Chunghwa Telecom Co Ltd Q4 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Fourth Quarter 2023 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 Ms. Angela Tsai, the Director of Investor Relations. Thank you. Ms. Tsai, please go ahead.

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Department for Chunghwa Telecom. Welcome to our fourth quarter 2023 results conference call. Joining me on the call today are our Chairman, Harrison Kuo; our President, Ivan Lin; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the Chairman's message, our business overview, a discussion of our segment performance and the financial results, followed by management guidance for 2024. After, we will move on to the question-and-answer portion of the call. On Slide 2, please read our disclaimers and notes concerning forward-looking statements. Now, without further delay, I will turn the call over to our Chairman. Chairman Kuo, please go ahead.

Thank you, Angela, and hello, everyone. Welcome to our fourth quarter results conference call. And I would like to begin with our strong financial performance for 2023. We concluded 2023 with an EPS of NT$4.76, while both revenue and EPS exceeded the high end of our full year guidance and hit six-year highs. We are proud to beat the full year guidance and are also committed to giving all-out efforts for this year. During the fourth quarter of last year, Taiwan's telecom industry entered a new three-player landscape, where Chunghwa Telecom continues to be the largest telco, followed by the other two players. Our market cap represents 60% of the industry market value. Our revenue share in the Taiwan mobile market also exceeded 40%. In addition, we have the most 5G subscribers in Taiwan, with more than 3 million, not to mention the overall mobile subscriber number. All the stats highlight that our leading position far outweighs our peers. At the same time, we are happy to see the domestic industry evolution and believe that under the current structure, value creation for customers will continue to remain the industry focus and the digital transformation will continue to develop and serve as one of the key strong growth drivers. Keeping our #1 position, we reiterate our confidence in widening our lead against the peers due to our solid strengths and growth momentum. In 2023, our mobile postpaid subscriber numbers continued their year-over-year growth throughout the whole year despite the total number of mobile SIMs in Taiwan decreasing in 2023. We also achieved the highest mobile service revenue in the industry. Our success in attracting subscribers speaks for our network strengths, including the most extensive mobile coverage, largest capacity, and fastest speeds, supported by our many mobile base stations already in use. We believe our mobile subscriber gains and revenue growth in 2023 will continue and roll over to 2024. Our competitive advantage also comes from our cross-sector business wins, including our growing fixed broadband business, accelerating technology momentum, monetization, and the ongoing investment in content and digital ecosystems. With our continuous efforts in business development, we remain optimistic about a positive outlook for the next year ahead. Lastly, I am pleased to share that we are establishing a subsidiary in Germany in the first half of 2024, which will serve as the forerunner for international business expansion in Europe. This marks a meaningful milestone for our international expansion. Now, let me hand the call over to Ivan for the business update of the fourth quarter of 2023.

Thank you, Chairman Kuo, and hello, everyone. Now, please flip to Page 5 for an update on our outperformance in the mobile service. As of November 2023, we maintained our leading position in Taiwan's mobile market with the largest subscriber share of 37.1%. Meanwhile, we were excited to see our revenue share reach a remarkable milestone, exceeding 40% in the third quarter and hitting 40.2% by the end of last November, further widening our lead against our peers. Our excess revenue share over subscriber share increased to 3.1%, which is encouraging. In addition, our mobile service revenue in the fourth quarter recorded a 5.8% year-over-year increase, maintaining its growth for 33 consecutive months. While our postpaid ARPU reported a 4.3% year-over-year increase, continuing this consecutive growth for the 11th quarter. This increase was mainly due to the 5G migration upsells, international roaming recovery, and the increase of the postpaid subscriber numbers. Thanks to 5G adoption, we see the average monthly fee uplift from customers who migrate from 4G to 5G increasing to 49% in the fourth quarter, up from 44% in the third quarter, maintaining an inspiring upward trajectory. Going forward, we expect the overall 5G penetration in Taiwan to continue to steadily develop in 2024. We believe that Chunghwa will benefit the most, given our #1 position in the best 5G quality ranked by well-known international institutes. Let's move on to Slide 6 for an update on our fixed broadband business. In the fourth quarter, we are glad to see positive performance in the fixed broadband sector, with revenue and ARPU increasing by 2.6% and 1.1%, respectively, on a year-over-year basis, mainly attributed to the increased higher-speed migration. Our sign-ups for service of 300 megabits per second or higher continue to be popular among all speed mixes since the second quarter of 2023, achieving a 32% year-over-year growth in the fourth quarter, maintaining double-digit growth. It's worth noting that our speed profile optimization, promoted by market incentives, also worked in upgrading speeds from below 100 megabits per second to transition to higher speeds above 100 megabits per second. We see a 12% year-over-year increase in sign-ups for services at 100 megabits per second or higher. As the optimization strategy continues in 2024, we are confidently seeing the upward trend of the fixed broadband ARPU continue going forward. Now, let's move on to the performance of our customer-centric business group. Slide 8 presents the performance of our CBG Group. In the fourth quarter, total CBG revenue rose by 4.4% year-over-year. The increase was mainly driven by the notable increase of our outperforming mobile service revenue at a 5.3% increase on year, owing to the continued 5G migration and postpaid subscribers increase, better sales of the iPhone 15 series, and stable growth of the fixed broadband revenue with a 3.3% uplift on year, while fixed-line revenue decreased. Additionally, I would like to highlight our notable international roaming revenue in 2023, which increased by 270% year-over-year and has already surged to pre-COVID-19 levels. In addition to busy international activities in 2023, our popular global roaming package also contributed to the success. We cover 125 countries to offer customers the convenience of using one package to enjoy transformational data roaming during one trip. We expect strong demand from customers to continue driving the growth of our roaming business in 2024. CBG income before tax decreased by 0.2% year-over-year, owing to asset impairment losses accompanied with the phase-out of the 3G network. Excluding one-time factors, CBG income before tax increased by 3.6% on year. Slide 9 further illustrates our Consumer Business Group highlights. In the fourth quarter, our multiple-play package continued to grow on a yearly basis. The subscriber numbers for mobile, fixed broadband, and WiFi service together demonstrated a 14% quarter-over-quarter growth, entering the seventh consecutive quarter of double-digit quarter-over-quarter growth. In terms of individual and home-centric applications, we were happy to record subscriber gains as well. Our video subscribers continued to grow steadily by 3.7% year-over-year, mainly due to the rich content provided on both MOD and Hami Video, particularly the exclusive and award-winning dramas. In addition, we observed an increasing demand for CBG cybersecurity services as consumers have become accustomed to accessing the Internet across mobile and fixed broadband in the post-pandemic era. In the fourth quarter, our customer cybersecurity sign-ups increased by 19% year-over-year and demonstrate potential for further growth. Going forward, we will continue to develop consumer applications to grow both application and telecom revenue in the sector. Please turn to Slide 10 for an overview of our Enterprise Business Group performance. In the fourth quarter, EBG revenue increased by 2.5%, primarily attributed to a substantial 13% increase in other revenue, driven by equipment sales from subsidiaries and the launch of high-end mobile phones contributing to a boost in sales revenue. Additionally, ICT business revenue increased by 2.3%, propelled by a rise in project revenue, sustained growth in cybersecurity service revenue, and robust expansion in AIoT service revenue. Furthermore, EBG mobile service revenue increased by 3%, fueled by 5G upselling and recovery of international roaming revenue. Although fixed-line revenue slightly decreased year-over-year, mainly due to voice decline, data communication revenue and broadband access revenue continued to grow. In spite of the revenue growth, EBG reported a 6.2% year-over-year decrease in income before tax, mainly because of the fixed voice decline and the asset impairment loss related to the phase-out of the 3G network. Excluding one-time impairments, the EBG income before tax decreased by 4.8% on year. Most importantly, ICT business revenue continued to increase and profit margin kept improving. Slide 11 illustrates our Enterprise Business highlights. In the fourth quarter, our AIoT and cybersecurity business demonstrated robust growth, while total emerging enterprise business revenue from our major applications decreased by 2.7% year-over-year due to the higher base of revenue recognition in the period relating to e-learning and fintech projects. Specifically, the cybersecurity business achieved a 7.3% growth in the fourth quarter, driven by increasing service demand from our enterprise clients, climbing upward for the eighth consecutive quarter on a year-over-year basis. Furthermore, our AIoT business also experienced a year-over-year increase, owing to revenue injection from large projects relating to smart energy and intelligent buildings. Furthermore, although our cloud service revenue and IDC revenue decreased on a year basis due to one-time projects recognized last year that created a high revenue base, we are glad to see our recurrent revenue for these two services deliver stable growth. On a year-over-year basis, recurring revenue from the international public cloud service grew by 20%, whereas recurring revenue of the IDC grew 15% in the fourth quarter. In terms of our applications, we achieved a milestone in the fourth quarter by establishing Taiwan's most extensive 5G network slicing verification field in Kaohsiung to support innovation development and successfully deliver multiple innovative cybersecurity and encrypted cloud solutions catering to the diverse needs of our clients. Slide 12 illustrates our International Business performance. In the fourth quarter, total revenue and income before tax of IBG increased by about 33% and 39% year-over-year, respectively. The impressive growth was mainly fueled by the growing demand for emerging business, including IDC and cloud services from our global clients. During the quarter, we see ICT project completion and continue to find growing opportunities for global expansion. We are glad to announce that we signed an MOU with NTT Corporation in the fourth quarter, aiming to accelerate the relation of the Innovative Optical and Wireless Network service. Looking forward, we are optimistic about seeing the growth momentum roll over into 2024. In addition, as the SJC2 international undersea cable is expected to launch service this year, we're looking forward to capitalizing on our undersea cable asset amid the growing opportunities from international OTT service providers. Now, I would like to turn the call to Vincent.

Thank you, President Ivan. Good afternoon, everyone. Now, I will present a financial summary of our fourth quarter results in 2023 and financial guidance for 2024. Let's begin with Slide 14, income statement highlights. During the fourth quarter in 2023, total revenue increased by 4% compared to the same quarter last year, primarily attributed to growing ICT business revenue, sales revenue, mobile service revenue, and broadband service revenue. Income from operations and net income decreased by 4.6% and 1.7% on year, respectively, mainly due to the impairment loss of telecom equipment caused by the phase-out of the 3G network and the impairment loss of investment property. Excluding the impact of the aforementioned one-time impairment losses, income from operations and net income increased by 2.2% and 7.2% on year, respectively. For the full year results, total revenue increased by 3% year-over-year due to solid growth in our mobile, ICT, and broadband services. Income from operations decreased by 1% due to the one-time impairment losses mentioned above. Excluding the one-time effect, income from operations grew by 0.6%. Net income increased by 1.2% on year. EPS rose from NT$4.7 to NT$4.76. It's noteworthy that both of our revenue and EPS reached a six-year high and have maintained growth momentum for four consecutive years. Now, move on to Page 15 for balance sheet highlights. As of December 31 of 2023, total assets increased by 0.2% on year, mainly due to the increase in current assets, long-term investments, and other assets, which offset the decrease in intangible assets. Total liabilities decreased mildly on year, primarily attributable to the decrease in accounts payable. Additionally, the debt ratio decreased slightly and net debt over EBITDA remained zero. Altogether, we continue to maintain a strong balance sheet with great financial flexibility to fully support our operations and business expansions and swiftly adapt to a fast-changing macroeconomic climate. Page 16 provides the summary of our cash flows. For 2023, we continue to generate stable and solid cash flows from operations. While our operating cash flows were down by 1.8% relative to the prior year, the decrease was mainly due to income tax payments and settlement of accounts payable. Capital expenditures decreased by 2.5% on year, of which mobile-related CapEx was reduced by 19.3%, whereas non-mobile CapEx increased by 10.6%. The latter was largely attributable to greater IDC investments. On top of that, free cash flows decreased by 1.4% on year. Collectively, our robust balance sheet together with solid operating cash flows enables us to seize business opportunities amidst trends of digital and sustainability transformations and further create sustainable and long-term value for our shareholders. On Slide 17, the table presents financial results against management guidance. In the fourth quarter of 2023, total revenue was about on par with our revenue projection. Profit-related metrics fell short of our expectations, largely attributed to the higher maintenance and material expenses, impairment losses on the phase-out of the 3G network, and investment property. For the full year results, our revenue and profit-related measures mostly exceeded the high-end target of our full year guidance, driven by our steady-growing core business and improved margins in the ICT business. That concludes the overview of our 2023 financial results. Moving on to Slide 18, please see our guidance for 2024. Looking ahead, total revenue for 2024 compared to 2023 is expected to increase by between 2.4% and 3.1%, primarily driven by growth momentum in our core business. Well-received 5G services and the speed upgrade promotion packages of fixed broadband are expected to continuously lift subscriber numbers and ARPU. The ICT business will also contribute, as we expect growing emerging services to cater to customers' demands for digital transformation. Operating costs and expenses are expected to rise between 4% and 4.6% as a result of investments in talent and infrastructure that support future business development in core and emerging businesses. Given these projections, we expect our EPS to be in the range between NT$4.6 and NT$4.8. As for capital spending, we budget about NT$34 billion for 2024, as our 5G network is close to its full deployment, and its #1 quality has been consistently endorsed by Opensignal and Speedtest for consecutive years. Our mobile-related CapEx is expected to decrease by 14% on year, which continues its downtrend since 2021 for three consecutive years. Non-mobile-related CapEx, which consists of investments in fixed-line network, IDC, and submarine cables, is expected to increase by 24.7% on year to support business expansion in emerging businesses. Now, I would like to turn the call over to Chairman Harrison for awards and recognitions.

Thank you, Vincent. On Slide 19 are our awards and ESG achievement highlights in the fourth quarter. In 2023, Chunghwa Telecom was recognized by the Dow Jones Sustainability World Index as #1 among world-class telecommunication sustainability leaders, as well as the Emerging Market Index reflecting recognition from investors for our ESG practices. We also received a AA ESG rating from MSCI. In addition, we were reaffirmed with the highest AA credit rating by S&P Global Ratings, continuing our exclusive leading position among global telcos. Besides to enhance interest alignment between the top management team and shareholders, we are the only telecom operator in Taiwan to follow the international best practice of implementing the Incentive Compensation Clawback Policy. Furthermore, we implemented an internal carbon pricing mechanism of NT$1,600 per ton in 2023. We are delighted to report that the internal carbon fee collected for 2023 was approximately NT$1 billion, all of which was used to encourage carbon reduction initiatives and technologies. In the fourth quarter, we also completed carbon credit procurement to further utilize product carbon neutralization. Meanwhile, we initiated the first environmental footprint standard of network equipment in Taiwan to facilitate a low carbon supply chain. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

Thank you, Chairman Kuo. Our first question is from Neale Anderson of HSBC. Please go ahead.

Good afternoon. I have two questions. The first is about revenue, specifically regarding the Enterprise Business Group and the emerging enterprise application revenue. Last year, it decreased, likely due to a high base of one-time revenue in 2022. Are you facing a similar situation this year, or do you believe it can return to growth, supported by a substantial amount of recurring revenue without one-time factors? My second question is about the guidance for cost increases and investments in growth businesses. Can you provide more insight on this? I assume much of this will be directed to the Enterprise Business Group, but I am also curious about the allocation for the International Business Group, especially with your expansion into Germany and other markets. Any additional comments would be appreciated. Thank you.

Thank you, Neale, for your questions. Regarding the revenue in the Enterprise Business segment, we had a strong performance in 2022 due to several significant projects, and we are uncertain if we will experience similar situations in 2024. However, we anticipate moderation in this area. For the ICT in the Enterprise Business Group, we expect reasonable growth. As for guidance on cost increases, as mentioned in the PowerPoint, in 2024 we will continue to invest in talent and infrastructure, as well as in content to attract more subscribers and enhance our platforms to benefit our customers. Therefore, we expect our content-related costs to rise. Additionally, some costs will correlate with revenue growth, such as increases in our cost of goods sold alongside sales revenue. In terms of the International Business segment, we foresee strong growth as we expand our presence in Europe and expect increased demand from our international customers. Thank you.

Understood. Thank you.

Thank you, Neale. The next question is from Sara Wang, UBS. Go ahead, please.

Thank you. I have two questions. First is on EBG revenue. So, I think management just mentioned that the ICT revenue in the fourth quarter increased as well as the margin. So, just wondering why the income before tax, if holding the 3G impairment, still declined by mid-single digits. And then, second question is on the CapEx guidance for 2024. So, I noticed that non-mobile CapEx is guided to increase quite meaningfully. So, could you elaborate more on where the key investment areas are? Thank you.

Thank you, Sara. In the EBG, particularly in the ICT business, both revenue and margins are improving. However, the overall segment profit has declined due to factors such as the 3G impairment and the impact of long-distance calls. Additionally, there are internal costs, including carbon fees, that affect the bottom line in the Enterprise Business segment. Regarding your second question on CapEx guidance for 2024, the increase in non-mobile CapEx is primarily due to ongoing construction projects at IDC. This represents a significant portion of our investments. Regular items such as submarine cables and fixed-line network upgrades also contribute to the non-mobile CapEx. Thank you.

Got it. Just a quick follow-up on the IDC revenue. So, in the fourth quarter, the total IDC revenue declined although the recurring IDC revenue increased. So, just wondering if you could provide an example of like what's the non-recurring IDC revenue. Thank you.

Yeah. For the one-time items, some of these are set up revenue for our customers. For example, the cloud switch office is one of the examples.

Got it. So, theoretically, for the IDC CapEx, that will bring recurring revenue, right?

Yes, yeah.

Okay. The next question comes from our Internet is from Rob Lowe. Could you please elaborate more on the business plan for the German office? Does the company plan to team up with European telecom companies for business expansion or does the company plan to expand the exposure to European ICT services, etc.? Thanks.

Thank you for your question. For 2024, we will continue to expand international outreach by mainly following Taiwanese clients' global footprints and replicate our successful use cases in 5G private networks and smart cities to overseas markets. In addition, Europe will be a new focus in 2024 as we have seen growing ICT demand from clients' global expansion in Europe. Therefore, we plan to set up a subsidiary in Frankfurt to provide business support, and we don't rule out the possibility of increasing offices in different locations in Europe. Thank you.

And on the telephone, we have another question from Rajesh Panjwani at JPMorgan. Please go ahead.

Thank you very much. A couple of questions. First one, you mentioned that the increase in the non-mobile CapEx in 2024 is mainly due to IDC CapEx. Can you just give us some idea about what proportion of the total CapEx is going into IDC in 2024 versus 2023? Second, do you expect the non-mobile CapEx to remain at an elevated level after 2024, or do you expect it to decline after that? Lastly, can you give us some more ideas about your International Business expansion? What exactly are the kind of projects you are targeting in international markets? Thanks.

Okay. So for the first question regarding non-mobile CapEx, right, the IDC investment increased by about 10% and more. So that's the increase in the non-mobile CapEx. And for the international projections and targets, actually we don't disclose figures, but we do have some orders in hand. That's why we deploy our staff and resources overseas. Thank you.

Just a follow-up on this. So, I'm not asking for numbers. I'm more interested in the kind of projects that you are likely to do in the international markets going forward. Can you give us some idea of that? And also, you said the IDC investment has increased by 10%, but your non-mobile CapEx is going up by 25%, which means that investment in non-IDC areas is probably even higher. So, can you give us some breakup of that? And also whether the CapEx is likely to remain at an elevated level beyond 2024, or once your subsea cables are commissioned, CapEx will fall in 2025?

Yeah. For the CapEx, right, actually, the undersea cable also increased a lot. So, these are the two big ones. For the regular fixed-line, actually it just increased at a steady rate. As for the international projects, right, we basically help our customers to deploy their not only CT but also ICT business in Europe, the U.S., and Japan, in these overseas areas. So currently, we cater to many Taiwanese clients, but we also expect there will be more foreign customers and clients to use our ICT services. So, these are the main areas for the IBG. Thank you.

Got it. And can you also comment on whether the CapEx is likely to remain at an elevated level beyond 2024? Or once your subsea cables are commissioned, CapEx will fall in 2025?

Because for 2025 and outwards, we haven't finalized the numbers, so we cannot give any indication or any prediction at the moment. Thank you.

Okay. Thank you.

Thank you.

We have another question from our chat box. Can you provide the outlook for the ICT business in 2024?

We will continue to cultivate our three major service areas, and many pro-IDC cybersecurity and IoT services in emerging sectors. We also work on 5G applications and AI solutions to capture the increasing demand. Looking forward to 2024, we maintain an optimistic outlook for our ICT business and are positive about achieving our full-year guidance as we are continuing to see healthy order intake and project completion. We will also continue leveraging our ICT capabilities to further enhance our ICT margin. Given the order intake in our pipeline, we expect the ICT revenue to deliver positive growth on a year-over-year basis in 2024. Thanks for your questions.

Thank you. If there are no further questions at this point, I will turn it back over to Chairman Kuo. Chairman Kuo, please proceed.

Thank you for your participation. Happy New Year. Goodbye.

Thank you, Chairman Kuo. And ladies and gentlemen, we thank you for your participation in Chunghwa Telecom conference. There will be a webcast replay available within an hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may now disconnect. Thank you and goodbye.