Chunghwa Telecom Co Ltd (CHT) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's fourth-quarter 2013 operating results. (Operator Instructions). For your information, this conference call is now being broadcast live over the Internet. Webcast reply will be available within an hour after the conference has finished. Please visit CHT by our website www.cht.com.tw/ir under the IR calendar section. Now I would like to turn it over to Fu-fu Shen, the Director of Investor of Relations. Thank you. Miss Shen, please go ahead.

Thank you. This is Fu-fu Shen, Director of Investor Relations for Chunghwa Telecom. Welcome to our fourth-quarter 2013 earning results conference call. Joining me on the call today are Dr. Tsai, Chunghwa's newly appointed Chairman; Mr. Shih, President; and Dr. Yeh, CFO. During today's call, management will first discuss business, operational and financial highlights. Then we will move on to the Q&A session.

On slide number 2 please note our Safe Harbor statement.

Now I would like to turn the call over to Chairman Tsai.

Thank you, Fu-fu. Hello, everyone. This is Rick Tsai. Thank you all for joining our fourth-quarter 2013 earnings results conference call.

Before Mr. Shih leads you through the business overview, I would like to thank the Company, its Board of Directors and investors for the confidence and support in having me to serve Chunghwa Telecom as its Chairman. It's an honor to have the opportunity to work at Taiwan's leading telecom company during this exciting time in the telecom industry. I look forward to serving as Chairman of Chunghwa Telecom as the Company helps to usher in a new era of telecommunication capabilities in Taiwan and globally.

Now Mr. Shih would like to lead you through the business overview. Thank you.

Thank you, Chairman Tsai. We are glad to report to you that we ended the 2013 on a high note, with a strong operational result. We outperformed our competitors in growing our mobile business and successfully upgraded customers to a higher speed of fiber broadband services across our network.

Heading into 2014 our focus is on the seamless rollout of 4G services in the second half of the year, for which we have already procured the first batch of 4G equipment in December last year. Not only do we aim to be the first 4G operator, but we are also determined to provide the highest-quality services available.

In terms of our broadband services, since our broadband household penetration rate is already very high, we continue to focus on customer retention and the migration to higher-speed services. In addition, we recently announced a convergence plan, combining broadband with MOD family packages. We believe this initiative will further stimulate fiber migration and MOD subscription growth. In addition, we will be launching even higher speed services, such as 300 megabits per second in order to maintain our technological lead and market-leading position.

Moving on to slide 4 regarding our fourth-quarter operating results, we are proud to say that we continue to outperform our competitors in attracting mobile Internet subscribers. As at the end of 2013, our mobile Internet subscriber market share reached 34.8%, which, once again, was the highest among our peers. We will continue to support this growth momentum and market leadership by further strengthening our cutting-edge and robust infrastructure to support the ever-increasing growth in mobile data usage.

Slide 5 provides an update on our mobile business. During the fourth quarter, mobile Internet subscribers grew by over 58.8% year over year to 3.94m. Our mobile data revenue grew significantly by 39.4% year over year, the highest growth rate amongst the Taiwanese telecom operators.

We believe that this success is mainly due to our aggressive promotion plans, which not only attract many new mid- to low-tier smartphone users, but also helps encourage existing 2G subscribers to upgrade to our 3G network through attractive data plans. In 2013 we successfully upgraded almost 740,000 subscribers to the 3G network, 40% of who subscribed to our additional data plan upon the migration. We will continue to encourage migration and expect 1.2m 2G subscribers to upgrade to 3G in this year.

Moving on to slide 6, our successful promotional initiatives targeting mid- to low-tier smartphone users helped boost our smartphone penetration rate to 53% at the end of last year. In addition, we were able to increase total mobile Internet subscribers to 3.94m. In year 2014 we expect to add 1.1m more mobile Internet subscribers, further boosting revenues and increasing data usage.

Another exciting development we initiated in late November last year was the cooperation agreement with LINE, the developer of an increasingly popular communication app for smartphones. Under this cooperation, by late this year, all mPro subscribers will be able to enjoy free mobile Internet services for LINE usage. We expect this cooperation will strengthen customer stickiness and attract voice-only subscribers to subscribe to mPro packages.

ARPU for the first quarter decreased Q on Q, mainly due to the seasonally -- seasonality of our business. Typically we launch our promotional plans in the third quarter and we continue to offer those plans through the fourth quarter. During last year the Big Saving plan was very successful with regard to attracting new subscribers, but also caused some temporary downward pressure on ARPU.

Slide 7 shows the results for our broadband business. During the last quarter we continued to see a steady migration of subscribers to higher-speed fiber services. We witnessed over 25.5% year-over-year growth in subscribers opting for connection speed of 60 megabits per second and higher, reaching about 1.14m by the end of last year.

We will continue to encourage our subscribers to migrate to higher-speed fiber offerings. As mentioned previously, we announced a fiber convergence plan, combining broadband with MOD family packages. We believe this initiative will stimulate both fiber migration and MOD subscription. We are also targeting small and medium enterprises and machine-to-machine applications to stimulate further broadband usage.

Moving on to slide 8, our IPTV revenue in 2013 increased by 15% year over year. During the same period our advertising revenue grew by 37%, a trend we expect to continue in the future. In addition, the household TV usage rate continued to increase over the past quarters, demonstrating our success in boosting customer stickiness on our platform. Once again, our fiber convergence plan mentioned previously is expected to also boost the IPTV subscriptions as it will allow broadband users to subscribe to IPTV services under the convergence plan.

Please see slide 9 for an update on our ICT and cloud initiatives. In 2013 our cloud business revenue tripled year over year. In the fourth quarter of 2013 we continued winning ICT projects, including but not limited to monitoring and recording system project for the Taipei police department, a core system project for an insurance company, and a thin client and storage service project for a construction company. We will continue to leverage our core telecom infrastructure and services to expand our ICT and cloud business.

Slide 11 provides an update on the regulatory front. Regarding the Telecom Act amendment, the Executive Yuan asked the NCC to submit the Digital Convergence Regulation draft in February this year. On January 14, the NCC held a meeting collecting options -- opinions on critical issues of the draft. However, it is widely believed that the timing for the NCC to submit the draft could be delayed. We will keep monitoring the progress closely.

Now, before I hand it over to Dr. Yeh to go through our financial results, I would like to personally thank Dr. Yeh for his years of services to Chunghwa, helping our Company to navigate this increasingly competitive and complicated telecommunication environment. We all wish you great success in your future endeavor. Thank you.

Thank you for the kind words, President Shih, and good day, everyone. I appreciate the opportunity to help serve Chunghwa through this amazing time. I'm very thankful and fortunate to have worked with so many talented executives and investors over the years. Thank you for all your contributions.

Moving on to the financials, I will review our financial results in detail, beginning on slide 13. On slide 13 are our income statement highlights. Total revenue for the fourth quarter grew by 4.6%, and operating costs and expenses increased by 6.1% year over year. Our income from operations and net income increased by 2.2% and 3.4% respectively. In addition, the EBITDA margin decreased from 34.12% to 32.75% in the fourth quarter as compared to the same period in 2012.

Please refer to slide 14 for an update on our business segment revenue. The total revenue increase in the fourth quarter of 2013 was driven by a 39.4% year-over-year growth in mobile VAS revenue, a 21.9% growth in handset sales, including Senao's open channel sales, and an increase in ICT revenue. The strong growth of mobile VAS revenue was mainly driven by an increase in mobile Internet subscribers.

Local voice and DLD revenue decreased by 6.1% and 4.8% respectively, mainly due to mobile and the VoIP substitution. Broadband revenue was flat year over year. Mobile voice revenue decreased by 8.4% due to tariff reduction, VoIP substitution and the promotional packages.

Moving on to slide 15, you can see that our operating costs and expenses increased by 6.1% year over year. The increase in operating cost was mainly due to the rising cost of handsets sold, resulting from higher handset sales, an increase in personnel expenses for Senao's channel expansion and the higher ICT project cost.

As shown on slide 16, cash flow from operating activities increased to TWD30b during the fourth quarter. This was mainly due to the procurement of land by our property development subsidiary in 2012 for construction and the decreased mobile handset inventory level compared to the same period of 2012.

Cash and the cash equivalents at end of the period decreased, mainly due to the TWD39.1b cost of acquiring the mobile broadband business license. As of December 31 last year, we had TWD14.6b of cash and cash equivalents.

The EBITDA margin decrease was primarily due to the tariff cuts and the higher sales of handsets, for which the EBITDA margin is lower than our traditional telecom services.

Slide 17 shows our consolidated guidance for this year. Looking ahead at 2014, we will continue our strategical focus and the build-up and the expansion of fiber and the mobile broadband networks in order to provide quality services to customers and remain ahead of the competition as Taiwan's leading telecom operator.

Total revenue for 2014 is expected to be flat at TWD228.2b. Expected increase in revenue due to ongoing promotion for mobile Internet and the growth in handset sales as well as ICT projects are likely to be offset by the voice revenue decline and the tariff reductions. We expect broadband revenue to be flat year over year due to market saturation and cable competition.

Operating costs and expenses for this year are expected to increase by TWD4.21b to TWD184.7b. Costs of handsets sold are expected to increase along with the promotion of mobile Internet package and customer migration to 3G. Increase in CapEx for the Company's fixed and mobile broadband business is expected to result in higher depreciation and maintenance expenses. The 4G license acquisition will also increase amortization expenses.

Overall, income from operations, EBITDA margin, net income and EPS are expected to decrease as compared to last year.

Lastly, on slide 18, as stated in our guidance, we increased our capital expenditure for this year with the focus on 4G network deployment, fixed and mobile broadband construction and cloud deployment, which includes data center construction. We will review our CapEx budget and execution plan on a regular basis and focus on making the most cost-effective spending decision possible.

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

(Operator Instructions). Peter Milliken, Deutsche Bank.

Yes. Good afternoon, everybody. Thanks for the call and congratulations on ending the year well. I would just like to address a question to Mr. Tsai. Welcome to Chunghwa Telecom. I'd be interested to know if you have any goals or any particular management style that we might see brought to Chunghwa Telecom in the years ahead.

Could you repeat your question again? I missed part of it. Sorry.

Yes. I was asking if you had any particular management style or any particular goals that you might bring to Chunghwa Telecom in the coming years.

I see. I see. Maybe I should start with my goal. As you know, I was elected the Chairman of the Company yesterday afternoon. I have done some homework with the management team here during the last couple of weeks. But I cannot say I have really in-depth understanding of the Company business and strategy. I have a pretty good idea, but not in-depth yet. So I need some time to formulate my strategy -- our strategy, I should say. However, I am convinced that Chunghwa Telecom is a very capable Company with a lot of talent, with a lot of resources.

Now my goal, together with our management team, going forward is really to take Chunghwa Telecom on a growth path in the next few years to come. It is not an easy goal, as most of you understand. A lot of the telecom revenues continue to decline year over year, which means we have to find a growth opportunity to compensate and to win growth in our future business. But I think our team is determined that we want to go on a growth path. And my commitment is to work with our team to find ways to grow our business.

As to my management style, it is difficult for me to describe my own style, so I think the question might be better answered by some of the people who work with me or work under me or who managed me in my prior life. Thank you.

Okay. Thank you very much for that. And just one more general question for the team, that is that we saw voice -- mobile voice revenue being under pressure in the fourth quarter. Is that something -- will we continue to see that continue to come under increased pressure ahead, or do you think they're at a more stable level -- at a lower but more stable level of voice revenues at this point?

Yes. As you can see, in the last quarter of last year the local voice and the DLD voice as well as mobile voice has declined 6% to 8%. And we believe this trend will continue at this moment. So we take that into consideration in our guidance for this year. Thank you.

Thank you very much.

Michelle Wei, JPMorgan, Hong Kong.

Hi. I have two questions. My first question is on 4G network rollout. So how many base stations in total do you think Chunghwa Telecom will need to deploy to have good nationwide coverage of 4G? And also what's the timetable for that? In terms of CapEx, what do you think the trend is going to look like in the next few years? That's my first question. Thanks.

Yes. For the LTE, we launched the 1,800 megahertz band. So we estimate within three years we will construct around 7,000 to 10,000 base stations to give more than 90% of the population coverage.

Okay. But do you think this year is going to be the peak CapEx year?

Can you repeat again?

If you look at CapEx, is this year going to be the peak? Is CapEx going to more gradually decline starting from next year?

Michelle, could you move away a little bit from the microphone because it's a little bit noisy here.

Okay. Hi.

The CapEx for this year, 2014, we're the peak. Next year will gradually decrease to a normal level because this year we have a 3G/4G deployment so this year will be the peak.

Okay.

TWD40b. TWD40b. Around the TWD40b, yes.

Thanks. My second question is about dividends. Earnings dropped 2% last year. And according to your guidance the decline will accelerate this year. So just wondering if you are considering freezing the payout ratio a little bit more to at least keep the EPS flat.

In terms of dividend policy, it will be decided by the Board. At this moment we don't really have detailed information to provide.

However, this year there are many more factors to be considered by the Board. For example, the adoption of [IFERS], which decreases our retained earnings -- beginning retained earnings as the [patient] application of employee upon privatization. The number is like TWD18.4b. So if we'd like to maintain similar level of regular dividend payout ratio, we need to distribute special dividend from additional (inaudible). That will be one issue.

Another issue, as you can tell, our cash balance has reduced substantially because of the 4G license payments. And although this won't affect our financial finance stability, but however, there are some -- those changes we will bring to the attention of the Board for consideration. But on the other hand we also understand the importance of a stable dividend policy to the shareholder. We also report these issues to the Board members. Thank you.

Okay. Thanks. My last question is on pricing, on your 4G pricing strategy. We know [NCT] supports tier pricing for 4G, but given the fact that actually there will be two other 4G players and they seem to be quite aggressive on pricing, especially on (inaudible), Vibo. According to a conversation with them they plan to launch 4G service by end of this year as well. And they have no plan to remove the unlimited data price and data plan. So do you think this will make it more difficult for the big three operators to leverage 4G service launch to move to tiered pricing?

Yes. We still have not finalized our data package plan. But the basic principle is we want to increase the so-called fair usage policy with the tiered pricing. We will have full management to the users' data. Because 4G is coming, the download speeds will be increased a lot. So there will need to be some changes on the current 3G data package. So we are trying to do good tariff package based on the fair usage policy and tiered pricing.

Okay. Thank you very much.

(Operator Instructions). Gary Yu, Morgan Stanley.

Hi. Thank you for the opportunity to ask a question. This is Gary Yu from Morgan Stanley. I just have one question from my side. Given that you have paid a high amount on the spectrum compared to your peers, is it fair to assume that you would probably want to target a larger market share in 4G compared to 3G? Otherwise if you paid more and get a similar amount of market share, would it be worse off for Chunghwa Telecom? Thank you.

Yes. Because we have 35 megahertz total and also have 15 megahertz [against the] C5 with 1,800 megahertz band, this offers more than 100-megabits-per-second speed. We are very confident that we'll be a much, much higher speed than other competitors. So we will acquire not only actually our current 3G subscribers to LTE, but also acquire some high-end users from our competitors. Currently our mobile Internet subscribers are around 34%. So we expect we will get -- acquire more subscribers from our competitors, so we expect we can increase our market share.

Okay. And a follow-up question to that is could you share with us your strategy in terms of gaining market share from your competitors? Will it be more on pricing or will it be more on coverage or handset availability? And is there any target market share that you want to achieve compared to the current 34% share that you have on mobile Internet?

We expect this year we will increase 1.1m newly subscriber for the data mobile Internet. So it will reach more than 5m subscribers totally. So we are very confident that Chunghwa has a very good 2G coverage to offer very nice coverage for voice, even in the remote areas, including the mountain areas and over sea level.

So we not only -- the reason is the LTE cannot full coverage at this early stage, so it still needs a fall back to 3G. So we are in a very good position, offering high speed in the six big cities in the early stage. But also we can offer 3G in case the 4G LTE is not available. So we offer the total package, not only for 4G but also 3G and 2G. Thank you.

Okay. Thank you very much.

(Operator Instructions). If there are no further questions, I will turn it back over to Chairman Tsai. Go ahead, please.

Thank you for spending your time with us. We wish you all a Happy Chinese New Year. Thank you.

Thank you, Chairman Tsai. And 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 IR calendar section. You may disconnect now. Goodbye.