Chunghwa Telecom Co Ltd (CHT) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the Company's fourth quarter 2016 operating results.

(Operator Instructions). For your information, the conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference has finished. Please visit the CHT IR website www.cht.com/tw/ir, under 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, the Director of Investor Relations for Chunghwa Telecom. Welcome to our fourth quarter 2016 results conference call.

Joining me on the call today are Mr. Sheih, Chunghwa Telecom's President, and Mr. Chen, our CFO.

During today's call, management will first discuss the overview of our (technical difficulty) the quarter, followed by operational and financial highlights. Then we will move on to the Q&A session.

On slide number two, please note our Safe Harbor Statement.

Before I turn the call over to President Sheih, I would like to make a brief introduction. Mr. Sheih has served in many different management positions within Chunghwa Telecom over the past years and is extremely familiar with our broad and comprehensive telecom platform. Before taking this position as the President of Chunghwa, he was the Senior EVP supervising marketing, information security and customer service. He was also responsible for the establishment of our big data office and cybersecurity department.

Now I would like to hand the call over to President Sheih.

Thank you, Fu-fu, and good afternoon everyone. Welcome to our fourth quarter 2016 earnings conference call.

To begin, let me first just start out by saying that it is an honor to be promoted to President for this Company, which I have spent most of my career helping build. In this new role, let me share with you the mission and operational strategies for Chunghwa Telecom's long-term development, which I have co-developed with Mr. Yu Cheng, who was appointed as the Company's new Chairman and CEO.

First of all, we will focus on further cross-selling our high-quality and diversified services to our business and retail customers, while at the same time closely reviewing the efficiency and effectiveness of our marketing activities, to further streamline it, and strengthen profitability. Secondary, to stay in front of and capitalize on our industry trends, we will leverage our integrated networks and service platforms to promote digital convergence services, and develop new opportunities in innovative business lines, including ICT, IoT and OTT, and so on.

Third, pursuant to the government's New Southbound Development Policy, we will explore opportunities to strengthen our cooperation with companies in Southeast Asia countries and expand our geographic footprint. Fourth, we will internally broaden our corporate governance initiatives to ensure that Chunghwa will continue to be a leading model in fulfilling its corporate social responsibility. Finally, we will continue to drive investment into talent, network construction and technology R&D to maintain our long-term competitiveness.

Now let's take a look at our business overview. For our mobile business, even though we are the market leader in Taiwan, we did experience some customer turnover during the fourth quarter. Even with the fierce competition in this business, we are able to slow customer loss as compared to the previous quarters. We continue to retain our market-leading position in mobile subscriber and mobile revenue, which was primarily attributable to our entire team's effectively streamlined marketing efforts. Going forward, we will continue to streamline our marketing activities, aiming to further strengthen our customer loyalty and retention.

For our broadband business, the intense competition from cable operators resulted in some customer loss for 2016. However, due to our precision marketing and improved product offerings, the loss was mitigated as compared to 2015. Going forward, we will continue to leverage our big data analysis capability and promote diversified digital convergence services to defend our market share.

Now, I will walk you through each of our business lines. On slide 5, I would like to update you on our mobile business.

Due to market competition and SIM card consolidation, our total mobile subscribers decreased by 3.5% year-over-year to 10.8 million. However, subscriber count stabilized in the fourth quarter, primarily due to improved customer targeting and increased marketing.

To cater to our customers' demand and compete more effectively with other players in the market, we launched new promotional plan at the beginning of this year, targeting both mid to low and mid to high tier customers separately. With the new plan, we further raised the bar for unlimited data usage, as we aim to continue shepherding the market towards tier pricing structure.

Going forward, we will continue to weigh the risks and the rewards of adjusting our pricing strategy, but we will remain consistent in strengthening the subscriber acquisition (technical difficulty) our market share. Meanwhile, we will increase our overall revenues by encouraging customers to subscribe to a second SIM card, for usage with wearable devices and IoT applications, as well as further growing our enterprise customer revenues.

Slide 6 shows the performance of our broadband business. During the fourth quarter of 2016, we continued to see a migration of subscribers to high-speed fiber services. Further, the number of users signing up for connection speed of 100 megabits per second or higher grew by 11.1% year-over-year to 1.17 million. We are pleased with the results we are seeing and will continue to promote and upsell our broadband services and encourage customer migration to high-speed services. We believe we are taking the right steps to further improve user experience and user stickiness on our network.

Moving on to slide 7, after an adjustment of our cooperation agreement with channel providers from the third quarter of 2015, our IPTV revenues stabilized in the third quarter of 2016. For the fourth quarter of 2016, IPTV revenue increased by 6.3% year-over-year, primarily driven by the healthy growth of IPTV and SVOD subscribers. More specifically, by the end of 2016, we accumulated 718,000 SVOD subscribers, which exceeded our original target. Additionally, household TV usage rate also increased to 72.2%. Going forward, we will continue to enrich IPTV content and offer upsell package to increase customers' contribution and the total revenues.

Please turn to slide 8 for an update on our ICT initiatives. We are delighted to see continued solid growth in our ICT business in 2016 and aim to continue to leverage our competitive advantage in network infrastructure, IDC and CDN, to offer reliable, customized and comprehensive ICT solutions to our enterprise customers.

Additionally, by leveraging our cloud big data and information security capabilities, we established an IoT platform that develops green energy, smart building, media surveillance and intelligent transportation solutions for enterprises to facilitate their business development. By leveraging our network and cloud resources, enterprises from different industries can also develop their own solutions over the platform.

Now I would like to hand over the call to Mr. Chen for our financial results.

Thank you, President Sheih. Now I will go through our financial results in details, beginning on Slide 10.

Slide 10 provides you with highlights from our income statement. For the fourth quarter of 2016, total revenues decreased by 6.2% and operating costs and expenses decreased by 5.7% year-over-year. Our income from operations decreased by 12.7% and our net income decreased by 18.3%. In addition, our EBITDA margin decreased to 30.9% in the fourth quarter of 2016 as compared to 31.5% in the same period of 2015.

Please refer to slide 11 for revenue breakdown by business segment. The decline in total revenue for the fourth quarter of 2016 was driven by a decrease in voice revenue, smart devices sales, and ICD product revenue, which was partially offset by the increase in mobile value-added service revenue and applications revenues under Internet segment.

Moving on to slide 12. Our operating costs and expenses decreased by 5.7% year-over-year in the fourth quarter of 2016, primarily driven by the lower cost of goods sold, interconnection expenses, and ICD project costs.

On slide 13, cash flow from operating activities for the fourth quarter of 2016 increased by TWD4.6 billion or 15.7% as compared to the same period of 2015, which is primarily attributable to the decrease in receivables and inventory, partially offset by a decrease in payables. As of December 31, 2016, we had TWD32.1 billion of cash and cash equivalents.

Slide 14 shows our operating results as compared to our guidance. We are pleased that our performance in year 2016, including net income and EPS, met our full year guidance. The lower than expected operating income the fourth quarter of 2016 was mainly due to the impairment of 2G equipment and net income was further impact by the impairment from China Airlines investments.

Moving on to slide 15, which shows our 2017 consolidated guidance. Looking ahead, total revenue for 2017 is expected to increase by 0.5% to TWD231.2 billion. The increase in revenue is expected to come from the expansion of mobile value-added service, smart devices sales, and enterprise ICT business.

Operating costs and expenses for year 2017 are expected to increase by 2.8% to TWD186.46 billion, primarily driven by the growth in our ICT business, mobile internet service, smart device sales, and enhancement our digital content. Additionally, amortization and expenses for the 4G license will increase year-over-year.

Given these projections, we expect a 7.1% YoY decrease in operating income and a 7.8% year-over-year decline in net income.

Lastly, moving on to slide 16, our CapEx spending in year 2016 was TWD23.5 billion, which was much lower than the budget amount of TWD30.6 billion. The difference mainly came from price negotiations with vendors during the procurement. Our internal optimization review process and change in budget now has been canceled or deferred to year 2017. For 2017, we are budgeting TWD30.3 billion in CapEx, including the deferred items from year 2016. We will continue to invest in 4G, FTTx, our various service platforms, as well as IDC and cloud business.

Thank you for your attention. We will now open up for questions.

Thank you. (Operator Instructions).

Our first question is coming from Neale Anderson, HSBC. Go ahead please.

Hi, good afternoon. Two questions please.

One is on the mobile pricing environment. In your revenue guidance, as you said, it reflects a quite difficult outlook in 2016. Do you feel that Chunghwa as the largest wireless operator is close to being able to lift prices in 2017, or is that difficult?

My second question relates to the ICT business where we've seen costs scale up in both 2016 and in the guidance for 2017. Could you give us a bit more detail on how you expect the margin trend to develop this business this year? Thank you.

I think you know the -- the reason we guide down a little bit of our mobile business earnings for 2017 is most because, you know, you probably understand already that in 2016 we have some -- we experienced some customer loss, and we do forecast in the beginning of this year we will continue to have some loss for this coming one to two quarters. So it's basically, you know, we are taking some countermeasures, try to retain the customers, try to shrink the number of the loss. We did see this phenomenon happen in the fourth quarter last year. We would like to see this good positive things continuing this year, in the coming quarters, okay? But still, you know, (technical difficulty) still kind of difficult to really get back to the previous level in this year.

But, however, talking about the pricing, how to -- how can we able to lift prices in 2017? I think we have different kind of plans to please different target audience. We also have the different kind of commission strategy for a different target audience, hopefully this year can work out.

This is the answer to your first question.

In response to your second question, you see the ICT business costs are rising. I think in general, the revenue is also -- the revenue also increasing in double-digits. And as we all know that the ICT, profit margin, unlike our traditional telecom business, is a bit lower. But, however, with the larger economy of scale, and also we have more and more our self-developed products inject into the project, overall the profit margin is improving.

Thank you.

Thank you. Your next question is coming from Patrick Chen, Nomura. Go ahead please.

Hi. Thank you for taking my question. I have two questions.

Number one, you mentioned in your operational strategies that you want to leverage on the new government's Southbound Development Policy. Could you elaborate a bit more on what kind of advantages or benefits that you expect to get from this Southbound Policy and how would that translate into the financial contributions?

And secondly, I mean, first of all, congratulations on your new role, Sheih, but could you share with us how differently would you approach to managing this Company differently than the previous management? That's my two questions, thank you.

About how to take advantage of the government's Southbound Development Policy, first of all, we would like to expand our cooperation with our partner, Viettel, in Vietnam to further explore opportunity in Southeast Asia. And we will plan to establish a subsidiary in Thailand. Currently, we have an office out there. Also, we will focus on Indonesia and Malaysia markets as well.

We'll continue exploring opportunities in Southeast Asia for years. Of course, it's important to our long-term development and has been one of our existing overseas expansion strategies. In mid to long term, we expect to offer our ICT, IoT and digital convergence services to this market via investment company.

May I ask a follow-up? Since the retail markets in these geographic markets seems to be like a bit more competitive than our market, so, is it fair to assume that your focus will be mainly on the, say, ICT or the corporate segment?

Okay. We will focus on corporate customers.

Thank you very much, yes. (Multiple speakers).

About the previous question on how management of the Company is different than the previous management, the operational strategy we showed on slide 4, okay, the operational strategy is including streamlined services and strengthened profitability, and capitalize and remain at the forefront of digital convergence trends. The third is leverage government's New Southbound Development Policy. The fourth is broaden corporate governance initiatives. And the last, finally, is continue to invest in talent, network construction and R&D.

So these are the main, say, areas of focus that you would highlight to, I mean, the shareholders that you wanted to carry this Company forward. Is that fair to assume?

Yes, it is.

Okay. Thank you. That's very clear. Thank you very much.

Thank you. Our next question is coming from Varun Ahuja, Credit Suisse. Go ahead, please.

Yes, hi, thanks for the call. I've got a few questions. Firstly, if you look at your financial performance [bearing 2015], wherein the earnings improved in double-digit earnings for the Company has been on a decline for the last four or five years.

And in 2016, it declined, and on 2017, if you look at your guidance, you are going back below what you had in 2013 or below that level also in terms of earnings.

So I'm just trying to gage, every year you come out with a guidance with decline in profitability (inaudible) net profit. Where do you think over the next three to five years, growth is going to come from?

I just want to get management's views over the long-term, how do you plan to grow this business going forward?

Number two, if I heard it correctly, have you raised prices at the start of this year, when you said you launched new plans wherein you've raised the threshold. Can you please provide more clarity, what are the new plans? If I remember, TWD1399 was the plan that was launched with your offering unlimited data. So I just want to hear has there been any change in terms of plans?

Thirdly, can you provide much more clarity on the geographic expansion that you are talking about. What kind of amount of investments you are looking at, is there any amount that you have fixed in terms of wherein that much you will invest? What is the size basically, I'm just looking at?

And if I heard it correctly, you are not going to enter into any of (technical difficulty) market looking at mobile but it's just the enterprise side of the business that -- a little bit of clarity on that, that will be helpful.

And lastly, given the free cash flow profile that's improving dividends, how should we look at dividends with the management, given the free cash flow is increasing and your net cash balance sheet, is it much more willing to give more than 100% as dividend?

Sorry, lastly, one more thing, CapEx, what should be the normal CapEx level given you have TWD6 billion of spillover into 2017? Thank you.

Okay, regarding -- in response to your cash dividend. I think, as we said before, that it is still subject to our capital expenditure status and also approval from the Board. It is likely that our cash dividend policy was similar to last year.

Now, regarding your question about the CapEx, this year, we just announced that our guidance is around TWD30 billion, and we also have a breakdown for these investment segments. So I'm going to say that in the future, next year, probably, we will just maintain a similar CapEx level.

Regarding your question about expansion and the money or where we are planning to spend, I can tell you that so far, we fully dedicate in the new business such as the IDC, IoT, cloud computing, I think areas definitely will be our major targets.

And also, your question about whether we are going to enter mobile business in these markets, I think -- I believe is the overseas market. I think as we just mentioned, for the IDC offshore business, we were -- at this moment, we were mainly focused on corporate enterprise as customers. Especially there are some Taiwanese corporate enterprises overseas.

Regarding your question about have we raised the price on our mobile plan, I think the market comparative dynamics, currently it seems a lot of the high competitive intensity in the lower end segments. But, however, we see a good result in our high-end segments.

Currently, I think, for the new acquisitions, we have over 50% of the customer pick up, the TWD1399 program and we continue to see the good acquisitions. So as you say, we will raise the price as I believe we are confident about our current status and we would -- if any change is still subject to the market competition status.

Regarding the first question about the year 2015 performance and 2016, where does all the revenue growth come from? I think the current status is that the voice revenue continue to decline. And we do our best to defend our mobile market share and also we want to improve our ARPU and generate more revenue.

So we will enhance our base station construction, enhance our service quality, but on top of that, we will also put more efforts and resources in the new business related segments such as the IoT. We have some progress in smart manufacturing industries, and also transportation for the IoT related services. And also, for the information securities, it has a very good progress in that segment. And also cloud computing and big data, we see many good business opportunity layers.

So I can tell you that also contribute a great part of the future revenue growth.

Regarding the ICT, we just say that with higher economy of scale, we see that our profit margin is getting better, and also, we have more, ourselves, developed products injected into the projects so we are confident to see greater success in the future.

Yes, thanks. Just a bit more clarity on the mobile setup. When you say, in terms of your strategy, you will look at raising the threshold for unlimited plans and move toward tiered pricing. So what is there in terms of next two to three years, do you think the pricing in the sector has moved up? Can move up further? What is your view? Given last year, we had TWD1399 change, after that, the service revenue has not shown any growth and the financial performance hasn't been that great. Additionally, there has been the launch of several other TWD699 or other plans in the market, as you mentioned, the low-end has been pretty competitive.

So how do you see the mobile as a whole over the next one or two years and given your strategy because you are the market leader and your directions, the other two also follows what had been done in the past. So do you think you will continue to -- can you raise prices to move toward effective tiered pricing, which is obviously your strategy?

So how do you plan to follow your -- the steps that you want to take to follow the strategy? Thank you.

We still believe now that tiered pricing and fair usage is the right move and that is also the long-term direction. But, however, we also understood that the current market, there's still a demand for unlimited programs. So I think the unlimited program will continue to survive -- stay for a while. But, however, in the longer trend, the tiered pricing is the right move, is the right direction.

Okay, thank you.

Thank you. Our next question is coming from Peter Milliken, Deutsche Bank.

Go ahead, please.

Yes, good afternoon. Thank you for the call and congratulations on the new role.

I just got one question and that is, it is mentioned in the report that you've published that the churn is the lowest in the industry on mobile. And yet, you did have this big outflow of mobile subscribers indicating that your gross adds were quite weak. Is that because of the competition in the first half, the TWD499 plans, or do you think there is something else that was stopping you from getting growth adds in 2016? Thank you.

I think the overall mobile market is shrinking, okay? We understand that in the Taiwan market, the mobile customer number is shrinking, and we mentioned earlier before, it's -- one of the reasons is the SIM consolidation. The other reason (inaudible) the whole market is quite saturated. So it is quite competitive at the moment.

And we do observe that Chunghwa in the fourth quarter, because you know, in third quarter profit, the overall performance for mobile is not good but in the fourth quarter, even though we still experience customer loss, the overall situation is getting better and we do hope that the overall situation will go to this direction, to be more positive in this next one or two quarters.

So currently, we are -- internally, we are reallocating, trying to optimize our resource to specifically a different type audience, we will offer different kind of resource.

Try to not only get the positive customers again, but also for the bottom line, we will be improving. That's how we are looking at this business.

Right, okay. Thank you. And just to summarize some of the points on strategy, under President Sheih, is it fair to say that Chunghwa Telecom is looking to move from what's been probably an efficiency focus previously in the last three years towards more of a growth strategy by the ICT and IoT and other type of services? Or is efficiency still going to be a big focus? Thank you.

I think both the efficiency and growth, that's the two sides we are looking at, okay? We understand that currently, we are experiencing the voice revenue losing, which means the good margin is not come back. But for ICT, since we are building our capabilities for the past several years, so we are pretty confident that for ICT, we are also the leading brand in this market.

So currently we are trying to even streamline, more streamline and at the same time, trying to make the profitability, the margin of the ICT business is getting better.

So in the years to come, you can see not only the increase of the revenue for ICT but also you can see the more margin come up when there is new emerging business.

Okay, thank you.

Thank you. Our next question is coming from Jack Hsu, SinoPac Securities. Go ahead, please.

Thanks for giving me a chance to ask a question. I have two questions. The first question is will we -- any further cooperation with some companies such as Netflix or content providers over the wall in the near future? This is the first question.

And my second question is about our ICT business, could you inform us or elaborate more detail about the ICT and IoT will -- what kind of things will be done in the 2017? Thank you.

Regarding the operation with Netflix or other content providers, I would say, it's possible to incorporate with all other content.

And for your second question, I think our President already mention in the presentation that we are building some IoT platform, to invite the industry to develop their application on top of it.

Internally, we are also doing our own jobs and try to bundle some products that we can get more enterprise customer to use our services.

Okay, just the one follow up question. If we cooperate with the content provider over the wall, where we are in -- they will then use our data center just operator in the 2016. Thank you.

The answer is yes. So IDC and CDN is a possible cooperator.

Thank you.

Thank you. Our next question is coming from Livia Wu, Yuanta Securities. Go ahead, please.

Thank you for taking my questions. I have three here. One is that, to follow, you mentioned Chunghwa Telecom will streamline your marketing expenses going forward. Is it something that maybe for this year, your total marketing expense will decline YoY this year?

And my second question is about our future strategy about handset subsidies. I'm wondering if there is room for Chunghwa Telecom to lower the overall subsidies? How do you balance between the subsidies and also the competitive landscape in the Taiwan telecom market?

My third question is to follow up, you mentioned currently about over half of our new acquisition of the subscribers took out TWD1399 plan, but I want to make -- which timeframe you referred to because as I remember maybe in the second quarter or the third quarter last year, you have said that over half of our new acquisition is below TWD1000, because most of the new subscribers are low tier customers.

So I want to know if you are getting more acquisition that is over TWD700 or is there any particular timeframe [drivers there]? Thank you?

Could you repeat your question about the room for Chunghwa Telecom to [reference] growth. Could you repeat that one?

Okay, because overall, the marketing of your competitors compared to our peers, I wonder if there is room for us to lower our overall handset subsidy to balance handset subsidies and also the competitive situation and market.

Okay, I think that currently, our main strategy is try to encourage especially for the mobile customer, to move to the high-end program which has higher handset subsidy and also higher ARPU.

But however, as we just mentioned, we see a good rebound and currently, the ARPU over the TWD1000 acquisition, new acquisition, is over 50% and the trend is still going up.

But as you said, how about our subsidy and our marketing expenses? I can tell you it is still subject to market competition landscape.

The current low-end segment, the competition is very intense. And we definitely will defend our market share. On the other hand, we also encourage more and more customer to move to the high-end segment. Regarding -- streamline our marketing expenses, it is dynamic and is [spreadable], it depends on the results and also see that's our market share status.

Okay, got it. Thank you.

Thank you. (Operator Instructions). Our next question is coming from Jack Hsu, SinoPac Securities. Go ahead please.

Okay, thank you. I just have one question. Thank you. My question is will we have any number about our 4G subscriber in the 2017? Thank you.

By the end of 2017, the number of 4G subscribers will reach 8.4 million.

Is that 8.4 million?

Yes.

Thank you.

Thank you. I will turn it back over to President Sheih. Go ahead, please.

Thank you for joining the call.

Thank you, President Sheih. 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. Goodbye.