Chunghwa Telecom Co Ltd (CHT) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's third-quarter 2014 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. Miss Shen, please go ahead.

Thank you. This is Fufu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our third-quarter 2014 earnings results conference call. Joining me on the call today are 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 Q&A session.

On slide number 2, please note our Safe Harbor statement.

Now I would like to turn the call over the President Shih.

Thank you, Fufu. Hello, everyone. This is Mu-Piao Shih. Thank you for joining our third-quarter 2014 conference call.

According to an NCC press release announced last week, total 4G subscribers on October 15 reached 1.65m. With this, we believe that our 4G market share has already exceeded 35% and we are in the leading position in Taiwan mobile market. We are working aggressively within our Company and with our partners to enable and facilitate the 4G service promotion.

Part of the reason we saw strong 4G subscription momentum was due to the long-awaited iPhone 6, which went on sale in September. However, we have been concerned about the supply shortage of iPhone 6 handsets, which may impact our year-end revenue guidance.

Also we -- as we continue to regularly and carefully review our CapEx budget and execution plan, we will focus on ensuring optimal return through the cost-effective spending as well as the precision construction. In addition, our CapEx outlay will continue to focus on 4G network deployment and fiber broadband construction.

The fiber broadband investment will predominantly emphasize FTTH construction instead of network coverage enhancement. Therefore it is possible to realize more than a 10% reduction in budgeted CapEx for this year.

Slide 5 provides an update on our mobile business. During the third quarter, mobile VAS revenue grew by 22.1% year over year, mainly driven by the 29% increase in mobile Internet revenue.

Entering into the new 4G era, our mobile business strategies are focusing on 4G service promotions, followed by expanding the 4G device profile from high-tier to mid- and low-tier. The migration of 2G customers to the 3G or 4G network is also part of the strategies to promote data service. Meanwhile, we will accelerate 4G network deployment to reach a population coverage of 90% and 99% by the end of 2014 and 2015 respectively.

Moving on to slide 6. For the first nine months of 2014, we saw a net increase in mobile Internet subscribers of more than 950,000. We expect to reach our 1.1m net add target for the year, which is currently ahead of schedule.

From our internal calculation, ARPU for 4G subscribers in the third quarter exceeded the ARPU figure for our mobile Internet subscribers.

Slide 7 shows the results for our broadband business. During the third quarter we continued to see a steady migration of subscribers to higher-speed fiber services. We witnessed almost 300% year-over-year growth in subscribers opting for connection speeds of 100 megabits per second or higher, reaching about 752,000 by the end of September 2014.

We will continue to encourage our subscribers to migrate to higher-speed fiber offerings. This year we launched 300-megabit-per-second fiber broadband services to keep ahead of the competition. We will continue to promote convergence plans which combine broadband and MOD services. In addition, we are planning to include 4G mobile services in the new convergence plan to stimulate fiber migration and the MOD and the 4G subscriptions.

Moving on to slide 8. Our IPTV revenue in the third quarter 2014 increased by 23.2% year over year. Moreover, the household TV usage rate continued to increase to 61.9% over the past several quarters, demonstrating our success in boosting customer stickiness on our platform.

In addition to fiber convergence plan, which boosted IPTV subscriptions, we will continue enriching local content and VOD programs. We will also focus on optimizing the MOD cost structure to enhance capital efficiency.

As mentioned, we are planning to offer a fixed and mobile convergence plan so that 4G subscribers who also subscribe to the convergence services can enjoy MOD programs over their smart devices.

Please see slide 9 for an update on our ICT and cloud initiatives. We will continue to leverage our core telecom infrastructure and services to expand the ICT business, including cloud services, enterprise total solutions and the government projects. Although relevant revenue from this area will be less than 5% of our total revenue in 2014, it is expected to be more significant in 2015.

Now I would like hand it over to Mr. Chen to go through our financial results.

Thank you, President Shih. Now I will review our financial results in detail, beginning on slide 11. On slide 11 are our income statement highlights. For the third quarter of 2014, total revenues decreased by 1% and operating costs and expenses increased by 1.9% year over year. Our income from operations and net income decreased by 11.3% and 8.8% respectively. In addition, our EBITDA margin decreased from 36.36% to 35.19% in the third quarter as compared to the same period in 2013.

Please refer to slide 12 for an update on our business segment revenue. For the third quarter of 2014, the year-over-year decline in total revenue was driven by the decrease in fixed and mobile voice revenue and handset sales, which offset the increase in mobile value-added service revenue and ICT project revenue.

Moving on to slide 13, our third-quarter operating costs and expenses increased by 1.9% year over year, mainly due to the higher early retirement compensation and increasing depreciation and amortization expenses, which were partially offset by a lower cost of handsets sold and the interconnection fee. To be more specific, the increase in depreciation expenses was mainly from 4G construction, 3G maintenance and cloud IDC equipment investment, while amortization expense was mainly from amortization of the 4G license fee.

On slide 14, in the third quarter of 2014, cash flow from operating activities increased by TWD1.05b compared to the same period of 2013.

Cash and cash equivalents at the end of the period decreased year over year, mainly due to the TWD39.1b payment for acquiring the mobile broadband license in the fourth quarter of 2013. As of September 30, 2014, we had TWD1.1b (sic - see presentation slide 14 "TWD8.1b") of cash and cash equivalents.

The decrease in EBITDA margin was primarily due to the 4G promotion and higher personnel expenses in the third quarter of 2014.

Slide 15 shows our 2014 third quarter and the first nine-month results as compared to our guidance. In the third quarter, our revenue was lower than expected, mainly due to lower handset sales. Operating costs and expenses were also lower than our expectations, mainly due to the lower cost of handsets sold, which offset the increase in costs and expenses from the following two factors, the higher early retirement compensation owing to more employees than expected that took the program and the higher depreciation and amortization expenses attributed to the ahead-of-schedule 4G service launch. As a result, our operating income, net income and EBITDA are all lower than our third-quarter guidance.

For the first nine months, although revenues and operating costs and expenses are lower than expected, our operating income, net income and EBITDA for the first nine months exceeded our guidance. We expect our full-year net income will slightly outperform our forecast.

And here is the last page, slide 16. We expect to see more than a 10% reduction in budgeted CapEx this year. We continue to allocate our CapEx expenditure primarily toward 4G network deployment and fiber broadband construction. Precision construction based on big data analysis is the key to ensure the optimal CapEx spending. The fiber broadband investment will emphasize FTTH construction rather than network coverage enhancement. We will also continue to leverage our scale by focusing on our -- on the procurement process.

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

Thank you all for joining the call. Thank you.

(Operator Instructions). Danny Chu, Macquarie.

Thank you, management, for the presentation. Just three questions. The first question is in your presentation you mentioned that we should expect about 10% CapEx savings for 2014. So going forward, should we assume heading into 2015 that this year, 2014, is the peak of the CapEx cycle and then 2015 CapEx would be lower than this year's amount? That would be my first question.

Second question is can management share its thoughts, like the possibility of introducing tiered pricing into 4G after the expiration of the promotion going on for this month?

And the third question is I recall the management previously set a target of about gaining 40% market share for the 4G business. And right now the Company did an excellent job in terms of getting 35%. So going forward from the current 35%, heading towards 40%, what's the specific strategy or actions the Company is going to take in order to expand the market share from 35% to 40%? Would it be spending more CapEx or would it be spending more on subsidy, promotion etc.? Thank you.

Thank you for your questions. I will answer the first one and our General Manager will just reply you the next two questions. The first one, about the 10% CapEx reduction, I think we are still working on the year 2015 CapEx. And we believe the year 2015 will be lower than this year's number. So that is so far, and I think we will release the year [2000] CapEx guidance in the next conference call.

Regarding the tiered pricing, we always believe that tiered pricing is the right way for fair usage of 4G services. However, we will also take into consideration the market sentiment and the competition landscape to make the financial decision.

Regarding the 40% market share, as I mentioned earlier, according to an NCC press release announced last week, the total 4G subscribers on October 15 reached 1.65m. We believe that our 4G market share has already exceeded 35% and we are in the leading position.

Over the past quarter we are working aggressively within the Company and with our partners to enable and facilitate the 4G promotion. This proved to be effective as we are gaining market share month over month. Thus we still maintain the year-end 40% 4G market share. So we will stress the -- keep the momentum. So far today in the daily increase, more than 10,000, so we think if we can keep the momentum we can reach our 40% target. Thank you.

So if I may ask a follow-up question with regards to that introducing the tiered pricing, so basically we should assume that Chunghwa will wait for its competitors to first introduce tiered pricing before Chunghwa will follow, or Chunghwa will take the market leader position in terms of introducing tiered pricing?

I think the competition is very keen, so we still make -- we're still waiting for our final decision. We will announce the date that we will introduce the new tariff plan. So we still need to consider the market sentiment and the competition landscape. Thank you.

Okay. Thank you.

Steven Liu, Standard Chartered.

Thank you. I have three questions. The first is on the local fixed line business. Can I have what percentage of revenue in voice in your local fixed line revenue? What percentage from voice business? That's the first question.

Second is on the broadband business. It looks like quarterly revenue is still just flattish, but we have seen very strong adoption in your migration to fiber to the home, that package. So when would you expect the revenue to pick up in the Group in the broadband business?

And thirdly is on data usage. Can you share with me the smartphone data usage? What is the 4G data usage? Thank you.

25% of the revenue is voice from fixed line business.

Overall fixed line or just local or overall fixed line? Just local?

Overall, yes. Overall fixed line.

Okay. Thank you. Okay. Great.

Steven, I think you have to get back to slide 12. We have a segment revenue slide. You can do the calculation, because under domestic fixed we have local, DLD and all these are voice revenue. And broadband access, that's for broadband access. And the MOD, that's our IPTV revenue. You can do some calculations and get the percentage. Okay?

Yes. To my understanding, your local still has some leased line business so I think this number is shared in the local, I think.

So for the data usage of 4G, the average data per month is 8 -- 7 to 8 gigabytes, almost double for -- compared with 3G.

For the broadband, the revenue is almost flat. So we are trying to increase the broadband subscribers, so maybe smoothly -- we can expect to increase smoothly.

Okay. Thank you.

Chate Ben, Credit Suisse.

Thank you very much for the opportunity to ask questions. I have four questions in total. The first one is a follow-up regarding the 4G subscribers. Would you be able to share with us how many 4G subscribers you already have right now roughly?

The second one is regarding the decisions for the promotions. I understand that you still have yet to make the final decisions whether to change or to continue with the existing promos. When you comment about the market competition, are you also taking into account your target to achieve the 40% market share by year end as well? Or do you think that with your current promotions, or even if you introduce tiered pricing, that should still be achieved just from the momentum that you have alone? I just want to understand what is the key determinant of the decisions on the promotion side.

The third question is regarding the 4G ARPU uplift. You mentioned during the call, the presentation, that when you calculate the 4G ARPU, there's an uplift compared to what you get out of the mobile Internet subscribers. Can you share with us roughly what kind of uplift that you are seeing there?

And the fourth question is regarding your initiative to do a bundling offer between your fixed line, your broadband, your TV and also mobile business. What kind of bundling that we should expect to see? Are we looking to actually see some discount if you subscribe to multiple products, or are we looking at more a cross in terms of the content from the IPTV to be viewed on the mobile? What do you think about the concept of bundling? Thank you.

So according to the NCC, they only announced the number on the end of last month. So we will keep the subscribers not disclosed at this moment. But we calculate we already reach more than 35% of the market share.

So regarding the 40% market share, we see the competition from our competitors is very keen. So we have 35 megahertz bandwidth and our maximum down speed for C5 spectrum, 50 megahertz. We can reach more than 100 megabits per second downlink and 30 megahertz -- 30 megabits per second for uplink. So we will emphasize our competitiveness with a strong point for the competition.

Regarding the 4G ARPU, because we -- currently we didn't introduce the tiered pricing so the ARPU is not significantly different for the same subscribers. So we would like to introduce new tariff plans and we can have an ARPU lift in the future.

For the bundled fixed line, broadband, TV, we already have a discount for the bundled services. It's already been approved by NCC.

All right. Thank you very much. Just a follow-up regarding the comments on the competition from your competitors. Is it purely on the price or are we talking about other aspects of the competition as well that you feel that your competitors are quite strong and you might want to improve on apart from price? Thank you.

I think it's not only on the price. Okay? I think we mentioned earlier that we have the cooperation with our partners and we also have good channel execution. I think that's the major two reasons for us to compete. Of course, talking about the population coverage of our network, I think that's another major achievement. So I think this is probably what we are looking at, not only the price.

Okay. Thank you very much.

Tina Hou, Goldman Sachs.

Hi. Good afternoon. Thanks for the opportunity. First of all, just a follow-up question on management's answer to Danny's question before. You mentioned a daily increase of more than 10,000. I just want to clarify that. Does that mean that we're currently gaining daily 10,000 4G subscribers? Is that what you meant?

Yes. Yes. We have a very good momentum on the increase of 4G subscribers. The average increase per day is 10,000.

Okay. And going forward, do you see that rate being steady or slowly coming down? Or in other words, am I correct to expect that on a monthly basis the 4G net adds will be around 300,000?

Currently still increase. The trend is increased today. So we will see the competition, because it really depends on the new tariffs, the tiered pricing trend, we will watch how to keep the momentum.

Okay. Thanks. And then I have three other questions, if you could bear with me. First one is that I see that the operating cost, excluding the 7% growth in depreciation, operating costs are still flat despite handset revenue been declining by 13.5% year over year. So I'm just wondering what's driving -- what are the reasons for COGS being flat while handset revenue declining by more than 10%?

And then the second question is that your EBITDA margin on service revenue actually improved in September versus August. Well this contrary to the trends we are seeing at your peers. So I'm just wondering what has made the difference and also where can we see impact of the iPhone 6 as it was introduced in September?

And then the third question is also on your new promotions. What would prevent you from taking away the unlimited plans or lower your 4G pricing in your future promotions? Thank you.

For your second question, the COGS being flat, I think for the first nine months of this year the reason for this keeping flat is, first one, is we adopt the precision construction in CapEx. The second one is still in the interconnection fee reduction, it's according to the NCC regulation. So I think -- and also for major handset sales for the first nine months compared with the same period last month -- last year, it also has a big decrease. So that totaled together makes the cost of goods sold being flat.

And the other one, EBITDA margin, and you're asking about when we can see the impact of iPhone 6. I think the major iPhone 6 sales occurs -- happens mainly in the fourth quarter. So I think in the last quarter of this year we will see a cost increase for the iPhone sales -- associated with the iPhone sales -- 6 sales.

About the new promotions?

Yes. We believe the tiered prices is the right way for usage of 4G services. But at this moment I think our customers may not easy to accept the new plan so we will carefully design the new promotion plan to have a balance between the customer acceptance and the revenue growth. Thank you.

Okay. Thank you very much.

Sachin Gupta, Nomura.

Thank you. This is Sachin Gupta from Nomura. Just a few things. You're talking about this 40% target for 2014. I was just wondering, do you have any expectations for 2015 as well? Do you expect that market share to increase in 2015?

And secondly, between this market share aspiration and ARPU uplift, which one is more of a priority in the near term and the medium term?

And lastly, just a general question. If your networks are good, you've got plenty of spectrum, is there a massive need to move to this tiered pricing plan anyway? Is there another mechanism that you can actually look to adjust pricing up and still get the ARPU uplift? Thanks.

So far the 40% market share is our target by the end of this year. Now we have more than 35%. We are very confident that we have the target, by the end of this year we will reach 40%. But for next year we need to watch the competition because the new player will go into the market, we really need to carefully watch.

Okay. And how do you balance between ARPU increase targets and market share targets?

I think in the current status, the competition is very intensive. So market share, especially to have a significant market share at this moment, I think is the priority. However, in the meantime, we want to raise the ARPU after we gain a certain level of subscribers. So I would say the market share important, very important, but ARPU will be next priority. And we will see that going to happen when we present the next tariff program.

And the third question?

So I think the pricing is very difficult to increase. So we will have the applications, value-added services to increase the applications to increase the revenue. So we think the tariff now cannot be increased in the near future. Thank you.

Okay. Thanks.

(Operator Instructions). Alen Lin, BNP Paribas.

Hi. Good afternoon. Yes. Thanks for taking the question. I have two questions here. First one, I wanted to go back to the bundling question of fixed line, TV and mobile services. Can you disclose what proportion of your subscribers are currently in some kind of bundling package and also what your target is for the next 12 to 24 months?

The second question is on the CapEx and network build-out. Based on your current plan this year and also next year, what is the plan for population coverage through this year and also through next year? Thanks.

For the network deployment, we will have the coverage of 90% by the end of this year and 99% by the end of next year. We will incorporate the 900-megahertz spectrum and the 1,800 to integrate to carry our obligations so we can deploy this 900-megahertz to cover the rural area. So I think the coverage will be much, much better by end of this year. Thank you.

Alen, I think regarding the bundled package percentage, I think you know, regulation-wise we are not allowed to bundle our service, but only for promotional programs. So right now I think we are not really -- cannot really disclose any of those percentages. Sorry.

Got it. Thank you.

Regarding your CapEx, you can check our slide 16. I think the total of 4G and mobile-related CapEx this year, I think we still have a number close to TWD9.3b.

And the target for population -- I'm sorry. And the target for population coverage, I think we've mentioned earlier that for 2014 we expect to reach 90% of population coverage, and by next year, year end, we are looking at 99%.

Got it. Thanks.

(Operator Instructions). If there are no further questions, I will turn it back over to President Shih for closing remarks. Go ahead, please.

Okay. Thank you all for joining the call. Thank you very much.

Thank you, President Shih. 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 now disconnect. Goodbye.