Chunghwa Telecom Co Ltd Q1 FY2024 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's First Quarter 2024 Operating Results. During the presentation, all lines will be in a 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 would like to turn it over to Ms. Angela Tsai, Assistant Vice President 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 first quarter 2024 results conference call. Joining me on the call today are our Chairman, Harrison Kuo; President, Ivan Lin; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the Chairman's message and our business overview in the first quarter, followed by a discussion of our segment performance and the financial results. 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 I will turn the call over to Chairman. Chairman Kuo, please go ahead.

Thank you, Angela, and hello everyone. Welcome to our first quarter 2024 results conference call. In the first quarter, we proudly announced our success in expanding our lead in Taiwan's telco market. Amidst the robust three-player landscape, our revenue share in Taiwan's mobile market continued to steadily grow, climbing from 40.3% to 40.4% quarter-over-quarter, while subscribers' share enjoyed an increase from 37.6% to 37.7%, maintaining the growth trajectory after the market consolidation completed last third quarter. Our financial performance also speaks for our business success. Total revenue in the first quarter hit a new high for the same period since 2017. Income before tax also reached a record high for the same period since 2016. On the basis of excluding the one-time item of the government compensation for ST-2 satellite recognized in the first quarter last year. To invest in our leadership and long-term growth, we have been establishing AI infrastructure to enhance our operations and see opportunities in the AI mega trend. Our AI-powered network solution has been successfully used to predict network degradation and optimize energy consumption to enhance our network efficiency and contribute to cost reduction. In addition, generative AI is another technology that we leverage for troubleshooting to enhance service quality, response time, and cost efficiency in operations, particularly concerning network maintenance and customer service. To capture AI exploration opportunities, we actively deployed computability across cloud, edge, and terminals to bring computing resources closer to our customers with an intent to access AI applications. We also plan to establish AI data centers and develop GPU as a service, empowering industries to complete their AI transformations. To achieve this goal, we will team up with local and global ICT partners to establish ecosystems for the AI power of the future. Another value-added deployment lies in the expansion of content investments. In addition to network and platform strengths, we have been continuously investing in quality content to win subscribers over and thus are able to form the largest video platform in Taiwan. We are glad to announce that recently, we have acquired exclusive broadcasting rights for the 2024 Paris Summer Olympic Games and believe that this will significantly enrich our content broadcasting portfolio in the upcoming quarter. Moreover, following the announcement made last December, we officially set up Chunghwa Digital Culture and Creative Capital, CDCCC, in the first quarter to scale up our investment in video content and intellectual property management. In February, our Board of Directors further approved the investment in a fund for the cultural content industry managed by CDCCC. This fund will work as an important vehicle to upgrade the cultural content industry and further integrate our network, platform, and content IP to deliver quality content to users. Last, I'd like to share that we were threatened by the serious earthquake that happened in Taiwan in April, and in response, we offered complimentary communications to help disaster relief in Hualien by successfully leveraging a low earth orbit satellite, LEO. Going forward, in addition to GEO, the geostationary orbit and LEO, we also plan to add MEO, the Medium Earth Orbit, to our satellite portfolios this year to continuously strengthen our network resilience and further provide services to enterprise and government customers. Now let me hand the call over to Ivan for the business updates on the first quarter of 2024.

Thank you, Chairman Kuo, and hello everyone. Now please stick to Page five for an update on our outperforming mobile business. As mentioned by Chairman Kuo, we maintain our leading position in the Taiwan mobile market in the first quarter of 2024, with the largest subscriber share of 37.7%. Meanwhile, our revenue share continued to stay above 40%, hitting 40.4% by the end of March, further widening our lead against our peers. Our exceeded revenue shared over the subscriber and shared by 2.7% due to the exciting progress of subscriber share gains. In addition, 5G migration and international roaming continue to drive our mobile service revenue and post-paid output, recording year-over-year increases of 5.1% and 3.4%, respectively. Mobile service revenue and ARPU also continued to maintain their growth for six consecutive months and twelve consecutive quarters, respectively. As 5G continues to penetrate, we sold an average monthly feed uplift from clustering who migrate from 4G to 5G pool to 14% and 5% in the first quarter and it's rebuilding and spreading upward trajectory. Let's move on to Slide six for an update of our fixed broadband business. In the first quarter, we are glad to see accelerated growth in the fixed broadband sector due to our successful strategy to encourage speed upgrades. Fixed broadband revenue and ARPU increased by 3.8% and 2% on a year-over-year basis, both expanding their year-over-year growth margin compared with the previous quarter. The size up of service of 300 megabits per second or higher continues to be popular among all speed mixes with a 29% year-over-year increase in the first quarter, maintaining its double-digit growth. Now let's move on to the performance of our customer-centric business growth. Slide eight presents the performance of our CBG Group. In the first quarter, income before tax of the CBG increased by 3.7% year-over-year, mainly due to substantial growth in telecom service. On a year-over-year basis, total CBG revenue increased by 1.7%, driven by the healthy 4.2% increase in our mobile service revenue. Going forward, the continued increase in 5G migration and post-paid subscribers contributed to growth in roaming revenue. Fixed broadband performance saw a revenue growth increase to 4.6%, offset by a revenue decrease of 1.5% in voice sales, primarily due to the higher base in the first quarter last year stemming from deferred demand resulting from supply chain issues. Slide nine further illustrates our consumer business group highlights. In the first quarter, our multiple trade packages continued to support CBG's growth momentum. The subscriber numbers of the mobile and fixed broadband and Wi-Fi service all together demonstrated a 23.3% quarter-over-quarter growth, achieving the eighth consecutive quarter of double-digit quarter-over-quarter growth. This is attributable to the well-received promotion packages and value-added service bundles. In terms of individual and home-centric applications, we remain the largest video platform in Taiwan as the subscriber number of our video service stands. Notably, we successfully acquired the exclusive broadcasting rights for the 2024 Olympic Games in April, which we believe will bring a subscription and revenue increase for MOD and HamiVideo. In addition, we are excited to see a 17% year-over-year increase in our CBG cybersecurity service and SaaS Ops in the first quarter, primarily due to increased demand from services aimed at avoiding phishing websites and blocking malicious connections. Our service for filtering out adult content on the Internet and setting time limits on Internet surfing has also gained popularity among families, driving up the demand for our cybersecurity service. We expect this growth trend to continue and further contribute to our CBG performance. Please turn to Slide 10 for an overview of our enterprise business group performance. In the first quarter, the EBG revenue slightly decreased by 0.9%, primarily due to recognition of government compensations in the same period last year. Excluding the one-time item, EBG revenue increased by 1.9% year-over-year. Additionally, our ICT business revenue increased by 3.3%, mainly driven by the business expansion in big data search, cybersecurity, AIoT, and cloud service, all of which reported at least high single-digit year-over-year growth or higher. Going forward, we will continue our B2B 2X model to build up the ecosystem with key partners and further boost ICT performance. Furthermore, EBG mobile service revenue also demonstrated strong growth of 3.7% year-over-year, underpinned by continued 5G upselling as well as growth in international loan revenue. We have observed that text message revenues also turned positive due to growing enterprise marketing demand. Although fixed-line revenue slightly decreased, data communication revenue and assets revenue continued to grow and offset this voice decline, leading to a 13.4% year-over-year decrease in income before tax for EBG. However, excluding the one-time effect, EBG's income before tax decreased by only 1.5% year-over-year. Slide 11 illustrates our enterprise business highlights. In the first quarter, we were happy to see our total enterprise emerging application revenue increase by 5.2% year-over-year. Notably, big data analysis delivered significant 71.6% year-over-year growth due to the smart energy project injection, and cybersecurity revenue increased year-over-year for the ninth consecutive quarter. Additionally, the AIoT business experienced 6.5% growth due to revenue injection from green energy projects. Our cloud service revenue increased by 5.8% with substantial growth in international public cloud recurring revenues at 13.8% year-over-year. Although our IDC revenue decreased year-over-year due to recognition of one-time projects in the same period last year, we are pleased to report that our recurring revenue from IBG services delivered stable growth of 7.6% this quarter, and we successfully expanded our national expertise into the global market with the acquisition of our first overseas data center construction project. Furthermore, we are proud to announce that we are the first company in Taiwan to successfully introduce an Automatic Vehicle Identification, AVI, and the vehicle detection system to monitor overtime parking in the freeway service area, which we believe is replicable success and could be extended to other areas. Slide 12 illustrates our international business performance. In the first quarter, both income before tax and total revenue for the IBG reported positive and double-digit growth on a year basis at 23.5% and 13.3%, respectively. The impressive growth was mainly fueled by the growing demand for overseas ICT projects as our clients expand their global footprint, which offset the year-over-year decrease in fixed-line revenue resulting from the service portfolio change. During this quarter, we partnered with EXATEL, the Poland telecom operator, to launch the 5G zone in Warsaw, where our innovative 5G smart applications were showcased to attract business opportunities. It also serves as the foundation for local touch and business extension in Europe. In addition, we not only won the 2024 Smart City Innovation Application Award for our Smart Transportation solution but also won the 2024 System Integration Award for Intelligence Smart City export for our successful overseas smart healthcare solutions, proving our success in the Internet of Medical Things globally. Now I would like to turn the call to Vincent for our financial highlights.

Thank you, President Ivan. Good afternoon, everyone. Now I will present a financial summary of our first quarter results in 2024. Let's begin with Slide 14 income statement highlights. During the first quarter in 2024, revenue was about $55 billion, which hit an eight-year high for the same period. Compared to the same quarter last year, revenue increased by 1.4%, primarily driven by higher mobile service revenue, growing ICT business revenue, and broadband service revenue. Income from operations and net income decreased by 2.2% and 2.6% year-over-year, respectively, mainly due to the high base from last year as a result of government compensation related to ST-2 satellite. Excluding this one-time item, year-over-year changes in income from operations and net income remained in positive territory, which demonstrates the healthy growth momentum of our core and ICT businesses. EPS for Q1 is NT$1.21, and EBITDA margin remains steady. Now move on to Page 15 for balance sheet highlights: as of March 31, 2024, total assets increased by 0.9% compared to the year-end of 2023. This increase was mainly caused by the rise in current assets and long-term investments, which offset the decrease in property, plant, and equipment. Total liabilities decreased by 4.1%, primarily attributable to the decrease in accounts payable. Additionally, the debt ratio decreased by one percentage point and the net debt over EBITDA remained zero. Page 16 provides a summary of our cash flows. For the first quarter in 2024, we generated solid cash flows as cash flows from operating activities grew by 26.1% compared to the same quarter last year. The increase was mainly attributable to a decrease in settlement of accounts payable and payments for inventory. Regarding capital investment, the amount of CapEx declined by 6.9% year-over-year, of which mobile-related CapEx decreased by 50%, while non-mobile CapEx increased by 9.1%. The latter was primarily due to FTTH deployment and asset revitalization. On top of that, free cash flows increased by 56.9% year-over-year. Taken together, we maintain a solid balance sheet and continue generating strong operating cash flows, both of which are underpinnings to support our business expansion and seize digital opportunities. On Slide 17, let's turn to the table that presents operating performance against our forecast. In the first quarter of 2024, revenue was about in line with our estimate. For performance measures, income from operations, net income, EPS, and EBITDA all beat our forecasts by a modest margin. The better-than-expected performance was primarily driven by steady growth of our core business and improved profitability of the ICT business. That concludes our first quarter financial results. Let me turn the call over to Chairman Harrison.

Thank you, Vincent. On Slide 18 you can see our awards and ESG achievement highlights from the first quarter of this year. First, I'd like to report that relative to 2020, our revenue of the parent company increased about 5.7%, while carbon emissions experienced a downward trend by decreasing 40% in 2023. The inverse relationship between revenue growth and the carbon emissions trend highlights the effectiveness of our dual-track approach to operations and sustainable development. Moving forward, we will intensify our carbon reduction efforts by enhancing energy efficiency through innovative technology and the use of renewable energy. Additionally, we are the first telecom company in Taiwan to receive approval from EV100 and committed to transitioning 100% of our corporate fleet to electric vehicles by the year 2030. Besides, we once again ranked in the top five of companies in the S&P Global Sustainability Yearbook 2024 and was honored with the highest leadership level. The A ranking recognition involved the CDP climate change assessment and supplier engagement rating. In addition, we were the leading telco in Taiwan, receiving top awards for most committed to ESG and best Investor Relations from Finance Asia. This accolade attests to our position as an international industry leader with outstanding performance in all aspects of sustainable development. Furthermore, we clinched the first prize for overall ESG performance for three consecutive years from Global Views Monthly, one of the most prestigious ESG awards in Taiwan, which exempted us from competing in the same category for the next three editions. This outstanding outcome demonstrates a track record of long-term and stable performance in ESG evaluations and is featured on the annual honor roll. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

The first question, Neale Anderson of HSBC. Go ahead please.

Thank you. Good afternoon. Thanks for the presentation. I had a few questions relating to Slide number 11 please, the emerging enterprise applications. So with the percentage numbers it's a little bit hard to get a sense of the absolute contribution and growth in these business areas. So would it be possible to give us any more detail and say which is the largest one on an absolute basis and which business area you think has the capacity to be again larger in a few years' time, again on an absolute basis rather than percentage-wise? And the other question is relating to the revenue and margin trends in the data center and cloud business because we're getting something of a mixed picture from other telcos in this area. So it'd be great to get your views on that. Thank you.

Okay. Thank you, Neale, for your questions. So regarding the contribution of the emerging application revenues, we don't disclose detailed information, but what we will share is that the IDC contributed the most, followed by cybersecurity and AIoT. These are the key pillars, just for the first quarter. Yes. And for the revenue and margin trend on data center, what we can share is that for the recurring revenue of our IDC, the growth has increased. As we mentioned, the recurring revenue of IDC for this quarter year change is almost 8% and we think the recurring revenue makes up a big chunk of the total IDC revenue and it's on a healthy trajectory.

Thank you. Any comment on the margin side or competition in the IDC in the cloud area, please.

Okay, so basically for the margin for the data center, when we see the IDC business, we take a holistic view of this. For clients using our data center, normally they will use our other services. So when we look at the profit, we take it as a holistic view. This is unlike our competitors because their main business is on data center per se, but they don't provide integrated services to the clients. So together with our subsidiary, Chief Telecom, we are still the largest IDC service provider and we are way ahead of our competitors, and we are very confident that we can maintain our lead in this line of business.

Angela Tsai: Okay, maybe we have the first question from the platform. It is about that as the government announced the policy of raising the electricity fee, could Chunghwa Telecom Management share the impact on Chunghwa Telecom?

Okay, thank you. We don't anticipate a significant impact from the increase in electricity fees as we have continued to invest in energy efficiency. For example, our centralized RAN architecture and the retirement of 3G networks all contribute to energy savings. In addition, we have taken countermeasures to respond to the electricity cost increase. For the energy-intensive services like IDC, we have factored the electricity fee issue into our service contracts, including transferring the mark-up of the electricity fees to our clients. Thus, for us, the electricity fee increase is generally manageable. In the long run, we will still continue to invest in initiatives for carbon emission reduction, aiming to control the overall energy cost as well as to respond to ESG goals. Thank you.

Ladies and gentlemen, we appreciate your questions. If there are no more questions at this time, I will pass it back to Chairman Kuo for his closing remarks. Thank you.

Thank you for your participation. Goodbye.

Thank you, Chairman Kuo. We 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. Thank you and goodbye.