Chunghwa Telecom Co Ltd (CHT) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Chunghwa Telecom conference call for the Company's second quarter 2014 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 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 Fu-fu Shen, the Director of Investor Relations. Ms. Shen, please go ahead.

Thank you. This is Fu-fu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our second quarter 2014 earning results conference call. Joining me on the call today are Dr. Tsai, Chairman; Mr. Shih, President; and Mr. Chen, CFO.

During today's call, management will first discuss business, operational, and financial highlights; then, we will move on to the QA section. On slide number two, 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. Thank you, again, for joining our second quarter 2014 conference call. I'd first like to introduce our new CFO, Mr. Bo Chen. You may have read his resume, but as you can tell, Bo has a wealth of experiences in both banking and the technology industry. We are confident that he will contribute significantly to driving our financial performance in Chunghwa Telecom as well as improving or enhancing the investment relationship.

Now, let me get back to the business side of the conference. I've been with the Company for six months. I have worked very hard with our key management team on reviewing the Company strategies and our business development. We are focusing on 4G, broadband, fixed-line broadband, MOD enterprise business. These are four flags of our major efforts.

The management and I actually have worked on a comprehensive strategy development for the business in the coming one to three years. We have come to some conclusion and I am pretty confident that we can achieve a better growth for our Company in the years to come.

We also are focused on enhancing our operating and financial efficiency by reallocating and leveraging the resources for our long-term growth. As you know, at the end of May, we have launched 4G services and we were the first 4G operator in Taiwan. Since then, we are accelerating our 4G development and/or deployment. We are [pooling ahead] our capital expenditure for our 4G deployment. We want to offer our users better and faster experiences not only by deploying the base stations, but also by applying our technology capability in our R&D to ensure a better quality for our user experiences. In addition, our mobile division worked on very hard on the application side. We want to also enhance our customers' user experiences through offering them better and faster applications.

And finally, the services, we will continue enhancing our service capabilities so that in this competition, I will say a strong competition in the 4G market, with our deployment, technology, applications, and services, we're confident that we can meet our target of a market share of 40% by the end of this year. And more importantly, I think we will prevail in the years to come.

Finally, after reviewing our capital expenditure and resource allocation carefully, we believe, I think CFO will elaborate more later, we will have a capital expenditure this year which will be lower than our budget, which we reported to you at the beginning of the year. We also believe we will have higher and better operation efficiency in this year too. In parallel, we will also optimize handset subsidies in our smart device profile so that we can control our expenses better.

I and my management team continue to work on integration of the resources among the different business groups within the Company so we can have a better and a higher productivity for the Company; and of course, with that, we want to enhance our financial performance in time to come.

Thank you. That's my report. Now, President Shih would like to lead you through our business overview. Thank you.

Thank you, Chairman, Tsai. Moving on to slide 4 regarding our second quarter operating result, we continue to outperform our competitors in attracting mobile Internet subscribers. At the end of June 2014, our mobile Internet subscriber base had reached 4.6 million, representing 36.4% market share. We believe the growth momentum and the market leadership will continue, due to our effort on our promotion of trend, 2G to 3G's migration, and the 4G service launch.

We continue promoting our convergence trend, combining the broadband and the MOD services. The broadcasting of the FIFA games helped the broadband and the MOD subscriptions, especially for high-speed fiber services. The 100-megabit per second fiber services subscribers increased more than 500% and the MOD subscribers increased 6.3% year-over-year at the end of June 2014. Slide 5 provides an update on our mobile business.

During the second quarter, mobile data revenue grew by 23.7% year-over-year, mainly driven by the 32.5% increase in mobile Internet revenue. Entering into the new 4G era, our mobile business strategies are focusing on 4G service promotion followed by expanding the 4G device profile from high-tier to mid and low-tier. The migration of 2G customers to the 3G network is also part of the strategies to promote data service. Meanwhile, we will accelerate 4G network deployment to cater to customers' demand.

Moving onto slide 6, our promotional initiative targeting mid to low-tier smartphone users continue to boost our smartphone penetration rate to 58% at the end of the second quarter of 2014. Net add to mobile Internet subscribers are more than 700,000 for the first half of 2014. While we targeted an increase of 1.1 million mobile Internet subscribers this year, the growth rate has been much higher than expected. ARPU for the second quarter decreased Q-over-Q, mainly due to the continuous 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 this year.

Slide 7 shows the result for our broadband business. During the second quarter, we continue to see a steady migration of subscribers to higher-speed fiber services. We witnessed more than 500% year-over-year growth in subscribers opting for connection speed of 100-megabits per second or higher, reaching about [627,000] by the end of June 2014. We will continue to encourage our subscribers to migrate to higher-speed fiber offerings. As mentioned, the fiber convergence plan combining the broadband with MOD family packages stimulate 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 8, our IPTV revenue in the second quarter 2014 increased by 8.8% 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 boosted IPTV subscriptions, we will continue enriching local contents and VOD programs. We also focus on optimizing the MOD cost structure to enhance the capital efficiency. As 4G services has already been launched, we are planning to offer a convergence plan so that 4G subscribers who also subscribe to MOD services can enjoy MOD programs over their smart devices.

Please see slide 9 for an update on our ICT and cloud initiatives. In the first half of 2014, our cloud and information security business revenue increased by 6.8% year-over-year. In the second quarter, we continued to win in ICT project, including the data system projects for Department of Land of Taipei City Government. The host computer leasing projects for Ministry of Labor, the cloud computing system for National Police Agency, and then ICT projects for a hospital. We will continue to leverage our core telecom infrastructures and services to expand our ICT and cloud business.

Now, I will hand it over to our CFO, Mr. Chen.

Thank you, President Shih; and thank you, Chairman. Tsai for your kind introduction. I'm very excited to join the Chunghwa Telecom team and looking forward to working with all of you. Now, I will review our financial results in detail. Let's start from slide 11.

For the second quarter of 2014, total revenues decreased by 0.1%, and operating costs and expenses increased by 0.6%, year-over-year. Our income from operations and net income decreased by 2.6% and 0.3%. In addition, the EBITDA margin increased from 36.8% to 37.3% in the second quarter as compared to the same period in 2013.

Let's refer to slide 12 for an update on our business segment revenue. For the second quarter of 2014, the year-over-year decline in total revenue was driven by the decrease in fixed and mobile voice revenue and ICT project revenue which offset the increase in mobile value-added service revenue and handset sales. However, we expect handset sales will be deferred to the second half this year along with the 4G service launch.

Moving onto the slide 13, our second quarter operating cost and expenses increased by 0.6% year-over-year, mainly due to an increase in depreciation and amortization expenses and personnel expense which were partially offset by a decreasing interconnection fee. To be more specific, the increase in depreciation expense was mainly from 3G maintenance and cloud and IDC equipment investment, while amortization expense was mainly from the amortization of the 4G license fee.

On slide 14, in the second quarter of 2014, cash flow from operating activities decreased by TWD4.95 billion compared to the same period of 2013. This was mainly due to the higher operating cash flow in the second quarter of 2013 resulting from the delay of bill collection from the first quarter to the second quarter associated with the Chinese holiday season. Moreover, to a direct fiber and mobile network deployment, the higher payment for spare parts also explained part of the decrease.

And for the slide 15 shows our 2014 second quarter and half-year result as compared to our guidance. Our revenue and cost and expenses are lower-than-expected mainly due to the lower handset sales and lower cost of goods sold. However, our operating income, net income, EBITDA, all exceeded our second quarter guidance. We expect our full-year net income will outperform our guidance.

Here comes our last page. Our capital expenditure continued to focus on the 4G network deployment, fiber broadband construction, service platforms and cloud deployment which includes data center construction and then we will continue reviewing our CapEx budget and the execution plan carefully on a regular basis and the focus on making the most of the cost-effective spending decision possible. Therefore, a 5% to 10% reduction in budget CapEx for this year could be expected. Thank you all for your attention, and now we would like to open up for questions.

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. If you have the question for any of today's speakers, please press zero one on your telephone keypad and you will enter a queue, after you are announced please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question.

Thank you. Ladies and gentlemen, we will now begin a question-and-answer session. (Operator Instructions) Danny Chu, Macquarie.

Hi. Thank you for the presentation. Just one quick question is, in the presentation, you just mentioned that it is possible that the CapEx plan for 2014 could be 5% to 10% lower than your budget. Can you elaborate a little bit that you're going to spend less than your budget, is it for the mobile business or for the domestic fixed business or Internet? And given in your presentation, you also mentioned that the Company would like to speed up the rollout of 4G network, so can you please help us to understand how to speed up the rollout of the 4G network but at the same time, you're cutting your budget CapEx? Thank you.

I think I will answer the CapEx questions. As to the 5% to 10% reduction, in our slide, you will see that there are four major parts of our CapEx, the 4G, 3G and the Fiber Tool and the service platform and the Cloud/IDC. I think we will just accelerate our deployment in 4G. So I think we will be more construct precisely in the fiber broadband and also in the service platforms. As to the increase of the 4G rollout, I think the President.

I think the CapEx is totally including fixed line and mobile -- to expedite the deployment of 4G, we will basically put more on the 4G, but we have reduced or consolidated on others like fixed broadband. Thank you.

Thank you.

Steven Leow, Standard and Chartered.

Thank you. I have two questions. One is on the 4G rollout. I think you have 15 meg on the 1800 spectrum. How many, what amount will be used for the 4G and what amount of the spectrum to be left for the 2G and what you're targeting in the 4G population coverage coming few years. On the second question, can you give me an update on the dividend policy given your earnings likely above guidance, can we expect likely stable dividend per share going forward? Thank you.

Yes, we have 15 megahertz of spectrum in 1,800. So we will deploy the best stations and cover the 90% of the population by the end of next year. So the speed-wise, we have reached 100-megabit per second download and 15-megabit per second upload.

Yes, Okay.

As to the dividend policy, I think our historical data is around 90% and I think we will review our dividend distribution on a yearly basis and take into consideration our earnings and capital expenditure needs.

Okay. Thank you.

Neil Anderson, HSBC.

Hi, good afternoon. Just a follow-up question on the 4G service. Obviously, Chunghwa was the first operator to launch. I wonder if you could share anymore details and did the subscriber growth rate at change its all when your competitors launched later in the quarter and also can you discuss how you are using any introductory discounts to attract customers to 4G, and if so, when do you expect those to be reduced? Thank you.

We have a plan that the subscriber base at the end of this year will be 600K. Compared to our competitors, we have a slight higher than our competitors. We plan to migrate 2G subscribers to 3G or 4G. That's another resources for the subscribers. We have a iPhone, a lot of iPhone subscribers, we will encourage the 3G subscribers that who is own iPhone to upgrade to 4G. I think it is most differentiated to our competitors because we have a 15-megahertz spectrum in 1800 that already exists, is ready for the existing iPhone 5 and the 5S.

Thank you. And any comment on the discount plans that are being used for introductory discounts?

By the end of September, we have lots of promotion plans including , is including a lot of the applications -- apps and also we will give more data quantity in addition to our original allocations.

Thank you very much.

Thank you.

Gopakumar, Nomura.

Hi, thank you. This is a question regarding the current promotions which you've mentioned in the 4G plans. Is there any decision on discontinuing your promotions on 4G after September? Also one more question, in case new entrants decide to introduce unlimited 4G in the next few quarters either on voice or data, will we see your promotions being continued further? Thank you.

We have no decision yet on the promotion plan after September, but it's depend on the competition situation at that time. So we think we will be more flexible on our promotion. Thank you.

Thank you. Just a follow-up question if I may. Can you please share some color on the number of 4G subscribers that you have signed up so far since your launch and also, which rate plan is seeing relatively higher sign-ups? Thank you.

Yes, we have a six plan, the most attractive plan is NT$1,336. That is the most popular.

And how many 4G subscribers will you have? Is it possible to share that?

We have a more than 100K, but we didn't expose the particular numbers but we already announced with the subscriber is more than a 100k.

Thank you.

Thank you.

Jack Xu, Sinopac Securities.

Hi, thank you, and question on financial forecast right now and this is the first question and then the second question what are our strategy when we first look at the competition on the other two companies because they also get 50 megahertz, the 1800 megahertz spectrum and what is our strategy and how do we see in the future? Thank you.

In answering the financial focus, currently, we will not revise our financial focus. I just mentioned that. I think that we will outnumber our net income which is our EPS, as to the strategy differentiation from competition for 4G and President?

Yes we will offer a lot of the value-added services but that cannot be done by 3G, it's only very good quality. High-definition video and high-quality voice music and cloud, game and 3D navigation so we will encourage you that our subscriber to subscribe those kind of value-added services and also we will better quality and high speed and low latency compared to our competitors. Thank you.

Thank you.

Sydney Zhang, Bank of America Merrill Lynch

Thank you, [Mandarin]. I have three questions. The first question is on the page 7, you have the Internet revenue, you have VAS as a percent of Internet revenues certainly increased to 15.9% in the second quarter. Just want to find out what's the reason for that sudden changes and what's the reason?

My second question is regards the mobile voice revenue, we also noticed that voice revenue declined as being accelerated in the latest in the recent months. Can we explain what's the reason, you said because of any tariff changes and third question is on the regulation. Do you have any update on this last-mile unbundling from the fixed range side, any updates on the regulation? Thank you.

Internet revenue has come from the value added service for government so that's a 15.9% compared to 13.4% last quarter.

What do you mean from the government? Can you explain little more?

Our data business group got a big, I think it's a big project from the government.

It's like the [least line]?

Leased line. No. It's value-added services.

Is this a one-time or is it ongoing or -- ?

[Most of them are] declined, we basically because it's getting so popular on the line. So some of the voice and SMSs decline, that's very similar to our competitors in this industry. So the last question is an update on the last mile. So far, there is no any further news from our regulator. So it's very peaceful right now on the last mile.

Yes, okay. Thank you.

Danny Chu, Macquarie.

Hi, just I have four questions. First is you mentioned that the Company is targeting to have a 90% population coverage by the end of next year if I hear that correctly, but your competitors are targeting to have like 90% to 95% population coverage by end of this year. So do you think that we will put the Company in like a disadvantage position compared to the peers?

Second question is should we assume the bulk of the 4G network rollout will be completed by the end of our 2015 next year?

And then, the last question which is a very minor one. I just wanted to double check, since you launched 4G surface in late June, so did the Company one full month of the amortization expense of the 4G concession fee or the company has pro rata debt amount? Thank you.

Regarding the carriage, we have a very conservative prediction that 90% population coverage by the end of next year because we use 1,800 megahertz spectrum. So we predicted in more conservative way but we will expedite that deployment of our base station to cover the country. We are not being totally stopped by end of next year, we will enhance after 2015 so this is but most of the base station more than 10,000 base station will be completed by the end of next year but after we will increase slightly.

For license and amortization expenses we launched 4G services in June per month for 1800 megahertz, NT$113 million per month.

Tina Hou, Goldman Sachs.

Hi, thank you for taking my questions. I have two questions, first just for your 4G plans I wonder how you record your revenue between data and voice since you have the bundle with both data and voice inside and then second question is regarding your fiber broadband roll out. I understand that you will be focusing on the 300 Mbps coverage going forward. So wondering what if your current 300 Mbps coverage and your target in the next three years and also local news reported that Chunghwa plans NT$20 billion in CapEx for the fiber broadband roll out. I wonder like how the CapEx will be allocated? Thank you.

For your first question, just a different share so that don't disclose that in numbers.

Thank you.

For the 300 megabit per second the fiber broadband, we plan to have a 40,000 subscribers by the end of this year as our target. Currently we're very precisely do some data mining that who is our potential customer for 300 megabits per second. So it's quite good so far. So we will encourage you to currently 100 megabits subscribe to upgrade to 300 megabit per second.

TWD20 billion CapEx you were asking what is the allocation?

Yes, for the NT$20 billion for NT$300 million.

Yes, I think the allocation is basically similar to our chart year 2014 is I mean, the ratio percentage is similar.

Okay, thank you.

Steven Liu, Standard and Chartered Bank.

Thank you. I have one follow-up on the CapEx, I guess what's the plan to reach of the 2G network and 3Q still invest in 3G network already stopped CapEx on 3G is mainly on 4G. Thank you.

We are still do operation on the 2G network until the license expire at 2017. So currently we keep the 2G network working very healthy.

3G CapEx, are you still investing in 3G network?

Yes, we will slightly improve the coverage because in some rural area, the 3G is still not as good as 2G. So we still invest case by case on the 3G network. But we will focus in on the 4G. So 3G is case by case.

Okay, thank you.

Gary Yu, Morgan Stanley.

Just one question from my side on your remaining 900 and 1800 megahertz spectrum, when do you expect you can do far more spectrum for 4G when your 2G subscriber base becomes smaller and when it becomes appropriate to bring far more spectrum do you prioritize the 900 megahertz spectrum first or the other 1800 then first? Thank you.

So currently we plan to allocate 5 megahertz on this 900 spectrum to carry application with 1800, 50 megahertz. So we can reach -- we have 20 megahertz spectrum for carrier [identification]. So highest is the download speed, we have reached 140 and a megabit per second. So the timing will be by the end of the next August.

So the end of mid-August, so after one year you plan to allocate 5 megahertz?

Because the 2G subscriber, we have still two meaningful UG subscribers, So 2G subscriber so we will upgrade the 2G to 3G then the spectrum, the 10 megahertz in 900 can be reduced to minimum of 5 megahertz so we can allocate a 5 megahertz to carry application with 1800 to make the 4G 20 megahertz.

Okay. And just one follow-up question to that. When you return your original 900 megahertz spectrum to the government, does that also mean that [Huawei] will be able to use that 5 megahertz as well given you need to return the original spectrum before you can resubmit for 4G rights?

We will not return the 900 megahertz to the government because it's already B2, B2 is already awarded of our telecom for the 4G. So currently, we will use it for 2G; and later on, we will upgrade to 4G.

Okay, got it. Thank you.

Tina Hou, Goldman Sachs.

Just two follow-up questions. First is that after the 5% to 10% CapEx reduction this year. Should we still expect 2014 to be the peak CapEx year? And then, the second is that does the 900 megahertz band in Taiwan support iPhone 5S? Thank you.

This question is difficult, hard to answer that because it is also associated -- our focus for the year 2015. So I think currently we're saying that a 5% to 10% CapEx return is here, is that a peak compared to year 2015? As I mentioned that as of now we don't have the number. We're still doing the focus so we are not able to answer this question.

Tina are you asking about the 700 megahertz.

Sorry the 900.

Yes the iPhone 5S is supporting both the 1800 and the 900.

I will comment on the CapEx, overall we will now see for sure whether 2014 is a peak year or not but I would say we will work hard not to increase our CapEx next year compared to this year.

(Operator Instructions) Thank you. If there are no further questions I will turn it back over to Chairman Tsai for closing remarks. Go ahead please.

Thank you for joining us today. You have a good evening. Thank you. Bye.

Thank you Chairman Tsai. 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.