Chunghwa Telecom Co Ltd (CHT) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the Company's first quarter 2016 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 IR website, www.cht.com.tw/ir, under the IR Calendar section.

Now I'd like to turn it over to Ms. Fufu Shen, the Director of Investor Relations. Ms. Shen, please go ahead.

Thank you. This is Fufu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our first quarter 2016 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, Fufu. Hello everyone. This is Mu-Piao Shih. Thank you for joining our first quarter 2016 earnings conference call.

We are pleased to report robust operational results for the first quarter of 2016, owing to the successful execution of our strategies to grow the 4G, ICT and the enterprise business, as well as strictly control operational costs and expenses. EPS for the first quarter grew by 11.9% year over year and outperformed our peers in the market.

On the mobile business we deployed our 2.6 gigahertz frequency band on March 24 and were the first to do so among all spectrum winners. Through utilizing the carrier aggregation technology, we are able to integrate our three bands into 3CA and boost the data speed by over 300 megabits per second.

In addition, we launched the big 4G promotional plan on April 1 to cater to demand of a wide spectrum of customers, from high to low end. We raised the threshold slightly for unlimited data usage and plan for the whole contract period, and believe it is the right step to lead the market towards adopting the tiered pricing and the fair usage policy.

Our 4G subscriber growth continues to be strong. By the end of the first quarter of 2016, we accumulated 5.2m 4G subscribers, propelling our market share to reach 38.6%.

We also vigorously defended our broadband business. Despite heavy market competition on the 4G substitution, which hindered subscriber growth, we managed to maintain a flat sequential ARPU. We will continue to leverage our analytical capabilities for precision marketing and offer convergence services by bundling MOD, Wi-Fi and OTT services to enhance our product strength and defend our market share.

Slide 5 provides an update on our mobile business. The launch of the 2.6 gigahertz band will help us boost data speed and improve the foundation of further development of value-added services. We believe that driving increased adoption of value-added services outside of the standard mobile internet service is critical to accelerating the mobile revenue growth. Therefore, we will continue to focus on promoting our Hami value-added services such as music, games, TV and e-books, as add-ons to the big 4G promotional plan.

Supported by the continued increase in 4G and mobile internet subscribers, mobile internet revenue grew by 8.7% year over year in the first quarter of 2016 and served as the major driver of the mobile value-added services revenue growth. Regarding mobile operations, we are focusing on 4G services promotions and mobile internet subscriber expansion by further targeting mid to low-end customers, including the 2G subscribers.

Slide 6 shows the results for our broad business. During the first quarter, we continued to see a migration of subscribers to higher-speed fiber services. The number of subscribers signing up for connection speeds of 100-megabit per second or higher grew 15.7% year over year to 1.08m. We will continue to upsell our broadband services and encourage the customer migration to higher speeds.

Moving on to slide 7, our IPTV customers continue to sign up for additional packages and SVOD programs, as household TV usage rate also continue to steadily climb. Concurrently, our customer base further expanded, and we believe these positive developments demonstrates the potential of this segment.

To strengthen the competitiveness of MOD services, we will continue to enrich our content offering, by diversifying and expanding our selection of movies, dramas and TV series for SVOD. At the same time, we will also enhance the user interface and leverage our large broadband and 4G subscriber base to promote MOD and OTT services and to propel overall business growth. By leveraging our existing media content position in VOD, we will acquire OTT contents with all rights for distribution across all three of our platforms. We aim to utilize our robust network infrastructure to become the leading multi-screen service provider in Taiwan.

Please see slide 8 for an update on our ICT initiatives. We will continue leveraging our competitive advantages with regard to network infrastructure, IDC and CDN, among other services, to offer customized and comprehensive ICT solutions to enterprise customers. Additionally, we are cooperating with our partners to build a comprehensive IoT ecosystem to provide related services to enterprise across various industries.

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 first quarter of 2016, total revenues increased by 0.8% and operating costs and expenses decreased by 3.4% year over year. Our income from operations increased by 17% and our net income increased by 11.9%. In addition, our EBITDA margin increased by 38.5% in the first quarter from 36% the same period of 2015.

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 revenues, but was partially offset by a decrease in fixed and mobile voice revenue and sales of MOD device.

Moving on to slide 12, our first quarter 2016 operating costs and expenses decreased by 3.4% year over year, mainly due to the lower interconnection expenses, cost of goods sold, and depreciation expenses.

On slide 13, in the first quarter of 2016, cash flow from operating activities decreased by TWD5.3b or 44.9%, compared to the same period of 2015. The decrease mainly resulted from the cash contribution to the pension fund as required under the labor law in Taiwan. As of March 31, 2016, we have TWD34.54b of cash and cash equivalents. The increase in EBITDA margin was primarily due to the growth of total revenue and a decrease in cost of goods sold in the first quarter of 2016.

Slide 14 shows our first quarter of 2016 operating results as compared to our guidance. We reported robust operating results in the first quarter, with total revenues, operating income, net income and EPS all increasing year over year and outperforming our guidance. The lower operating costs and expenses were mainly due to the lower-than-expected depreciation expenses and the cost of goods sold.

Looking at our performance so far in 2016, we believe our business operations and developments are all on track, and we are confident that we will reach our full-year guidance.

Lastly, on slide 15, we are budgeting CapEx of TWD30.6b for year 2016, which includes the deferred projects from 2015 such as cloud datacenter and marine cable construction. Going forward we will focus on investment for core businesses, including 4G, FTTx and IDC among others under the precision construction principle.

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

(Operator Instructions).

Gopa Kumar, Nomura.

All right. Thank you for the opportunity and congrats on a good set of numbers. Three questions from me. First, how much does ICT revenues contribute to your total revenues? And how much versus contribution last year? I'm just trying to understand how this segment has grown.

Secondly, in terms of your operating expenses, there has been a significant improvement in 1Q 2016 in terms of lower cost. So, was there any one-time cost here except -- apart from the lower handset subsidies, was there any one-time benefits? And what does all this mean to your guidance given the fact that you're trending significantly ahead? Wouldn't you be -- why are you not revising up your guidance?

And lastly, on the 4G data [platters] I appreciate the fact that you have increased the entry-level unlimited plan pricing, but what is management's thinking of decreasing the data allowances on your TWD999 or TWD1,199 plans? So you still offer 16 to 25GB per month on these plans. And do you think that there is sufficient incentive for users to take up higher-priced tiers? Thank you.

The first question, ICT, I think it contributes around 5% to 10% of our total revenues.

And regarding your question about whether we will revise our focus or not, I think we will still stick with our original plan and we are confident to reach the plan, yes.

And the question on the pricing?

Okay. To your last question about unlimited pricing, will we -- going to increase data limit. I think --

No. My question is decrease data limit.

Can you repeat your question, Gopa?

My question was, would you be looking to decrease the data allowances currently on TWD999 and TWD1,199? You already offer 15 to 25GB, so do you think there is sufficient incentive for somebody to take up a TWD1,399 plan when he's already getting 15GB data on TWD999?

You see, we, according to our current statistic, our average data usage in first quarter is around 8 giga. So it's, I think, TWD999, for the TWD999 plan, we offer the first 12 months unlimited. For the rest of the contract period it's 15 giga. I think it's quite ample for the average -- for most of the customers already. So, currently we don't have any comments on the following measure.

Regarding your question whether we have the one-time cost or benefit coming to our income statement, the answer is no, we don't have one -- significant one-time cost or benefit.

Okay. Thank you.

Danny Chu, Macquarie.

Hi. Thank you for the presentation. Actually just two follow-up questions here. First is with regards to the launch of this move towards tiered pricing. I assume the two smaller players, [IADP] and Taiwan Star, I assume they continue to adopt very aggressive pricing plans for 4G service, and Chunghwa see a loss of 4G subscriber market share toward the two smaller players. Should we assume Chunghwa will not constantly make the backup move and withdraw all this (inaudible) tiered pricing? That's the first question.

Second question is, going back to guidance that is given for the first quarter, congratulations on the results, you guys are well ahead of the guidance. Then, given you just mentioned that you are not going to revise your 2016 guidance, so, should we assume the guidance that you provided back in February are not accurate anymore? Thank you.

We offer the big 4G plans starting on April 1 to cater to the demand of a wide spectrum of the customers, from high to low end. We upped the threshold slightly for unlimited data usage for the whole contract period. We believe this is the right step to lead the market towards tiered pricing and the fair usage policy adoption.

As to your question two, I think our guidance is still -- believe it is still accurate, because you know that this year is -- we have a government turnover and also that the global -- global and local economy, I mean, uncertainty is high. So I think our guidance is -- we still stick to our original guidance.

So if I may, just -- should I just -- excuse me, should I just follow up on that, so, should I interpret that, okay, meanwhile for 1Q, I mean Company is far ahead the guidance, but then for second quarter or third quarter, the Company's actual results will be more in line with your internal expectations?

Yes, we do think so.

Okay. Thank you.

Danny, back to your first question, okay? I think, we mentioned about the two smaller players. Because Chunghwa, we, currently, we leverage our 130 megahertz spectrum, this band, three bands, and we are adopting 3CA. So it's quite comprehensive. And the speed we can offer is quite high. I think it's quite ahead of the two smaller players. So we do have something to leverage, okay? So I think that probably can answer to your question.

Okay. Thank you.

Richard Chan, AIA Taiwan.

Thank you. Good afternoon. My first question is that facing your recent hike on the pricing on data plan, how is that going to benefit in terms of your, I mean, your blended ARPU, ARPU or potential for 2016? Could you share how many percentage of ARPU movement will you expect before and after this [healthy] pricing trend movement?

And the one follow-up question is that, what kind of competitive change you guys are seeing and therefore decide to gradually move to higher pricing? I think the price cut in the last year, which actually surprised us, if there is any kind of scenario, you will probably lower the price of the (inaudible).

I think it's -- right now it's still in the preliminary kind of status. We just launched this service April 1. But from this preliminary result, we can see that -- I think the overall performance is quite in line with our expectation. But we believe the benefits probably would take a while to be seen. So it's, like you mentioned about the benefit to the blended ARPU going forward, we are monitoring.

So, do you disclosure the 4G adoption rate on your postpaid user in overall subscribers? And you mentioned, I believe, I remember that you are targeting 38% to 40% of 4G market share. Did you still hold that expectation in this year?

I think the target for the market share, we -- that number is actually we provided almost two years ago when we first launched 4G services. This is the target. But of course, just like our CEO mentioned earlier this year, we, I think, get the business profitable. I think that's the first priority. Market share also important, but we will take it for our total consideration.

I heard you mention that the overall depreciation in first quarter this year is lower than expected. Did you expect this lower-than-expected depreciation will benefit throughout the year 2016?

The overall ARPU, you mentioned about ARPU, right?

I mean depreciation.

Depreciation.

Actually overall the depreciation part, the amortization, will just remain flat this year. Depreciation goes down a bit and amortization goes up, because we launched the D2 and D4 this year, the 2.6 megahertz services.

Okay. Thank you.

Ahuja, Credit Suisse.

Yes, hi. Thanks for the opportunity and congrats on a good set of results. I've got three, four questions with me. First, sorry to again go back to the pricing, the new plan that you launched. Do you think that the pricing that you launched is kind of a buffered tiered pricing that you're looking at? Because it's -- or do you believe there is furthermore scope to reduce the data allowances and increase the prices of unlimited plans further? That's number one. I'm not talking about over the next near term but in the longer term, two to three years, do you think there is scope of improvement in pricing and to move to a more buffered version of a tiered pricing?

Secondly, can you comment about the competitive landscape with respect to the new player, the two new players? How is it right now? And I didn't hear -- I think this question was asked earlier also but I couldn't get the comment. How do you think you can go back and reduce pricing if the competition from new players continue to increase? I believe they have not responded, they continue to offer unlimited at TWD599 plan. Are you not too much worried about these two new players?

Lastly, on depreciation and amortization, so you mentioned that D&A should remain flat given the depreciation will reduce but the amortization will increase because of spectrum utilization. So in that scenario, shouldn't your guidance be conservative very much? Because I believe you are projecting a net income decline on a Y-o-Y basis. So with the flat depreciation and a slight flat EBITDA, shouldn't there be a much better performance on the net income level? Thank you.

I think we -- to answer your question one and two -- I think we believe this is the right step to lead the market, toward a tiered pricing and fair usage policy adoption. You know we launched 2.6 gigahertz services in March and we now have the highest speed, over 300 megabits. That is -- I don't think it's the same product as we offered before. So I don't, we don't think it just increase the pricing, because we are also improved the quality of experience to customers.

And regarding your question three, the depreciation and amortization [flat]. I think overall generally speaking, still have TWD1b to TWD2b upside on expense and cost side. However, we're still working very hard to make it happen. As we said, we still stick to the original plan. Thank you.

Thanks. Just on pricing, my question was, do you think there is further scope over the next two to three years to improve pricing further? I understand you're mentioning that the product is much different from earlier, so I agree with you. But do you think you have (inaudible) the perfect tiered pricing environment or there is more scope for you to cut data alliances and increase the prices of unlimited plans further?

Yes, I think, Ahuja, we will always come back and review our plans. Because, just like I mentioned earlier, this is only about one month, less than one month, so we will always come back. So this -- currently we think it's -- we are still quite comfortable with the current plans but we will come back to review it for sure.

Thank you. And on competitive landscape, how are the two new players doing? Are you seeing much more competition from them? Are they grabbing much market share? How have they been doing? Because for the last few years they've been losing market share. So the last three months, how have they been doing?

I think, according to the statistics, I think the overall market, actually the SIM card number is decreasing, since fourth quarter. But talking about the smaller, two smaller, two new players, I think they don't really have too much performance, I will say that.

Okay. Thank you very much.

Jack Hsu, Sinopac Securities.

Hello. My question is, first, will we change our target about the added 4G subscribers in 2016? At the beginning of this year we will have 2m new 4G subscribers. Will we change this target? This is the first question.

And my second question is, right now we have 2.6 gigahertz spectrum and we also changed our price plans so what is our next step? Thank you.

Your first question, I think that 2m net add of subscribers, mobile subscribers, will still remain that number, don't change.

Thank you.

Regarding your second question, on top of the 2.6 gigahertz spectrum, as you know, we will enhance the sales in the value-added services. So I think now also the main driving force is to improve the ARPU.

Hello?

Jack, are you -- any other questions?

No, no. Thank you. Sorry.

Okay. Thank you.

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

Thank you for attending our conference call. Thank you very much.

Thank you for your participation in Chunghwa Telecom's conference. There'll be a webcast replay within an hour. Please visit www.cht.com.tw/ir, under the IR Calendar section. You may now disconnect. Goodbye.