Chunghwa Telecom Co Ltd (CHT) 2014 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 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.

And 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 fourth-quarter 2014 earning results conference call. Joining me on the call today are Mu-Piao 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 to President Shih.

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

We are pleased to report that according to both our internal figures and the statistics from the NCC, we have accumulated over 1.3 million 4G subscribers as of the end of December 2014, representing 38.6% of the 4G subscriber market share in Taiwan. We will maintain our target to achieve 40% market share in 2015.

In addition, not only did we remain the market leader in providing 4G services, but we also improved our market share in terms of mobile subscribers and revenues. As of December 2014, our mobile subscriber and revenue market share reached 37.1% and 35.7% respectively.

Furthermore, despite the fierce competition from cable operators, we still managed to maintain a stable level for our broadband market share.

For 2015, one of the key focuses for us is growing our total revenue. We plan on promoting both fixed and mobile value-added services, increasing our mobile Internet customer base, and also expanding the enterprise market to help boost revenue growth.

By leveraging our 4G high-speed network, we will offer high-quality mobile TV, music, gaming, and 3G GPS value-added services, as well as new products, such as telematics, [healthcare] management, and other value-added products. Increasing the MOD revenue will also be an emphasis for us.

For the enterprise market, we plan to offer ICT solutions, such as cloud IDC, mobile enterprise and information security services, to targeted customers and boost our ICT-related revenue.

Slide 5 provides an update on our mobile business. During the fourth quarter, mobile VAS revenue grew by 21.1% year over year, mainly driven by the 26.4% increase in mobile Internet revenue. For mobile operations we are focusing on 4G service promotions and mobile Internet subscriber expansion, followed by developing enterprise mobile solutions for targeted customers.

We continue leveraging our high-speed 4G network to promote value-added services and new applications, as well as migrating our 2G customers to the 3G and the 4G network, and promoting the usage of more data services.

Moreover, our customers' loyalty maintained high, especially during the fourth quarter of last year, when competition for 4G subscribers was particularly fierce. The fact that we continue to have the lowest churn rate demonstrates that our customers recognize and are pleased with our quality network and services.

Moving on to slide 6. In terms of 4G services, based on our 1.33 million additional subscribers at the end of 2014, we expect to reach our target of 40% market share in 2015. To enhance our service quality, we re-farm our 900 megahertz spectrum spend and introduced carrier-aggregation technology in 900 megahertz and 1,800 megahertz band to provide a higher data rate in December 2014.

Additionally, by the end of 2015, we expect our 4G network to have 99% population coverage in Taiwan.

In 2014, we added more than 1.2 million mobile Internet subscribers, bringing our year-end total to 5.2 million, representing 54.1% of our postpaid subscribers.

As we mentioned earlier, this year, we will continue to increase the subscriber base and further develop our data service offering.

Slide 7 shows the result for our broadband business. During the fourth quarter, we continued to see a steady migration of subscriber to higher-speed fiber services. We witnessed almost 132% year-over-year growth in subscribers opting for connection speed of 100 megabyte per second or higher, reaching 867,000 by the end of 2014.

We will continue leveraging our network capabilities of offering high-speed upload services and optimizing broadband network quality, to increase the customer satisfaction. As an integrated telecom service provider, we will leverage our mobile broadband and Wi-Fi capabilities, to offer seamless Internet services.

Last but not least, we will expedite OTT service offering and the content delivery network, CDN, construction to enhance digital convergence product competitiveness.

Moving onto slide 8, our IPTV revenue in the fourth quarter 2014 increased by 12.4% year over year. Package subscriber, as a percentage of total MOD subscribers, continued to increase. Moreover, the household TV usage rate increased to 65.7% in the fourth quarter of 2014, showing our success in boosting customer stickiness on our platform.

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

Please see slide 9 for an update on our ICT and the cloud initiatives.

We will continue leveraging our advantages on network infrastructure, IDC, CDN, etc., to offer customized ICT total solutions to enterprise customers.

In the meantime, we will develop in-house big data capability for further commercialization -- for future commercialization.

Although relevant revenue from this area was less than 5% of our total revenue in 2014, it is expected to be over 5% in 2015.

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

I will review our financial result in detail. Let's start on slide 11.

Slide 11 contains our income statement highlights. For the fourth quarter of 2014, total revenues increased by 1.4% and operating cost and the expenses increased by 6.7% year over year.

Our income from our operations and net income decreased by 16.1% and 12.6%, respectively.

In addition, our EBITDA margin decreased from 32.95% to 30.23% in the fourth quarter, as compared to the same period in year 2013.

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

Moving onto slide 13, our fourth quarter operating costs and expenses increased by 6.7% year over year, mainly due to the higher cost of handsets; increasing depreciation and amortization expenses; and the project cost for ICT.

To be more specific, the increase in depreciation expense was mainly due to 4G construction; 3G maintenance; and cloud and ITC equipment investment; while amortization expense was mainly due to the amortization of the 4G license fee.

On slide 14, in the fourth quarter of 2014 cash inflow from operating activities decreased by TWD1.34 billion compared to the same period of 2013.

As of December 31, 2014, we had TWD23.56 billion of cash and cash equivalent. The decrease in EBITDA margin was primary due to the 4G promotion including handset subsidies in the fourth quarter of 2014.

Slide 15 shows our 2014 operating result as compared to our guidance. Although total revenue was less than our expectation, mainly due to the lower handset sales, operating income outperformed due to lower operating cost and expenses and, more specifically, the decrease in cost of handsets sold

In addition, investment income under the equity method and the foreign currency exchange gain was higher than expected. As a result, net income and the EPS exceeded our guidance, with higher achieving rates.

Slide 16 shows our year 2015 consolidated guidance. Looking ahead at 2015, we will focus on developing fixed and mobile value-added service, and expanding the enterprise market to drive revenue and earnings growth.

Taking into consideration the mandatory tariff reduction and the economic growth outlook, total revenue for year 2015 is expected to increase by 2%, to TWD231.1 billion. The increase in revenue is expected to come from promotion for mobile Internet and the value-added services; the migration of broadband customers to higher speed fiber services; and the expansion of ICT and MOD business.

However, we are still projecting a decline in the voice business, which we expect will be offset by a growth of the other segments previously mentioned.

Operating cost and the expenses for 2015 are expected to increase by 1.9%, to TWD185.9 billion. Marketing expenses for mobile Internet and other growing businesses is expected to be higher. The amortization expenses outlook 4G license will also grow year over year.

Net income is expected to decrease by 2.9%, even though income from operations is expected to increase by 0.5% year over year. The projected decrease is mainly due to lower other income and the foreign currency exchange gains.

Lastly, on slide 17. For the actual CapEx of TWD32.6 billion in 2014 was 18.8% lower than the budget amount. Though we will continue to construct our 4G network aggressively, we still are budgeting a lower CapEx of TWD30.7 billion for 2015.

When compared with our actual CapEx in 2014, we will continue monetizing our existing installed equipment and the building infrastructure for new services, such as the 300 megabytes broadband based on the potential demand and effectiveness of the service.

Furthermore, the mobile network will be constructed according to the existing equipment utilization status and the business growth potential to enhance capital efficiency.

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

(Operator Instructions). Peter Milliken, Deutsche Bank.

I just have a couple of questions on regulation. Some of your pricing has been set by the regulator at CPI minus. How do you think that that might change going forward, given that CPI is so low right now and you're effectively having to have negative price provisions on some products?

And the other question is do you have any insight into the longer-term planning of the regulator of the industry?

Yes, the NCC have the guideline that the annual decrease of the X should be X minus CPI. So if the CPI is low then that means the X will be higher, a little bit.

Peter, could you repeat your first question?

Yes, I'm just saying in a world of low CPI, does the CPI minus X hurt you? But I guess if it's X minus CPI does that still become a factor? In other words, do you feel that the CPI-based regulation is too stressed on you at the moment?

Delta CPI for last year was 1.2%, so the delta CPI minus X, because X factor, is about 5-point-something, so the reduction will be 3.8%/3.6% something like that, [3.86%] for this year -- for this coming year.

Okay, so I should expect that sort of discount to the CPI should continue going forward? There's no sense that that might change in a low-inflation environment?

Peter, the last round for the mandatory tariff reductions from NCC that started from April 2013, because this is going to last four years from 2013. So I'm not quite getting your question, because this is the result of the CPI for the last year was 1.2%, so we have to follow this.

Okay, got it. And then the other question on the longer-term view of telecommunication structure in Thailand, is there any progress on that?

Yes, it is planned that NCC will announce that digital coverage is law after the Chinese lunar New Year. So they plan to have the digital conversions law completed by the end of this year.

But we're still not very clear about the details, no. They say there may be another new law except -- besides the currently three laws that means telecom laws and the broadcasting law and others -- [settler] law -- [settler broadcasting law.

Okay --

So we will be well prepared to the new digital conversion laws.

Got it, okay, thank you very much.

Gary Yu, Morgan Stanley Analyst

I have three questions from my side. First, on the mobile business, some of your competitors have mentioned that they are willing to remove unlimited data after Chunghwa has taken the initiative. So from that perspective, when do we think it's a better time for us to remove the flat-rate plans on 4G?

Second on CapEx, we've seen two consecutive years of declining CapEx in both 2014 and 2015 budget. How should we look at longer-term CapEx going forward? Shall we continue to see a decline in CapEx from 2016, given that most of the 4G deployment will be completed by this year?

And lastly on dividend, we're very pleased to see the higher dividend payout for 2014. How should we look at the dividend policy going forward? Do we have a more stable payout or absolutely dividend target that management want to maintain? Thank you.

The first question regarding the [freight] rate, we expect the unlimited data plan will be removed at the end of the day. However, it still depends on the market sentiment and the competitive landscape.

In 2014, 4G operators offer unlimited plan to expand the 4G customer base. CHT launched a 4G tablet plan without unlimited data in early December last year to test the water, we will continue expanding our 4G customer base to reach the economy of scale and enjoy the cost advantages of our mobile business.

So we think we will remove the unlimited data plan at the appropriate time, but so we cannot decide so far.

Regarding our long term CapEx plans, I think that by the end of this year our 4G coverage will be in a very stable condition. So I can tell you that next year the long-term overall CapEx will be reduced.

Regarding the dividend policy, it's still subject to our financial operating final result, and also we need to consider the -- all the capital expenditure situation. So that is the current status.

Okay thank you.

Anand Ramachandran, Barclays.

I had a couple of questions. Firstly, on 4G subscriber take up, could you talk to us a little bit about relative ARPUs revenue generation data usage? Do you expect this to drive revenues up into 2015?

And could I also check what kind of 3G -- 4G subscribers target, I'm sorry, 4G subscriber target that you have as an absolute number for end 2015?

Secondly, to follow-up on Gary's question, dividend for 2014 has that been announced? And with CapEx now obviously trending down should we be thinking about potentially going back to what Chunghwa Telecom was doing earlier in terms of repaying on top of earnings to shareholders? Thank you.

The data usage for 4G subscribers around 7 gigabytes per month, so we think the ARPU -- the branded ARPU will cost stabilize and mildly increase in the future by graduated service and bundled service.

Okay, can I take how much is the 4G ARPU now related to the overall ARPU, how much has it higher, or is it about the same?

The ARPU will be slightly higher.

Okay. And do you have an absolute 4G subscriber target for yearend 2015?

Okay the target was -- 2015 is 40% of the total subscribers; more than 3.2 million.

And dividends for 2014?

Regarding the dividends, I think as Yung just mentioned that it is possible that CapEx reduction next year. I think if [after] satisfaction operating results, I think the dividend policy probably in more positive way to think about that.

Understood, thank you very much.

Sachin Gupta, Nomura.

Thank you, regarding your 2% revenue growth guidance for this year, how much growth do you expect in the mobile service revenues? That's question number one.

Also in fixed segment since you have said you will have mandatory price cuts going forward this year as well, do you expect growth to come back in that segment, and if so what are the drivers please? Thank you.

The mobile service revenue will grow by around 5% this year compared to last year.

Okay, and the fixed segment?

Could you repeat your second question?

In the fixed segment since you said that you would have mandatory price cuts this year as well, what's the broad outlook there?

We're already setting these mandatory tariff cuts for 2015, are already set into our forecast for this year, so I think any other question related to that?

No, thanks.

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

Okay, thank you for the -- joining the conference call. The news is that Chinese lunar New Year is coming, so Happy New Year, everybody. Thank you.

Happy New Year.

Thank you, President Shih. 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. Goodbye.