Chunghwa Telecom Co Ltd (CHT) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company's First Quarter 2014 Operating Results. (Operator Instruction)

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 IR website, www.cht.com.tw/ir under the IR Calendar section.

And now, I would like to turn it over to Fufu Shen, the Director of Investor Relations. Ms. Shen, Please go ahead.

Thank you. This is Fufu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our first quarter 2014 earnings results conference call. Joining me on the call today are Dr. Tsai, Chairman; and Mr. Shih, President.

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, Fufu. Hello everyone. Thank you again for joining our first quarter earnings call.

I'd like to make a few remarks before the formal presentation. Since I joined the Chunghwa Telecom earlier this year, myself and my management team has been working diligently to revamp our corporate strategy in order to create an efficient, fast-moving and a full-service telecommunication company. So I want to start by first discussing our business goals and some actions we are taking for 2014.

The overall goal we are putting in place is to transform our Company into a full-service, digital convergence service provider. We will continue to build out our high-speed infrastructure in order to provide seamless mobile and fixed broadband services. We plan to offer 300 megabit per second to 1 gigabit per second and LTE mobile high speed broadband access services, which will help facilitate our innovative, digital convergence, value-added service offerings that targets the individual customer, household, and enterprise markets. In this context, we will continue strengthening our MOD services to ensure a gateway into our customers' homes.

So our key goal for this year is focused on business development, with an emphasis on the 4G, enterprise revenue, and fiber segments. First, as many of you know, we plan to roll out 4G services in July this year. And by the way, this afternoon, we were just awarded a license from NCC for the 4G service. Our aim is to acquire at least 40% of the 4G market share by the end of 2014. Second, we want to further increase our enterprise revenue share by offering a total solution package to small and medium enterprises, which includes ICT solutions and cloud services. And finally, we will be offering a fiber convergence plan that combines broadband and MOD packages so that we can stimulate both fiber migration and MOD subscriptions growth.

Moving on, our next goal is to reallocate resources, so that we can enhance our operating and financial efficiency. In order to achieve this goal, we plan on investing capitals more efficiently in our build outs and controlling operating expenses, while allowing for a moderate expansion in the marketing budget. Our final goal is to leverage our existing resources to grow our business. To this end, we will focus on further monetizing our fiber networks by increasing its capacity usage, which in turn will help to control CapEx. We will also leverage our R&D capability to develop new and innovative products and services, so that we can continue to drive growth and deliver improved returns for our shareholders.

Now, I'd like to move to our presentation. Please move to slide number 3. Regarding our first quarter operating results, we continue to outperform our competitors in attracting mobile Internet subscribers. At the end of March 2014, our mobile Internet subscriber base has reached 4.3 million, representing 35.6% market share. We will continue to support this growth momentum and market leadership. And because of broadband household penetration rates is already high, we continue to focus on customer retention and migrating users to higher speed services. We actively promoted our convergence plans, which combine fiber and MOD services, and believe this will help strengthen our competitiveness and solidify our customer base.

Please go to slide 4, about the cash return. The Board of Directors announced a cash distribution from distributable earnings and capital surplus paid to the shareholders of a total of TWD35.1 billion or TWD4.5251 per share, with TWD2.3881 from the earnings for year 2013 and TWD2.137 from capital surplus. A timetable will be announced following the shareholders' approval of this proposal at the Annual General Meeting scheduled on June 24 this year. As you probably know, due to the adoption of Taiwan's IFRS, the initial amount of retained earnings in 2013 was decreased. To compensate for the decrease, the Board of Directors allocated the cash distribution from the cash -- from the capital surplus.

From here on, President Shih would like to lead you through our business overview. Thank you.

Thank you, Chairman Tsai.

Slide 6 provides an update on our mobile business. During the first quarter, mobile data revenue grew by 23.4% year-over-year, mainly driven by the 32.6% increase of the mobile Internet revenue. We will continue our strategies to solidify high-tier smartphone users, introduce the mid-to-low tier smartphones to expand mobile Internet subscriber base, accelerate the migration of the 2G subscriber to 3G networks and to speed up the 4G network deployment to enjoy the first mover advantage. For LTE service launch, there are more than 30 high-to-low tier smartphone [in the pitch] available on 1,800 megahertz band currently, which should strengthen our competitiveness in the 4G business.

Moving onto slide 7, our promotional initiative targeting mid-to-low tier smartphone users continue to boost our smartphone penetration rate to 56% at the end of the first quarter of 2014. ARPU for the first quarter decreased QoQ mainly due to the continual promotional plan. During the quarter, the plan was successful with regard to attracting new subscribers, but at the same time, caused some temporary downward pressure on ARPU. We expect the ARPU to recover in the third quarter of this year.

Slide 8 shows the results for our broadband business. During the first quarter, we continued to see a steady migration of the subscribers to higher speed fiber services. We witnessed over 23.2% year-over-year growth in subscriber opting for connection speeds of 60 megabit per second and higher, reaching about 1.19 million by the end of the March 2014. We will continue to encourage our subscribers to migrate to higher speed fiber offerings. As mentioned previously, the fiber convergence plan combining the broadband with MOD family packages stimulated both fiber migration and MOD subscription. We are also targeting the SMEs and the machine-to-machine applications to stimulate further broadband usage.

Moving onto slide 9. Our IPTV revenue in the first quarter of 2014 increased by 19.9% year-over-year. Moreover, the household TV usage rate continued to increase over the past quarters, demonstrating our success in boosting the customer stickiness on our platform. In addition to the fiber convergence plan, which boosts IPTV subscriptions, we are targeting different customer groups to offer demassified subscription VoD packages, and providing TV Everywhere services over the multi-screen for better customer's viewing experience.

Please see slide 10 for an update on our ICT and cloud initiatives. In the first quarter of 2014, our cloud business revenues doubled year-over-year. We continued winning ICT projects, including the host computer leasing project for Ministry of Labor, the taxation information system maintenance project and the E-Invoice system project for Ministry of Finance. We will continue to leverage our core telecom infrastructure and the services to expand our ICT and the cloud business.

Slide 12 provides an update on the regulatory front. Similar to the mobile broadband spectrum auction last year, the government is expected to open the 2,600 megahertz spectrum for bidding in 2015. We plan to actively participate in the bidding process in order to remain competitive.

Moving onto the financials. Now, I will review our financial results in detail, beginning on the slide 14.

On slide 14 are our income statement highlights. For first quarter of 2014, total revenues decreased by 2.8% and the operating cost and the expenses decreased by 4.9% year-over-year. Our income from operation and the net income increased by 5.9% and 10.9%, respectively. In addition, the EBITDA margin increased from 34.02% to 36.81% in the first quarter as compared to the same period in 2013.

Please refer to slide 15 for an update on our business segment revenue. For the first quarter of 2014, the year-over-year decline in the total revenue was driven by the decrease in fixed and the mobile voice revenue, the handset sales and the ICT project revenue, which offset the increase in mobile VAS revenue. Local and the domestic long distance revenue decreased by 5.5% and 4.0% respectively, mainly due to the mobile and VoIP substitution. Broadband revenue was flat year-over-year. Mobile voice revenue decreased by 10.3% due to the promotional packages, tariff reduction and the VoIP substitution.

Moving onto slide 16, you can see that our operating costs and expenses decreased by 4.9% year-over-year, mainly due to the decrease in the costs of the handsets sold resulting from lower handset sales.

As shown on the slide 17, in the first quarter of 2014, cash flow from the operating activity increased TWD1.17 billion compared to the same period of 2013. Cash and cash equivalents at the end of the period decreased mainly due to the one-time TWD39.1 billion payment of acquiring the mobile broadband license in the [fourth] quarter of 2013. As of March 31, 2014, we had TWD18.99 billion of the cash and cash equivalents. The increase in EBITDA margin was primarily due to the lower handset sales, which have a lower EBITDA margin than traditional telecom services.

Slide 18 shows our 2014 first quarter results as compared to our guidance for the quarter. Our revenue and costs and the expenses are lower than expected, mainly due to lower cost of goods sold which resulting from the lower handset sales. However, our operating income, the net income and the EBITDA, all exceeded our first quarter guidance. Currently, we expect our full year operating result to remain in line with our earlier guidance.

Lastly, on slide 19, our capital expenditure in the first quarter was focused on the 4G network deployment, fixed and the mobile broadband construction, and the cloud deployment which includes data center construction. We will review our CapEx budget and the execution plan on a regular basis, and focus on marketing -- making the most cost effective spending decisions possible.

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

(Operator Instructions) Chate Ben, Credit Suisse Singapore.

Hi, good afternoon everyone. Thank you so much for the presentation and opportunity to ask the questions. I have four questions. The first one is regarding the 4G launch upcoming in July. I understand that one of your key advantages is 1,800 megahertz spectrum 4G launch, which allows you a better handset ecosystem as you point out. However, your peers also would launch very similar -- well, during the similar period which is June, July in this year and also the ecosystem around handsets on 700 megahertz has improved significantly like HTC M8 or Galaxy S5 offer on that band. So do you think that advantage is sustainable, and if there is anything that you would see as a key differentiation for you over your peers on 4G? Maybe we can go one by one question.

We have many LTE-ready handsets, smartphones, like iPhone 5 and 5S and HTC, etcetera. So we have expected more than 50 models will be available when we launch in July. So it's far beyond what the 700 megahertz has. So we think we have the advantage compared to our competitors.

Okay, thank you. And the second question is regarding your IPTV operations. I understand that its part of your core business strategy as well, the MOD services. However, what we is that number of subscribers growth has not really accelerate and your year-end target seems still on the higher side. Would there be any change in strategy around the MOD services throughout the year that would allow you to achieve your subscriber target?

Yes, we think the MOD is some kind of the differentiation by different categories, for example the movies, the drama and the sports. So we now focus on the demassified users. We would like to acquire more subscribers that focus on what they want instead of the linear channels. So we will do our best to acquire more subscribers, even the target is quite challenging.

Right. The next question is regarding your cost control initiatives. I understand that that is part of the strategy as well. Where do you see within your cost structure that you can maybe cut [or edit] -- any kind of guidance into what amount of costs that you can save over the next few years?

I think this is the -- we are right now, reviewing every aspect of our operating expenses from the maintenance, all the way to our administrative expenses. I don't think we're now today in a position to give you a forecast in that respect. But I hope maybe in the next [few] months, we will have a better forecast from that point of view. Thank you.

All right. Just one last question, it's a little bit housekeeping. I understand that you have already -- you just received operating license for 4G, right? Does it mean that your amortization of spectrum would start right away?

Yes, when we launch the 1,800 megahertz, we will amortize the license on the 1,800 portion. The license lasts for 17 years. So we launch earlier than we amortize in a longer term. So yes, we will amortize the license fee since we launch the services.

In July?

Maybe I want to add a comment on the IPTV part. I understand your question. We are, I think, also re-looking at our strategy. We will continue -- I think not only continue, we will strengthen our content in the months to come. We're in the process of doing that.

I think the voice -- the video-on-demand part, we will be able to provide a lot better content for our customers and potential customers. We will also increase our promotion, so that I think we remain optimistic and we are determined to make this a success for the Company.

All right. That is great, thank you so much.

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

Thank you for attending the conference. I wish you good weekend to come. Thank you and goodbye.

Thank you, Chairman Tsai. And thank you all 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 now disconnect. Good bye.