Chunghwa Telecom Co Ltd (CHT) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the Company's second-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. 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 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 the 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 in our second-quarter 2016 earnings conference call.

As you can see from slide 4, our 4G subscriber number continues its strong growth trajectory. By the end of the second quarter of 2016, we have accumulated 5.7 million 4G subscribers. As earlier promised, we took our first step on April 1st to move toward a tier pricing environment by launching our Big 4G plan, raising the bar for unlimited data usage and the catalyst to the strong demand from customer across the board.

As you are aware, we have experienced some subscriber loss over the past several quarters. The key reasons for these losses are due to the SIM consolidation as well as the fierce market competition in the low tier sector.

Following the launch of the Big 4G plan, we are focusing more on channel marketing by enhancing channel intensive program as well as up-selling renewed contract to retain the customer and increase their contribution. We started to see up-selling recently which is positive for the mobile service (inaudible).

Turning to our broadband business, we have continued to rigorously defend this business as heavy market competition and the 4G substitution hinder the subscriber and the ARPU growth. We will continue to leverage our marketing analytics for precision marketing and our convergence services by bundling MOD Wi-Fi and OTT services to enhance our competitiveness, [production] and to defend our market share.

Additionally, the Chunghwa's Taipei IDC, one of the four highest rated data centers in the world, has recently been [drawn] out and into operation. Our vision is to make this in the key information hub of the Asia Pacific region. We believe it will significantly enhance the CHT and other enterprise ability to further strengthen their cloud-based business capabilities.

Slide 5 provide an update on our mobile business. Supported by the continued increase in 4G growth and the mobile Internet subscribers, mobile Internet revenue grew by 6.6% year over year in the second quarter of 2016 and serves as the major driver of the mobile value-added service revenue growth.

In addition to our promotion campaign mentioned earlier, to strengthen subscriber acquiring and retention initiative, we are also promoting the coming years to increase customers' contribution.

Slide 6 shows the results of our broadband business. During the second quarter, we continued to see a migration of the subscribers to higher speed fiber services. The number of the subscriber signing up for connection speeds of 100 megabit per second or higher grew by 13.8% year over year to 1.12 million. We will continue to promote and up-sell our broadband services and encourage the customer migration to higher speed, which should further improve the user experience and (inaudible) on our network.

Moving on to slide 7, our IPTV customers continue to signing up SVOD programs, as household TV usage rate also continue to steadily climb. Concurrently, our customer base further expanded and we believe this positive development demonstrates the potential of this content services.

To strengthen the competitiveness of our MOD services, we will continue to enrich our content offering, by diversifying and expanding our selection of movies, dramas and TV series for SVOD. We will leverage our Brazil Olympics Games to be held in August and we are currently reserving the games' viewership rights, which have already begun to attract MOD subscribers and increase the SVOD subscription.

Additionally, we will broadcast related games and programs across all our three platform for fans to closely follow. And at the same time, we are continuing to enhance the MOD user interface and leveraged our large broadband and 4G subscriber base to promote MOD and OTT services further propelling the overall business growth.

Please see slide 8 for an update on our ICT initiatives. As you can see from the solid growth we have experienced with our ICT business, we aim to continue leveraging our competitive advantages with regard to network infrastructure, IDC and CDN to offer reliable customized and comprehensive ICT solutions to enterprise customers.

Additionally, we recently launched the highest rated cloud IDC beginning upon in (inaudible) direct access to the submarine cable and the high speed broadband networks to further explore business opportunities in finance and the ICP/OTT 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 second quarter of 2016, total revenues decreased by 1.3% and the operating costs and the expenses decreased by 0.9% year over year. Our income from operations decreased by 2.4% and our net income decreased by 0.7%. In addition, our EBITDA margin slightly decreased to 37.35% in the second quarter from 37.94% the same period of 2015.

Please refer to slide 11 for an update on our business segment revenue. The decrease in total revenues was driven by the expected decrease in fixed and mobile voice revenue and sales of smart devices which was partially offset by the growth in mobile value-added service revenue and ICT project revenue.

Moving on to slide 12, our second-quarter 2016 operating costs and expenses decreased by 0.9% year over year mainly due to the lower cost of goods sold and the depreciation expenses.

On slide 13, cash flow from operating activities for the second quarter of 2016 decreased by TWD4.7 billion or 26% compared to the same period of 2015 mainly due to a higher tax payout and increased ICT project revenues.

As of June 30, 2016, we had TWD44.6 billion of cash and the cash equivalents. Larger ICT project revenues also slightly brought down the overall EBITDA margin in the second quarter of the 2016 on a Y-o-Y basis.

Slide 14 shows our second-quarter 2016 operating results as compared to our guidance. In the second quarter of the 2016, operating income, net income and EPS all outperformed our guidance. The lower operating cost and expenses were mainly due to the lower-than expected depreciation expenses and the cost of goods sold.

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

Lastly on slide 15, we're budgeting CapEx of TWD30.6 billion for 2016, which includes the different projects from 2015 such as cloud datacenter and the marine cable construction. Going forward, we will focus on investments for our core business, including 4G, FTTx and IDC among others under the preceding construction principle.

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

(Operator Instructions). Danny Chu, Macquarie Securities.

Thank you for the presentation. Just two quick questions. The first is on -- with regards to the introduction of the tier pricing. Can you talk a little bit about like, I mean, since the launch of the new plans by the Company, roughly how many customers has taken the new tariff plans?

And the second question is, you just mentioned earlier that one of the reason why the net income is coming ahead of your current budget is depreciation expense is lower than expected. Can you elaborate a little bit on what particular items depreciation expense is lower than your expectation? Is it relate to because some 4G equipments are not being deployed according to schedule or (inaudible) what other special reasons behind the depreciation expense lower than your original expectations?

In response to your question two, I mean regarding why our EPS is ahead of the forecast, actually there are two major reasons. The first one is less (inaudible) devices were sold in the first half.

And the second one is depreciation, because if you see we just already present you the -- our CapEx expenditures and in the first half we only have TWD6.8 billion and then the remaining mostly will be spent in the second half this year. So that's also a reason the depreciation cost was below our original expectation.

Danny, regarding the first question about the launch of the new plan how many customer took the plans, I think since we already cancelled the original plan which we launched in back in September 2014, so basically currently most of the customers for 4G, the new subscription, is on the Big 4G plan.

So if I may clarify, so basically for all the new -- according to your explanation just mentioned, so basically all the new 4G customers that you have add on since the launch of the plans they are all subscribing to the new tariff plans, am I correct?

Yes. Yes, you're correct.

Jingjing Wang, UBS.

I have three questions. One is I noticed your churn rate has been very low --

Excuse me Jingjing, could you approach the microphone?

Okay. Is that better?

It's not really clear.

Is this better?

Yes, it's better, yes.

Okay. Sorry about that. My first question is regarding the churn rate. It seems like your churn rate has been declining and what's been the sort of the underlying drivers for the lower churn rate?

Secondly is management mentioned that ICT has been a driver to the incremental growth. I'm just wondering what is the roughly the ICT revenue as a percentage of total revenue and what is growth rate year over year?

And the third question is a follow-up question on the depreciation. Can you also give us some color regarding, for the full year, your D&A, depreciation plus amortization cost, what's going to be the trend compared with last year?

Jingjing, for your first question about the churn rate decline, yes, we did -- we do have churn rate decline in the recent months. I think we mentioned earlier about what kind of countermeasure we took for to defend our market share and to acquire customers, retain customer. Still we are focusing more on the channel marketing. We enhanced the channel incentive program and we also try to make the channel people to up-sell the new -- renew contracts to retain customers and increase their contribution. I think that's the main reason for the churn decline.

In response to your question two, the ICT, give me a rough number about the ICT -- sorry -- accounts for the total revenue in last year is between 4% to 5% and then this year we project will be around 6% to 8%. So it will be growing fast.

As to your question three, depreciation and amortization cost trend, I will say that depreciation, I mean, declined a bit, but amortization due to the -- I mean, due to Big 4 and the 4G license amortization, that will be increased a bit. So the total that will be remain [rate].

Richard Chan, AIA Taiwan.

I have three questions. My first question is, could you talk about what your 4G user target is in terms of market share and total usage at the end of this year and probably for the next year? We would like to know your longer term strategy between the market share and the pricing.

And my second question is the ARPU in this year seems -- is a little bit slow now compared to last year. Could you share the reason? And what kind of overall ARPU improvement should we expect and what's your strategy to improve or maintain current ARPU level?

And the third, my last question is could you share maybe the potential risk on the overall telecom industry? We know the -- it seems the market has become more positive. The price is healthier and the major players is still dominant in the market, but still could you share some potential risks that you guys and we investors should bear in mind?

Okay. In response to your question one, I will say that this year our target is to add new 4G customer around 2 million. But we will strive to do better. So the 4G user market share -- well, I think we present the number to you. It's 37.5%.

And regarding your question two, the ARPU this year is lower than last year. The reason is very simple. I think the -- the 4G penetration rate now is over the 50%. So the high tier, mid-tier customer, or the -- I mean, in revenue. So for the remaining, most of them will be shift from the 2G or 3G and most of them will be lower tier customers. So that's the reason we project our ARPU this year will be flat and then probably a bit increase due to the -- if we sell more value-added services.

Regarding the third question, the risk on telecom industry, I think currently, I think we -- people, probably already know that the overall, the mobile market is kind of saturated, okay. So I think the market competition is getting fierce. I think that's the -- really the concern for this industry.

Varun Ahuja, Credit Suisse.

First thing I want to ask you guys on the service revenue growth cellular mobile. It has declined on a Y-o-Y basis. So I wanted to check your views. What do you think over the next two to three years, how should we look at this important metric service revenue growth?

Can you elaborate more on the take-up of 1399 plans which you have launched recently for the unlimited? Your competitor mentioned that the take-up for them is pretty good. So I just wanted to hear your views. How are you seeing the uptake for this 1399 plan going forward?

And also if you can comment on how do you see the 4G renewal, which is going to happen from second half of 2016? Will customers move to the 1399 plan that you're expecting or there is still 999 plan or 1199 plan where the data allowance that you're offering is still generous, 15 GB to 25 GB?

Second, I want to hear your thoughts on EBITDA. Given that this quarter or this first half compared to last year, expected to have lower handset subsidy because iPhone 6S hasn't been that successful. So the expectation was that EBITDA should show some improvement Y-o-Y, but for you the EBITDA has declined.

I just wanted to hear what is happening on EBITDA? Why is on a Y-o-Y basis EBITDA is declining given handset subsidies is kind of have come off? And if you can elaborate what happened in May -- sorry, in June month particularly because EBITDA on a monthly basis declined by 8% on that month, so if you can help on that front?

Lastly, just on CapEx. You are currently running around 25% -- 22% of your full-year guidance. So do you expect significant increase in CapEx in second half?

In response to your question one, I mean service revenue declines, I think in the beginning we already mentioned that we have experienced subscriber loss. I mean, the reason is that for SIM card consolidation and also the very intense market competition on the loss here expected.

Sorry. I -- just repeat again. I think we have -- in the beginning, we have mentioned that we have experienced subscriber loss. The reason for our loss are the SIM card consolidation. And also, we face the very intense market competition on the low tier sector. So that you will see that overall the customer number declined a bit and the ARPU spread. So the sales revenue, I mean a bit declined.

But, however, if you see our service revenue market share, we do increase from 36.9% in the same period last year to 37.2%. So also we took over the first step, I mean the new tariff plan on April 1st. And I think this plan is very good right move to the fair usage and also to give the different package to different needs customers.

However, I think that for such kind of big change, it also takes some time to wait to see the meaningful impact, financial impact. So before we see that impact, I know we believe in the second half we will see the positive results.

We've enhanced a few, I mean, activities. First of all, we are now very focusing on the channel marketing by enhanced all the channel incentive program and up-selling renewed contract to retain the customers, and also increase their contribution.

And secondly, I think that most importantly, we need to accelerate our 2.6 giga construction and also to improve our telecommunication service quality to provide the best quality of experience to customers.

Thirdly, in order to compete with the -- I mean, the smaller -- I mean, players, in July we also offer -- I mean the comparative package to allow -- allowed here 3G customer to move to the 4G program.

Okay. And then regarding the 4G renewal, your question two, will the customer move to the 1399 or 999, I think that is the different package. The higher -- the 1399 is with a higher handset subsidy and also unlimited program. That makes a difference with the 999. So that it depends on the customer, will they need the higher handset subsidy or they just -- they don't care about -- or they don't care about a handset subsidy, they just want unlimited program.

And the EBITDA is that we just mentioned in the beginning also. Now, in the second quarter, we have larger ICT revenue on books. Although, we have saving on the handset subsidy, but IoT ICT revenue, their margins averagely speaking is lower than telecommunications. So that's the reason you will see our EBITDA margin a bit declined.

Regarding your last question, the CapEx. I think that for the remaining months this year, there will be a few big projects like the marine cable construction and also as we mentioned ICT the world-class, the highest rate IDC, IDC in which we will have a grand opening tomorrow.

So these few big projects will just happen in the second half of this year, okay. That's it.

Thanks. Just a follow-up on EBITDA. I was talking on absolute term. If you look at EBITDA on absolute term has fallen. If you had a good ICT revenue in second quarter, so on absolute EBITDA should -- shouldn't we expect some growth because if you have a good ICT revenue and if -- even if the margins are lower at least, which -- on a Y-o-Y basis it should show some growth?

Ahuja, as you know the -- you're talking about exclusively the first-half, actually the -- our EBITDA amount, absolute amount is increased, right. What is the --

Even second quarter if you look at it as --?

-- decreased a little bit here. Because I think the revenue side is declined for 1.3%, right. And we also have operating cost expenses. Even though operating cost expenses declined, but the numbers here doesn't really -- and also the D&A I think in the first -- in this quarter, I think the D&A expenses the amount is much less compared with the last year. I think that's another reason for that.

Jack Hsu, Sinopac Securities.

I have two questions. The first about IDC business were weak or operate -- some international business, international IT customers IDC. This is the first question.

And my second question whether we have any plan, any new plan and a way to promote to customers and the will to increase our 4G customers, 4G subscribers?

Let me repeat your question one. Is it, are you mentioning about the IDC where we operate with international IT customers?

Yes.

IDC, not, okay IT. Yes, IDC. Yes, we have a few, I mean, deal with the international. It's being now negotiated, yes. So sorry, cannot tell you more about that.

And for the new plan, I think the older current tariff plan we are keep stable. I mean, because as we mentioned I think that is a big move in the right direction, we should be patient to take some time to see the results. But, however, I cannot guarantee you 100% because it still depends on the market competition landscaping.

[Livia Wu, Genta].

I have three questions. One is also about IDC [franchise], do you have any expectation if the IDC reached its full capacity, how much revenue or profit can the new IDC contribute to our total revenue or profit? This is my first question.

And the second I want to talk about the new data -- 4G data plans from April. Do you have any number for -- of the total of subscriber acquisition? What's the percentage of the plans over TWD1,000? And also how much, what's the percentage of the plans over TWD1,400? That is my second question.

And the third one is about our broadband business, because we notice that our total broadband revenue started to decline Y-o-Y since first quarter this year. Do you think that because our ARPU also declined Q-o-Q in the second quarter, do we think that this trend will continue or do you have any strategy to counter to the pricing competition from [MS] or new entrants?

Well, IDC franchise, sorry, I cannot give you the forecast. But, however, I can tell you -- I mean, the result will be comprehensive because IDC franchises -- his function is carried many applications and the many services like the cloud computing and big data and IoT is service as a foundation for these applications. So we will see that result, positive result next year.

And regarding -- in response to your question three, I think as I just mentioned, we are now very focusing more on the channel marketing. We try to up-sell and we already see some positive result in June and July. So we hope, I mean, these good response and result will continue.

About your question number two, our Big 4G plan launched on April 1st, total customer number acquired, it's more than 0.5 million. As for the percentage for 100 or above 1399, I think as we mentioned earlier I think in the very beginning -- it takes some while. So in the very beginning, it's not proved to be, not that successful, but in recent -- recently, we see more up-sell -- average number we see the up-sell kind of number. So we think it's a positive direction. So we will like to see for several -- for IDC how it goes in the next several months, but the direction is quite positive.

Jingjing Wang, UBS.

If I may I have two more follow-up questions.

Jingjing, please again approach your microphone, sorry to say.

Sorry, I'm using a new headset and so I have some problem. The first question regarding your subscriber acquisition costs per subscriber. In the first half, according to my own calculation, since IPO, subscriber acquisition cost per subscriber declined 5% to 10% year over year. I just want to say that sort of roughly 9%?

And secondly, regarding the upcoming spectrum auction in 2017, I know now it's too early maybe to talk about the details, but can you just share some of the color in term of just your personal judgment, what do you expect this auction to be overly competitive or more or less rationale?

Regarding the spectrum auction next year, I think the 2100 is a very important for the 3G voice. And we believe the 3G voice and also will continue for a while. So we're -- internally we're working on a plan and so far -- I mean the game of rules still needs -- I mean, the regulator to formally announce. So that is the current status.

For your number one question, I think the subscriber acquisition cost, of course, this year because of the iPhone 6S it's not really as popular as iPhone 6. So, the overall handset subsidy per handset -- because still iPhone accounted for quite a handset number of our customer share. So it's -- I think the main reason for that is the handset is not that popular this year compared with last year. So the overall subsidy, the average subsidy is actually declined, but I'm sorry, I cannot share with you how -- what's the percentage is.

Just one follow-up question. So is that fair to say iPhone accounts around 15% to 20% customers?

I didn't really mention about the share -- the percentage, but it's still quite a number, okay. And of course, this year I think the first half compared with the same period last year even the Android phone, it's more towards mid to low tier handset. I think that's another reason for that.

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

Thank you for joining in our conference call. Thank you very much.

Thank you President Shih. 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.