Chunghwa Telecom Co Ltd (CHT) 2013 Q2 法說會逐字稿

Good evening ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the Company's second quarter 2013 operating results. (Operator Instructions). 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 CHT's IR website, www.cht.com.tw/ir under the IR Calendar Section. Now I would like to turn it over to Fufu Shen, the Director of Investor Relations. Thank you. Ms. Shen, please go ahead.

Thank you. This is Fufu Shen, the Investor Relations Director of Chunghwa Telecom. Welcome to our second quarter 2013 earnings results conference call. Joining me on the call today are Dr. Lee, Chairman, Mr. Shih, President, and Dr. Yeh, CFO. During today's call management will first discuss business, operational and financial highlights, which will then be followed up by Q&A. On slide number two please note our Safe Harbor statement. Now I would like to turn the call over to Chairman Lee.

Thank you Fufu. Hello everyone. This is Yen-Sung Lee. Thank you all for joining our second quarter 2013 earnings result conference call. Before Mr. Shih lead you through the business overview, I would like to update you regarding the progress of our business operation.

Moving on to slide three, for our second quarter operating results, we are proud to say that we continue to outperform our competitors in attracting more mobile Internet subscribers. By the end of June our mobile Internet subscriber market share reached 33.5%, which was the highest in the market. We will continue to support this growth momentum and market leadership in the future. Since our broadband household penetration rate is already high, we continue to focus on customer retention and migration to higher-speed service. We are also focusing on gaining more customers by promoting convergence plans, combining fiber with WiFi, Hami+ cloud and other value-added service.

Now President Shih would like to lead you through our business overview.

Thank you Chairman Lee. Please refer to slide five for our mobile business. By the end of the second quarter mobile Internet subscriber amounted to 3.17m, representing strong growth of 59% year over year. Our mobile data revenue growth rate was 35% year over year, the highest among the mobile operators. We believe that this success was mainly due to our aggressive promotion plans, which not only attract mid-to-low-tier smartphone users, but also have encouraged 2G subscribers to upgrade to the 3G network through our attractive data plans.

On slide six, the successful promotion targeting mid-to-low-tier smartphone users helped lift our smartphone penetration to 47%. Smartphone sales as a percentage of total handsets sold increased to 86% in the second quarter. Furthermore, among all the smartphone models we sold during the quarter, mid-to-low-tier models accounted for 52% comparing with only 44% in the first quarter. We will continue this effort to enlarge our mobile Internet subscriber base.

Slide seven shows the result for our broadband business. During the quarter we continued to see a steady migration of subscribers to a higher speed fiber services. We experienced over 50% year-over-year growth in the number of subscribers opting for connection speed of 60 megabits per second and higher, reaching more than 1.02m by the end of the second quarter.

Overall, even though total broadband subscriber numbers remained flat for the past several quarters, we continue to encourage our subscriber to migrate to a higher speed of fiber offering by offering attractive promotional plans that combine our fiber solution with WiFi, Hami+ cloud and all other value-added services. Additionally, we are targeting SMEs and the machine-to-machine applications to stimulate further broadband usage.

On slide eight, our IPTV revenue increased by over 26% year over year and our advertisement revenue doubled in the second quarter of 2013. We expect the advertising revenue will continue to grow throughout the remainder of the year. In addition, the household using TV rate continue to increase in the last two quarters, which demonstrates our success to cultivate customer stickiness. To further stimulate the subscriber growth we will continue offering convergence plans to cross-sell our MOD and other broadband services.

On slide nine, we continue to leverage the core telecom infrastructure and the services to expand our ICT and the cloud business. In the first half of this year our cloud business revenue tripled year over year and the Personal Cloud subscriber reached to 920,000.

Slide 11 provides an update on the regulatory front. The NCC announced seven qualified bidders yesterday. We are one of the qualifiers and are well-prepared for the bidding process, which will commence in September. In addition, regarding the Telecom Act, the Executive Yuan returned the amendment proposal to NCC again on July 16 and decided that the NCC to submit the Digital Convergence Regulation draft in February next year instead.

Now I would like to hand it over to Dr. Yeh to go through our financial results.

Thank you President Shih and good day everyone. Thanks for joining us today. I will review our financial result in detail beginning with slide 13.

On slide 13 are our income statement highlights. Total revenue for the second quarter grew by 2.6%, and operating costs and expenses increased by 8.7% year over year. Our income from operations and the net income decreased by 5.6% and 7% respectively. If factoring out the one-time bad debt reversal and non-cash impairment loss on real estate in 2012 as well as the lower construction revenue from the development subsidiary, our income from operation would be flat year-over-year. In addition, the EBITDA margin decreased from 39.47% to 36.99% in the second quarter as compared to the same period last year.

Please refer to slide 14 for our business segment revenue. Our total revenue increase was driven by 35.1% year-over-year growth in mobile VAS revenue and 16.1% growth in handset sales. This strong growth was mainly driven by an increase in mobile Internet subscribers. Local voice service revenue decreased by 8% mainly due to mobile and the VoIP substitution. The 4.1% revenue decline in the DLD business was primarily due to mobile substitution. Broadband revenue decreased by 1.8% mainly attributable to the NCC tariff reductions for both ADSL and fiber service tariff. The ADSL revenue decline offset the fiber revenue growth. Mobile voice revenue decreased 5.7% due to promotional package and mandatory tariff reductions.

Moving on slide 15, you can see that our operating costs and expenses increased 8.7% year over year. The increase in operating costs was mainly due to the rising costs of handsets sold resulting from strong mobile Internet and handset sales growth during the quarter. Operating expenses increased primarily because of a bad debt reversal of TWD1.5 billion last year.

As shown on slide 16, cash flow from operating activity increased to TWD19.4 billion during the second quarter. This was mainly due to the delay of bill collections from the first quarter to the second quarter associated with the holiday seasons. We maintained a strong cash position with cash and cash equivalents amounting to TWD59 billion as of June 30 this year. The EBITDA margin decrease was primarily due to the tariff cuts and the higher handset sales, of which the EBITDA margin is lower than our traditional telecom services.

Slide 17 shows our 2013 second quarter results as compared to our guidance for the quarter. We achieved relatively higher revenue operating income, net income and the EBITDA as compared to our second quarter guidance, which was mainly attributable to higher handset sales and mobile VAS revenue. However, EBITDA margin was lower than expected due to the lower margin for handset. Currently we expect our full-year operating result to remain in line with our earlier guidance.

Lastly, on slide 18, our capital expenditure will continue to focus on broadband and the mobile network construction and cloud deployment, including cloud datacenter construction. We will review our CapEx budget and execution plan on a regular basis, focusing on making the most cost-effective spending decision possible.

Thank you for your attention and now we would like to open up for questions.

Thank you. We will now begin our question-and-answer session. (Operator Instructions). The first question is from Joseph Quinn, Macquarie, Taiwan. Please go ahead.

Thank you and congratulations on your results. I just have a few questions that hopefully you can help me with. Firstly, on the mobile data side you are doing particularly well and I congratulate you on the new data packages that you're offering. On that side of things can I just check with you how do you find the competition in that space as you're moving more to the mid-to-low end? Now I do see a lot more aggression from both Taiwan Mobile and Far EasTone too.

The second question is around the broadband and fixed-line sides of your business. It does seem that when we're looking at the progression of revenue there it seems to be on a negative trajectory and you're seeing constant year-on-year declines. Is there a focus here from the management in terms of how do you reduce costs in that part of the business? I'm just wondering, can you maybe explain some of the efforts on that side given the declining revenues?

And then on the 4G side of things, I understand that maybe you can't really discuss too much about your intentions or bidding amounts etc, but can you discuss a little bit about the fact that with 4G licenses and the related CapEx there will obviously be a quite high level of expenditure needed? Will Chunghwa be willing to take on some debt to account for that?

And then lastly is on your overseas investments. There has been some local discussion about you looking to do more overseas investments and particularly a cooperation with Orange. Can you give us some more color on that side of things as well? Thank you.

So the mobile data now is increased, very good condition because we have introduced 52% of the mid-to-low-tier smartphone. So we encourage the upgrade of 2G to 3G. So, so far we already have more than 3.1m mobile Internet subscribers so we expect it to reach 3.5m by the end of this year. So it's a good situation for the data users increase.

Are you finding more competition, however, as you're moving into the more mid-to-low end from Chunghwa and Far EasTone?

I think our competitor has a very similar trend, that because the high-end users already subscribe the services, so we hope that more users can subscribe by reducing the so-called tariff. So we introduced tiered pricing, not always high tariff. So it's a good news.

Yes, thank you.

So the 4G, because we already been one of the qualifiers so we, start from the third of next month we will go to the auction, to the bidding, the price bidding. So we expect that next year we will have some CapEx on the 4G. This year we have lot of the investment on 3G so next year we will move most of the CapEx to 4G. So total maybe a little bit increased but not so big increase.

For broadband revenue and how to reduce cost we think that because of fierce cable competition for broadband service and also the number of the subscribers maybe achieve some (inaudible). So how to reduce the cost, we use the data mining to look for the precision marketing and also precision networking construction, especially for the fiber-to-the-home construction.

Now for the overseas investment, when we cooperate with Orange we're trying to cooperate Orange to acquire the license of Myanmar. And if we cannot get the license, we still will cooperate with Orange to look for any other opportunities, like construction, maybe the tower or other network construction, or even we can cooperate with Orange to look for if we can get the operation from the licensed operator.

Okay. Thank you. Can I just follow up? On the broadband when you're relating to cost, the cost reduction, I can see that you're highlighting strategies themselves, but is there direct ways that you can reduce cost either from a personnel point of view or from a store point of view, or reallocating those personnel to better divisions, maybe your faster growth in mobile data?

Yes. We're trying to look for some resource allocation from Internet. So this is direction we're trying to look for and use this strategy to reduce the related cost there.

Okay. And just on the 4G side of things, you did say that the CapEx may be a little bit higher next year, but --- and I'm more wondering in terms of your debt, do you think the Company will need to raise debt or is your cash position okay to support 4G license auction, CapEx, dividends etc?

I think at this moment we think we would have sufficient cash available. So at this moment we don't consider debt-raising, but if possible in the future, if necessary, it will be possible. Thank you.

Okay. Thanks. And just a follow up on the Myanmar, is this something that in terms of the risk aspect or the overseas investments, how closely do you look at this? Obviously it seems you want to cooperate with Orange. Is there an understanding of how much risk you're willing to take onboard in relation to these overseas investments?

Yes, because the consortium is organized by Orange and Marubeni in Japan and Chunghwa Telecom, still it's non-disclosure on the detail. But anyway, it's one of Chunghwa's policies to invest on other countries, especially in South East Asia.

Okay. Thank you very much.

The second question is coming from Chate Bend, Credit Suisse, Hong Kong. Please go ahead.

Thank you very much for the opportunity to ask the questions and good evening everyone. I have four questions. The first question is regarding your year-on-year growth in mobile data revenue. I understand that you also benefit from the expiration of the discount you've previously gave on the mobile data revenue. I just want to understand in the second quarter, if you exclude that impact from that expiration, then what would be your year-on-year growth in mobile data revenue, if you can share?

Second question is regarding the broadband subscribers and your target. I understand that quarter-on-quarter, actually it's your total broadband subscribers declined quarter-on-quarter, but you are still targeting quite a growth into the end of the year. I just want to understand that is there anything in the pipeline that would actually help you in achieving the target to grow the total subscribers in the broadband?

The third question is, based on the operating performance to date, do you have the confidence that you would be able to return to growth in terms of profit into next year or you are looking more in a two/three-year view?

And last question, if you made a few years' CapEx outlook, should we expect it to increase from what have seen FY '13 or you see some room for that to actually taper down? Thank you.

For broadband growth target each year, I think the growth of the broadband subscriber is (inaudible), but we can, we have to increase the base broadband subscriber from, maybe come from SME subscriber, and then maybe also we can, some subscriber maybe come from the IoT, machine-to-machine service. So even the subscriber may be not so achieve our target, but we think the overall broadband service will be a better growth.

On the first question regarding the mobile data revenue growth exclude the 20% discount, removed, the half-year growth rate is 29.8%, the first half compared to last year, if we take the 20% off, away.

Yes. Just the final two questions. The first one is --

Now for the CapEx, as we indicated before, we believe next year would still higher than this year and that then it would level off. It would fall back gradually over the next few years. In general we'll stay high for the next few years. Thank you.

Yes. The last question is based on your operating performance to date, what you have achieved so far. Do you think that you can return to growth in terms of profitability next year or we are looking at more like two-to-three-year view? Thank you.

The operating performance, currently we tried to set up or tried to construct certain business areas, like ICT, like cloud services, also some value-added services. We expect definitely the income and revenue will be achieved around 10% of the total revenue at maybe three years after.

Alright. Thank you very much.

(Operator Instructions). The next in line is Lucy Liu from JP Morgan. Go ahead please.

Hi. Thank you. I have three questions. First one, I think previously you mentioned about tier pricing so can I just confirm that is it on your agenda that you want to move to tier pricing? If so, whether you want to remove the unlimited data pricing and, if so, which will be the time we should expect?

And secondly, also on 4G, I understand you mentioned about the 4G plan. I just wanted to know how quickly do you think you will roll out a 4G network, like roughly in how many years? And what kind of scale are you expecting? Do you want to fully upgrade the whole network from 3G to 4G or it will be mainly a [half-half] strategy?

Lastly is on dividend, so just wondering any change or any new guidance on the dividend. Thank you.

Yes. There is a discussion that when to remove the unlimited package because it's very depend on the competition and our regulator. The regulator now is trying to allow the operator to using the tier pricing. So we think we will evaluate the tier pricing and how can make the so-called fair usage policy available. I think the 4G is a good time to make the decision, but so far we have no final decision yet.

So the 4G rollout, because the spectrum now we are bidding is 700, 900 and 1,800, we still need to -- depends on what spectrum we got. For 1,800 maybe it's more easy to roll out for the current base station. And some smartphone like iPhone 5 is already available for 1,800 for LTE. So according to our preliminary plan, maybe in one and one-half year we can launch the service. But the requirement for NCC is very low. It's only 250 base stations you can launch the service. But we don't think it's good enough so we expect maybe one year or one and a half year we can launch the commercial LTE service.

Thank you. Can I just follow up on that? So you mean that you basically want to roll out the whole network to a larger scale before you start considering launching the service or you think you will just do on a very gradual basis, so maybe just set up several thousand base stations in popular cities and then you can start [in gradually]?

Actually we think, because we still have 3G as a basic network, so we start from metropolitan city. We have Taipei, Taichung, Kaohsiung, for example, and we can launch the services if we have some continuous coverage in the city and we can launch for LTE services. I think competition is very important. We will face the competition and, depend on the competition situation, we will be maybe the number one or number two, depend on -- but I think it is very close for every operator.

Thanks.

For the dividend guidance it's still too early to tell what the Board would do next year. You know it's the Board's right to decide it. But we haven't paid this year a dividend yet so we haven't really discussed the issue with the Board. Thank you.

Okay. Thank you.

Next question is from Jack Xu from Sinopac Securities. Go ahead please and ask your question.

Thank you. And my question, my first question is what's our strategy for the mid-and-low-end smartphone penetration rate growth because it will affect our ARPU? Thank you.

The growth strategy, currently we would like to maintain the momentum by further introducing mid-to-low-tier smartphone. And tablets are very important. Currently we have lot of tablets to expand the mobile Internet subscriber base, further promoting mobile Internet by accelerating migration of 2G customer to 3G mobile Internet subscriber. We have over more than 20 low price and large screen smartphone handset model and also for low tier smartphone price, low price brand to increase smartphone penetration. Some senior people, I think it's a good opportunity because we have a lot of friends that they say the senior people like to have a big screen tablet. And also data package. So we think it's a good -- there's still a lot of growth room in the future.

So ARPU, mid-to-low-tier ARPU, yes, it's a little bit lower compared with high-end users. But we have a low subsidy so the final result is we have the even the better performance for operator. Thank you.

My second question -- thank you. My second question is what is the effect for the LTE upgrade? Seven companies they will compete for the 4G license. What do you feel? Is it a negative impact for us or the positive impact for us? Thank you.

The NCC have, it only have 135 megahertz spectrum. Now we have seven competitors so we can see the situation is very competitive. The final result will depend on who will withdraw from the bidding. So the NCC's policy is encouraging the competition. But as an incumbent operator we have a very willing or decision. We are ready to go the bidding because it's very important for Chunghwa to evolve from 3G to 4G. So it's a must for Chunghwa so we are very confident we will get the license, but it depend on how much cost we should pay.

Thank you.

I think seven is too many. According to every people I discuss, seven should be too many. So the reasonable final winners should be four or five. That's my personal observation.

Thank you.

(Operator Instructions). Your next question is from Lucy Liu JP Morgan. Go ahead please.

Hi. Thank you. I just had two follow-up questions. One is, I totally agree; I think you just mentioned the reasonable final spectrum winners probably just should be around four to five. But even let's assume four to five, we're still facing new competitor, new competition into the market. I think they might not have 3G or 2G existing network, but they might work with someone else to either acquire or do MVNO. So how do you view the competition and also the market dynamics after the 4G spectrum? Thank you.

This question is very interesting, but it may not suitable to answer from Chunghwa's point of view. My personal point is because as the voice is still very important for mobile users. LTE is a high-speed mobile Internet majorly for data usage so the voice now is using called circuit switched fallback. In the future maybe it go to voice over LTE. So for newcomer or new player, if they don't have 3G or 2G it will be very difficult. But according to the NCC regulation, we are asked to roam, to offer the roaming service to the new player so I think they're -- we expect the newcomer to go to the market, but it looks like they take time to acquire the location for the base station construction.

For the incumbent operator I think that we have many advantages over the newcomers, but we will see. We will see how the new competitors, they solve the problem of acquiring the base stations because now it's very crowded for location because we already have five operators in the same location. If there is another newcomer, maybe it's too many. So according to the news report that some of the 3G -- one of the operators, 3G operators, may have an opportunity to be acquired by new player, but we just have no comment on the situation. So we think Taiwan would be very, very crowded market, very competitive market in the 4G area. Thank you.

But actually -- I understand. I think although there are three or four 3G players in the market now, I really don't think Taiwan market is very competitive or very nasty. I think people, I think the market players tend to be quite rational in competition. So do you feel that with the newcomer into the market, this kind of rationale can be maintained?

Yes, because now we have five operators in the 3G, Chunghwa Telecom, Taiwan Mobile, Far EasTone and Vibo. And Taiwan -- then there's APBW, Asia-Pacific Broadband Network. So it's already very competitive. If allowed more player come in, maybe it's more severe competition, especially if the giant manufacturer, the Foxconn joined the game. So I think you know the potential of the Huawei Group if they want to join the game. But we need to wait and see. We have no comments on what's their plan.

Okay. Thank you. That's fair. My last question is on the value-added service --- sorry, on your mobile data service growth. So you mentioned earlier after excluding the 20% discount impact the growth is trending around 28%. This year I compared that number to Far EasTone and Taiwan Mobile growth. It seems like you guys are still a little bit falling behind, but you still have the positive momentum to catch up. So I just wanted to know if you feel that in the rest of the year or even to next year you will eventually catch up with the competitors or you think with a higher base effect the growth will be -- you will start some see slowdown going forward.

Yes, I think if we exclude 20% discount, we are a little bit lower than our competitors. But we think we are very confident that we can catch up by have some promotion programs and we have some tablets and mid-to-low-tier smartphone promotion. Yes, so we will do our best to catch up. Thank you.

Okay. Cool. Thank you so much.

The next question is from Sydney Zhang, Bank of America - Merrill Lynch. Go ahead please.

Hi. (Spoken in Taiwanese). This is Sydney. May I ask just one question? It's really to express the concern about really on the voice revenue or voice business given 4G's coming and the fast Internet, mobile Internet speed is going to be provided on the 4G smartphones. Given Chunghwa Telecom and also your peers have, almost they have 70% of revenue coming from voice and SMS, I think given all this in line and those OTT kind of applications is going to take in -- is more becoming popular, I just want to check what's your long-term plan how to mitigate this, the risk from voice revenue loss in the future?

And do you have any plan to partner with any OTT application providers to work together? Thanks.

Yes, the OTT is very -- so I think there's same situation for operators, the overall operator we have the same kind of situation. So we will need to develop some value-added services to enhance. So the OTT can take away some voice and SMS, it's true. So all the operators now is trying to do some effort. Even the [ITU level], they still have a dialogue between the OTT players and operators, but does not have a good solution so far. So we need to consider the pricing structure because if the 4G is coming that means your speed and quality is much better than theirs. If we cannot change the all-you-can-eat structure to do something, it will be a problem. So we also try to work with some providers to solve the problem, but it's really a challenge anyway.

So any comments?

Do you have any plan to launch a flat voice pricing to provide like unlimited voice like what Verizon and the US carriers are doing?

Yes, we will see the trend that the voice will be cheaper. I learnt from the UK that they have quite high charge for the monthly data package and offer several thousand free voice call and unlimited SMS. This is already been practiced in the UK. For this -- for our country we need to evaluate how to increase the data charge otherwise the total revenue will be perhaps some influence. So, yes, one of our price plans for LTE is unlimited voice. In the 4G we will have a plan, but not today because today the all-you-can-eat is only charge TWD950. This is too low, cannot compensate for the voice free. So in the 4G, yes, we will have the plan to offer the -- okay.

Okay. Thank you.

Yes, but it's too early to say this.

Thank you. The next question is from Joseph Quinn from Macquarie Taiwan. Go ahead please.

Thank you. I just have two quick follow-up questions. Firstly, on the broadband side, can you go into a bit more detail? Obviously you've mentioned there's more competition from the cable operators as well. I've seen recently there's been some talk about the reduction in usage of the high larger screen TVs, the bundle with your MOD. I'm just wondering are you seeing an overall slowdown in the take-up of bundles of TVs of MOD as well? Is that becoming more difficult to achieve?

And then the second question is on the new 4G entrants. You did mention that you may be required by the NCC to offer roaming to the new players. Can you just go into that in a little more detail? Is that just Chunghwa Telecom who's required to do roaming services for the new entrants or would that be of all players that have existing 3G services? Thank you.

The second question is very simple. All the existing operator have the obligation to offer the roaming service, but it's still subject to negotiation.

Okay. So this is something that the NCC would like you to be open to, but not necessarily force you to offer. Is that correct?

Only if they launch 4G then they can ask the 3G operator to have the roaming, but not for 4G to 4G.

Okay. But there'll be no -- is there -- will it be a direct requirement from the NCC or is this something that is on a case-by-case basis?

It's a case by case because the interconnection or the roaming fee is subject to negotiation. In NCC's requirement it is ask the 3G operator needs to allow for the new entrant to go to have the roaming services.

Okay. Thank you.

For broadband services under this TV set, I think previously we cooperate with Foxconn to share this package. Now we may have cooperate more local or other brand TV set. But we think because this package is not, is maybe not so much or so many subscribers were in this package, so this is maybe -- the sales room would very limited.

So is it something -- so can I view this as maybe an old promotion now and maybe you're looking at something else to improve those broadband subs or to defend against the cable subscribers?

I think all broadband services will be look for new or the other promotion packages, like we bundle with the other value-added services and also bundle with WiFi service, bundle with like Hami+ cloud personal service. So this we maybe look for other promotion packages. And also for include new subscribers, we just look for the SME subscribers and also other IOT services, IOT projects come from government, local government.

Thank you. That's very helpful. Just in terms of the, on the overall market, so it does seem that the domestic consumer market is pretty much saturated for you guys, if you're looking more towards SME. Do you find that the cable operators competing with you, do you find subscribers are moving away just because of price or is there anything else you feel they're moving away because of?

The MOD is very important is the HD program now. So we have very high quality programs that are not available in the cable. So the content will be one of the key competitiveness. So the price is, the pricing structure for cable will be changed. So they are still in the Legislative, the Legislative Yuan for discussion about the new pricing structure for cable. So in the future we think the MoOD will be more competitive, really some advantage over the cable.

Okay. Thank you.

(Operator Instructions). If there are no other questions I will turn it back over to Chairman Lee.

Thank you all you participated this second quarter, the first half annual result. Thank you very much. Thank you all of you.

We thank you for your participation in Chunghwa Telecom's conference. There will a webcast replay within an hour after the conference. Please visit www.cht.com.tw/ir under the IR Calendar section. You may disconnect now. Goodbye.