Chunghwa Telecom Co Ltd (CHT) 2011 Q3 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's Q3 2011 operating results. (Operator Instructions). For your information this conference is 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 now like to hand over to Fufu Shen, the Director of Investor Relations. Ms. Chen please begin.

Thank you. This is Fufu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our third quarter 2011 results conference call. Joining me on the call today our 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 quarter. This will be followed by Q&A. Before we can continue please note our Safe Harbor state 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 third quarter 2011 earnings results conference call.

On slide number three total consolidated revenue for the third quarter of 2011 amounted to TWD55.7b, with the increase mainly from higher Fixed line revenue, mobile VAS and handset sales. Higher property sales from our property development subsidiary also contributed to the revenue growth and we continue to expand our traditional telecom service business during the quarter.

Moving on to slide four which shows our cash return over the last several years. This year we have returned TWD19.4b via capital reductions and have distributed dividends of TWD42.9b relating to the year 2010. Going forward we will remain committed to distributing dividends to shareholders.

I will now hand you over to President Chang for our business overview.

Thank you Dr. Lu. Now let me take you through business performance. We have outlined our business highlights on slide six to give an overview of some key corporate developments.

Beginning with our Mobile business, smartphones as a percentage of total handsets sold continued to grow, reaching 45% for the third quarter compared to the 40% for the first half of the year. Due to a close correlation to do with the popularity of the smartphone VAS revenue as a percentage of the total Mobile revenue to 21.6% for the third quarter as compared to 15% for the same period of last year. We successfully addressed the market competition by offering limited free on-net calls and -- my hot line -- packages to enhance customer loyalty.

In terms of Broadband, we reduced our broadband tariff in June, especially for higher-speed services such as 20 megabytes per second and 50 megabits per second, in order to speed up the migration to fiber solutions and to facilitate the take-up of relevant applications. As of now 50 megabits per second subscribers total 365,000.

As for our IPTV service, this has proved to be competitive and has performed quite well this year. With subscribers already totally 980,000, we expect the growth momentum to continue as customers have reacted positively to the enriched Family package. On the content front we expect to have 43 HD channels by year end, making our platform top-notch one in the Taiwan market. In addition in response to customer demand for ubiquitous services we plan to launch our new IPTV platform in December of this year. With the new platform customers will be able to enjoy our high quality programs on TV, computers, tablets as well as handsets by taking advantage of our cloud computing technology.

Slide seven focuses our Mobile business. We have seen maintaining the highest number of subscribers and the lowest churn rate in the market. Although our churn rate increased in the third quarter due to the market competition we managed to lower it by providing limited free on-net call and the -- my hot line -- packages. We are carefully monitoring the competitive landscape and will retain the flexibility to implement appropriate measures to maintain our leadership.

On slide eight, due to the continued popularity of smartphone mobile internet and the mobile data usage continued to increase. At the end of September there were 1.32m Mobile Internet subscribers compared to 809,000 as of December 2010, evidencing strong growth momentum. We expect it to accumulate to 1.47m Mobile Internet subscribers by year end.

The construction and the capacity expansion of base stations are on track. We already have over 2,000 base stations of 21 megabytes per second. We believe we continue to maintain the best quality of our Mobile service in Taiwan with now our survey of major networks. In addition we are continuing to install WiFi APs to offload the traffic on mobile networks and we expect to accumulate 20,000 public WiFi APs by the end of this year.

Slide nine shows the results for our Broadband business. Due to the previously mentioned reduction in our broadband tariff our broadband ARPU dropped to TWD742 for the third quarter, as compared to TWD780 for the second quarter. Although the lower broadband tariff had 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 10, we have seen steady MOD subscriber growth in the third quarter as we continue enriching the Family package with more premium content. We have achieved over 980,000 MOD subscribers so far and we expect to reach 1m in November. In addition we anticipate that the package service subscribers including for Golden package and the Family package will be over 850,000 by the end of this year.

We have made progress on our client content. For example, we started offering Next TV news, the first domestic 24-hour HD news channel on our MOD platform on August 22. In addition we have acquired a new media broadcasting right for the 2012 Olympics for our MOD mobile and the HiNet platforms.

Now I'll hand over to Dr. Yeh for our financial results. Thank you.

Thank you President Chang and good day everyone. Thank for joining us today. I will review our financial results in detail beginning with slide 12. This slide shows our income statement on a consolidated basis.

Total revenue for the third quarter this year was TWD55.7b, a 9.5% increase compared to 2010, primarily due to an increase in Fixed line revenue resulting from the shift in the pricing rights of fixed to mobile calls from mobile operators to fixed network operations. The increase was also due to mobile VAS and the handset sales, and the revenue recognition of the government integrated taxation information system project. Additional higher property sales from our property development subsidiary also contributed to the revenue growth.

Operating costs and expenses grew by 14.9% to TWD41.8b. Income from operations for the third quarter of 2011 decreased by 3.9% to TWD13.9b. Net income for the third quarter 2011 decreased by 0.2% to TWD11.9b. EBITDA for the third quarter 2011 decreased by 4.1% to TWD21.9b, mainly as a result of the increase in operating costs and expenses.

Slide 13 shows our revenue for each business segment for the third quarter of 2011. In the Domestic Fixed line business local revenue increased by 32.6% year over year mainly due to a shift of the pricing right for fixed to mobile calls. The 11.4% decline in DLD revenue was due to mobile and the VoIP substitution as well as reflecting the mandated tariff reduction. Broadband access revenue including ADSL and FTTx decreased by 2.1% year over year mainly due to our company tariff reduction in June as well as the mandated tariff reduction.

Mobile revenue increased by 6.6% year over year. The rise 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 resulting primarily from the fixed to mobile calls pricing rise shift and the mandated tariff reduction.

Internet revenue rose by 0.6% with the lower growth rate also due to our company tariff reduction in June. International Fixed line revenue decreased by 6%, mainly due to the decrease in international long distance service revenue as a result of market competition. Others grew by 94.8% primarily due to the increase in property sales mentioned previously.

Slide 14 show the breakdown of operating cost and the expenses. The increase in operating cost and the expenses in the third quarter 2011 was mainly due to the increase in cost of handsets sold, interconnection cost and the transition fee resulting from the shift in the pricing right of fixed to mobile calls, and the increase in corporate solutions and the ICT expenses and the maintenance expenses.

As shown on slide 15 cash flow from operating activity decreased by 2.3% year over year with TWD19b during the third quarter 2011. We maintain a strong cash position at September 30, 2011 with cash and the cash equivalents amounting to TWD48.8b.

Slide 16 show our results of our operations as compared to our guidance. Net income for the third quarter 2011 results was essentially in line with our guidance, while income from operations was slightly below primarily due to the broadband and the mobile internet tariff reduction, accrual of the refund for fixed line service affixed to ADSL service, higher costs for maintenance, material and rental expense for high-speed broadband network and mobile base station expansion as well as personnel expense due to salary raise. We anticipate that the full year operating result will be in line with our guidance.

Moving to slide 17. We will moderately speed up our capital expenditure for the following years. As mentioned earlier we will focus on fixed and mobile construction to facilitate the migration to even higher speed fiber solutions.

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

Thank you ladies and gentlemen, we will now being our question and answer session. (Operator Instructions). Our first question is [Sam Kotei] from Credit Suisse. Please go ahead.

Hi, good afternoon. Congratulations on the result and thank you very much for the opportunity to ask questions. I have two questions, mainly on your mobile side. The first question is on the smartphones. You mentioned that, I believe, 45% of the handsets sold during the quarter are smartphones. Would you mind giving us a little bit of a guidance on how much of that is the high-tier smartphones like iPhone or things like Samsung Galaxy S and what's the proportion of the medium- to lower-end smartphones in there?

Second question is on the mobile data revenue. I notice that for the latest month mobile data revenue actually decline month on month. I understand that is partly due to your discount for lower usage users. I'm not sure whether that is a sustainable trend of what is your view on that? Thank you very much.

About the first question, the high-tier and the middle-tier, virtually it's about 78% to 21% -- 22%.

78% high-tier or 78% medium and --

Yes, 78% for high-tier and then 22% for lower-tier.

Thank you very much.

Your second question about the decline of month over month, this is really as you indicated; it's due to the discount for the lower usage users. And we predict that this will be only a short term impact and in the long term the data revenue will grow after we gain more customers.

Thank you very much.

Thank you Sam. Do you have any follow-up questions.

That's it from me, thank you.

Operator; Thank you. Our next question is from Danny Chu from Nomura. Please go ahead.

Danny Chu; Yes, thank you for the presentations. Three quick questions. First is when I look at the Company's EBITDA I notice that for the first time this year the EBITDA of the Company actually is reporting a quarter-on-quarter decline. Should we expect such a quarter-on-quarter decline of the EBITDA continue into the fourth quarter, i.e. the last quarter of this year? That is my first question.

Secondly is that when I look at the smartphone ARPU versus the post-paid ARPU, it seems that your industry peers, the other two Taiwan Telcos, are generating a slightly higher premium from the smartphone versus the normal post-paid ARPU. In your opinion what are the things that Chunghwa needs to do in order to further raise the smartphone ARPU?

And the final question is when I look at the Broadband ARPU for the latest quarter, is it the decline of the Broadband ARPU is entirely due to the tariff cut that you mentioned that initiated by the Company to attract customers to migrate to high-speed fiber services and has nothing to do with competition in the market? And consequently, getting into the fourth quarter what should we expect in terms of the trend for the Broadband services? Thank you.

For the first question about the EBITDA, yes, we expect fourth quarter's EBITDA probably will continue the trend since usually the fourth quarter expenses are higher than earlier quarters. So there -- and also the trend that will be there, okay, yes.

And to your third question about the Broadband ARPU, the major issue is the tariff declines. According to our expectation until next year, after our 50-megabytes-per-second customers will go up to about 600,000 customers then we're back to the original level.

If I may just clarify on that point, so for fourth quarter this year we should expect the Broadband ARPU to stabilize at around the TWD740 or we should expect further decline from that level?

It will be a little bit higher than TWD742, a little bit higher.

Okay. Thank you.

And for the Mobile ARPU as you're comparing different operators' performance, please I would like to remind you that the definition of ARPU may differ from operator to operator. And for Chunghwa Telecom we are working on more value-added services and especially trying to increase the kind of better of service that will generate revenue.

And the second item is of course we would like to further improve the quality of our network so that more usage and more customers will join in our mobile network. Thank you.

Thank you.

Our next question is Anand Ramachandran from Barclays Capital. Please go ahead.

Yes hi. My name is Anand Ramachandran, calling from Barclays Capital. Thanks for the call. I had three questions. Firstly I was wondering if you could provide us with some color on the property sales, how should we think about forecasting property let's say for the next three to four quarters? If you could give us some color around being able to do that that would be very useful.

Secondly, you talked about launching the new IPTV platform in December 2001. I was wondering if you could tell us what to expect from that, how you expect that to differentiate the offering.

Thirdly, you spoke about moderately speeding up CapEx in the medium term. I was wondering if you could give us some color around CapEx for this year and maybe CapEx into next year and the year after. Thank you.

First about the property sales. Since most of the revenue came from the finished houses or finished apartments, the sales from them, it depends how the market is so we don't have forecasts for that. But for the most of our inventory is recognized probably in this year so not much inventory remains. Thank you.

Okay, if I could just briefly follow-up on that. So from you're telling us, all of the revenues this year on property are actually sales related and are not rated recurring. So for more sales into next year we probably need to see if you develop more projects and develop an inventory.

Some of -- most of them, the majority, substantial part of them is sales related, but there are some is related to percentage completion. Yes, but the key point, since our current land policy is to our operational use so the sales we have now this year is related to the land we sold to our subsidiary a few year ago. So basically there are no new land sales transactions so that is the current status. Thank you.

Okay, so into next year -- sorry to labor the point. So just into next year we should not expect this kind of property sales to recur or is it too early to say that?

No, since now our property is for Company use so in the near term now we don't see this will be a major factor. Thank you.

Thank you for that.

About the new IPTV platform, I think the major difference the new platform will integrate all the content, all the (inaudible) content and the internet content together and then we offer all the different devices that can access this content including the TV set, mobile devices, tablets and so on. Thank you.

On this we'll have a new user interface and it will be much easier for our customers to access to the MOD programs or contents. I believe it's going to greatly improve user experience with our new IPTV platform.

The CapEx, since we are launching higher speed in fixed line broadband, we currently promote 50 megabits per second access speed and going forward even higher speed fixed line broadband access will be offered. So we need to be, to appropriate CapEx for this kind of development and since the country is moving towards digital convergence the competition in this area might intensified. So I believe appropriating more CapEx for fixed line access with fiber solution is a good thing, very constructive for the Company going forward.

Thank you. So what's the level of CapEx in dollar terms we should expect this year or next year? Is it pretty much in line with what you've guided or is it likely to go up?

We will offer you more information when we present our guidance next year, okay.

Okay. Thank you so much for taking the time. Thank you for the call.

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

Thank you for the opportunity to ask the questions. I just want to focus a little bit on your MOD and you're talking about the IPTV services. When I look at your Family packages, for example, on your website I notice that the monthly charge is about TWD359 per month, but I notice that your ARPU continuously stays down below about TWD130, well, at the moment TWD133. I'm just wondering in terms of the growth that you're seeing in these IPTV subscribers, is this very much to do with offering a free package to users that are upgrading their fiber packages, for example? I'm just wondering, if that's the case, how long are these free offers provided to them for? Thank you.

Okay. The reason why the ARPU is TWD130 is because the revenue, we don't recognize the whole TWD359 revenue. We split that with the content provider, okay. So TWD130 is the ARPU we keep. Thank you.

Okay. So if I was to work that back out I should assume that the content providers get TWD240 per user.

It's more complicated. You know --

Okay. But what I'm trying to understand is when I'm looking at your subscriber base, what I want to have an idea of is, is there an issue of users getting a free package and when they get charged for this service, is there a risk that they could also sign off as we have seen this in the past? I'm just wondering if there's a risk for that to happen again.

I think that's related to our marketing strategy and we don't disclose that much of detail. But the current ARPU is what you see there. Thank you.

Okay. Thank you.

Our next question is Ravi Sarathy from Citi. Please go ahead.

Thank you very much. I have three questions, if I may. The first question is around the IPTV service and the launch that you're expecting at the end of this year via multi device. Just drilling down to the next layer of detail when you talk about having the service available via tablets, phones, PCs, etc. is that via a set of applications that will be on for example, iOS and Android, perhaps a client-based or a web app on the PC side? How are you accomplishing that? You mentioned a much more straightforward user interface and access process.

The second question is around CapEx and the incremental CapEx you've talked about around pushing fiber or accelerating the fiber to the home build or depth. I was wondering if you could give a little bit more color around where you see some of that accelerated CapEx. Is it accelerating fiber to the home deployments or is it home, the home installation piece to that? Where do you see that incremental CapEx coming from?

My next question is around, my final question is around smart mobility. I was wondering if you could update us in terms of the percentage of your total mobile subscribers that are on smartphones today.

And the second part of that is I was wondering if you had any information that you could share with us around the number of tablet users that you added in the third quarter. So I guess including the tablets that you yourselves have distributed plus of course the iPad isn't distributed via telcos, so the micro SIMs that are clearly for the iPad. I was wondering if you had a feel for the total number of additions that you saw in the third quarter there. Thank you.

Since we probably will launch the new IPTV platform before the end of the year, we will disclose how our customers will make use of the new platform.

And the CapEx, that's incremental CapEx around for the fiber solution. We believe the total CapEx for the next two to three years probably will be slightly higher than our guidance of 15% of the revenue.

I'll give you a figure about the tablet. It's only about 40,000 customers in our network.

Total. Understood. Do you have a feel for the additions that you saw in the third quarter there?

Because the tablet is only -- what we get is only the data revenue; we don't get any voice. So I think we'll be maintaining same level.

Understood. Thank you.

Our next question is --

Sorry -- hi. And the total percentage of subs on the subscriber base that are represented by smartphones at the moment, do you have -- I wonder if you could share with us any data there.

About 19% of our customers, they are smartphone customers.

Thank you very much.

Thank you. Our next question is May Lin from Yuanta. Please go ahead.

Hi, this is May Lin from Yuanta Taipei. Thanks for taking my question in the call. I have three questions. First is about domestic long distance revenue decline. You mentioned about the competition from VoIP. Can you deliver a bit more do you see the competition to rise after there is more VoIP software available on the smartphone, for the smartphone user?

And also we heard about some, a potential regulation change. I know it's still under negotiation, but can you share with us if there's any preliminary estimates about the financial impact to Chunghwa?

Second question about your smartphone strategy. Previously you mentioned about around like 78% is the higher tier of smartphones and your competitors continue to talk about launching more mid- to low-end smartphones which is accommodating to market trend and also helps on their subsidy front. I don't know if Chunghwa has any guidance about your -- this kind of smartphone mix is going to be changed in the future.

And lastly about tariff promotion. We launched actually limited free on-net calls. I'm not sure if this will be a long term or it will sustain for a while and how you see the impact on the financial.

Also on the broadband fiber tariff promotion side, do you have any guidance about when we may consider to end of this kind of promotion which may better -- be better to our revenue? Thanks.

About the DLD revenue decline, I think the major competition is from the mobile, not from the VoIP. So the mobile device is so popular to everybody, so.

And we, about the regulations, we have proposed a new type of plan for the one price for local and long distance, but it's still under approval by the NCC.

The new tariff plan for local and DLD will be disclosed by our regulator upon the approval so we are not in position to say anything at this moment.

The promotion of -- your question, your third question is on tablet promotion?

On mobile, free on-net calls, limited free on-net calls.

This free on-net calls is a promotional package. I hope it will not become a regular offering. And I hope it will stop sometime in the future, okay.

For the smartphone strategy, today what I just mentioned 78% is high tier is according to our statistics. But actually we are following customer needs and the production.

So may I follow up that do you also see a trend that more demand or preference towards mid to low-end tier smartphones? Is this actually happening in past few quarters?

Yes, I think it's a trend.

Okay, got it. So it means that Chunghwa remains the possibility to adjust our subsidy strategy based on customers' preference.

Our subsidy depends on the contribution of the customers.

Sure. Sorry, may I follow up also on the CapEx side? If I didn't remember wrong, our guidance for this year is around like 15% of revenue to be the CapEx number, but so far accumulated first to third quarter number it seems like only TWD16b so far, TWD16b, TWD17b so far. Is there any chance for us to actually have a lower CapEx number than previous guidance for this year?

The CapEx on the execution of or implementation of our projects so it's slightly behind the guidance. So maybe up to about 80% of the budgeted CapEx will be spent this year.

Understood. So if we talk about next year, next two years CapEx trend, you mentioned about that potential incremental side. Will this delay from this year, the CapEx budget delay into next year to become another incremental or maybe just included inside?

Let me correct the figure I just gave. It's nearly 85% of the CapEx will be spent this year. And for the next two years, the incremental, it's really depending on the customer demand of the fiber solutions. But we would like to expedite our deployment of higher speed access through fiber solutions. So maybe, as I said, we will give more color when we disclose our guidance next year.

Sure, no problem. Thank you very much.

(Operator Instructions).

Okay. If there's no more questions, thank you very much for joining our conference call. Thank you. Good night.

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