Chunghwa Telecom Co Ltd (CHT) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's Third Quarter 2017 Operating Results. During the presentation, all lines will be on listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question-and-answer session.

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 third quarter 2017 results conference call. Joining on the call today are Mr. Sheih, our President and Mr. Kuo, our Chief Financial officer, previously our CIO.

During today's call, management will begin by providing an overview of our business during the quarter, followed by a discussion of operational and financial highlights. And then we will move on to the QA session.

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 go ahead.

Thank you, Fu-Fu, and hello, everyone. Welcome to our third quarter '17 earnings conference call. For the third quarter of 2017, we continued to retain our market-leading position in mobile subscribers and in mobile revenue. And we are pleased to achieve slightly higher mobile revenue share.

We also managed to have the lowest churn rate despite certain challenges during this quarter. To enhance our mobile margin and customer profile, we continue to allocate resources to guide mobile subscription towards high-end plans in the third quarter, which proved to be successful.

Looking ahead, we plan to further strengthen our subsidy efficiency by allocating more resources to high-end bundled plans, which will then reinforce our user stickiness and drive user acquisition for high-end plans. In addition, we have further solidified our broadband customer base and we have achieved positive broadband customer growth in the past 2 consecutive quarters.

Meanwhile, the number of MOD subscribers also grew significantly during this quarter. As part of our ongoing efforts to develop and expand our business, we continue to rationalize our revenue sharing arrangements with the channel providers in the introduced OTT services and 4K content to further improve the user experience.

Going forward, we will also utilize our IDC and CDN advantages to offer upgraded broadband service to attract more high-end users towards high-speed service adoption and to strength our broadband revenue.

Now, I will wake you through each of our business lines. On slide 5, I would like to update you on our Mobile Business. As of September 2017, our total number of 4G subscribers has exceeded 7.8 million. Mobile Internet adopters continue to grow reaching 81.7% of total postpaid subscription, which sequentially drove up our mobile Internet revenue by 6% year-over-year.

Moreover since we've strengthened the subsidies and incentives to certain high-end handset models in the third quarter. Our uses find our plan TWD 1399 and above increased significantly. It proves that our subsidy efficiency has improved when considering the cost of handset subsidies versus the revenues brought it during the customer's entire contract period. We will continue this effective strategy to enhance our mobile segment margins in the future.

Slide 6, shows the performance of our broadband business. For the third quarter of '17, broadband subscriber loss was mitigated and we now see steady growth in the number of subscribers. Although the number of our broadband subscribers slightly declined year-over-year, we're encouraged to see a quarter-over-quarter increase.

In addition, we were pleased to see continued migration of our broadband subscribers to higher speed fiber services. The number of users signed up for connecting speeds of 100-megabit or higher grew by 10.3% year-over-year to 1.26 million in the third quarter. We are pleased with the results we are seeing so far.

Going forward, we will continue to strengthen our products by rolling out broadband Wi-Fi MOD/OTT and even information security bundled services to increase revenue.

We believe we are taking the right steps to continue to upsell our broadband services and encourage customers to migrate to higher-speed services. Meanwhile, we will further improve both user experience and user stickiness on our network.

Moving on to Slide 7, we are glad to report that our IPTV subscriber net add in third quarter increased significantly, reaching 1.45 million as of the end of September and the trend continues. Our IPTV revenue have maintained its growth trajectory and I think the third quarter last year with 4.5% year-over-year increase in the third quarter of '17 primarily driven by the healthy 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 boost our IPTV business and enhances user experiences, we started to carry OTT services including Fox+ and KKTV on the platform this quarter. We also broadcasted the popular Taipei 2017 Summer Universiade in 4K this August.

With the increase of household subscriptions, we continue to enrich content and up-sell our services. Going forward, the quality and diversification of our IPTV content offerings will continue to be a priority in order to further strengthen user acquisitions and the user stickiness. We also offer up-sell packages and channels to increase customers' contribution to our total revenue.

Please turn to Slide 8, for an update on our ICT Initiatives. By utilizing our cloud, big data, information security, and AI capabilities, we rolled out an IoT platform last year, which develops green energy, smart building, video surveillance and intelligence transportation solutions for our enterprises customers to facilitate their business developments. We are proud to see the role that our IoT platform is playing in transforming major cities in Taiwan into Smart Cities.

We believe the platform has showcased great potential in attracting enterprise customers and facilitating the further adoption of our IoT applications. We also leverage our own data and add resources to develop various Smart applicators, which will enable us to monetize our telecom data and accelerate the development of IoT related applications.

Going forward, as we continue to sharpen our competitive edges in network infrastructure, IDC and CDN, we remain committed to offering reliable, customized and complete ICT solutions, developing new opportunities in our innovative business lines, and establishing a comprehensive ecosystem in this sector.

Now, I will like to hand the call, over to Mr. Kuo our CFO.

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 third quarter of 2017, total revenues decreased by 3.6% and the operating costs and the expenses decreased by 6.4% year-over-year. Our income from operations increased by 8% and our net income increased by 6% year-over-year. In addition, our EBITDA margin increased to 35.84% in the third quarter from 33.47% in the same period of 2016.

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

Moving on to Slide 12. Our operating costs and expenses decreased by TWD 3.03 billion or 6.4% year-over-year in the third quarter due to the lower cost of goods sold, interconnection costs and ICT project cost.

On Slide 13, cash flow from operating activities for the third quarter of 2017 increased by TWD 5.94 billion or 44.4% compared to the same period of 2016, mainly due to the lower receivables. As of September 30, 2017, we had TWD 25.48 billion of cash and cash equivalents.

Slide 14 shows our operating results as compared to our guidance. In the third quarter of 2017, our revenues were slightly lower than our expectations. However our operating income, net income and EPS all outperformed our third quarter guidance. With the injection of ICT project revenue in the fourth quarter, we still expect the 2017 consolidated revenue must be slightly lower than the guidance.

Lastly Slide 15, we are budgeting CapEx of TWD 30.3 billion for 2017 and the actual spending is expected to be close to the budget. We will focus on investments in our core businesses, including FTTx, 4G, IDC and Service Platform, among others under our precision construction principle.

Thank you for your time. Now, we would like to open the line for questions.

(Operator Instructions) Our first question is coming from Neale Anderson, HSBC.

I had 2 questions please. The first one was on IPTV. I was interested in your comments describing the current state of the business, and I was wondering if is there any pending regulatory change that might help your IPTV business growth and if you expect any change in regulation soon? The second question is on the ICT side. I think you mentioned earlier, you've been looking at developing some new projects in Southeast Asia, I wondered if it was possible to get an update on those?

Regarding the regulation to help to promoting our IPTV services, I think you know, currently of course, we are still looking at the digital convergence regulation, but unfortunately right now you know this drafting is still pending in NCC of regulators. So currently, we don't really have too much information about that. But despite of the regulation pending, I think for Chunghwa, we see try to get around. So from our numbers, you can see our performance in the third quarter is quite good and quarter-over-quarter, we see the jump of our customer increase and we see this change still continue.

Regarding your question 2, we have continued exploring opportunities in Southeast Asia for years, which is important to our long-term development and that's been one of our existing overseas expansion strategies. We would like to expand our corporation with our partners such as local governments and Taiwanese companies in Southeast Asia to further explore opportunities in the area. We have established subsidiaries in Thailand and expect to offer data communications services in the beginning. We also will focus on Indonesia and the Malaysia markets as well. And in mid-to-long term, we expect to offer our ICT IoT and digital convergence service to these markets and we would like to copy our successful Smart City cases, we did recently in the major cities in Taiwan in these countries.

Thank you. The next question is coming from Wang Jinjin, UBS. Go ahead please.

I have 3 questions. We're very pleased to see that your fixed line broadband side, we'll see -- quite a signs of stabilization and also increase in subscribers as well as stabilization in terms of ARPU. And on the mobile side, seems like the both mobile subscriber and ARPU are still declining, so what's management view regarding the competitive landscape, whether we're going to see any turning points, which could help subscriber and ARPU stop declining? That's #1 question Number 2 is...

Excuse me, Jinjin, please place the microphone closer, because I'm not really hearing you, sorry. Could you repeat the first question?

Yes, is this better now?

Yes, it's better.

Okay, sure. Sorry about that. Basically, my first question is regarding mobile subscriber and ARPU decline, what's management view regarding the competitive landscape in term of competition, whether we're going to see any signs or turning points in fourth quarter or next year that we could see a stabilization of mobile ARPU and the subscriber? My #2 question is regarding, seems like -- it's very encouraging in the third quarter you reported a positive earnings growth and also stable EBITDA margin. I noticed that's mainly because you have a more decline in operational costs. What has been driving that? I believe it's more from the cut in terms of subsidy or anything -- also cut in commission. Whether we expected these positive earnings growth to continue, they're trying to continue in the fourth quarter as well as next year? Third question is regarding CapEx, I noticed your CapEx run rate in the first 3 quarters is only 55% compared with your full-year guidance. So, I'm not sure whether you're going to achieve your full-year guidance or we should cut down your CapEx budget in our model?

Okay, for question #2, as mentioned earlier, the lower cost and the expenses was due to the lower cost of goods sold and ICT project cost. And the cost of goods sold decreased by [the burden] of quantity. And #3 is CapEx, the actual spending is expected to be close to the budget for the full year and that we are very close to the full-year guidance.

Okay, Jinjin, about the question #1, you asked about the subscribers, is there any turning point for Chunghwa to come back to -- in terms of the mobile subscriber number. I think currently no, we're still, I think currently no, we still -- I think overall market still suffer SIM consolidation, this trends will continue. Of course, understand that our churn rate is still relatively low among the major operators, but the acquisition number is bit lower, so that's -- so we are losing small market share in terms of subscriber. But you see that overall, the revenue share we are -- actually had some increase. The main reason, the service revenue in terms of service revenue, I think our performance is actually better than our peers -- that of our peers. Talking about how -- when we will be the turning point, I think currently, we trying to improve mobile customers in ARPU, so you can see for this year, quarter-over-quarter you see very small increase of our ARPU -- blended ARPU and we will expect in fourth quarter this year, our mobile ARPU will come back to the similar level we had in fourth quarter last year. So I think we are focused more on this part. But [the question] on subscriber number, we will see what we can do going forward.

Okay I had 1 point number for question # 2, we will continue focusing more on strengthening subsidy effectively by allocating more resources to the high-end bundled plan. And at the same time, we have decreased the subsidies and removed credits for the mid to low end plans gradually.

So, do we expect that these earnings positive growth -- positive growth in earnings will continue in fourth quarter and as well as next year or it's probably a one quarter thing?

About earnings, I think revenue side, in fourth quarter we mentioned about more ICT project in revenue injecting, so that you see the overall fourth quarter revenues will be quite healthy. But for the bottom line since -- you understand that, ICT project, although we have been more selective and more risk control since fourth quarter last year, but the margin of ICT business is still much lower compared with the traditional telecom services, okay. So the increase of the percentage of ICT revenue in fourth quarter will definitely have some impact to our fourth quarter bottom line. But for the full year, we're seeing a forecast, I think the -- we have forecasted overall EBITDA margin for this year, we still expect the number will be a little better for the whole year. I believe we forecasted like a 30% -- 33%, 34%, hopefully it will be better than that for the whole year's performance.

The next question is coming from Jack Xu, SinoPac Securities.

I have 2 questions. The first question is, the company has informed, will lower the revenue forecast start of 2017. But could we know, will we lower also our CapEx forecast right now, so we will keep our CapEx forecast, this is the first question. And my second question is about the 4G bid. What are the strategies for the 4G spectrum, the bidding, the coming off the bidding, what are the strategies or will we see this bidding will need to spend amount the expenditure in comparison to the Phase I and the Phase II?

For question #1, we expect the 2017 consolidated revenue might be slow and slightly lower than the guidance, but we expect the net income and the EPS might be slightly higher than our full year guidance.

Regarding question 2 on the spectrum bidding, the NCC announced the auction for price of TWD 29.4 billion, which is higher than previous round for mega per year basis. However, the spectrum to be released is for capacity enhancement, we expect the premier to [flow] price, won't be too high, we will assess and then make reasonable decision according to the business prospect in this regard. And we are neutral on the slot and are studying auction strategies for different scenarios to optimize our long-term business development.

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

Firstly on the revenue side mobile, I know you mentioned that for the fourth quarter you're looking at improvement in ARPU to be similar level as what you witnessed in 4Q '16. So is it more a function of popularity of iPhone 8 -- sorry, the launch of new iPhones or is it just fundamentally you're seeing on the ground pricing is improving, customer are moving to higher tier plans. It seems to me there is not much change in the pricing side, customer moving up the ladder in terms of higher data tiers given that you have (inaudible) in even in the lowering segment? That's one. Number 2, on the cost side, I remember last quarter -- last year this quarter you had increased your channel commissions. So it is little bit of change in marketing expenses, have you reduced those channel commission cost, is it coming off a little bit? A clarity on that that will be helpful? Thirdly, if you can provide clarity on voice interconnect. So I believe there has been reduction in interconnect charges, how should we look at this impact, does the revenue guidance cut is related to that voice interconnect cut? And lastly, if you can provide little bit of color how iPhone 8 is doing in the -- new iPhone is doing in the market?

Let me start with the #2 okay, about the cost last year. Yes last year, because you know in August we had this 699 Plan, which along with some channel commission increase and that's already come back to the normal starting from first quarter this year. So I would say back in third quarter this year, the commission level is much less compare with that of the past year. And of course -- that's for the # 2. For # 3, you mentioned about the interconnection; interconnection charge are actually going to decrease from November this year, another 3 or 4 years kind of reduction similar to what we had last round and that's of course -- we had the -- for revenue side, we had some impact but also in the expense side, we also had some gains. So net-net, I believe there is no really too much impact to our bottom line in terms of interconnection fee reduction, okay. About iPhone 8 performance, we currently know, we started to have i8 sales from September 22. In the first phase I think i8, i8 Plus, now you understand that this year we have 3 models. Apple actually has 3 models. Last year -- previous year, there were only 2 models. So from our understanding, we have less handset sales for iPhone 8 this year versus last year -- that of last year. But from our survey we understand that the i-10 is very popular, but of course -- everybody understanding availability of i-10 is also one of the factor for the future quarter's handset sales. So we'll see how Apple is going to supply this pipeline. For #1, you see this -- because you know the, mobile -- although you know the popularity of new iPhone of course we see more subscription, high-end subscriber coming this quarter. So, this will last for the next 24 months or 30 months we'll benefit with this. However it's just part of our -- portion of our overall customer base. So it really don't have too much impact for the ARPU in the very first phase. So we still need sometimes to see what happen, but we understand that changing the subscription profile, this is our goal and it has proved to be successful. We see more high-end subscriber -- subscription coming since second quarter this year and this trend continue. So I think probably next year we can have more solid performance we can report to you.

Our next question is coming from Jack Xu, SinoPac Security.

I have one more question. There was a news about your company because the company will -- adding the service, the 3.54% in the 2018, could we know how this will impact our EBITDA or our cost or our expense.

We will factor it into the 2018 guidance and we'll release it in the next conference call. Thank you.

So will the EBITDA margin will keep same with the 2017 or maybe get little pressure, will this -- lower than the 2017?

We will try to keep the EBITDA margin rate at the 2017's level.

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

Okay. Thank you for your participation.

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.