Chunghwa Telecom Management Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Chunghwa Telecom Co., Ltd. (CHT)
by: SA Transcripts

Chunghwa Telecom Co., Ltd. (NYSE:CHT)

Q1 2014 Earnings Conference Call

April 30, 2014 4:00 AM ET

Executives

Fu-fu Shen – Director, IR

Rick Tsai – Chairman

Shih Mu-Piao – President

Analysts

Chate Benchavitvilai – Credit Suisse Singapore

Operator

Good afternoon, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company’s First Quarter 2014 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.

And now, I would like to turn it over to Fu-fu Shen, the Director of Investor Relations. Ms. Shen, please go ahead.

Fu-fu Shen

Thank you. This is Fu-fu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our first quarter 2014 earnings results conference call. Joining me on the call today are, Dr. Tsai, Chairman; and Mr. Shih, President. During today’s call, management will first discuss business, operational and financial highlights. Then we will move onto the Q&A session.

On Slide #2, please note our Safe Harbor statements. Now, I would like to turn the call over to Chairman, Tsai.

Rick Tsai

Thank you, Fu-fu. Hello, everyone. Thank you again for joining our first quarter earnings call. I’d like to make a few remarks before the formal presentation.

Since I joined the Chunghwa Telecom earlier this year, myself and my management team has been working diligently to revamp our corporate strategy in order to create an efficient fast moving and full service telecommunications company. So I want to start by first discussing our business goals and some actions we are taking for 2014.

The overall goal we are putting in place is to transform our company into a full-service, digital convergence service provider. We will continue to build out our high-speed infrastructure in order to provide seamless mobile and fixed broadband services.

We plan to offer 300 megabits per second to 1 gigabit per second and LTE mobile high-speed broadband access services, which will help facilitate our innovative digital convergence value-added service offerings that targets the individual customers, household and enterprise markets. In this context, we will continue strengthening our MOD services to ensure a gateway into our customers’ homes.

So a key goal for this year is focus on business development, with an emphasis on the 4G enterprise revenue and fiber segments. First, as many of you know, we plan to rollout 4G services in July of this year. And by the way, this afternoon we were just awarded the license from NCC for the 4G service. Our aim is to acquire at least 40% of the 4G market share by the end of 2014.

Second, we want to further increase our enterprise revenue share by offering a total solution package to small and medium enterprises which includes ICT solutions and cloud services. And finally, we will be offering fiber convergence plan that combines broadband and MOD packages, so that we can stimulate both fiber migration and MOD subscription growth.

Moving on, our next goal is to reallocate resources, so that we can enhance our operating and financial efficiency. In order to achieve this goal, we plan on investing capitals more efficiently in our build outs and controlling operating expenses while allowing for a moderate expansion in the marketing budget.

Our final goal is to leverage our existing resources to grow our business. To this end, we will focus on further monetizing our fiber networks by increasing its capacity usage, which in turn will help to control CapEx. We will also leverage our R&D capability to develop new and innovative products and services so that we can continue to drive growth and deliver improved return for our shareholders.

Now I’d like to move to our presentation. Please move to Slide #3. Regarding our first quarter operating results, we continue to outperform our competitors in attracting mobile internet subscribers. At the end of the March 2014, our mobile internet subscriber base has reached 4.3 million, representing 35.6% market share. We will continue to support this growth momentum and market leadership.

And because of broadband household penetration rate is already high, we continue to focus on customer retention and migrating users to a higher speed services. We actively promoted our convergence plans which combine fiber and MOD services, and believe this will help strengthen our competitiveness and solidify our customer base.

Please go to Slide 4. About the cash return. The Board of Directors announced a cash distribution from distributable earnings and capital surplus paid to the shareholders of a total of NT$35.1 billion or NT$4.5251 per share, with NT$2.3881 from the earnings for year 2013 and NT$2.137 from capital surplus.

The timetable will be announced following the shareholders’ approval of this proposal at the Annual General Meeting scheduled on June 24 of this year. As you probably know due to the adoption of Taiwan’s IFRS, the initial amount of earnings in 2013 was decreased. To compensate for this decrease, the Board Directors allocated cash distribution from the capital surplus.

From here on, President Shih would like to read you through our business overview. Thank you.

Shih Mu-Piao

Thank you, Chairman Tsai. Slide 6 provides an update on our mobile business. During the first quarter, mobile data revenue grew by 23.4% year-over-year, mainly driven by the 32.6% increase of the mobile internet revenue. We will continue our strategies to solidify high-tier smartphone users, introduce the mid-to-low-tier smartphones to expand mobile internet subscriber base. Accelerate the migration of the 2G subscriber to 3G networks and to speed up the 4G network deployment to enjoy the first mover advantage.

For LTE service launch, there are more than 30 high-to-low tier smartphone in the picks [ph] available on 1800 megahertz band currently, which should strengthen our competitiveness in the 4G business.

Moving onto Slide 7, our promotional initiative targeting mid-to-low tier smartphone users continue to boost our smartphone penetration to 56% at the end of the first quarter of 2014.

ARPU for the first quarter decreased Q-o-Q mainly due to the continual promotional plan. During the quarter the plan was successful with regard to attracting new subscribers, but at the same time, cost us some temporary downward pressure on ARPU. We expect the ARPU to recover in the third quarter of this year.

Slide 8 shows the results for our broadband business. During the first quarter, we continue to see a steady migration of the subscriber to higher speeds of fiber services. We witnessed over 23.2% year-over-year growth in subscriber opting for connection speeds of 60 megabit per second and higher, reaching about 1.19 million by the end of the March 2014.

We will continue to encourage our subscriber to migrate to higher speeds of fiber offerings. As mentioned previously, the fiber convergence plan combining the broadband with MOD family packages stimulated both fiber migration and MOD subscription. We are also targeting the SMEs and the machine-to-machine applications to stimulate further broadband usage.

Moving onto Slide 9. Our IPTV revenue in the first quarter 2014 increased by 19.9% year-over-year. Moreover, the household TV usage rate continued to increase over the past quarters, demonstrating our success in boosting the customer stickiness on our platform.

In addition to the fiber convergence plan which boosts IPTV subscriptions, we are targeting different customer groups to offer demassified Subscription and VOD packages, and providing TV Everywhere services over the multi-screen for better customers viewing experience.

Please see Slide 10 for an update on our ICT and Cloud initiatives. In the first quarter of 2014, our Cloud business revenues doubled year-over-year. We continue wining ICT project including the host computer leasing project for Ministry of Labor, the taxation information system maintenance project and the E-Invoice system project for Ministry of Finance.

We will continue to leverage our core telecom infrastructure and the services to expand our ICT and the Cloud business.

Slide 12 provides an update on the regulatory front. Similar to the mobile broadband spectrum auction last year, the government is expected to open the 2600 megahertz spectrum for bidding in 2015. We plan to actively participate in the bidding process in order to remain competitive.

Moving onto the financials. Now, I will review our financial result in detail beginning on the Slide 14.

On Slide 14 are our income statement highlights. For first quarter of 2014, total revenues decreased by 2.8% and the operating cost and the expenses decreased by 4.9% year-over-year. Our income from operation, the net income increased by 5.9% and 10.9% respectively.

In addition, the EBITDA margin increased from 34.02% to 36.81% in the first quarter as compared to the same period in 2013.

Please refer to Slide 15 for an update on our business segment revenue. For the first quarter of 2014, the year-over-year decline in the total revenue was driven by the decrease in fees and the mobile voice revenue, the handset sales and the ICT project revenue, which offset the increase in mobile VAS revenue.

Local and the domestic long distance revenues decreased by 5.5% and 4.0% respectively, mainly due to the mobile and VOIP substitution. Broadband revenue was flat year-over-year. Mobile voice revenue had decreased by 10.3% due to the promotional packages, tariff reduction and the VOIP substitution.

Moving onto Slide 16, you can see that our operating costs and expenses decreased by 4.9% year-over-year, mainly due to the decrease in the costs of the handsets sold resulting from lower handset sales.

As shown on the Slide 17, in the first quarter of 2014, cash flow from the operating activity increased NT$1.17 billion compared to the same period of 2013. Cash and cash equivalents at the end of the period decreased mainly due to the one-time NT$39.1 billion payment of acquiring the mobile broadband license in the first quarter of 2013.

As of March 31, 2014 we had NT$18.99 billion of the cash and cash equivalent. The increase in EBITDA margin was primarily due to the lower handset sales, which have lower EBITDA margin than additional telecom services.

Slide 18 shows our 2014 first quarter result as compared to our guidance for the quarter. Our revenue and costs and the expenses are lower than expected, mainly due to low cost of goods sold, which resulting from the lower handset sales. However, our operating income, the net income and the EBITDA, all exceeded our first quarter guidance. Currently, we expect our full year operating result to remain in line with our earlier guidance.

Lastly, on Slide 19. Our capital expenditure in the first quarter was focused on the 4G network deployment, fixed and the mobile broadband construction and the cloud deployment which include data center construction. We will reveal our CapEx budget and the execution plan on a regular basis and the focus on marketing making the most cost effective spending decision possible.

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

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. (Operator Instructions) Our first question is coming from Chate Ben, Credit Suisse Singapore. Go ahead please.

Chate Benchavitvilai – Credit Suisse Singapore

Hi, good afternoon everyone. Thank you so much for the presentation and opportunity to ask the questions. I have four questions. The first one is regarding the 4G launch upcoming in July. I understand that one of your key advantages is 1800 megahertz spectrum 4G launch, which allows you a better handset ecosystem as you point out. However, your peers also would launch very similar – well during the similar period which is June, July in this year and also the ecosystem around handsets on 700 megahertz has improved significantly like HTC M8 or Galaxy S5 offer on that band. So do you think that advantage is sustainable, and is there anything that you would see as a key differentiation for you or your peers on 4G? Maybe we can go one by one question.

Shih Mu-Piao

We have many LTE-ready handset smartphones like iPhone 5 and 5S and HTC etcetera. So we have expected more than 50 models will be available when we launch in July. So it’s far beyond what the 700 megahertz has. So we think we have the advantage compared to our competitors.

Chate Benchavitvilai – Credit Suisse Singapore

Okay, thank you. And the second question is regarding your IPTV operations. I understand that its part of your call business strategy as well, the MOD services. However, when we see the number of subscribers growth has not really accelerate and your year-end target seems still on the higher side. Would there be any change in strategy around the MOD services throughout the year that would allow you to achieve your subscriber target?

Shih Mu-Piao

Yes, we think the MOD is some kind of the differentiation by different categories, for example the movies, the drama and the sports. So we now focus on the demassified users. We would like to acquire more subscribers that focus on what they want instead of the linear channels. So we will do our best to acquire more subscribers, even the target is quite challenging.

Chate Benchavitvilai – Credit Suisse Singapore

Right. The next question is regarding your cost control initiatives. I understand that that is part of the strategy as well. Where do you see within your cost structure that you can maybe cut or edit any kind of guidance and what amount of costs that you can save over the next few years?

Rick Tsai

I think this is the – we are right now reviewing every aspect of our operating expenses from the maintenance all the way to our administrative expenses. I don’t think we’re now today in a position to give you a forecast in that respect, but I hope maybe in next three months we will have a better forecast from that point of view. Thank you.

Chate Benchavitvilai – Credit Suisse Singapore

All right. Just one last question. It’s a little bit housekeeping. I understand that you have already – you just received operating license for 4G, right? Does it mean that your amortization of spectrum would start right away?

Shih Mu-Piao

Yes, when we launch the 1800 megahertz, we will amortize the license on the 1800 portion. The license lasts for 17 years. So we launch earlier than we amortize in a longer time. So yes, we will amortize the license fee since we launch the services.

Chate Benchavitvilai – Credit Suisse Singapore

In July?

Rick Tsai

Maybe I want to add a comment on the IPTV part. I understand your question. We are, I think also, re-looking at our strategy. We will continue – I think not only continue, we will strengthen our content in the months to come. We’re in the process of doing that.

I think the voice – the video-on-demand part, we will be able to provide a lot better content for our customers and potential customers. We will also increase our promotion so that I think we remain optimistic and we are determined to make this a success for the company.

Chate Benchavitvilai – Credit Suisse Singapore

All right. That is great. Thank you so much.

Operator

We are now in question-and-answer session. (Operator Instructions) If there are no further questions, I would turn it back over to Chairman, Tsai. Go ahead please.

Rick Tsai

Thank you for attending the conference. I wish you good weekend to come. Thank you, and goodbye.

Operator

Thank you, Chairman Tsai. And thank you all 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.

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