Chunghwa Telecom Co Ltd (CHT) 2015 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 2015 operating results. (Operator Instructions). And 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.

Now, I would like to turn it over to Fu-fu Shen, the Director of Investor Relations. Thank you. Ms. Shen, please go ahead.

Thank you. This is Fu-fu Shen. Welcome to our fourth-quarter 2015 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 to President Shih.

Thank you, Fu-fu. Hello, everyone. This is Mu-Piao Shih. Thank you for joining our fourth-quarter 2015 conference call.

We are pleased to report robust operational result for the full year of the 2015, owing to the successful execution of our strategies to grow our 4G, ICT and the enterprise businesses, as well as strictly controlled operational cost and expenses. Consolidated revenues reached a record high and the EPS also saw its best performance since 2012.

On the mobile business, we accumulated 4.4 million 4G subscribers by the end of 2015, propelling our market share to reach 38.2%. We expect to continue offering the best quality of experience to 4G customers through our carrier aggregation or CA technology, supported by our acquisition of the 30 megahertz 2.6 gigahertz paired spectrum, which enhances our competitiveness and further strengthens our market leading position. We expect to roll out the 2.6 gigahertz frequency band in the second quarter this year at the earliest.

We defended our broadband business very well. Although subscriber growth was hindered by cable competition and the 4G substitution, we managed to grow ARPU by upgrading subscribers to higher speed services and ultimately increased revenues.

Entering into 2016, we will continue to focus on 4G, value-added and the ICT services. We expect to add 2 million more 4G subscribers and expand our ICT business by leveraging our advantages as an integrated telecom service provider. With our comprehensive network infrastructure, marketing resources and R&D capacity, we are confident that we will continue to maintain our leading market position in all our major businesses and boost growth momentum in 2016.

Slide 5 provides an update on our mobile business. As you know, after acquiring the 2.6 gigahertz spectrum band, CHT became the operator with the largest 130 megahertz mobile broadband spectrum in the 900 megahertz, 1,800 megahertz and the 2,600 megahertz frequency band through utilizing the carrier aggregation technology or 3CA scenario. Combining this three frequency bands will enable us to offer a faster theoretical peak speed. In addition, effectively the load balancing between the high and the low band will help us to deliver the best quality of experience or QoE to customers.

Our abundant spectrum resources also provide a solid foundation for the development of IOT, video and the value-added services, which are our operation focuses.

Supported by the continued increase in 4G and the internet mobile subscribers, mobile internet revenue grew 13.5% in the fourth quarter of 2015 over the prior year period. This is the major driver of mobile service revenue growth, which continues to grow despite the decline of the mobile voice revenue. For mobile operations, we are focusing on the 4G service promotions and mobile internet subscriber expansion by further targeting medium-to-low end customers.

We continue leveraging our high-speed 4G network to increase the adoption of our value-added services and the new applications by bundling the Hami services. We will also continue upgrading mid-to-low end customers, including 2G subscribers to 4G services.

Slide 6 shows the result for our broadband business. During the fourth quarter, we continue to see a steady migration of subscribers to higher speed fiber services. We witnessed 21.5% year-over-year growth in subscribers opting for connection speed of 100 megabit per second or higher, reaching 1.05 million by the end of 2015. The subscriber migration strategy successfully increased the broadband ARPU and the revenue.

Facing competition from cable players, we continue to leverage our big data analysis capabilities for precision marketing and precision construction. We are closely monitoring broadband network construction and the service availability in selected communities to adapt to competitive circumstance.

We are also offering convergence services to families by bundling broadband, MOD, Wi-Fi, OTT and IoT services, leveraging our product advantages over cable operation -- operators.

Moving on to slide 7, our IPTV customers continue to sign up for additional packages and SVOD programs, while household TV usage rate continued to steadily climb. We are pleased to see this healthy business development.

To strengthen the competitiveness of MOD services, we will continue to enrich our content offering, including movies, [street] dramas and a TV series for SVOD. We will also enhance the user interface and leverage our broadband and 4G mobile subscriber base to promote MOD, OTT services to propel the overall business growth.

By leveraging our existing media content position in VOD, we will acquire the OTT content with all rights across our three platforms. We aim to become the leading multi-screen services provider by our robust network infrastructure.

Please see slide 8 for an update on our ICT and cloud initiatives. We will continue leveraging our competitive advantages with regard to network infrastructure, IDC and the CDN, et cetera, among other services to offer customized and comprehensive ICT solutions to enterprise customers.

Now, I would like to 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 10.

Slide 10 contains our income statement highlights. For the fourth quarter of the 2015, total revenues increased by 4.3% and the operating cost and the expenses decreased by 0.1% year-over-year. Our income from operations increased by 20.8% and our net income increased by 13.3%. In addition, our EBIDTA margin increased to 31.5% in the fourth quarter from 30.2% the same period in 2014.

Please refer to slide 11 for an update on our business segment revenue. The increase in total revenues was driven by the growth in mobile value-added services revenue and ICT project revenue, but was partially offset by a decrease in fixed and mobile voice revenue.

Moving on to slide 12, our fourth quarter of 2015 operating costs and expenses remained flat year over year.

On slide 13, in the first quarter of 2015 cash inflow from operating activities decreased by TWD470 million or 1.6% compared to the same period of 2014. As of December 31st, 2015, we had TWD30.29 billion of cash and cash equivalents. The increase in EBITDA margin was primarily due to growth of telecom service in the fourth quarter of 2015 year over year.

Slide 14 shows our 2015 operating results as compared to our guidance. We reported robust operating result in 2015, with revenues, operating income and the net income all exceeding our guidance. The lower operating costs and expenses were mainly due to a lower than expected interconnection expenses and the depreciation expenses.

Now, slide 15 shows our 2016 consolidated guidance. Looking ahead at 2016, we will focus on developing fixed and mobile value-added services, as well as 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 2016 is expected to increase by 0.7% to TWD233.5 billion. The increase in revenue is expected to come from promotions for mobile internet and the value-added service, the encouragement from 2.6 gigahertz service launch, as well as the expansion of our ICT business. However, we are still projecting a decline in the voice business, which we expect will be offset by the growth of the previously mentioned segments.

Operating cost and the expenses for 2016 are expected to increase by 2.3% to TWD185.5 billion. Marketing expenses for mobile internet, ICT projects and the value-added services are expected to be higher. Additionally, amortization expenses for 4G license will grow year over year.

Given these projections, we see a 5.2% year-over-year decrease in operating income and a 6.6% decline in net income. The greater projected decline in net income is mainly due to the expected lower investment income under the equity method.

Lastly, on slide 16; total CapEx spending was TWD25 billion in 2015, much lower than the budget amount of TWD30.7 billion. The difference mainly came from the strict project review for precision construction and also some deferral in the construction of the cloud data center and submarine cable into 2016, as well as residual payments for certain 4G construction project.

We are budgeting CapEx of TWD30.6 billion for this year, which includes the deferred project as previously mentioned. We will focus on investment for core business, including 4G, broadband and IDC among others under precision construction principle.

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

Thank you, ladies and gentleman. We will now begin our question-and-answer session. (Operator Instructions) Peter Milliken, Deutsche Bank.

And congratulations on the good results. Now, my first question is on the change of government that is underway in Taiwan. Does that have any impact, do you think, on the way that telecoms will be regulated and is there anything that you would suggest to the new government?

I think this is a good question, but at this moment I don't think we have any ground to comment on new government policy. Without knowing the future policy, we don't know what is the impact on the telecom industry, okay.

Yes. And any suggestions you might have for them or things you might suggest they take a look at?

Yes, certainly, yes. I think the telecom industry is a very important, critical industry in Taiwan and the government should just put higher attention on this industry.

Okay, got it. And one other question on the CapEx. You did talk about why it came in at such a low level. So it was a very efficient result that you had, free cash flow was up 30% to TWD50 billion. Would you be looking at further efficiency, do you think, in 2016 and beyond or is it just an ongoing push to just keep the costs and CapEx in check?

Actually, as we just mentioned before, that there are some deferral from last year, so it makes the total budget CapEx number to the TWD30.6 billion this year. But if we exclude this deferral this year, the overall actually probably will be much lower than the TWD30.6 billion. So I will say that this year, 2016, the overall CapEx is lower than last year. So we will see a number a bit higher than last year thanks to the deferral impact.

So I will say that we already have some CapEx investment (inaudible) efficiency has happened. So I think in the future probably we will just see that continue to go on, yes.

Okay, great. Thank you very much.

Neale Anderson, HSBC.

I had a question about the competitive dynamics in mobile. Particularly, in the fourth quarter it seems each of the big three companies, Chunghwa included, lost some subscribers each month. I wondered if you could comment on that. Was that the result of increased competition from new entrants or maybe a depleting database of prepaid customers? Thank you.

We have no comment on this numbers.

Can you give a comment on competitive dynamics in the fourth quarter?

I think that we -- normally, we don't comment on our competitors, their dynamic, yes. I think the market is -- 4G is still very competitive.

Right, okay. Perhaps I could try with a different approach. In terms of the -- Chunghwa has indicated that it may look to withdraw the flat rate plans in May of this year. I know you are not absolutely committed to that. But I noticed in December there was a promotion from Chunghwa at TWD988 for flat rate data I think.

So could you tell us how you are currently thinking about that, the plan to withdraw flat rate plans in May?

Some of our mobile customers still opt to unlimited data plan, so it is unlikely 4G unlimited plan will be all removed this year. Currently, part of the 4G plan is unlimited and the rest is tier plans. As we move to removing the unlimited plan, it is quite likely some of the plans will still remain unlimited as long as it is profitable and competitive.

We need to keep our tariff structure flexible so as to cater to a wider spectrum of customer needs. Changes are needed, but that does not mean a one or nothing decision for unlimited plans.

I see. Thank you. My last question, still on that same topic. I think I read somewhere that around 40% of Chunghwa's 4G customers are using an unlimited plan. Is that correct and is it a very small number of customers that are using very large volumes of data? Or, to get to that sort of average of about 10 gigabytes or 11 gigabytes a month, is that reflecting high usage from say 40% or 50% of 4G customers? Can you give any clarity on that?

Yes. For our 4G subscribers, we have -- around 49% choose the unlimited plan. But for the 3G it's lower. So 4G is higher, it's roughly 49%.

Right. Thank you very much.

Can I go back to the first question? You mentioned about the losing of the mobile customers. I just want to provide information. Actually, in Taiwan, I think the end of last year we can see that the overall mobile market subscriber base, the whole market actually shrinked for several hundred thousand, okay. So I think probably that's part of the reason for that.

Okay, thank you.

Danny Chu, Macquarie.

Just a few quick questions. The first is on page 6 of your presentation. You mentioned earlier that the fixed broadband subscriber base has been coming down partly because some of the customers you lost to other competitors and some because of the substitution to, for example, like 4G usage. Can you quantify in terms of percentage how much percentage of the decline in the fixed broadband subscriber is because of substitution to your own 4G service and what is the percentage of fixed broadband subscribers that you lose because -- to competitors?

The second question is, I notice on page 12 of your presentation despite the launch of iPhone success in Taiwan, your marketing expense actually remained relatively flat even in the fourth quarter. Any particular reasons why the marketing expense stays at such a low figure despite the launch of iPhone in the fourth quarter, because in the past normally we would tend to see when iPhone, new product get launched there is a jump in the marketing expense?

And the last question is -- back to the CapEx figure. You mentioned some of the projects in 2015 get deferred to 2016. So should we still assume that like also original 2015 CapEx budget, originally if those projects had not been deferred the CapEx spend in 2015 would be TWD30 billion -- so as a result the CapEx budget for 2016 in reality should only be TWD25 billion? Thank you.

Danny, to your first question, I think we don't disclose any number amount that -- the percentage, okay? Sorry for that.

Okay.

Regarding your third question about the CapEx, I think you are asking if we just include our deferrals back to year 2015 will that be around the TWD30 billion CapEx numbers. Yes.

Yes. Okay.

Yes, yes.

Okay.

The second question is -- sorry, your second question? Could you repeat your second question?

Yes. The second question is because -- normally for most operators across the region we tend to see a noticeable jump in the marketing expense when new item, product get launched. But when I look at your fourth quarter marketing expenses it has stayed relatively quite flat in the fourth quarter despite iPhone 6S get launched in Taiwan. So any [color] in particular, strategy that you have made in order to keep the marketing expense relatively flat versus a year ago?

Okay. Let me say this way, the number is a consolidated number, so the marketing including the -- not just the Chunghwa Telecom, but also including our subsidiaries, our investment companies. So I think for iPhone the marketing expenses, yes, due to the launch of the iPhone 6S should be a bit higher. But however, our -- for instance, like our subsidiary, Senao, they have cut some marketing expenses in mainland China, so that also helped drag down the overall marketing expenses. So that's the reason. Now, together, you will see that the fourth quarter the overall marketing remained flat. By the full year the marketing expense on a consolidated basis is a decrease.

Okay. If I may just ask a follow-up question since you mentioned in terms of the guidance for this year 2016 -- you mentioned that you expect that the marketing expenses could increase a little bit. So should I assume the increase in marketing dollars is entirely attributable to your Taiwan business or you also Senao [back] to increase its marketing dollars this year?

Okay. I think the overall guidance -- everybody -- I saw today's news and research reports saying that Chunghwa Telecom has been conservative in earnings guidance, and this year is not an exception. But however, I think in general for this guidance the revenue -- the top line side, the revenue side, I think we have some upside. This year we will have the 2.6 gigahertz service launch. That will add some upside for revenue.

Operation expenses and cost wise -- I think not just the marketing expenses, but I think internally we have precision -- we do a very precise calculation about how to spend money in CapEx. And overall, I think there will be a -- I can -- my take will be around -- they will be TWD1 billion to TWD2 billion, that kind of costs and expenses probably will be saved this year. I think that the -- not just the [prior year] marketing expense, but also the [prior] -- the possibility of overall cost and expenses.

Okay, thank you.

Gopakumar Pullaikodi, Nomura.

I had a few questions. One is, can you please give your service revenue growth outlook for this year on mobile? That's question number one.

And secondly, since you've already won 2.6 gigahertz spectrum you have more vacant spectrum now. Do you think there is real need to remove the unlimited data plan to the market? Given that you spend a fair bit on networks and you plan to spend more this year, would it still be possible for you to continue to offer unlimited plans as it is, from a networks perspective? That's question number two.

And thirdly, looking at the CapEx structure on a longer term given that you have 2.1 gig and 1.8 gig auctions coming up, can we expect CapEx to be at like -- to TWD33 billion levels going forward and not materially go down from here? Thank you.

Gopa, regarding first question, I think we don't disclose individual segment kind of revenue forecast about that.

Regarding the just to remove -- removing the unlimited data plan, I think our President already said -- answered that question. It's not a yes or no decision, that simple. We will just provide flexible tariff solutions to customers.

Some of them need --

So --

-- and some of them don't need the program. So there will be a mix.

Okay. Sorry, my question was do you --

Regarding -- sorry?

Sorry. My question was do you really need to remove it? Because you can still continue as it is, isn't it, because you have more spectrum now and you are spending more. So there's no real need to remove these plans from a network's perspective. Would that be a right assumption?

I think it's not necessary or not. I think we -- for the operation wise, I think we can move towards to remove some of the unlimited plans. But I think our President just mentioned, we don't really -- I think at the moment we don't want to talk about remove all the unlimited plans, but we can move towards that direction, okay. Thanks.

Thank you.

I think for the last question you mentioned that the CapEx -- your last question about can we expect it to be like TWD30 billion per year going forward. I don't think it's a easy question to answer. I will say that in this way. I mean do that CapEx in a more efficient way, so gradually a decreased trend probably looking forward.

Mr. Gopa, you are still online. Do you have any more questions for our host today?

No. Sorry, I missed the last -- answer to the last question. Can you please repeat that? There is some issue with the line.

Okay. Your last question, okay. I don't think it's a easy answer for if going forward to be TWD30 billion per year going forward. I will say that we will do the CapEx in a more efficient way. So gradually reduction is looking forward.

Okay, thank you.

Jack Hsu, Sinopac Securities.

I have two questions. The first question is what's our plan for the ICT [lease] segment in the 2016?

And the second question is our expenses will grow more than the revenue growth -- more than the revenue. Could you give me some detail about the growth of the expense? Thank you.

Can you repeat your second question?

Oh, sorry. My second question is in 2016 our expense will grow 2.3% -- is more than the revenue growth. And I just want to know some details about the expense -- the detailed expense growth. Thank you.

I think for this year the expense and cost like increased mainly from the marketing expense for mobile internet, ICT project and the value-added service. And I think, well, the important factor is that we purchased the 2.3 giga license, so it has started to amortize. So the number for this year will be around the TWD550 million amortization expenses.

As I just mentioned before, even under this guidance while we see some upside, we can have opportunity to reduce the expense and cost by TWD1 billion to TWD2 billion.

Thank you. And how about the ICT -- our plan for ICT in 2016?

Do you mean ICT -- IDC?

Yes, IDC, sorry.

Internet data center, right?

Yes, sorry.

Yes, we -- I think we plan to -- I think our IDC center, the one, the new one in Banqiao will be ready in the end of the first quarter. I think you know that's probably the time we are going to launch the service.

Okay, thank you.

Richard Chan, AIA Taiwan.

I have several questions. The first one will be, what kind of 4G [transaction] rate you expect at the end of 2015. In the total users, will Chunghwa Telecom target what kind of 4G market shares, 38% or 40%? Could you give some numbers?

Yes. We will have 2 million more subscribers, 4G subscribers. So the total will be 6.4 million by the end of this year. So the market share, we are around 38% -- now it's 38.2%. Our target is 40%.

Forty -- you will target 40%, okay. I have follow-up questions. Yes, as we know, I think that it's pretty hard for Taiwanese to withdraw the unlimited data given Taiwanese usage habit. However, I think in the last year that you have said that it's probably to launch a tier fighting at the middle of 2016. But what actually happened so that you slightly changed your tone?

Probably you see new entrants, small players has enough spectrum to compete in the future as well as probably they use a more aggressive pricing to deal with the customers?

I think that tier pricing is our target. We already have lots of tier price plan, including some unlimited plan rates. So we are just going very, very -- a very complicated analysis how is the best pricing structure. So we are still under investigation. Thank you.

Okay. (Inaudible) under what kinds of circumstances you think, okay, everything is okay, so it's about time to [implant] a 4G tier pricing, for example, a very high 4G retention rate or a manageable impact from newcomer? I mean under what kind of a situation would it be fair enough to take tier pricing?

It's very related to the market competition because now we have two small players. They have a very low price to try to acquire the subscribers from Chunghwa. So we need to be very careful how is the -- the price structure is the best to our customers.

Okay. I think the last question will be if you can just share about some -- the ARPU, the total ARPU uplift on average when your customer transfers from 3G to 4G, what kind of ARPU -- ARPU uplift that could be in 2016 and the overall ARPU that you expect to uplift in 2016?

I think we answered that question many times. I think the increase, the APRU increase, uplift, is very, very limited from the migration.

I think that my last question, do you -- can you comment about the -- do you expect some consolidation or collaborations among the operators in the future? Could you share your view?

I think everything is possible, so it's difficult to comment it's when? But I think the consolidation -- last year we already are seeing some cooperations, so I think the trend probably will continue.

Okay, thanks.

[Emerson Chin], Merrill Lynch.

Sydney Zhang, Merrill Lynch.

I have three questions. The first question is can you comment on the Taiwan Mobile and the Far EasTone, they have this TWD499 plan that provides unlimited data in the first year and 5 gigabytes in the second year, that plan. Will you follow that plan to rollout the same similar plan as well?

The second question is how do you think about the cannibalization of this high usage mobile 4G to cannibalize the fixed line broadband of your broadband customers and how would you prevent that?

The third question is on the dividend guidance. Do you have any comments on the future dividend, if you are going to pay special dividend of over 100% or what's -- any guidance or comments? Thank you.

The first question, we continue monitoring the market and we will take countermeasures when it is necessary.

I think regarding the dividend guidance, I think -- actually, we have a very good year -- good result last year. And the dividend payout ratio is still subject to the CapEx situation, investment and the working capital status and subject to the Board's final approval. But however, I believe this year the payout ratio will be equal or better than last time.

Well, we do see some -- for broadband business, we do see some 4G -- or we do see some mobile substitution happen. But we continue to constructing our broadband infrastructure to enhance and continue to migrate people to higher speed. I think that's part of our strategy.

Okay. Can I add one more question? Sorry. Regarding the 3G spectrum that might expire -- that will expire in 2018, do you expect the NCC to do anything this year about how to re-auction or whether -- how to renew that spectrum or how much that will cost?

According to our information, NCC will do the auction from next year, not this year. Thank you.

Okay.

Mr. Zhang, you are still online. Do you have any more questions for our host today?

I'm okay. Thank you.

Thank you very much. (Operator Instructions) If there are no further questions, I will turn it back over to President Shih.

Okay. Thank you for joining today's conference call. Thank you.

Thank you, President Shih, 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 now disconnect. Good bye.