Chunghwa Telecom Co Ltd (CHT) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's second quarter 2017 operating results. (Operator Instructions)

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 2017 results conference call. Joining me on the call today are Mr. Sheih, our President; and [Mr. Kuo], our Chief Investment officer.

During today's call, management will begin by first discussing the overview of our business during the quarter, followed by operational and the financial highlights. Then we will move on to the Q&A section.

Before I turn the call to President Sheih, I would like to introduce [Mr. Harrison Kuo] who has been in charge of different fields at Chunghwa Telecom, including corporate planning, accounting and investment since 2005. Mr. Kuo also has extensive experience reporting to company's President and CFO by supervising its financial activities.

Now I would like to hand the call over to President Sheih. And please note our safe harbor statement on Slide 2. President Sheih, please.

Thank you, Fu-Fu, and hello everyone. Welcome to our second quarter 2017 earnings conference call.

For the second quarter of 2017, we continued to retain our market-leading position in terms of the number of mobile subscribers and in mobile revenue. We also managed to have the lowest churn rate despite certain challenges. We are pleased to say that we have successfully mitigated the mobile subscriber loss. And we allocated resources to guide mobile subscription to our high-end plans. Going forward, we will continue to strengthen our subsidy efficiency by allocating more resources to high end bundled plans and then to reinforce our user stickiness and acquiring increasing number of new high-end customers.

On the broadband sid0e we are noticing that competition from cable operators has decelerated a bit. Although the number of our broadband subscribers slightly declined year-over-year, we are encouraged to experience a small quarter-over-quarter increase in the second quarter of 2017. Going forward, we will continue to leverage our marketing analytics for precision marketing to further strengthen our high-speed service adoption. Meanwhile, the [hovering] 4K services will enable our customers to enjoy quality content by our MOD/IPTV platform. To further develop our MOD service, we will continue our revenue-sharing arrangement with channel providers and OEM to enrich our MOD content, by carrying OTT services in the near future.

Looking ahead, we will continue to leverage our expertise in cutting-edge communications technology, as well as our marketing resources to strengthen our user acquisition, enhance user stickiness, diversify our product offerings and solidify our market-leading position in the market.

Now, I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business. The number of our 4G subscribers and the mobile Internet adopters continued to grow in the second quarter of 2017, which consequently drove our mobile Internet revenue to increase by 5.4% year- over- year. As many of you know, we have been adjusting our strategy to allocating more resources to the high end bundled plans this year. In the second quarter, we have seen some encouraging results. First, as a percentage of total new subscribers, our high-end plan subscribers increased year-over-year in the past quarter. Second, our subsidy efficiency has improved when considering the cost of handset subsidies versus the revenues brought in during a customer's whole contract period. This is a strong testament of our effective strategy and the solid execution capability of our team. We will continue this effort as we move forward with the goal of increasing the number of our new high-end customers and ARPU.

Slide 6 shows the performance of our broadband business. Although the number of our broadband subscribers slightly declined year-over-year, we are encouraged to see a small quarter-over-quarter increase in the second quarter of 2017. The mitigation of our subscriber loss demonstrated the effectiveness of our overall marketing initiatives, as we leverage our big data analytic capabilities for precision marketing and our flexible pricing for certain communities or areas.

In addition, during the second quarter, we continued to see a migration of our broadband subscribers to higher-speed fiber services. The number of users signed up for connecting speeds of 100-megabit a second or higher, grew by 10% year-over-year to 1.23 million in the second quarter. We are pleased with the results and we believe we're taking the right steps to continue to promote and up-sell our broadband services and encouraging customers to migrate to higher-speed services. Meanwhile, we will further improve the user experience and the user stickiness on our network.

Moving on to Slide 7. Our IPTV revenue maintained its growth trajectory since the third quarter last year with an 8% year-over-year increase in the second quarter 2017, primarily driven by the growth of IPTV and SVOD subscribers. We are pleased to see that our IPTV customers continue to sign up for additional SVOD programs during the quarter. To further bolster the development of our IPTV business, in July we renewed our contract with channel providers for our IPTV services. We believe the revenue-sharing arrangement in the new contract will help improve the bottom line of our IP TV services.

Moreover on the content side, we aim to enrich our IPTV content by inviting OTT service providers to offer their services over our platform in the near future. Going forward, the quality and diversification of our IPTV content offerings will continue to be our priority. We will also offer up-sell packages and the channels will increase customer contribution to our total revenues.

Pleased to turn to Slide 8 for an update on our ICT initiatives. We are delighted to see continued solid growth in our ICT business in the second quarter of 2017. By leveraging our cloud, big data, and information security capabilities, we rolled out the IoT platform during the fourth quarter of 2016, which [develops] green energy, smart building, video surveillance and intelligence transportation solutions for enterprises to facilitate their business development. Enterprises from different industries can also develop their own solutions over the platform using our network and cloud resources. Recently we have leveraged this platform to help turn major cities in Taiwan into smart cities. We are pleased by the initial results and we believe the platform has showcased great potential to attract enterprise customers and to facilitate the further adoption of our IoT applications.

Going forward, we remain committed to leveraging our competitive advantages in network infrastructure, IDC, and CDN to offer reliable, customized, and a comprehensive ICT solution to our enterprise customers.

Now I would like to hand over the call to [Mr. Kuo] for financial results.

Thank you President Sheih. Now I will go through our financial results in detail.

Beginning on Slide 10. Slide 10 provides you with highlights from our income statement. For the second quarter of 2017, total revenues decreased by 0.9% and the operating costs and the expenses remained flat year-over-year. Our income from operations decreased by 4.3%, and our net income decreased by 5.6% year-over-year. In addition, our EBITDA margin decreased to 36.54% in the second quarter from 37.35% in the same period of 2016.

Please refer to Slide 11 for revenue breakdown by business segments. The decline in total revenue for the second quarter of 2017 was driven by the decrease in voice revenue and the ICT project revenue, which was partially offset by the increase in mobile value-added services revenue and the smart device sales.

Moving on to Slide 12. Our operating costs and expenses remained flat year-over- year in the second quarter. The higher cost of goods sold and the marketing expenses offset the lower interconnection and the ICT project costs.

On Slide 13. Cash flow from operating activities for the second quarter of 2017 increased by NT$ 2.53 billion or 18. 9% compared to the same period of 2016, mainly due to the lower income tax paid. As of June 30, 2017, we had NT$ 48.3 4 billion of cash and the cash equivalents.

Slide 14 shows our operating results as compared to our guidance. In the second quarter of 2017, our revenues were slightly lower than our expectations. However, our operating income, net income and the EPS all outperformed our second quarter guidance.

Lastly, Slide 15. We are budgeting CapEx of NT$ 30.3 billion for 2017. We will focus our investments in our core business, including FTTx, 4G service platforms, and IDC among others under our precision construction principle.

Thank you for your time. We will now like to open the line for questions.

(Operator Instructions) Our first question is coming from Peter Milliken, Deutsche Bank. Our next question is coming from Jack Hsu, SinoPac Security.

Congratulations for the company for achieving the guidance. I have two questions. My first question is, we had just mentioned we will have the new OTT service. Whether the new OTT services are highly related with [TBPS] will join the MOD, is this related with the TBPS of something else? And my second question is, could you inform our 4G subscriber number at the end of the first half of 2017, and will we change our target of our 4G subscribers in the end of the 2017? Thank you.

For the OTT business, we are inviting local channels to join our channel providers, and they would put their comment on our MOD platform. And about the target subscribers for the end of 2017, the 4G subscribers will reach 8.4 million, as we said in last time.

And by the end of first half, the 4G subscriber number is roughly about 7.5 million.

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

In terms of revenues, they've been weak in the first half of the year. In the second quarter service revenue is down 3% year-on-year, domestic fixed line revenue is down 8%. Is there a way for you to be able to turn that positive that you can see, or do you just need to keep on cutting costs to try to hold earnings at a relatively flat level?

I think the first half is compared with (inaudible) our revenue is a little bit slightly behind our guidance. But we believe in the second half we expect the ICT business will have some pickup. So hopefully we can meet our guidance at end of this year.

Right, okay. And you've spent a lot of money on the data center that you turned on fairly recently. Can you tell us the utilization of that or net potential growth profile of how that will drive the business?

Basically we don't really share the utilization rate of our data center, but I can inform you that we see more customer in -- coming. It's really -- meet our expectation.

Okay. And one final question from me. You turned on the 2600 in March of last year. Does that mean that there was a full 3 months of costs of the 2600 network in the second quarter last year? Thank you.

Yes. I'm sorry, really. Peter, do you mean the CapEx spending for 2600 or what's your question? Could you repeat that?

Yes. Did the second quarter of last year have a full quarter of 2600 megahertz OpEx, or was it only a partial contribution to costs last year?

Sorry we didn't really separate out those maintenance fee for [2600].

Right. Okay. I was just trying to understand whether from the third quarter we would have sort of a better period of profitability, because we didn't cycle through the 2600 having been on for full year. Is there anything you can say about that?

Peter, really -- basically we are an integrated service provider, so mobile is part of our business. But we already disclosed the percentage or the absolute amount we expect to spend for mobile, so all the maintenance and the CapEx spending all included in those number already, the offer, okay. So I'm sorry, I don't really have any further disclosure on that.

Our next question is coming from [Ronnie], UBS.

I have 4 questions, which (inaudible) know them more. One is about the 4G subscriber. We are affected by the same kind of consolidation for about a year or more and when do we expect it will be the turning point? And my second question is, I noticed the handset sales, which increased like 14%, which is a lot. Would you mind to remind us why it's increased so much? Did we raise our handset subsidy? And my third question is about the spectrum auction. Any information about the timing and how do we expect it will be? And my last question is about the special [lowering] plan -- the special plan. Are we expected to terminate it soon or not? That's my question. Thank you.

Okay. About the 4G subscribers, we think same consolidation will continue for a while and there is no sign to see at this point of time. It's hard to predict when the market -- the same number will revert to the growth. However, we expect there is opportunity when IoT service is widely offered in the (inaudible).

Thank you for your question #2. As mentioned in the presentation earlier, we will focus more on strengthening subsidy's efficiency by allocating more resources to the high end bundled plans. But at the same time we have decreased the subsidy and removed credit for the mid- to low end plans gradually. So the handset cost is about 14%. The spectrum auction time is about October.

And do we have any color on that?

In October the spectrum to be released this time is total about 150 megahertz, 1800 megahertz and 2100 megahertz. And the regulator already gave the floor pricing of NT$ 29.4 billion, which is higher than previous rounds on (inaudible). And [Ronnie] your fourth question is?

Last question is about the special plan, the NT$ 699.

Oh, NT$ 699? I think we've already mentioned that NT$ 699 we kind of -- it still are there in the market, but it's not really -- not attracting more, because we decreased the subsidy level and we also decreased the minutes we offer. So we try to move people to the high tier, okay? I think that's our plan and it proved to be -- it really worked out in the second quarter. So that's why we mentioned about -- the overall subscription profile we see this time, we see the -- we have more high-end subscribers coming in the second quarter.

And by the way, one follow-up question. We do not expect a further special plan, right? Do we expect the -- us or our competitor will raise more aggressive plan?

The standard answer, we see up to the market, look at the market sentiment, but of course you understand that we would like to move customers to higher-tier plans. Yes.

Our next question is coming from Varun Ahuja, Credit Suisse.

I've got 3 questions. First if I look at your mobile 4G subscriber base, I think the penetration rate is more than 60% now. So how does the management think about monetizing the 4G investment that has been made? Clearly, if I look at your performance, the EBITDA has been declining. So -- and obviously, the consolidated performance has also been weak. So how does the management think about now the investments that have been made on 4G? How do you -- for the next 2 to 3 years plan to monetize and show some returns of the same? Secondly, on the CapEx part it seems -- do you expect very large amount of CapEx in second half? It seems to be it's running the same story as in last year, where, again, you have to cut the guidance. So just wanted to hear on CapEx, is it any project-specific CapEx that we're looking in second half that will lead to achieving the guidance that you've given? Secondly -- thirdly, sorry, second half, do you think -- because last year second half EBITDA was declining because you raised your channel commissions, do you think in the second half the performance should be much better, because you've an easier comp when compared to last year? Thank you.

About how to monetize 4G investment discussion, as we mentioned in the presentation earlier that we will focus on strengthening our subsidy efficiency by allocating more resource to the high end bundle plans. But at the time we have decreased the subsidies and we removed credit for the mid- to low plans gradually. And considering the handset subsidy cost and revenues to be brought in during customers whole contract period, we have seen the subsidy efficiency improve and our strategy of focusing on promoting high-end plans.

The second question is about the CapEx. The increase of this CapEx budget this year is mainly attributed to the 1 gigabit per second coverage enhancement. In addition, we will allocate more resources within total CapEx budget to enhance mobile and mobile network and improve our service quality. Therefore, total CapEx this year is expected to be closer to the guidance. And we will review our CapEx spending regularly to ensure the optimum CapEx investment, and also strengthen our network quality to maintain our leadership in the market at the same time.

We believe the total volume of second half in mobile performance, we believe the fourth quarter last year is kind of a bottom. We will like to -- you see the first quarter, second quarter, we have small improvement, but not enough. But if you look at our ARPU, ARPU level actually had some small increase quarter-over-quarter. We do see -- do expect in the third quarter Y-oY numbers to kind of decline, but in fourth quarter we can get back to -- the fourth quarter this year, I think our ARPU level can get back to the fourth quarter this year -- last year's kind of level. So it's kind of bottom up, this is what we expect. But first, you know in next year we still have to factor the market competition and the decline of the voice usage. We expect the whole situation probably kind of flat for -- versus next year the ARPU level kind of flat versus this year.

Just a follow-up. How much of your improved performance in fourth quarter relative to the second half is also based on -- dependent upon iPhone's success, new iPhone model success? Is there any factor built into that?

Not big number. We still forecast this year's ARPU should be still lower than what we had last year. So it's not a big jump, but if you see the quarter- over- quarter's number, it's trended up a little bit, feel encouraged.

(Operator Instructions) The next question is coming from Jack Hsu, SinoPac Security.

I have another two questions. One question is how will we improve our 4G -- the subscriber experience? Will we add more best -- I mean, [best in] hardware or will we use more technique, like the CA, Carrier Aggregation? How will we improve the user experience part of 4G? And this is the first question? And the second question is, could you inform us more about the ICT business, what is the most important thing -- or most -- project for ICT in second half of 2017? Thank you.

This year we will allocate more resource within total CapEx budget to enhance our mobile network and improve our service quality.

As for the ICT business, okay, since -- of course, we have several projects going on, especially like the smart city, we've been working on in Taiwan's major cities. This is a continuous effort and of course, fourth quarter last year, we launched IoT platform, it's a open platform. We are inviting the different industries, they can actually put their services on top of our platform. So we can -- basically we would like to focus on the -- to enhance the overall ecosystem -- IoT ecosystem in Taiwan. So we would like to lead this kind of this -- latest industry to see if anything we can be helpful. So I think -- currently I think the several industries is more important at the moment, like FinTech, like the small manufacturing and like the (inaudible) et cetera. This is what we are working on right now.

(Operator Instructions) Our next question is coming from [Andrea].

I want to ask a little bit about MOD, our revenue sharing with the channel operators. Can you give us some color on how much do we expect this mechanism to improve our bottom line, and when can we see the bottom line improve, any color would be greatly appreciated? Thank you.

I think -- of course, the new mechanism we mentioned about further price [increment], can you talk a little bit about here, right now?

We have accumulated more than 1.3 million subscribers. Therefore, this year we communicated with our channel providers for new revenue-sharing arrangement, which is based on the audience ratings and (inaudible) to a win-to-win situation.

As for the -- you mentioned about what can you inject to the bottom line and when we can see the better performance. I think currently we're in the process. I think this new arrangement should lead us to a win-win situation and we believe right now the audience has been educated to be more active, can subscribe in their own channels, not only the aggregate package plan. So I think the performance we need to watch and to monitor to see how it progresses, but we believe it leads to the positive direction for sure.

If there are no further questions, I will turn it back over to President Sheih. Go ahead please.

Okay. Thank you for all your participation. See you next time.

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.