Chunghwa Telecom Co Ltd (CHT) 2011 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's first-half 2011 operating result. During this 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 section. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cht.com.tw/ir, under the In Focus section.

Now I'd like to turn the call over to Fufu Shen, the Director of Investor Relations. Thank you. Miss. Shen, please go ahead.

Thank you. This is Fufu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our second-quarter 2011 results conference call. Joining me on the call today are Dr. Lu, Chairman and CEO, Mr. Chang, President and Dr. Yeh, CFO.

During today's call management will discuss business, operational and financial highlights for the second-quarter 2011. This will be followed by Q&A. Before we continue, please note our Safe Harbor statement on slide two. Now I would like to turn the call over to Chairman Lu.

Thank you, Fufu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first-half and second-quarter 2011 earnings results conference call.

On slide number three, total consolidated revenue for the second quarter of 2011 amounted to TWD54.4b, mainly from the increased Fixed-line revenue, Mobile value-added service and handset sales. In addition, an increase of construction revenue from our property development subsidiary also contributed to the revenue growth. During the second-quarter 2011 we continued to enjoy growth in our traditional Telecom service business and to win additional major ICT contracts.

Moving on to slide number four, which shows our cash return over the last several years. In addition to the TWD18.4b cash returned via the capital reduction in January, on August 17 we distributed a dividend per share of TWD5.5243, amounting to a total of TWD42.9b [relating] to year 2010.

Our continuing commitment to shareholders is evidenced by our decision to distribute the highest dividend payout ratio, of 90%, with the remaining 10% set aside as legal reserve in accordance with Company law. However, once our legal reserve reaches our capital stock level, which is expected to occur in three or four years, we will be exempted from this requirement. As a result, a dividend payout ratio of over 90% is likely in three or four years.

Before beginning the financial overview for the second quarter I would like to take you through some recent developments, as shown on the following three slides.

Slide number six. As innovative offerings and premium customer service are key elements of Chunghwa's corporate culture, we have taken the decision to leverage these strengths to further differentiate ourselves from our peers. We have therefore announced our Digital Rainforest initiative to offer a cutting-edge Broadband service to address customers' desire for even higher speeds, a Cloud computing platform to encourage innovation, integrated service platforms for up and downstream partners to develop relevant applications and contents, as well as co-operation with vendors and international operators on carbon emission reduction to promote sustainability.

In order to provide superior customer service we are renovating our service channels and outlets to offer an enhanced user experience. We anticipate that these efforts will enrich the development of the industry and result in a win-win situation for Chunghwa, its partners and customers.

Slide number seven illustrates our Cloud computing business. Our Cloud computing service is one of our new businesses that have attracted considerable attention. This B2B-to-C initiative involves Chunghwa and its partners working together to offer a developing platform, hicloud PaaS for independent software vendors to develop cloud applications that are then provided to customers in the hicloud apps mall.

We are also collaborating with government network communication entities and independent software vendors to promote innovative Cloud services and applications. We expect to have over 1,000 SME customers by the end of this year.

Slide number eight demonstrates our service channel transformation initiative. As a service provider we are keenly focused on improving the quality of our customer service. ECHT is the guideline for -- that we are using to establish a brand new spectrum of distributed channels.

E stands for user experience. In these renovated service channels we plan to create optimum user experience by communicating and sharing services with our customers. C stands for caring. We plan to demonstrate our care by bridging the digital gap and offering customized services to people of different ages and in different areas. H stands for holistic. We aim to offer integrated and versatile Telecom services that meet customer needs. T stands for trustworthy. We will provide reputable and quality services to retain customer loyalty.

We plan to establish over 20 service channels in this year, over 100 in next year and 50 in both 2013 and 2014. Of course, we will monitor and assess the effectiveness of these new channel service centers and adjust our approach if necessary.

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

Thank you, Chairman Lu and good day, everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide number 10.

Slide number 10 shows our income statement on the consolidated basis. Our total revenue for the second-quarter 2011 was TWD54.4b, a 9.6% increase compared to 2010, primarily due to an increase in Fixed Line revenue resulting from the shift in the pricing right of a Fixed-to-Mobile call from Mobile operators to Fixed Network operators, as well as Mobile VAS and the handset sales. Additionally, an increase of construction revenue from our property development subsidiary also contribute to the revenue growth.

Operating cost and expenses grew 12.3% to TWD39b. Income from operations for the second quarter of this year increased 3.4% to TWD15.4b. Net income for the second-quarter 2011 increased 2.8% to TWD13.3b. EBITDA for the second quarter this year was flat at TWD23b.

Slide 11 shows our revenue for each business segment for the second quarter of 2011. In the Domestic Fixed Line business local revenue increased by 33.6% year over year, mainly due to the shift of pricing right for Fixed-to-Mobile calls. The 13.9% decline in DLD revenue was due to Mobile and VoIP substitution, as well as reflecting 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 subscriber migrated to fiber solution, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 11.1% (sic - see presentation) year over year. The increase was mainly due to growth in Mobile VAS revenue and the handset sales relating to our smartphone promotion, which offset the decline in Mobile Voice revenue resulted primarily from the Fixed-to-Mobile call pricing right shift. Internet revenue rose by 3.4%, mainly due to the Internet service growth, which was driven by the increase in Broadband subscribers and the migration of ADSL subscribers to fiber solutions.

International Fixed Line business increased by 3.9%, mainly due to the growth of international long distance service revenue and leased line revenue. Others grew by 369.3%, primarily because of the increase in construction revenue, as mentioned earlier.

Slide 12 shows the breakdown of operating cost and expenses. The increase in operating cost and expenses in the second-quarter 2011 was mainly due to the increase in [interconnection] cost and transition fees resulting from the shift in the pricing right of Fixed-to-Mobile calls and the higher cost of handsets sold.

As shown on slide 13, cash flow from operating activity was TWD16.3b during the second-quarter 2011. The year-over-year decrease was mainly due to a higher bonus payout. We maintained a strong cash position as of June 30 this year, with cash and cash equivalents amounting to TWD81.5b.

Slide number 14 shows our results of operation for the first-half 2011 as compared with our full-year guidance and the results of our second quarter this year operation as compared with our second-quarter guidance on an unconsolidated basis. Our second-quarter 2011 result were essentially in line with our second-quarter guidance.

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

Thank you, Dr. Yeh. Now let me take you through our business performance.

Slide 16 shows the results of our Broadband services. This year we are focusing on promoting our 50 megabit per second FTTx services and we expect to reach 400,000 subscribers by the end of this year. We have therefore reduced our Broadband tariff in June, especially for high-speed services such as 20 megabit and 50 megabit per second to stimulate the momentum of migration and subscription growth.

The new tariff plans have so far been welcomed and we have received a lot of subscription request. Although the lower Broadband tariff will have a temporary impact on our revenue, we believe the speed upgrade will have a positive effect on our promotion of Broadband value-added service in the long run.

Moving on to slide 17, we have seen further MOD subscriber growth in the second quarter as we continue enriching the Family Packages with more premium content. This has served to accelerate the package subscription growth. We have achieved over 930,000 MOD subscribers so far and we expect it to reach 1m in November, one month earlier than our original year-end target. In addition, we anticipate that package services subscribers, including for Golden Package and the Family Packages, will be over 850,000 by the end of this year.

We have made progress on acquiring content. For example, we started offering Next TV News, the first domestic 24-hours HD news channel on our MOD platform on August 22. Additionally, we have acquired 2012 Olympic new media broadcasting right for our MOD, Mobile and HiNet platforms.

Slide 18. On our Mobile revenue business we have been successful in maintaining the highest number of subscribers and the lowest churn rate in the market. As our number of subscribers continue to grow we believe we'll reach our 10m subscriber target this year, as expected.

On slide 19, due to the continued popularity of smartphones, Mobile Internet and the Mobile Data usage continue to increase. By the end of June there were 1.15m mobile Internet subscribers, showing the strong growth momentum compared to 809,000 as of December last year. As a result we have raised our year-end Mobile Internet subscriber target from 1.2m to 1.4m.

Given the higher Data traffic on our Mobile Network we will speed up the construction and the capacity expansion of the base stations. We anticipate that we will have over 2,000 base stations with speed of 21 megabits per second by year end. In addition, we are continuing the installation of Wi-Fi access points to offload the traffic on Mobile Network and expect to accumulate 20,000 public Wi-Fi access points by end of this year.

Slide 20 on CapEx. We will moderately speed up our capital expenditure for the following years. We are -- as we mentioned earlier, we are focusing on Fixed and Mobile Broadband construction to facilitate the migration from megabit-per-second era to gigabit-per-second era.

That's all for the presentations. We would now like to open up for the questions.

Thank you. We will now begin our question and answer section. (Operator Instructions). Our first question is Danny Chu from Nomura. Please go ahead.

Thank you for the presentation, three quick questions. First is on the slide that you talk about Cloud computing. Can management give us some guidance in terms of what kind of an impact we should expect to see on the revenue as well as the EBITDA from the [introduction] of Cloud computing service for 2012 or maybe 2013?

Second question is you project that there will be a very sharp jump in terms of the IPTV subscribers. Are there any special initiatives or price cuts you're going to do in order -- or that can explain why the IPTV subscribers will jump very significantly for the remaining six months towards the end of this year?

And the final question is, given that the Company gave out a very bullish forecast on the Mobile Internet subscribers, do you expect the actual CapEx spending for this year will exceed the CapEx budget that the Company gave out earlier this year. Thank you.

Okay. Your first question regarding the operation of Cloud computing, you especially mention about the upcoming revenue or EBITDA in 2012 or 2013. It's a little bit early for us to put up significant numbers on Cloud computing at this stage. So we will include it in our business plan for the following years to come. So, I'm sorry, it's a little bit early to give figures as you mention on Cloud computing.

The MOT -- our MOD service -- IPTV service we forecast that we would have 1m subscribers by the end of the year and with today's number it's already over 930,000. We expect to reach 1m before the end of the year. To be more specific, it's likely to occur in November.

And the reason that we have very good growth in number of subscribers in MOD is our quality of service, our rich contents, all these are really well received in Taiwan, and the CapEx is within our budget.

On Mobile, I would like to have our President answer the third question.

For the Mobile Internet I think that this year our target were up to 1.9m customers of the total number, right? 1.4m.

1.4m in Mobile Internet subscribers. And the network is -- we are expanding the capacity of our Mobile Network to accommodate all this Mobile Internet traffic. We believe it's also within our -- this year's CapEx for this expansion.

Thank you. So if I may ask a follow-up additional question. Given that you mentioned that currently Broadband subscribers have increased quite a lot and you have been lowering tariffs, should we expect that getting into 2012 the Company will aggressively lower its Broadband tariffs further down in order to drive the Broadband subscriber growth? Thank you.

Currently we do not have this plan. Maybe it's your anticipation. We would like to monitor the market reaction to the service and -- to see if -- what will be the tariff for next year or year after.

Okay, thank you.

The next question is [Ken Goh] from GIC. Please go ahead.

Hi, good evening. Thanks very much for the call. I've just got one question on your operational data. The market share for Mobile by subscribers is going up, but the market share for -- by revenues is coming down. I'm just wondering what do you think is explaining the difference in the trends in those market shares? Thank you.

Yes, I think, one, the revenue recognized for our Mobile segment is affected by the shift in the pricing right of the call -- the Fixed call -- Fixed-to-Mobile call. And other operators they recognize the interconnection fee we give to them but, however, our Mobile segment don't include the internal transfer pricing as their revenue here.

Okay, all right. Thank you.

The next question is Chate Benchavitvilai from Credit Suisse. Please go ahead.

Hi, it's Chate here from Credit Suisse. I have five questions for you, number one, regarding your current plan about both Mobile and also on the Internet side. Should we expect some operating expense increase in a significant way into the second half to achieve that?

The second question is regarding the other revenue from construction. Should we -- what kind of revenue share we should expect going forward, because it's quite a significant spike in the second quarter.

The third question is regarding your CapEx budget. You mention the acceleration of CapEx budget into medium term. Can you give us a rough guidance of how we should look at CapEx into 2012 or 2013?

And regarding the capital management you mention that there would be a change in payout ratio from the current 90%, possibly over the next three to four years. In the meantime, should we assume that there would be no further capital management, or is there any trigger point that we should be looking at.

The last question is regarding your guidance. I think your first-half result is running quite ahead of your published guidance currently. Should we expect that to -- at the end of the year to beat the guidance, or, actually, are you expecting some charge or some expense to be incurred into the second half that would fully align you to meet your original guidance? Thank you so much.

So many questions. Okay. I think, so far we think our guidance is still valid and we don't see any reason to change the guidance.

And for our capital management issue, at this stage we don't know what would happen in the future, okay, but it looks like the CapEx would be a factor affect the need of our cash, okay. But for the CapEx budget for the next few years we don't have the number yet, okay, but we would give you the number when we have them available, okay.

And for the revenue from the construction, I think our current policy is the land policy is for lease not for sale and the revenue we recognize this year from our subsidiary are from land. We've put aside for them when we started the business, so we'd -- we will see what development they would get. But at this stage the parent company, Chunghwa Telecom, has no plan to give them more land to develop, okay.

And, again, the first question is whether the OpEx to increase significantly in the second half. My answer to your last question is about the guidance. We think the guidance is still valid, so, so far we think we would try our best to control OpEx. Thanks.

Thank you very much. Just to follow up on regarding the revenue from the other income from construction, basically, so just to be clear again, if the revenue you record in the second quarter could be considered recurring revenue, or if this just one quarter's spike and it would return to something below this in the next quarter to come?

Those are related to some projects, some of them is still under construction and some of them has completed, so for this year you can -- I think the issue is not specifically which quarter. You can refer to our original forecast. Our forecast is still valid at this stage, so it's a good idea go back to our original guidance to look into this issue.

Thank you so much.

(Operator Instructions). The next question is Joseph Quinn from Macquarie. Please go ahead.

And thank you for the opportunity to ask a few questions. I've got three main questions. The first one is actually on your CapEx again. I know some of the other speakers were asking in terms of what your CapEx is for 2012 and 2013.

And while you may not be able to give an exact figure, a, you have made clear statements in local press to spend over TWD200b in the next 10 years on Taiwan's broadband infrastructure, obviously, for your own customers etc. Can you maybe give a bit more color exactly how we should expect that in terms of impacting your CapEx? Should we expect CapEx to increase, given these statements?

The second question is more focused on your Mobile subs at the moment. It does seem that your Mobile subs growth has been slowing. And, in particular, it seems that both Far Eastern and Taiwan Mobile have been gaining against Chunghwa Telecom. And when we look in a bit deeper into your numbers, it does seem, in particular, actually, your value-added services are slowing in terms of an ARPU number. So can you talk a little bit about that? Are you facing more competition on that side of your business at the moment from both of these players?

And then the last one is on your MOD service, your IPTV. At the moment it's obvious that you're getting quite good momentum in terms of subscriber growth. But have you a number in terms of when that business would actually make a breakeven point? And what do you think about that? Thank you.

The CapEx trend, and you are referring -- you have referred to the -- some newspapers' report about we mention about TWD200b over next 10 years. Well, TWD200b in 10 years, average TWD20b a year and our CapEx is around TWD3b average, so it's really not significantly different from what we spend in this year's. But because we would like to accelerate or expedite the rollout of higher-speed Broadband access, so we may raise a little bit of the CapEx to meet this needs in our rollout of higher-speed Broadband access. And it will not be significantly higher, okay.

Every year we offer a guidance on our performance in our forecast. We will do so in the following years and every year we will include CapEx in that forecast.

Let me take the third question, MOD. Yes, we currently have a very good momentum. And I believe the national policy of moving towards digital convergence helps to stimulate the market. And, as I mentioned earlier, that also with good quality of service and rich content in MOD, so we have this very good subscriber growth. The breakeven point probably would occur if we double our number of subscribers and, this, likely to occur in maybe two years, yes.

About the Mobile subscriber growth slowing, you're right. Actually, from the figure of the -- number of the number portability it seems we are losing some customers from this game. But we still have confident that we can achieve to 10m customers at the end of the years. The major reason we -- our growth is slower, because the two major competitors provide a [tariff plan] is Internet free and we will have some counter-measures to face that.

As to the value-added service ARPU, our -- according to our figures we have -- we are growing a little bit. Thank you.

Can I just follow up, sorry, just in terms of your saying the value-added service? What I noticed is the actual value for your value-added services seems to have really flattened in terms of a March/April timeframe. It started to really slow down versus the other two. That's before the plan that you just mentioned that Far Eastern and Taiwan Mobile had announced. They've only just recently announced those.

I'm just wondering, -- this is something that's been happening over a few months now. It's not just something that happened the last month. So I'm just wondering is there anything else, in particular, you've seen them do differently that maybe has been a reason for users porting over? Thanks.

According to our figures, this Q2 our Mobile value-added service growth compared to last year is 40% plus. So I don't know if your figures are right or not.

Sorry, I'm not referring to the exact growth on the actual year on year. I'm looking at the actual ARPU on a value-added service basis that you get from your subscribers. I'm happy to share the numbers with you. I'll send them over. They're based on your own numbers. Thank you.

Our next question is Steven Liu from SCB. Please go ahead.

I have two question. One is regarding your co-operation with China Telecom. I understand you are doing co-operation on Wi-Fi roaming. Can you provide more details about the current co-operation and the future plans, the co-operation with China Telecom?

And second is can you give me a breakdown in the EBIT margin? Just give me the Mobile business and the EBIT margin based on the Mobile services revenue. Thanks.

Okay. About the Wi-Fi roaming, we have just launched this service for less than one month, so we'll see how is the revenue and -- because [what our] focus is to give our customer more convenience, not for revenue concern.

So do you have other plans to roaming, like Taiwan is going to China for some province for the roaming -- exclusive roaming partner with China Telecom or something like this, or other ICT-related service? I understand that Far Eastern is working with China Mobile, like Wireless City and IT solution, a wide range of co-operation. What are your plans with China Telecom in China market?

We do have provided some service called SIM to travel that our customer, if they are roaming to China, will have a relation with China Mobile, and to Hong Kong, Singapore, to several countries, with one SIM card. So that is something like the co-operation with FET and China Mobile. So we have another arrangement.

Okay, thanks. How about the EBIT margin for Mobile phone business? The Mobile service revenue, please, yes.

We don't provide the EBITDA margin by segment.

Okay, thanks.

(Operator Instructions). The next question is Gary Yu from Morgan Stanley. Please go ahead.

Hi. Thanks for the opportunity for me to ask the questions. I have two questions from my side. First of all, what's management views on data tier pricing. I understand you talk between Chunghwa and the NCC in terms of moving from unlimited data plan to tier pricing on Mobile Internet.

Second question is just for my bookkeeping reference. What is the rough revenue amount Chunghwa booked in the second quarter from your property construction project? Thank you.

For Mobile Internet, of course, it's better to have tier pricing. This is more reasonable because of limited resources available from Mobile spectrum. But as of now in Chunghwa Telecom our priority is to expand our network capacity to meet the needs of our customers for Mobile Internet access. If we reach to certain stage of expansion, then probably we will consider along the lines that some of our NCC commissioners are promoting, to shift from unlimited to tier pricing. We will consider, yes.

Regarding to the property construction project, as I mentioned on slide 11, the segment of other revenue, most of the increase came from the property construction revenue. So you can figure the number approximately from there. Thanks.

As something about the ARPU of our Mobile VAS services, at Q1 last year our ARPU of the data VAS is TWD91 and Q2 this year is about TWD128, for your reference.

Hi, Gary. Do you have any follow up?

No, thanks. Thanks, management.

(Operator Instructions). Our next question is Lucy Liu from JP Morgan. Please go ahead.

Thank you. I have two questions. One is on the smartphone handset pipeline trend. So I just wonder what's your strategy going forward. Are you intending to promote more mass markets like the mid-end or low-end smartphones, or just you're targeting at relatively to high end?

And, secondly, we heard that some -- heard from [your] managers that the NCC, basically, prohibits Taiwan telcos to use the Chinese equipment vendors in the core network part. So I just wonder what's the impact potentially on your network and roughly any CapEx implication? Thank you.

Smartphone handset first. I think as a first stage we are focusing on the high-end customers such as iPhone or HTC handset. But because the high-end customer will be saturated sooner or later, so in the near future we will focus on the middle layer. That means the handset price is about less than TWD300, this area. That will be more customer enjoy it.

Thanks.

(Operator Instructions).

Excuse me, your second question is about you have heard of NCC's -- some statements and (multiple speakers).

Basically, I think we heard that the NCC says that they do not -- in future they do not allow Taiwan operators to use Chinese equipment vendors in the core -- in terms of the core network build out. So for that some of your competitors mentioned they need to replace part of the core networks' CapEx -- transmission part of network to the other vendors, besides -- beyond China. So do you have -- do you heard things like that, or do you have such a plan as well?

Well, in Chunghwa Telecom we procure our equipments from the open market and often it's competitive bidding. Unless the -- it's a very clear, official requirements, we procure our equipments from the open-tender basis, yes.

Okay. Okay, thank you.

(Operator Instructions). Chairman, do you have any further closing comments?

Well, thank you very much for your participation in our conference call for the first-half 2011 results. Thank you very much.

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. Goodbye.