Chunghwa Telecom Co Ltd (CHT) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom's conference call for the Company's third quarter 2016 operating results. (Operator Instructions).

For your information, this conference call is now being broadcast 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 after the IR calendar section.

Now, I would 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, welcome to (technical difficulty) 2016 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 the overview of our business during the quarter, followed by 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 third quarter 2016 earnings conference call. During the third quarter of 2016, we continue to grow our 4G subscriber base. As of September 30, we have over 6.2 million 4G subscribers and for total mobile subscribers in Taiwan, we maintained our market leadership with 37.3% marketshare.

As you are aware, we have experienced some mobile subscriber turnover in the past several quarters due to increased market competition and SIM card consolidation. To address the situation, we strengthened our channel marketing processes by enhancing our incentive [recovery] programs. Which was proven to be effective as prepaid subscribers and postpaid subscriber net addition turned positive in September. And the total customer loss during the third quarter declined significantly as compared to the previous two quarters.

We will continue to defend our market share going forward. In the meantime, the introduction of our Big 4G plan is proving to be a solid strategic move, which is leading the broader market towards adoption of the tiered pricing plans and the fair usage policies.

For our broadband business, although we had experienced the customer decline since the beginning of 2015, the number of customer and ARPU growth increased quarter over quarter in the third quarter. We are encouraged to see this turnaround and we will continue to leverage our marketing analysis for precision marketing and overall convergence of services by bundling MOD, Wi-Fi and OTT services to enhance our product offering and competitiveness.

Next slide, I would like to update on our mobile business. Due to the competition of low priced unlimited plans, postpaid churn rate of the big three operators all increased in the third quarter. However, we still managed to have the lowest number. More importantly, our churn rate for postpaid subscribers decreased month over month in September. A nice turnaround attributable to our marketing efforts including the subscriber acquisition and retention initiatives.

Slide 6 shows our broadband business performance. During the third quarter, we continue to see a migration of subscribers to higher speed fiber services. The number of subscribers that sign up for connection speeds of 100 mbps per second were higher, grew by 12.1% year over year to 1.14 million.

We will continue to promote and upsell our broadband services and encourage customer migration to higher speed services. Which is due to further improve the user experience and their stickiness to our network.

Moving on to slide 7, despite the adjustment of the cooperation scheme with channel providers from the third quarter last year, our IPTV revenues continued to increase year over year. Primarily driven by healthy growth of IPTV and SVOD subscribers. Meanwhile, in August, the Olympic Games programs enriched our IPTV and SVOD content and helped bring in additional advertisement revenues as well as experiencing household TV usage rates continuing to climb steadily.

We, however, observed that our MOD profit benefits from the cooperation scheme adjustment with channel providers over the past year. And we will maintain this effort through next year.

Please turn to slide 8 for an update on our ICT initiatives. We are glad to see the continuing solid growth in our ICT business. We aim to continue leveraging our comprehensive advantages in network infrastructure, IDC, and CDN to offer reliable, customized and comprehensive ICT solutions to enterprise customers.

Additionally, with our highest-rated cloud IDC launched this July, which connected to global submarine cables and high-speed broadband networks. We will also further expand our IDC business opportunities in finance ICT/OTT manufacturing industries.

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

Thank you, President Shih. Now, I will go through our financial results in detail beginning on slide 10.

Income statement highlights. For the third quarter of 2016, total revenues increased by 4.2%. And operating costs and expenses increased by 11.7% year over year. The hot sales of iPhone 7 was the biggest driver for revenue growth.

However, it's also broad impact to our operating costs. Consequently, our income from operations decreased by 18.1%. And our net income decreased by 18.7%. In addition, our EBITDA margin decreased to 33.5% in the third quarter, from 39.7% in the same period of 2015.

Please refer to slide 11 for revenue breakdown by business segment. The growth in total revenues was driven by the increase in smart devices sales, mobile value-added services and ICT project revenue. Which was partially offset by a decrease in fixed and mobile voice revenue.

Moving on to slide 12, our operating costs and expenses increased by 11.7% year over year in the third quarter, mainly due to the higher cost of goods sold and the expenses associated with the ICT project revenue.

On slide 13, cash flow from operating activities for the third quarter of 2016 decreased by TWD4.0 billion, or 23%, compared to the same period of 2015. Mainly due to the decreased profit and higher tax payout.

As of September 30, 2016, we had TWD10.8 billion of cash and cash equivalents. ON the EBITDA margin, the increased sales of iPhone brought down the overall EBITDA margin on a year-over-year basis in the third quarter.

Slide 14 shows our operating results as compared to our guidance. In the third quarter of 2016, our operating income, and net income were lower than our expectation. Mainly because of earlier than expected iPhone 7 sales, starting from September, which increased cost of goods sold.

However, looking at our performance thus far in 2016, we believe our business operations and development are on track. And we are confident that we will reach our full-year guidance.

Lastly, on slide 15. We expect the actual CapEx for year 2016 will be about 10% lower compared with the budget amount of TWD30.6 billion. The reduction mainly came from the price negotiation with vendors during the procurement, the international optimization review process, and the change of the prior year's plan which has been cancelled or will be deferred to the next year.

However, CapEx for mobile business remains unchanged. We have spent TWD12.3 billion in the first nine months and we will catch up for the rest in the fourth quarter.

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

(Operator Instructions). Peter Milliken, Deutsche Bank

Yes, good afternoon, everybody. Yes, thank you for the call.

Now, you already answered part of this, but when I look at the third quarter profit, there was quite -- it was weak on a year-on-year basis, weaker than your peers. Is that purely because of iPhone 7 having maybe a different demand profile to your peers?

Or has there been some other items that have been holding you down? And if so, are they one off in nature or is there something else going on? Thank you.

Okay, so Peter, you only have one question?

I have -- actually, I have one more after that, would you like me to ask it now as well?

Actually, in response to your first question, I think the iPhone 7 sales definitely is the main driver to the lower down the overall profit. And also, as we mentioned before, we are working very hard to defend our market share. So we enhanced our channel market so there are higher spending in marketing-related programs.

I think these two major reasons dragged down the profit. However, we believe that the overall mix of customer acquisition is tending to be positive in September. And we are looking for that the trend will continue in the fourth quarter this year.

Yes, so it's clearly worked. And so I guess going forward, iPhone 7 demand will be seasonal but then the subsidy -- or the dealers' commissions will remain probably to similar to what we saw in the third quarter going forward. Does that sound realistic?

I think programs for the iPhone subsidy will continue until the year end, unchanged.

Okay, and then my other question is about some of the new businesses you are getting involved in. So although times have been challenging in the quarter, you know, you are growing in some of these areas. And I like how you've split out IoT, which doubled year on year and is now about 2% of revenue.

And you talk about IDC and content. Could you give us a couple more details on the -- what is driving IoT? What are the main use areas of customers? And what is the new content that you're offering? And maybe how many racks have you added recently? Or that sort of detail if possible. Thank you.

I think on the new business in IoT, actually, we mentioned on our presentation as well, basically, we are looking for exploring the new opportunities in finance ICP/OTT, and manufacturing industries. But do you understand that since we are kind of new in this market, although we already have some track record for several years, we're still new compared with those system integration operator companies.

So we still continue building our track record (inaudible) now. But [with the understanding], our ICT revenue share now is getting larger, so it's -- basically now, I think we are looking at this new opportunity, it's our new revenue stream in the future.

Okay, great. Thank you very much.

Danny Chu, Macquarie Securities.

Hi, thank you for taking my questions. Just three quick questions. First question is related to the CapEx. You mentioned in your presentation that you expect for the full year of 2016, the actual CapEx spend will come about 10% lower than your initial budget amount. So basically, you're indicating that the CapEx spend for 2016 will be about TWD27 billion.

But you also mentioned in the presentation that some CapEx will be pushed into 2017. Can you share with us roughly how much CapEx amount that's being pushed to 2017? That would be my first question.

And then the second question is in relation to your EBITDA margin. You mentioned that because the iPhone was launched near the end of the third quarter, and that's the main reason for the decline in the EBITDA margin.

But should we assume for the fourth quarter of this year, i.e. the last quarter, that the EBITDA margin will be roughly the same as what we are seeing in the third quarter? Or do you expect given the sales of our iPhone 7 that the related handsets actually may push the EBITDA margin in the fourth quarter to a lower level?

The third question is about your fixed-line broadband business. When I look at the slide, page 6, I recall since the third quarter of 2014, the fixed-line broadband subscriber base has been coming down. But I note there is an increase during the third quarter.

Any particular reasons why suddenly, there is such a swing or change in terms of the subscriber base growth? Thank you.

Okay, in response to your first question, the year 2016 CapEx will be 10% lower. And I think that your question is related to the next year, or how about the next year level. I can -- so far, we can say that the CapEx guidance will be disclosed early next year. However, we expect that the next year, the total amount, CapEx amount, will be equal or smaller than this year's guidance.

As to the question two, the EBITDA margin, I think whether the Q4, the EBITDA margin will be higher or lower than Q3, it still depends on the sales status on the iPhone 7. So far, we still see that the momentum is still very strong.

As for the third question, [I think you know], as you understand that in last year, actually we were facing quite serious competition from the cable operators in broadband business. So for the past 12 months, actually our subscriber numbers actually -- we are losing subscribers for the past 12 months or even in more than one year.

But recently, since we enhanced more on our marketing capability, we enhanced the capability of marketing, we also have put more -- we are allocating more resource for broadband. So in the last four months you can see the net adds of the broadband subscriber instead of net loss for the past 12 to 15 months.

So if I may (inaudible) ask a follow-up question. So basically for the fixed line broadband business, because for the past couple of months, the Company has been conducting more marketing activities and promotion, and that is why we are seeing a growth once again for the fixed line broadband subscriber base, am I correct?

Actually, it's more than that today. For the past several years after we launched 4G services, we actually put more efforts, more marketing efforts to 4G instead of broadband. And so I think starting from the end of last year, we started to allocate more resource for broadband.

Not only the marketing efforts, but also we are doing some kind of platform, try to evaluate the customer's behavior, try to reach some community to defend our share. It's a lot of countermeasures conducting out there.

Okay, thank you.

Jack Hsu, SinoPac Securities.

Thank you, I have two questions. First, if we see our CapEx, our CapEx will be TWD30.6 million (sic) and right now, I see the number is TWD12.3 billion. So does it mean we will -- very big CapEx in the fourth quarter? And what will be? In the mobile or fixed broadband or something else? This is the first question.

My second question is right now, we see the IDC business has big growth, and how do we evaluate the growth in the fourth quarter or even in the 2017? Thank you.

I think we already spent TWD12.3 billion in the first nine months. And we will catch up the rest in the fourth quarter. I think as we just mentioned, for the mobile business, our plan will keep unchanged. So I think that in the fourth quarter, no matter in the fixed line or in internet, we will have CapEx to reach as we just mentioned -- the total amount is about TWD27 billion total CapEx.

As for the IDC business growth, as you understand, as you know, we just launched the high standard IDC center in Taiwan. So currently, we are getting more and more customers.

So of course, we do see some continuing growth of the IDC business. But I don't really have any forecast for 2017. Not even for the fourth quarter, I'm sorry.

Okay, thank you.

Varun Ahuja, Credit Suisse.

Yes, thanks for the call. I got a few questions. Number one, on the mobile side, if you look at the cellular service revenue has declined on a YOY basis, given you said you've seen good traction iPhone during this quarter. And I assumed that iPhone adopters are going to be high ARPU customers.

So I just wanted to understand why, despite the adoption of high iPhone sale plans, you're seeing YoY decline in service revenue? That's number one.

Number two, can you explain or elaborate more on the competitive dynamics? Compared to 12 to 15 months ago, do you think competition is much better right now, post the increase in threshold of unlimited plans?

So I just want to hear management commentary, how do you see competitive dynamics currently in the cellular side?

In the same vein, if you can explain how you're see the adoption of TWD1399 plan? Because your competitors have been saying that they are seeing good adoption, about 33% adoption that they are seeing from new customer. How are you seeing adoption of the TWD1399 and above plans? That would be helpful.

And lastly, as you mentioned that you have increased the channel commissions to get more in line with your peers. So I just wanted to check, are your commissions, do you think, are pretty much in line with your peers or you have got it below, and that is the reason why you are losing subscribers? Thank you.

Okay, in response to your first question, I think we have -- in the beginning, we mentioned we have experienced some mobile subscriber turnover in the past few quarters. So the overall subscriber number has declined.

However, I think we have done a lot of effort in the third quarter to defend our market share. So we see the positive results in September. The iPhone definitely, the customer profiles are mostly in higher-side. And we see that acquisition on the iPhone customers are good for the revenue and also for profit.

And regarding your second question, competition dynamics. I think the mobile business now is -- especially 4GB, now is not in early stage. So the competition and the new acquisitions, I think most 2G transferred to 4G and 3G to 4G we've done a lot. And also, the competition as for the other two smaller competitors, I think they are also working very hard.

However, since we launched the Big 4G program, we still believe that is a very strategic move. And I think the move forward to the adoption of the tier pricing plan and the fair-usage policy which is good and right for the Company and also for the market.

And adoption of the TWD1399 plans, I think we are gradually seeing that the percentage is improving.

And for your last question, channel commissions, I think the current incentive program to our channels is in line with our peers. So that we see the good results, the customer -- the overall additions tend to be positive.

Thanks. Just to follow up on the pricing. Do you think that currently the tiered -- are you moving toward tiered pricing? Do you think there is further scope for pricing to improve?

Because clearly, the 25GB or 16GB seems to be pretty high in terms of regional context. I know the usage in Taiwan is pretty high, but do you think -- are you moving toward a better tiered-pricing environment right now? Or do you think there is scope for further increase in pricing?

So far, we see different customer demands. And the tiered pricing is a good move, and I think we gradually see a positive result. However, there are still some customers, their need is for unlimited.

So I think we have a tiered pricing program, but to a certain extent, we also -- I would say that the unlimited program to a certain customer will stay for quite a while.

Okay, thank you.

(Operator Instructions). Jack Hsu, SinoPac Securities.

Thanks for giving me a question. I have only one question. Right now, we see the iPhone 7 made public earlier in this year, so could we conclude that -- because it is usually in the new iPhone -- when a new iPhone releases, it will impact our EBITDA margin in the fourth quarter.

But right now, they go public on the end of the third quarter. And will the iPhone, the negative impact for the EBITDA margin will less than last year? Thank you.

Yes, of course. It seems this year, iPhone was launched in September, that's in third quarter this year. So this year, I think we already mentioned that EBITDA margin in the third quarter already, I think the primary impact is from the higher sales of iPhone 7.

So since we launched the iPhone sales from September 16, so the impact only half month, okay? For the fourth quarter, if we see these continuous sales of iPhone 7, you will see that the EBITDA margin impact as well. But that will be quite similar to what we had in last years. Last year, the iPhone actually was launched in October 9, so it will be quite similar.

Are you talking about the impact in this fourth quarter going to be less than last year? I think we will see how it progresses, okay?

Okay, thank you. And the one follow-up question. How do we see the impact of the Note 7, Samsung's Note 7, what's the impact for us? Will this event affect the mobile device sales or it will -- any impact? Thank you.

To think even Apple mentioned about that they did not really assess the impact of Samsung Note 7 to them. So I think, currently, of course we see the sales of iPhone 7, the overall popularity is quite similar to what we had for iPhone 6S.

But our customers, especially, they are -- [push the] Android phone. Will they buy other brands or they just need a Samsung's Note 7. I mean will the Note 7, this issue will affect our Android phone sales in the fourth quarter.

Thank you.

Actually, we got all kinds of situations, I think it's really no comment on that.

Okay, thank you.

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

Thank you for joining in today's earning conference 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. Good bye.