Chunghwa Telecom's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Chunghwa Telecom (CHT)

Chunghwa Telecom Co., Ltd (NYSE:CHT)

Q1 2012 Earnings Call

April 30, 2012 5:00 AM ET

Executives

Fu-Fu Shen – Director, IR

Shyue-Ching Lu – Chairman and CEO

Shaio-Tung Chang – President

Shu Yeh – CFO

Analysts

Danny Chu – Nomura

Joseph Quinn – Macquarie

Chate Benchavitvilai – Credit Suisse

May Lin – Yuanta Taipei

Lucy Liu – JP Morgan

Operator

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company’s Q1 2012 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 broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cht.com.tw/ir under the In Focus section.

Now, I would like to turn it over to Fu-Fu Shen, the Director of Investor Relations. Thank you. Ms. Shen, please go ahead.

Fu-Fu Shen

Thank you. This is Fu-Fu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our first quarter 2012 results conference call. Joining me on the call today are Dr. Lu, Chairman and the CEO; Mr. Chang, President; and Dr. Yeh, CFO.

During today’s call, management will first discuss business, operational and the financial highlights then followed by Q&A. Before we continue, please note our Safe Harbor statement on slide two.

Now, I would like to turn the call over to Chairman Lu, please.

Shyue-Ching Lu

Thank you, Fu-Fu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first quarter 2012 earnings results conference call. Before President Chang reports on business development in more detail, I have some comments regarding CHT’s progress. As an integrated service provider, we maintain our market leadership in all of our major business segments.

On the first quarter, mobile value-added service continued to be our growth driver. We are optimistic about the mobile Internet market’s growth, and we offer various kind – marketing packages to meet customers’ demand. In addition to the (inaudible) we also offer discounted mobile Internet service to existing smartphone users in order to maintain and to further penetrate the market.

We’re also very keen on packet markets in maximizing the potential growth of synergies. For example, beginning March this year, we began to offer mobile voice service bundled with data plan for student use. We currently anticipate this campaign to be very positive in computing future revenue growth.

Along this growth mobile data usage, we are making efforts on the improvements of the network quality. Our efforts to enhance our mobile network and to promote Wi-Fi in order to offload the data traffic proved to be effective, this off-loading rate via home Wi-Fi product, along 40 times. Further, the rate for public Wi-Fi has not achieved the same rate as the home Wi-Fi. We are continuing the interface improvement in order to be more user-friendly.

We are pleased to report that our IPTV service are gaining traction due to the higher subscription number. The MOD ARPU increased 15.7% year-over-year in the first quarter. Moreover, the broadcasting service of 2012 Olympic Games will be launched on July 28. 2,000 hours of games are planned to be broadcasted over the 14 high-def released channels. And there will also be 500 hours of quality main program. We are pretty optimistic that this event will drive the growth of MOD subscriptions significantly.

Now, I will hand it over to President Chang for our business overview.

Shaio-Tung Chang

Thank you, Dr. Lu. Moving to slide five. On Mobile business, we’ve maintained the largest subscriber base and the lowest return rate in the market, demonstrating our market positions and the customers’ inclination.

As Mobile value-added service remains to be our growth driver and the smartphone – smart devices are becoming wider-used day by day, we’re continuing the improvement of network quality in order to enhance user experience.

As an integrated service leader, we’ll hold a greater value of the network quality which commands the highest priority in our daily operation. Based on our internal study, mobile data traffic is expected to increase 65% year-over-year in 2011 – in 2012. To cater to such rapid expansion of data usage, we plan to increase the base station, grow the excess capacity by 70% and then the mobile network bandwidth by 73% this year.

In addition, 25% of our base stations were turned on the second carrier. Moreover, more than 50% were turned on the third carrier and will affect 80% of our topic will be carried by these base stations at the year-end. This made us aware of further ensure and enhance our overall network quality.

Moving to slide six, mobile valued-added service continued its momentum with 29.2% growth rate year-over-year for first quarter 2012. This is supplemented by the growth momentum of smartphone usage which boosts mobile Internet subscribers to 1.8 million by the end of first quarter 2012 from 1.5 million in the first quarter 2011. Attributable to the strong growth momentum we increased the target number of our mobile Internet subscriber to 2.35 million by the end of 2012 reflecting a growth rate of 56% compared to last year’s.

Starting March this year, we began to offer student plans to attract students and youth who are active users of mobile data services. We have set a several mid-to-low tier smartphone models with brand names and the extensive function is for these users to choose a package in lower rate and the cheaper models. We are confident that the student plans will be very successful.

On slide seven, although high-end smartphone subscriptions increased due to the hot sales of iPhone 4s in the first quarter, our smartphone strategy this year is still to increase mid- to low-end smartphone users. The availability of more party mid- to low-end smartphones in the near future will help our execution and the promotion. For the first quarter, the smartphone customers accounted for 59% of the total handsets that we offered and to expand the percentage to be 70% for the whole year.

Slide eight shows the results of our broadband business, migrating broadband customers to the high-speed service continue to be our key strategy, as well as attracting more broadband customers. Under this strategy, we reduced our fiber and the ADS tariff in mid last year and the beginning of this year. We mentioned previously that the broadband revenue is expected to be recovered to the level prior to the fiber tariff cut by the same quarter 2012. Although this revenue recovery is slightly behind schedule, we will continue migrating customers to high-speed services, as well as offering high-definition programs such as upcoming broadcasting of Olympic games to accelerate the revenue recovery.

Slide nine shows that the MOD subscribers and the revenue continue to increase. In addition, our television market still increased 17.3% by the end of last year, compared to 13.8% by the end of 2010. Our enriched and high-definition content will continue to attract the subscriptions with 76.5% of our subscribers signed up additional package services, and their percentage of the premium package subscriptions continue to rise.

As a result, ARPU for MOD increased 15.7% year-on-year for the first quarter, and ARPU for the March have increased to TWD157. We expected a new platform to be launched towards the end of the first half 2012 leveraging the advantage of the new platform in the coming 2012 Olympic games forecasted service. We are optimistic that MOD customers will likely reach 1.5 million for end of this year.

Owing to the decline trend of the traditional market and regulations dynamics, we are focusing on paving new revenues for – new avenues for revenue streams. On slide 10, in addition to our traditional telecom service, well, we have expanded our corporate business scope and have focused our ICT business to include the government projects.

Now, I will hand it over to Dr. Yeh for the financial review. Thank you.

Shu Yeh

Thank you, President Chang, and a good day, everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 12. The following discussion is focused on the first quarter of this year.

Slide 12 shows our incomes payment on a consolidated basis. While total revenue for the first quarter increased by 5.6% compared to same period last year, operating cost and expenses reported a 14.4% increase year-over-year. As a result, net income and the EBITDA increased 19.8% and 11.8% respectively. The EBITDA margin decreased year-over-year due primarily to the higher handset sales such as iPhone 4S and the higher handset sales from our subsidiaries spin-off through open channels, as well as the growth of corporate solutions and the ICT business. EBITDA margin of this particular business are relatively lower than the traditional telecom services.

You can refer to slide 13 for our business segment revenue. The revenue growth for the first quarter was primarily due to the 29.2% increase in mobile VAS revenue and 53.7% increase in handset sales. However, the increase was offset by the decline in mobile voice revenue attributable to the fixed-to-mobile call pricing right shift, the marketing campaign and NCC tariff reduction. Additionally, the decline in DLD and the broadband revenue due to tariff cost also partially offset the overall growth.

Slide 14 shows the breakdown of operating cost and expenses. The operating cost and the expenses increased in first quarter consist of three components. First, the cost of handsets sold representing 69.8% of the increase. Secondly, the increase of fiber-related solution and ICT project cost accounted for 14.6%. And finally, the increase of maintenance and the material expenses for broadband service promotion was about 6.1%.

As shown on slide 15, cash flow from operating activities increased by 34.9% year-over-year to TWD13.1 billion during the first quarter this year. The increase was mainly because, starting 2011, the company adjusted its billing period for monthly fee one month later to be in line with that for communication charge. Hence, accounts receivable for the first quarter last year increased accordingly. We maintained a strong cash position as of March 31 this year, with cash under cash equivalent amounting to TWD69.9 billion.

Slide 16 show our 2012 unconsolidated forecast and the results of our first quarter operation. Comparing to our original first quarter guidance, we achieved relatively higher revenue, as we already explained. However, operating income, net income and the EBITDA were behind our guidance due to certain business with lower margin, as we already mentioned, such as the handset sales and the ICT business. As the EBITDA margin for the first quarter was lower than our forecast, we are still maintaining our full-year guidance.

On to slide 17. As the company listed on the Taiwan Stock Exchange, Chunghwa is required under ROC laws to prepare its financial payments in accordance with IFRS starting from fiscal year 2013. In this slide, we are providing the possible financial impact after adoption of IFRS. This assessment maybe changed as the SEC may issue new rules covering the adoption of IFRS and other laws and the regulation maybe amended to comply with the adoption of IFRS.

Our assessment maybe affected accordingly due to this uncertainty in the other potential factors. You might see from the payables that the more significant ones is the impact of employee benefits. The pension obligations of employee upon privatization in 2005 was calculated based on IFRS. The impact which amounted to TWD20.6 billion should be radioactively deducted from the written earnings and transferred to additional paid-in capital while the total shareholder equity remain unchanged.

The adoption of IFRS to the consolidated financial statements, for the first quarter this year increased Chunghwa’s consolidated net income by TWD106,000 – by TWD106 million.

Moving to slide 18, our budgeted CapEx for this year is TWD31.1 billion. We began our network expansion plan last year in order to enhance our network quality for better customer service. As a result, our first quarter CapEx spending is relatively higher than that of first quarter last year.

That’s all for the presentation. We will now like to open up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. (Operator Instructions) The first question is from Danny Chu from Nomura.

Danny Chu – Nomura

Hi. Thank you, management, for the presentation. Actually, I just have one quick question. In one of the slide, you mentioned that, like, despite the EBITDA and the net profit for 1Q fell short of the company’s initial guidance. But right now, the company is still maintaining its guidance for the full year. Like, what should we expect to happen in 2Q or 3Q in order for the company to deliver on its full-year guidance? Thank you.

Shyue-Ching Lu

Okay. I think we still maintain the same guidance for the whole year. One of important events for the lower EBITDA or net income in our guidance is because the iPhone 4S sales is higher than our expectations. And I think it’s more like a coming issue. We didn’t expect that much of iPhone 4S sales. And since these sales, we would expect that we’ll have lower handset subsidy in the later quarters. So, that’s why we are still maintaining our full-year guidance.

Danny Chu – Nomura

Thank you.

Operator

Thank you. Our next question is from Joseph Quinn from Macquarie.

Joseph Quinn – Macquarie

Thank you for the call and an opportunity to ask some questions. I have four questions, if I may. The first one is on your mobile side. I noticed on a Q-on-Q basis that your mobile additions seemed to be slower versus your peers. And also, your smartphone revenue had dropped Q-on-Q. I was just wondering what was the drivers behind that, especially as you’re mentioning before, us being a higher attraction than you previously expected.

The second question is on the business front. Both Far EasTone and Taiwan Mobile have commented quite a lot about increasing their SMB businesses, increasing their market share. I just wonder if you got any comments on that in terms of how you’re feeling competition and what the plans are to combat that.

Thirdly is on the broadband front. We are seeing cable broadband players continue to see increases in their subscribers. I’m just wondering how you’re seeing that affecting you. And also, we’ve seen from the likes of the TVC announcing a lot more free set-top boxes and bundling that with their broadband. I’m just wondering what packages or difference in your packages you’re planning in 2012? I could stop that sort of growth from them.

And the last question is more related to your 20-F filling actually. On your 20-F, it seemed that all of your businesses faced significant margin erosion in 2011. I was just wondering what your views are for 2012 in terms of which business lines will be stronger and which business lines will potentially see more weakness. Thank you.

Shyue-Ching Lu

Okay. Let me answer your first question for the mobile synergies. Sorry, you are right. Our – we are slightly a little bit on the mobile services because last – the mobile congestion – traffic congestion happened in last August. So, we don’t have to promote our mobile service. After several months of construction, I think our network quality is okay to promote again. So, we have some promotion plans that will be launched in the coming months. So, we think the market will come back to our side.

On your second question about competition with our peers, are you addressing certain specific market or just the general competition in Taiwan?

Joseph Quinn – Macquarie

No. This is specifically on the SMB business, so you’re more enterprise-focused business.

Shaio-Tung Chang

Okay. Yeah. So, well, we believe Taiwan enterprise market is still going from our own pace. We believe we are still growing in our enterprise market. So, we are happy to see that our peers also have certain increase in their operation. That’s a good indication for the market.

Your third question is about the cable competition. According to our statistics for the last year, our cable – our broadband customer increased their budget for customers. For cable, there are only – we increased about 124,000 customers. Cable has increased about 86,000. So, we don’t lose this market. And for the last two months, we increased about to 18,000 customers. Cables only increased 9,000. So, in this area, we think we are confident this still very – we are – comparability, it’s still very strong. And the second part is we will increase our speed to enhance our speed. We will launch the 100 megabits per second in the coming months. So, I think that we can keep business. Thank you.

Joseph Quinn – Macquarie

But in terms of your broadband subscriber growth in 2011, do you have any – can you give us any idea of how much of that has been driven from the consumer side, and how much of that’s been driven from your business customers?

Shyue-Ching Lu

I think the – we combined our MOD and our cable together. It’s very good for us.

Joseph Quinn – Macquarie

Sorry, maybe I’ll ask it another way. I’m trying to understand, when you give us your broadband numbers, the combined number of both business and consumers, I’m just wondering have you got an idea of what the mixture of your growth was last year? Is it coming more from the personal consumer at home connection, or is it coming more from the business connection?

Shyue-Ching Lu

Both of them are – both.

Joseph Quinn – Macquarie

Okay. Thanks.

Operator

Thank you. (Operator Instructions)

Joseph Quinn – Macquarie

Sorry. Just one final question...

Shu Yeh

Yes. Number one – number four, okay. No, the decline of the EBITDA margin was caused primarily by the handset subsidy and the handset sales cost of our subsidiary signal to open channel. And also, it’s caused by the terrible reduction as a result of the competition and regulation. So, you can refer to our guidance about our view for the margin of this year. Thank you.

Joseph Quinn – Macquarie

Yes. So, I just want to follow up on that because in the 20-F, it’s quite clear that every single one of your segments that being domestic, mobile, fixed and your Internet are all seeing margin declines. So, what I’m more interested is, in 2012, what areas do you feel will be stronger, thus won’t see as much margin impacts, and which areas do you feel will have the most weakness? Thanks.

Shu Yeh

I think you can refer to the different regulations in tariff and to figure out. Okay, so different segment phase, different label, different extend of regulations. And so, our tariff reduction would vary. Okay, that’s all what we offer now. Thank you.

Joseph Quinn – Macquarie

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Chate Ben from Credit Suisse.

Chate Benchavitvilai – Credit Suisse

Thank you very much for the opportunity to ask question. Good afternoon. I have, in total, three questions. The first question is regarding your broadband business that you mentioned during the call that the recovery in ARPU or revenue is slightly behind schedule. Would you kindly remind us again what’s the schedule in terms of the revenue recovery in broadband is right now and what might be the main cause of this delay in the recovery? Is it because of competition or is it because of network rollout?

The second question is regarding the discount you provide on the mobile Internet for the lower usage of subscribers. I understand that the discount, the current discount would come to an expiration at the end of this year, do you think given your intention to continue to drive penetration that discount should be continued or do you think that you do not actually need that once expired, it’s gone?

The third question is regarding the dividend. Apology if I missed any announcement but is there an announcement for FY 2011 dividend or in term of the regular and special dividend? Thank you very much.

Shyue-Ching Lu

Okay. About your first question is the because we have bundled our MOD service with broadband together to sell. But at the beginning of this year, our MOD second platform is delayed because of the NTC. No. we cannot promote them together. So, we have a little bit delay for this broadband. And so that’s in question.

Chate Benchavitvilai – Credit Suisse

Yes. Can you remind us again in terms of the broadband recovery timetable or when should we expect the revenue to come back to the same level again? Is it the second quarter of 2013?

Shyue-Ching Lu

Maybe to third quarter.

Chate Benchavitvilai – Credit Suisse

Just the second question regarding the mobile data discount and the third question is regarding the dividends.

Shyue-Ching Lu

The second question on mobile Internet discount, for those customers whose data volume is less than 1 gigabyte, we offer discount. This will be a special offer until it’s the end of this year, and we have no intention to continue this special offering, yeah.

Shu Yeh

Okay. For the third question, we proposed TWD5.46 per share dividends to be approved by the AGM. Thank you.

Chate Benchavitvilai – Credit Suisse

Thank you very much.

Operator

Thank you. Our next question is from May Lin from Yuanta Taipei.

May Lin – Yuanta Taipei

Hi. Thanks for taking my question. I have three question. First is follow-up on the dividend side. I know the actual 2011 dividend distribution has been announced, but do you have any guidance for the forward-looking dividend payout policy? One of our peer has raised our payout – their payout ratio guidance to 100% going forward, at least. So, not sure if any update from Chunghwa.

My second question is about a mandatory tariff cost site. In the year, we’ll start another cycle for the new proposal. Do you see any potential risk for the mandatory tariff cost for the next three-year cycle on the fiber site of broadband service?

My last question is about smartphone volume sales mix. Do you have any update or add more color on the smartphone high-end, mid-end, low-end mix for first quarter and a forward-looking target? Thanks.

Shyue-Ching Lu

Okay. We don’t have any update of dividend payout policy yet. But in the past, we pay out as much as permitted under – by the law. And I think we already explained this in the past, okay. But in the future, if there would be some change, we will make announcements. Thank you.

Shu Yeh

Your second question, we have an idea about – to hear anything about the NCC total GAAP or the cut – the tariff cut about the fiber. And then your third question is about smartphone. Our high-end, middle-end and the lower-end, the duration is about 36% to 46% to 32% to 22%.

May Lin – Yuanta Taipei

Okay. This is for first quarter, the smartphone mix?

Shu Yeh

Yes.

May Lin – Yuanta Taipei

Do we have any – sorry?

Shu Yeh

This quarter.

May Lin – Yuanta Taipei

Yes. And do we have any target for the like long-term smartphone mix we would like to achieve maybe for manage our subsidy expense?

Shu Yeh

Yeah. We tried to make the middle and the lower end higher. We don’t have the definitive figures.

May Lin – Yuanta Taipei

Understood, understood. Thank you. And about the NCC tariff cut, if I didn’t get it round, you mean, we don’t have any signals in whether we will any tariff cut on the fiber side, is that correct?

Shu Yeh

No. We don’t have any particulars, right.

May Lin – Yuanta Taipei

Understood. Understood. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Lucy Liu from JP Morgan.

Lucy Liu – JP Morgan

Hi. Thank you very much for the call. I just have two – single question. One is your ICT margin. You mentioned that the plan in the margin dilution is 182 (inaudible) the ICT. So, just wondered what’s the absolute level of the ICT business margin?

And the second to this on 4G business. So, just wondered what’s your generous thought in terms of the upcoming 4G licensing and also our strategy in bidding for the spectrum in terms of proposed 4G and the 2G Reforming Spectrum? Thank you.

Shyue-Ching Lu

We don’t disclose that. It’s a new business, and we would – of course, one is the beginning (inaudible) and the most stable stage. Thank you.

Shaio-Tung Chang

And regarding to the 4G licensing strategy, we have heard from MCC that they will start preparing for the bidding guideline sometime next year. But the company, we have already started in certain working group to work on this. We will be ready as long as MCC release any specific guidance on the bidding.

Lucy Liu – JP Morgan

Okay. Sir, can I have one more follow-up question, sir? You mentioned also earlier that you see the Olympics broadcasting as one of the catalyst in second half for your MOD/IPTV service. I just wondered regarding the contents. So, whether if you have any exclusive contents that a cable TV won’t have, or basically pretty much the same? Thank you.

Shyue-Ching Lu

Well, at Chunghwa Telecom, we have obtained rights for the so-called new media, okay? And this is the licensing – the rights in Taiwan market is obtained by one of our partner and we have secured the rights for the new media. That’s all I can say about this.

Lucy Liu – JP Morgan

Okay. So, the last question. So, after you basically reached the deal with China Airlines, so any new updates in terms of cooperation or synergies on that?

Shyue-Ching Lu

We made some progress. But still, we have to wait for some time to report more concrete result. But we talked about some business and we’ve reported to the board members. Thank you.

Lucy Liu – JP Morgan

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from (inaudible) from Merrill Lynch.

Unidentified Analyst

Hi. I have one question on the iPhone plans. I know that your competitors are focused a lot on the one-year iPhone plan and package plans and that actually can reduce the subsidy. What’s your plan on that? And what’s the percentage of your iPhone package on one-year plans? Thanks.

Shyue-Ching Lu

We do have the one-year package for iPhones per say, but we don’t have the percentage.

Unidentified Analyst

Do you have plan for the future to roll out one-year plan?

Shyue-Ching Lu

Yes. We already launched that. We launched that about one month ago.

Unidentified Analyst

Okay.

Shu Yeh

The percentage is about 6%.

Unidentified Analyst

In the last one month, 6%?

Shu Yeh

Yes. Totally, the customer chose this package, about 6% of total.

Unidentified Analyst

Okay. Thanks.

Shyue-Ching Lu

We launched in last month.

Unidentified Analyst

Okay.

Operator

Thank you. (Operator Instructions)

Fu-Fu Shen

Okay. Thank you very much for joining our conference call for the operating results of the first quarter of 2012. Thank you very much. Good night.

Operator

Thank you. 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 In Focus section. You may now disconnect. Good-bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!