are currently over 1,000 Hami Apps applications, such as GPS navigation, dictionaries, games, music, and stock information. We believe our efforts to enhance content will further expand our customer base and solidify our leading market position.

On slide 16 I would like to share with you our new business initiatives to drive future growth. First, we have initiated convergence service to meeting growing customer demand. We are integrating internal resources to conduct cross-platform services over our MOD, mobile and HiNet platforms. Single sign-on over the three platforms have became available from December 2010. Cloud-based multi-screen services including micro-payment, video, weather information, news and music will be available by the end of this year.

Second, we are focusing on our ICT business including services such as iEN, ITS, information security, PBX, call centers and IDC, as well as the Internet of Things. We also earned several government projects by leveraging our ICT expertise. Corporate ICT-related revenue grew 15.4% year-over-year for 2010 and is expected to grow 23% year-over-year for 2011.

Third, we launched hicloud services in April last year to service SME and public users. As we are building the largest cloud-computing datacenter in Taiwan in anticipation of growing demand for this service, with our experience, leading market position and continued investment in technology, Chunghwa Telecom is well-positioned to further solidify its leading position as an information and communications service provider.

Turning to slide 17, I'd like to show you our continuous prudent CapEx plan. The total CapEx for 2010 amounted to TWD24.5bn, a 3.8% decrease compared to that for the same period in 2009. Of the TWD24.5bn CapEx, 72.7% was used for the Fixed and Internet businesses, 21.5% was spent on the Mobile business and the rest went on other capital expenditure. We believe that it indicates a healthy CapEx level for long term sustainable growth.

Slide 18 highlights our operational focus for 2011. 2011 is Chunghwa's year of 'broadband, value-added, innovation and integration'. While continuing our previous efforts we made in these areas, we are focusing particularly on integration this year in order to strengthen our capability to offer converged services. In terms of integration, in line with the trend of broadband network development and digital convergence, we are leveraging our advantage as an integrated telecom service provider by integrating our fixed line, mobile and internet networks, platforms, resources and marketing efforts to facilitate the offering of cross-platform multimedia services and enhance customer satisfaction.

Next is the regulatory update. We have four major regulatory updates to share with you, as shown on slide 20. First, this is the second year of the three-year tariff reduction plan starting from April 2010. Data CPI was minus 0.87 for year 2009 and 0.96 for year 2010, hence the tariff reduction rate is expected be lower than that of the previous year.

Second, there was the shift in pricing right of a fixed-to-mobile phone call from mobile to fixed line operators at the beginning of year 2011 under the direction of the NCC. Please refer to slides 27 and 28 for more details.

Third, the third phase -- this first phase of the digital convergence legislation is to amend the Telecom Act and the three broadcasting-related regulations separately by June 2012. The second phase is to complete the Digital Convergence Framework by 2014. And the digital convergence law is expected to be finalized in 2015.

Lastly, 2G licenses will expire in 2012 and 2013. However, the MOTC has announced that it will extend the 2G licenses until the year 2017. The licenses that will be auctioned in 2015 will be technology neutral.

That's all for our business operations. Now I will hand it over to Dr. Lu to take you through our strategy.

Thank you President Chang. Our business strategy and policy is focused on five areas.

First of all, we will maintain our operational focus on broadband, VAS, innovation and integration. We will also enhance cooperation with subsidiaries to expand our overseas businesses and enlarge the scale of our operations. Recently, we signed an agreement and a letter of intent with China Telecom to work together on iEN or 'intelligent energy saving network services' in Fujian Province, and on 'smart city', Internet datacenter and cloud-computing services, energy saving, ecommerce etc. in the Special Economic Zone of Taiwan Strait west bank. This is a remarkable stride for us to expand service areas in the mainland.

At the same time as pursuing growth, we will accelerate network upgrades and integration as well as taking advantage of industry alliances to develop market-leading products and services and capture new service opportunities.

The quality of our human capital remains key, very key factors to our success. As such, we promote professional development and encourage early retirement. We also foster talent to meet our need for innovation and overseas expansion.

Given the importance of efficient management systems, we will continue to implement stringent cost-control initiatives to support the development of our business.

We continue to promote the importance of corporate social responsibility in everything we do with the aim of achieving enhanced commitment to corporate citizenship. As a telecom and ICT service provider, we joined the GreenTouch Alliance originated by Alacatel Lucent and make effort to reduce the energy consumed and the carbon emitted by communication networks.

And finally, we will maintain our stable dividend payout policy.

That's all for the presentation. We would like now to take your questions.

Thank you. We will now begin our question and answer session. (Operator Instructions). The first question is [Jason Ling] from UBS. Please go ahead.

Hi, this is [Jason] from UBS. I have three questions. The first one is related to your guidance for CapEx in 2011. The CapEx guidance is increase by 35% year on year. Can you share with us what is driving the increase and could you break it down for us, the amount of CapEx that is spent on Mobile and Fixed Line? That's the first question.

The second question I have is could you share with us your thoughts on further capital reduction and when can we expect this to be finalized if any?

And my third question is on the recent news about the price reduction on the domestic long distance calls. Can you comment on the impact of that? Thank you.

Let me answer your third question first. About the DLD calls, according to the legislative decision, we have to reduce the tariff on the offshore island. It is totally our revenue will decrease about TWD17m per year. Thank you.

Can I just follow up on that? The legislative decision to reduce the price for offshore island calls - that would begin I think in April this year - will impact by TWD17m for this year. But I understand that there is going to be a complete rollout country-wide next year so what kind of impact do you foresee for that?

You mean for the whole -- because this issue is still negotiated with the NCC. The NCC, according to our conversations, they promised us we can increase our local phone tariff to compensate that. So today I don't have any figures to you because it is still under negotiations. Thank you.

Thank you.

Okay. For our second question about capital reduction, so far we don't have a specific plan for it. But we will continue to evaluate the capital reduction plan. But I want to remind you there are other ways. We have other options to implement capital reduction, for example, like a share buyback could be alternative. We did that in the past. So we would continue to evaluate our capital management program.

Can I just jump in here and ask whether there is any consideration that would lead you to think about doing the share buyback rather than strict capital reduction?

Not particular reason but I think some of the shareholders, they expressed they prefer share buyback to direct capital reduction. So as I mentioned, we did it before so that is an alternative so -- but so far, we don't have any specific plan. But I just want to emphasize our capital reduction, capital management has many different ways to do it and. So we don't have a specific plan, we don't have a specific timetable for the capital management this year yet, but we will continue to evaluate.

Thank you.

And to your first question regarding to our CapEx guidance for this year, if you remember for the year 2010, we budgeted our CapEx around about the same level as we mentioned for this year. But due to certain factors affecting the levels that we actually implemented all this CapEx trend, it resulted into, maybe it's only about less than 80% in spend. So since our budgeting is [lever] based so we anticipate that for this year, we probably would have similar level of requirements in CapEx.

And it really depending on the market acceptance of our new offerings, for example, we emphasize 50 megabits per second in our last-mile capabilities to our customers. It really depends on the acceptance from the market. So we would like to roll out higher speed to our customers, but it is under -- if the market receives this very well we probably will gear up to this budgeted CapEx. Otherwise, it could also be less we have indicated.

And the breakdown, roughly -- Chunghwa Telecom is an integrated operator. Our classification of Fixed Line includes the backbone required for Mobile operation so roughly 80% of our CapEx is in Fixed Line and something -- about 70% to 75% on Fixed Line and about 20% to 25% on Mobile.

Thank you.

Okay. Thank you.

(Operator Instructions). Our next question is [Eric Sean] from Overlook Investment. Please begin.

Hi, one question. You said you had increased bonuses in 2010 because of the growth in net income, but your net income only grew because of the decrease in the tax rate. So my question's why should employees get a bonus for a regulatory change by the government? Thank you.

This is a good question. And because the Company, we have a policy on deciding how we treat our employees and our guideline for this reflects the certain percentage of the balance from net income will be attributed. And so according to that formula, we, our employees also enjoyed this change in regulatory on corporate tax regime. We have to find balance among several factors on the value we have created. We should treat our customers well. We should treat our shareholders well and we also need to treat our employees well. And finally, it's to the social responsibility. So this is a very good question and we believe with this kind of balancing out among the stakeholders, I believe our employees will work harder this year.

Do you have more questions, Eric?

No.

Thank you. Our next question is Joseph Quinn from Macquarie Securities.

Good evening guys. Thanks very much for the call and the opportunity to ask some questions. I have one major question maybe you can highlight and give me a little more detail on. In relation to your 2011 guidance, on the non-op side you mention a gain in disposal of property and also on your actual investments as well. Can you break out the detail on that? And in key can you actually tell, give us some more detail when the gain on property will be recognized, i.e. first quarter, second quarter etc? Thank you very much.

Okay. First of all, the gain primarily related to some land we sold to our real estate subsidiary a few years ago and but because it's a parent and a subsidiary relation so we need to offset the gain. But recently the project is going to be completed this year. And also there is another piece of land, is we build IDC center in Banciao and we sold a piece of land to Taiwan stock exchange. So based on the real estate company's transaction and also their development so we expect that the gain from the real estate related, including the real estate subsidiary and sales, land sales to Taiwan stock exchange, is around [$2b]. That explains most of the change, most of the increase we refer in earlier we talk about.

And since the profit will be recognized when the real estate project transferred to the buyer, and there are a couple of dates, a couple of licenses to be obtained before they can transfer. So, so far we expect this will be done in this year, but we don't have a specific date for them. Okay, thank you.

Thank you. So we shouldn't expect it in the first quarter then, is that correct?

No, not first quarter. Also I want to remind this transaction related to land are past transactions and we don't plan to sell land in the near future.

Understood. Thank you very much.

(Operator Instructions). Our next question is [Eric Sean] from Overlook Investments. Please begin.

Yes, in your 2011 forecast for operating cost and expenses this number of TWD138.6b is an increase of almost TWD8b from 2010. Can you provide a breakdown of how much of this TWD8b is for higher costs for the transition and interconnect fees and how much is for higher handset subsidies? Thank you.

Okay, thank you. Please refer to page 26 --- 27 and I think that is the detail we have based on the traffic volume of 2010. Since the shift in calling rate is kind of complicated and -- but this, page 27 would give you a good reference about what is going on here. But I want to remind you, say the number we estimated using this year's traffic, the profit impact is TWD1.2b instead of the TWD1.3b. But this would give you a rough picture about the number you are looking for. So we don't give out that much of the detail in our forecast but this would give you a good feeling about the numbers, okay? And then you can figure out the range of them primarily as related to the handset sales.

Okay. So here, the TWD5.3b is from the extra cost here?

Yes.

Okay.

Okay.

Thank you.

Our next question is Joseph Quinn from Macquarie Securities. Please go ahead.

Thank you again. Can I just follow up on some items in relation to your product offerings for this year? Firstly, can you maybe give us a little bit more detail on what you expect to do with tablet PCs? We are hearing a lot obviously from both Far EasTone and Taiwan Mobile on that front.

And in addition to that, can you give us a little bit more detail on your pricing expectations for HSPA-plus, the faster connection speed that you are offering to customers. Do you believe that you can sell these as a premium or do you think there will be different package terms with these products? Thank you.

You are asking about the tablet PCs like the iPad or similar type of new devices available in the market. Yes, we intend to introduce this type of new devices that is becoming available and our offering will be somewhat different from the smartphone because the tablet has different characteristics and different user behavior. For example, we offer the iPad these days without any subsidy on this. And it is a nice device for customers and probably will have really encourage people to use mobile internet. So we encourage customers to use it.

As you have heard from our presentation, we have signed a strategic relationship and a strategic agreement with HTC. And with this kind of closer relationship and we would hope that we will be able to better and also to receive premium products from HTC in this year and in coming years.

Thanks. And can you give us maybe some details on the HSPA-plus question as well? Thanks.

HSPA-plus, our schedule will be developed in this summer about 21 megabits per second.

Okay. And what pricing scheme do you expect to be able to charge for this? Will it be a significant premium to your current packages and do you...

We try to set another package for the HSPA-plus because the speed is much higher than HSPA so we are setting another package.

Okay. Thank you.

It is still under NCC's permission.

Okay. Does NCC have any particular issues with the pricing at this moment?

At this moment, I think they are considering about this as a different product and so I think they will accept our suggestion, I think.

Okay. Thank you.

Our next question is [Jerry Yin] from Morgan Stanley. Please begin.

Hi, thanks for the opportunity to take my questions. I just have one question. On your slide 15 you showed your smartphone ARPU, which is higher than TWD1,200. Is there any reason why this number is almost TWD200 lower than what you reported in the previous quarter? Is there any specific reason for ARPU to decline for smartphone or is it basically a seasonal factor? Thank you.

Our smartphone, actually the first stage we introduced smartphone it's focused on the iPhone so iPhone's ARPU is very high. But gradually we have introduced lots of models of smartphones so that is middle levels and their ARPU of course, as you know, because the customer becomes bigger, the ARPU goes down. But totally I think it's worth to develop this and to make more customer of the smartphone.

Okay. Thank you.

(Operator Instructions). Our next question is Eric Sean from Overload Investment. Please begin.

Just one question. When do you expect to announce the final dividend for 2010? Thank you.

The dividend need to be approved in the shareholder meeting so that is around June.

So when will the Board propose the final dividend amount?

The Board will have a meeting in April and probably, it will approve in our proposal in April.

Okay, thank you.

Thank you. I will turn it back over to Chairman Lu.

Okay, thank you very much for participating in our conference call for the results of our operation year 2010. Thank you for your questions and thank you for your continuous support to Chunghwa Telecom. Good night from Taipei.

Thank you Chairman Lu. 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 and good bye.