Chunghwa Telecom Co Ltd (CHT) 2012 Q1 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's Q1 2012 operating results. During the presentation all lines will be on listen-only mode. When the briefing is finished directions for submitting your questions will be given in the question and answer session. For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit to www.cht.com.tw/ir under the 'in focus' section.

Now I would like to turn it over to Fufu Shen, the Director of Investor Relations. Thank you. Mr. Shen, please go ahead.

Thank you. This is Fufu Shen, the Investor Relations Director for Chunghwa Telecom. Welcome to our first-quarter 2012 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 first discuss the operational and financial highlights, then followed by Q&As. Before we continue please note our Safe Harbor statement on slide number 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-quarter 2012 earnings results conference call. Before President Chang reports our business development in more detail I have some comments regarding CHT's progress.

As an integrated service provider we maintain our market leadership in all of our major business segments. For the first quarter Mobile value-added service continued to be our growth driver. We are optimistic about the Mobile Internet market's growth and will offer various current marketing packages to meet customers' demand. In relation to the packages bundled with handset subsidies we also offer discounted Mobile Internet service to existing smartphone users in order to maintain and to further penetrate the market.

We are also very keen on target markets in maximizing the potential growth opportunities. For example, beginning in March this year we began to offer Mobile Voice service bundled with Data plan students and youths. We currently anticipate this campaign to be very positive in contributing future revenue growth.

Along with the growth of Mobile Data usage we are making efforts on the improvement of the network quality. Our efforts to enhance our Mobile network and to promote WiFi in order to offload the Data traffic proved to be effective, with offloading rate via home WiFi around 40%. While the rate for public WiFi has not achieved the same rate as the home WiFi, we are continuing the interface improvement in order to be more user friendly.

We are pleased to report that our IPTV service are gaining traction. Due to the higher subscription number the MOD ARPU increased 15.7% year on year in the first quarter. Moreover, the broadcasting service of 2012 Olympic Games will be launched on July 28. 2,000 hours of games are planned to be broadcasted over the 14 high-definition channels, and there will also be 500 hours of on-demand programs. We are pretty optimistic that this event will drive the growth of MOD subscription significantly.

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

Thank you, Dr. Lu. Moving to slide five, for Mobile business we maintained the largest subscriber base and the lowest churn rate in the market, demonstrating our market position and customers' recognition. As Mobile value-added service remains to be our growth driver and smart devices are becoming widely used day by day, we are continuing the improvement of network quality in order to enhance user experience.

As an integrated service leader we hold great value of the network quality, which commands the highest priority in our daily operation. Based on our internal study Mobile Data traffic is expected to increase 65% year over year in 2011 -- 2012. To cater to such a rapid expansion of Data usage we plan to increase the base station Broadband access capacity by 70% and the Mobile network backhaul bandwidth by 73% this year.

In addition, 95% of our base stations will turn on their second carriers. Moreover, more than 50% will turn on third carriers. And we expect 80% of traffic could well be carried by these base stations at the end -- at the year end. These measures will further ensure and enhance our overall network quality.

Moving to slide six, Mobile value-added service continued its momentum, with 29.2% growth rate year over year for first-quarter 2012. It is supplemented by the growth momentum of smartphone usage, which boosts Mobile internet subscribers to 1.8m by the end of first-quarter 2012, from 1.5m in fourth-quarter 2011. Attributable to the strong growth momentum we increased the target number for Mobile Internet subscribers to 2.35m by the end of 2012, [representing] a growth rate of 56% compared to last year.

Starting March this year we began to offer student plans to attract students and youths who are active users of Mobile Data service. We have selected several mid- to low-tier smartphone models with brand names and extensive functionally for these users to choose. By packaging lower rates and cheaper models we are confident that the student plans will be very successful.

On slide seven, although high-end smartphone subscriptions increased due to the hot sales of iPhone 4S in the first quarter, our smartphone strategy this year is still to increase mid- to low-end smartphone users. The availability of more quality, mid- to low-end smartphones in the near future will help our execution and promotion. For the first quarter smartphone customers accounted for 69% of the total handsets we offered and we expect the percentage to be 70% for the whole year.

Slide eight shows the results of our Broadband business. Migrating Broadband customers to the higher-speed service continues to be our key strategy, as well as attracting more Broadband customers. Under this strategy we reduced our fiber and ADSL target in mid last year and beginning this year.

We mentioned previously that the Broadband revenue is expected to be recovered to the level prior to the fiber tariff cut by the second-quarter 2012. Although this revenue recovery is slightly behind schedule we will continue migrate customers to higher-speed services as well as offering high-definition programs such as upcoming broadcasting of the Olympic Games, to accelerate the revenue recovery.

Slide nine shows that the MOD subscribers and the revenue continue to increase. In addition, our television market share increased to 17.3% by the end of last year, compared to 13.8% by the end of 2010.

Our enriched and high-definition content continued to add subscription, with 76.5% of our subscribers signed up additional package services and the percentage of premium package subscription continues to rise. As a result, ARPU for MOD increased 15.7% year on year for the first quarter, and ARPU for March has increased to TWD157.

We expect the new platform to be launched toward the end of the first half 2012. Leveraging the advantage of the new platform and the coming 2012 Olympic Games broadcast service we are optimistic that MOD customers will likely reach 1.5m by the end of this year. Owing to the declining trend for the traditional market and regulation dynamics we are focusing on paving new avenues for revenue stream.

On slide 10, in addition to our traditional telecom service, we have expanded our corporate business scope and focus on ICT business to include government projects.

Now I will hand it over to Dr. Yeh for the financial review. Thank you.

Thank you, President Chang, and a good day, everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 12. The following discussion is focused on the first quarter of this year.

Slide 12 shows our income statement on a consolidated basis. While total revenue for the first quarter increased by 5.6% compared to same period last year, operating costs and expenses reported a 14.4% increase year over year. As a result net income and EBITDA decreased 19.8% and 11.8% respectively.

The EBITDA margin decreased year over year, due primarily to the higher handset sales, such as iPhone 4S, and higher handset sales from our subsidiary, Senao, through open channels, as well as the growth of corporate solution and ICT business. EBITDA margin of this particular business are relatively lower than the traditional telecom service.

You can refer slide 13 for our business segment revenue. The revenue growth for the first quarter was primarily due to the 29.2% increase in Mobile VAS revenue and 53.7% increase in handset sales. However, the increase was offset by the decline in Mobile Voice revenue attributable to the fixed-to-Mobile call pricing right shift, the marketing campaign and the NCC tariff reduction. Additionally, the decline in DLD and the DLD and Broadband revenue, due to tariff cuts, also partially offset the overall growth.

Slide 14 shows a breakdown of operating costs and expenses. The operating costs and expenses increase in the first quarter consists of three components. First, the cost of handsets sold representing 69.8% of the increase; secondly, the increase of corporate solution and ICT project costs accounted for 14.6%; and, finally, the increase of maintenance and material expenses for Broadband service promotion was about 6.1%.

As shown on slide 15, cash flow from operating activities increased by 34.9% year over year, to TWD13.1b, during the first quarter this year. The increase was mainly because, starting 2011, the Company adjusted its billing period for monthly fee one month later, to be in line with that for communication charge. Hence, accounts receivable for the first quarter last year increased accordingly. We maintained a strong cash position as of March 31 this year, cash and cash equivalents amounting TWD69.9b.

Slide 16 shows our 2012 unconsolidated forecast and the results of our first-quarter operations. Comparing to our original first-quarter guidance we achieved relatively higher revenues, as we already explained. However, operating income, net income and EBITDA were behind our guidance due to business with lower margin, as we already mentioned, such as the handset sales and the ICT business. As the EBITDA margin for the first quarter was lower than our forecast we are still maintaining our full-year guidance.

On to slide 17. As a company listed on the Taiwan Stock Exchange, Chunghwa is required under our ROC laws to prepare its financial statements in accordance with IFRS starting from fiscal-year 2013. In this slide we are providing the possible financial impact after adoption of IFRS. This assessment may be changed, as the FSV may issue new rules covering the adoption of IFRS and as other laws and regulations may be amended to comply with the adoption of IFRS. Our assessment may be affected accordingly due to this uncertainty and other potential factors.

You might see from the table that the most significant one is the impact of employee benefits. The pension obligations of employees upon privatization in 2005 were calculated based on IFRS. The impact, which amounted to TWD20.6b, should be retroactively deducted from the retained earnings and transferred to additional paid-in capital, while the total shareholder equity remained unchanged.

The adoption of IFRS to the consolidated financial statements for the first quarter this year increased Chunghwa's consolidated net income by TWD106,000 --by [TWD106m].

Moving to slide 18, our budgeted CapEx for this year is TWD31.1b. We began our network expansion plan last year in order to enhance our network quality for better customer service. As a result our first-quarter CapEx spending is relatively higher than that of first quarter last year.

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

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

Hi, thank you, management for the presentation. (Inaudible) I just had one quick question. In one of the slides you mentioned that despite the EBITDA and the net profit for 1Q fell short of the Company's initial guidance, but right now the Company is still maintaining its guidance for the full year. What should we expect to happen in 2Q or 3Q in order for the Company to deliver on its full-year guidance? Thank you.

Okay, I think we still maintain the same guidance for the whole year. One of the important events for the lower EBITDA or net income in our guidance is because the iPhone 4S sales is higher than our expectation. And I think it's more like a timing issue. We didn't expect much of iPhone 4S sales. And since these sales we would expect will have lower handset subsidy in later quarters, so that's why we still maintain our full-year guidance.

Thank you.

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

Thank you for the call and the opportunity to ask some questions. I have four questions, if I may. The first one is on your Mobile side. I notice on a Q-on-Q basis that your Mobile additions seemed to be slower versus your peers and also your smartphone revenue had dropped Q on Q. I was just wondering what were the drivers behind that, especially as you're mentioning the 4S seeing higher traction than you previously expected?

The second question is on the business front. Both Far East Mobile and TeleMobile have commented quite a lot about increasing their SMB businesses, increasing their market share. I'm just wondering if you've got any comments on that in terms of how you're viewing competition and what the plans are to combat that.

Thirdly is on the Broadband front. We are seeing cable Broadband players continuing to see increases in their subscribers. I'm just wondering how you're seeing that affecting you. And also we've seen the likes of [PBC] announcing a lot more free set-top boxes and bundling that with their Broadband. I'm just wondering what packages or difference in your packages you're planning in 2012 that could stop that sort of growth from them?

And the last question is more related to your 20-F filing actually. On your 20-F it seems that all of your businesses faced a significant margin erosion in 2011. And I was just wondering what your views are for 2012 in terms of which business lines will be stronger and which business lines will potentially see more weakness? Thank you.

Okay, let me answer your first question about the Mobile services. Actually, you're right, our -- we are flat a little bit on the Mobile services because last -- the Mobile congestion -- traffic congestion happened in last August, so this slowed our path to promote our Mobile service. After several months construction I think our network quality is okay to promote again. So we have some promotion plans that will be launched in the coming months. So we think the market will come back to our side.

On your second question about the competition with our peers, are you (inaudible) certain specific market, or just the general competition in Taiwan?

Yes, this is specifically on the SMB business, so your more enterprise-focused business.

Okay, yes. So -- well, we believe our Taiwan enterprise market is still growing. From our own Data we believe we are still growing in our enterprise market. So we are happy to see that our peers also have a certain increase in their operation. That's a good indication for the market.

For your third question about the cable competition, according to our statistics last year our cable -- our Broadband customers increased about 12,000 customers. For cable there are only -- we increased about 124,000 customers, cable increased about 86,000, so we don't lose this market. And for the last two months we increased about 18,000 customers, cable only increased 9,000, so in this area we think we are (inaudible) is still very strong. And the second [part] we have well increased our speed. To enhance our speed we launch the 100 megabits per second in the coming months. So I think that we can keep this status. Thank you.

In terms of your Broadband subscriber growth in 2011, do you have any -- can you give us any idea of how much of that has been driven from the consumer side and how much of that has been driven from your business customers?

I think we combine our MOD and our cable together. It's very good for us.

Yes, sorry, maybe I'll ask you another way. I'm just -- I'm trying to understand when you gave us your Broadband numbers it's the combined number of both business and consumers. I'm just wondering have you got an idea what the mixture of your growth was last year. Is it coming more from the personal consumer at home connection, or is it coming more from the business connection?

Both of them -- both.

Okay, thanks.

Thank you.

Sorry, there's one final question (multiple speakers).

Okay. The decline of the EBITDA margin was caused primarily by the handset subsidy and the handset sales cost of our subsidiary, Senao, through open channel. And also it's caused by the tariff reduction as a result of the competition and regulation. So you can refer to our guidance about our view for the margin of this year. Thank you.

Yes, sorry, I just want to follow up on that. Because in the 20-F it's quite clear that every single one of your segments, that being domestic, Mobile, fixed and your Internet, are all seeing margin declines. So what I'm more interested in is in 2012 what areas do you feel will be stronger, what's the one seeing margin impact and which areas do you feel will have the most weakness? Thanks.

I think you can refer to the different regulations in tariff to that figure out. Okay. So different segments face different level -- different extent of regulations and so our (inaudible) will vary, okay. That's why we are hopeful now. Thank you.

Okay, thank you.

Thank you. (Operator Instructions). Our next question is from [Chate Benchavitvilai] from Credit Suisse.

Thank you very much for the opportunity to ask questions. Good afternoon. I have in total three questions. The first question is regarding your Broadband business that you mentioned during the call that the recovery in ARPU or revenue is slightly behind schedule. Would you kindly remind us again what the schedule in terms of the revenue recovery in Broadband is right now? And what might be the main cause of this delay in the recovery? Is it because of competition, or is it because of network rollout?

The second question is regarding the discounts you provide on the Mobile Internet for the lower-usage subscribers. I understand that the discount -- the current discount would come to an expiration at the end of this year. Do you think, given your intention to continue to drive penetration, that discount should be continued, or do you think that you do not actually need that once expiry is gone?

The third question is regarding the dividend. Apology if I missed any announcement, but is there an announcement for FY '11 dividend both in terms of the regular and special dividend? Thank you very much.

Okay, about the first question, because we have bundled our MOD service with Broadband (inaudible) to sell, but at the beginning of this year our MOD platform -- the second platform is delayed because of the NCC, so we cannot promote them together. So we had a little delay for this with Broadband. Has it answered your question?

Yes. Can you remind us again in terms of the Broadband recovery timetable when should we expect the revenue to come back to the same level again? Is it the second quarter of 2013?

Maybe to third quarter.

Just second question regarding the Mobile Data discount and the third question is regarding the dividends.

Your second question on Mobile Internet discount, for those customers whose Data volume is less than one gigabyte we offer discount. This will be a special offer until the end of this year and we have no intention to continue this special offer.

Okay. For the third question we propose TWD5.46 per share dividend to be approved by the AGM. Thank you.

Thank you very much.

Thank you. Our next question is from May Lin from Yuanta in Teipei.

Hi, thanks for taking my question. I have three questions. The first is a follow up on the dividend side. I know the actual 2011 dividend distribution has been announced, but do you have any guidance for the forward-looking dividend payout policy? One of your peers has raised our payout -- their payout ratio guidance to 100% going forward [at least]. So not sure if any update from Chunghwa?

My second question is about the mandatory tariff cut side. As NCC will start another cycle for the proposal do you see any potential risk for the mandatory tariff cut for the next three-year cycle on the fiber side for Broadband service?

My last question is about smartphone volume sales mix. Do you have any update or more color on the smartphone high-end, mid-end, low-end mix for first quarter and a forward-looking target? Thanks.

Yes, we don't have any update of the dividend payout policy yet, but in the past we pay out as much as permitted under -- by the law. And I think we already explained this in the past, okay. But in the future if there would be some change we will make announcement. Thank you.

[Your second question asked] if we have an idea about -- to hear anything about the NCC (inaudible) tariff cut about the fiber.

And your third question is about smartphone, our high-end, middle-end and low-end ratio is about 36 -- 46% to 32% to 22%.

Okay. This is for first quarter, the smartphone mix?

Yes.

Okay. Do we have any -- sorry?

This quarter.

Yes. And do we have any target for the long-term smartphone mix we would like to achieve, maybe, for manage or subsidy expense?

We try to make the middle and the low end higher. We don't have the definite figures.

Understood. Understood, thank you. And about the NCC tariff cut, I didn't get it [round]. You meant we don't have any signals being whether we will have any tariff cut on fiber side. Is that correct?

Right. No, we don't have any signals, right.

Understood. Understood, thank you.

Thank you. (Operator Instructions). Our next question is from Lucy Lu from JP Morgan.

Hi, thank you very much for your call. I just have two general questions. One is on your ICT margin. You mentioned that the blended margin dilution is partly due to [handset subsidy] and ICT, so I just wonder what's the absolute level of the ICT business margin?

And the second is on 4G business. So I just wonder what are your general thoughts in terms of the upcoming 4G licensing and also our strategy in bidding for the [section] in terms of both 4G and (inaudible) sector? Thank you.

We don't disclose that. It's a new business (inaudible) one is significant and more stable stage. Thank you.

And regarding to the 4G licensing strategy, we have heard from NCC that they will start preparing for the bidding guideline some time next year. But the Company we have already started setting a working group to work on this. We will be ready as long as NCC release any specific guidance on bidding.

Okay. Sorry, can I have one more follow-up question? You mentioned also in the call earlier that you see the Olympics broadcasting as one of the catalysts in the second half for your MOD IPTV service. I just wonder regarding the content, so whether you have any exclusive content that the cable TV won't have? Or is it pretty much the same? Thank you.

Well, Chunghwa Telecom has obtained rights for the so-called new media, okay. This is -- the licensing -- the rights in Taiwan market is obtained by one of our partners and we have secured the rights for the new media. That's all I can say about this.

Okay. Sorry, one last question. So after you basically reached a deal with China Airlines, so any new updates in terms of the co-operation or synergies on that?

We made some progress, but still we have to wait for some time to report more concrete results. But we talk about some business and we've reported to the Board members. Thank you.

Thank you.

Thank you. (Operator Instructions). Our next question is from (inaudible) from Merrill Lynch.

Hi, I have one question on the iPhone plans. I know that your competitor are focusing a lot on the one-year iPhone plan and package plans and that actually can reduce the subsidy. What's your plan on that and what's the percentage of your iPhone package on one-year plans? Thanks.

We do have the one-year package for iPhone handsets, but we don't have the percentage.

Do you have plans for the future to roll out one-year plans?

Yes, we launched them. We launched them about one month ago.

Okay.

The percentage about 6%.

In the last one month, 6%?

Yes. Totally the customers who chose this package is about 6% of total, largely in last month (inaudible).

Okay.

Thank you. (Operator Instructions).

Okay, thank you very much for joining our call for the operating results of the first quarter of 2012. Thank you very much. Goodnight.

Thank you. 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 under the 'in focus' section.