Earnings Call Transcript - CHT Q2 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Second Quarter 2023 Operating Results. 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 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.

Angela Tsai, Director of Investor Relations

Thank you. I'm Angela Tsai, Assistant Vice President of Chunghwa Telecom's Financial Department. Welcome to our second quarter 2023 results conference call. Joining me on the call today are Harrison Kuo, our Chairman and CEO; Chau-Young Lin, our recently appointed President; and Vincent Chen, our Chief Financial Officer. Before I turn the call over to Chairman Kuo, I would like to briefly introduce our new President, Dr. Ivan Lin. President Lin holds a PhD in electronic engineering from National Taiwan University of Finance and Technology. He has served in various leadership positions in information technology, enterprise business, and telecom laboratory at Chunghwa. President Lin also has a specialized interest and experience in IT advancements and AI-related development. On Slide 2, please read our disclaimers and most concerning our forward-looking statements. Now without further delay, I will turn the call over to Chairman Kuo. Chairman Kuo, please go ahead.

Harrison Kuo, Chairman and CEO

Thank you, Angela, and hello, everyone. Welcome to our second quarter results conference call. To begin, I would like to extend a warm welcome to our new President, Chau-Young Lin. We are happy to have his participation on today's call. Before Ivan walks us through our business overview and segment performance, I would first like to share our views and the exploration for Chunghwa Telecom on Slide 4. As I took office, I declared our mission publicly: to leverage our four assets, which include customers, partners, tech platforms, infrastructures, and talents to forge digital-enabler ecosystems, empowering individuals, families, governments, enterprise customers, global clients, and strategic partners to innovate and create value for customers, strategic partners, shareholders, and employees. I reiterate that our shared values are critical to driving business excellence and fulfilling our mission. The shared values that underpin our corporate culture include integrity, customer trust, innovation, value creation, as well as commitment and accountability. I believe these are the fundamentals that enable the whole company to move forward together. I also envision the company becoming an international benchmark enterprise recognized for sustainable development as well as a leading brand for digital ecosystem enablers based on the four assets aforementioned. To guide our success, I reviewed our financial benchmark, which is to become a top technology conglomerate far exceeding a market value of TWD 1 trillion. As our new management has recently onboarded with AI-related experience in particular, I am confident in our ability to position ourselves as a leading brand among digital ecosystem enablers. Our goal is to advance the development of an ecosystem-based industry environment as a leading telecom operator. Furthermore, we expect to continue outperforming our peers and extend our lead in providing our exclusive technology and solid capabilities. We believe the digital transformation trend will continue to prepare the industry for further growth and remain advantageous for our success. We rely on building ecosystems more than on typical industry competition. We aim to create accretive value for customers and enhance overall value for the industry, including ourselves. In July, we were invited to the New York Stock Exchange to celebrate the company's anniversary for our leadership team. We greatly appreciate this achievement and look forward to our investors' continued support. Now I will hand the call over to Ivan for the business overview.

Chau-Young Lin, President

Thank you, Chairman Kuo, and hello, everyone. I'm Ivan. I'm honored to be here today and happy to share the details of our second quarter business results. On Slide 5, please find our mobile business overview. In the second quarter, marketing in Taiwan further consolidated toward sales restructuring, and we are excited to see our revenue share in Taiwan's mobile market had increased year-over-year from 39.2% to 39.9%, as well as the quarter-over-quarter gross revenue of 39.7%. Our subscriber share also increased to 37% from 36.3% compared with the second quarter of last year. As a result, our incremental existing revenue as a share above our subscriber share increased to 2.9%, reflecting our healthy subscriber structure and better revenue generation compared to our peers. In addition, our postpaid ARPU reported a 4% year-over-year increase and continued growth for nine consecutive quarters. Our mobile service revenue also led the industry with a 6.5% increase, outperforming our peers and maintaining growth for 22 consecutive months on a year-over-year basis. This growth is attributed to upselling results from the 5G migration and the increase in postpaid subscriber numbers migrating from our 4G to 5G networks. We averaged a 44% uplift in mobile monthly fees, maintaining an upward trajectory quarter-over-quarter. Additionally, our international moment recovered, and prepared revenue increased, continuing to rise in the second quarter. Overall revenue this year is expected to recover to pre-pandemic levels. Regarding mobile quality, we are going to be recognized by OpenSignal for Taiwan's overall and 5G coverage and experience in June, showcasing our outperformance in network coverage and quality. Moving on to Slide 6, you will find an update on our fixed broadband business. We are delighted to see higher service adoption continuing to increase quarter-over-quarter, driven by our fixed broadband pick-up and upgraded promotional packages. Our sign-ups for services of 300 megabits per second or higher maintained a higher growth rate of 55% year-over-year, contributing to a 3% and 1% year-over-year increase. Overall, fixed broadband revenue is expected to increase for the 15th consecutive quarter. Going forward, we will continue our strategy of incentivizing subscription speed upgrades to enhance our ARPU. Now let's move on to the performance of our consumer business group, and Slide 8 presents the performance of our CBG groups. In the second quarter, income before tax for the CBG increased by 10.4% year-over-year, thanks to persistent growth in telecom services and a decrease in manpower expenses and depreciation costs. Total revenue for the CBG increased by 3.9% year-over-year, with mobile service revenue rising by 6.4% year-over-year, counting on stable 5G migration and increases in postpaid subscriber numbers. International roaming continues to recover, and broadband contributions increase in line with enhanced cross-border activities. Fixed line service revenue remained stable while fixed broadband revenue maintained its upward trend with a 2.9% year-over-year increase attributed to successful upselling along with speed upgrades. Sales revenue increased by 4.8% year-over-year, thanks to a stabilized supply and increased terminal sales during the quarter. Slide 9 further illustrates our consumer business group highlights. In the second quarter, our multiple-play package accounts continued to gain popularity with subscriber numbers for mobile, fixed broadband, and Wi-Fi services all gaining and demonstrating 10.2% quarter-over-quarter growth. Home Wi-Fi subscription numbers increased by 12.5% year-over-year alongside fixed broadband and MOD promotion packages. In addition, our video subscriptions continued their upward trend, increasing by 6.7% year-over-year, primarily driven by our popular OTT brand, Hami Video, thanks to its rich content, including extensive drama collections and professional baseball games. Despite broadcasting major sporting events and programs during this quarter, our IPTV brand/MOD managed a slight increase in both subscriptions and revenue in the second quarter due to successful upselling of SVOD features and channel services. We are continuing our content strategy to maintain our leading position as the largest video platform in Taiwan. Please turn to Slide 10 for an overview of our Enterprise Business Group performance. In the second quarter, the EBG reported an 11.9% year-over-year decrease in income before tax, primarily due to a decline in the tax business, which had relatively higher margins and a one-time recognition of large and small energy projects coupled with internal operational speed. Most sectors also contributed to a 1.2% year-over-year decrease in the total revenue of the EBG. In spite of the ICT revenue decreasing in the second quarter, mobile service revenues increased due to 5G upselling and a recovery in international roaming revenue. Sales revenue increased from our subsidiaries as well. Fixed line revenue slightly decreased year-over-year, mainly due to a decline in voice services, while data communication and broadband access revenue continued to grow as expected. Slide 11 illustrates our enterprise business highlights from the second quarter; most of our major applications demonstrated robust year-over-year growth. The 5G private network revenue, in particular, increased due to rising project numbers and revenue injections. Revenue from big data analysis, cybersecurity, IDC, and cloud services also achieved year-over-year growth of 67%, 17%, 14%, 16%, and 6%, respectively. However, total enterprise emerging application revenue decreased by 2.2% year-over-year, primarily due to one-time IoT revenue recognized last year related to smart energy projects. Excluding this one-time factor, we continue to see our IoT revenue develop on trade. Emerging enterprise application revenue rose by 16.7% year-over-year as we keep investing in developing 5G private networks and exploring AR platforms with acquired smart port applications in Southern Taiwan in the second quarter. This technology enhances our inspection capabilities and extends AR technology application to tourism and harbor parks, showcasing our leading ICT capabilities and potential revenue contribution. Slide 12 illustrates our international business performance. In the second quarter, income before tax for the IBG decreased by 6.6% year-over-year due to non-operating expenses such as foreign currency valuations and operational losses. Excluding this impact, IBG continues to experience strong growth with double-digit year-over-year profit generation. Total revenue for IBG increased by 23.2% year-over-year, primarily driven by rising demand for our international private leasing circuits and gains in emerging businesses in IDC and cloud services from global clients. For our international business expansion, we are pleased to share that we signed a Memorandum of Understanding (MoU) with the Provincial Electricity Authority of Thailand, ensuring that the PEA and we will collaborate on smart city solutions such as smart ports and smart meters. Now I would like to turn the call to Vincent for our financial highlights.

Vincent Chen, Chief Financial Officer

Thank you, President Lin. Good afternoon, everyone. I will now walk you through our second quarter financial results. Let's begin with Slide 13, income statement highlights. For the second quarter of 2023, we were glad to see our performance continue to exhibit growth momentum. Total revenues increased by 2% compared to the same quarter last year, as a result of growing mobile and broadband service revenues. Income from operations and net income grew by 2% and 2.9% year-over-year, respectively, with such growth mainly attributable to our strong core business performance. EBITDA maintained both quarterly and yearly growth. Overall, in the first half of the year, we delivered impressive operating performance, with total revenues increasing by 3.8% year-over-year, fueled by robust growth in our mobile, ICT, and broadband services. Income from operations and net income grew by 3.2% and 4.6% year-over-year, respectively, primarily due to our strong core businesses and growing ICT business. Notably, EPS increased by 4.6% year-over-year to TWD 2.52, hitting a six-year high. EBITDA continued to grow, and EBITDA margin remained above 40%. Now let's move on to Page 15 for our balance sheet highlights. Total assets as of June 30, 2023, compared to the end of 2022 grew by 1.3%, mainly due to the increase in our current monetary assets, such as negotiable certificates of deposits. Total liabilities rose by 21%, primarily attributable to the increase in dividend payable, leading the debt ratio to increase from 25% to 29%. Furthermore, net debt over EBITDA remains at zero. Altogether, these debt-related figures demonstrate the robustness of our balance sheet. Page 16 provides a summary of our cash flows. Cash flows from operating activities increased by 3.9% year-over-year, mainly due to decreased payments to suppliers and maintenance contractors, which offset the impact of rising interest and tax payments. Regarding our capital spending, the amount of cash outflows remained about the same compared to the same period last year. If we break CapEx into mobile and non-mobile components, mobile-related CapEx was lowered by 39.5%, while non-mobile CapEx increased by 28.9%. The latter was primarily due to IDC investments. On top of that, free cash flows grew by 6.9% year-over-year. Taken together, we maintained a robust balance sheet along with strong operating cash flows, which provide a solid foundation for us to be future-ready and allow us to remain committed to driving growth and creating long-term value for our shareholders. On Slide 17, the table presents our financial results against our financial guidance. In the second quarter of 2023, our revenue and profitability performance measures exceeded our financial forecast, with income from operations and net income surpassing financial projections by a modest margin. The better-than-expected performance was mainly driven by the performance of mobile and broadband services and our ICT business. In the first half of 2023, our performance measures surpassed our financial forecasts. Notably, all profit-related performance measures beat our guidance by more than 10% as a result of outperformance by core and emerging businesses. That concludes our overview of the Q2 financial results. Let me turn the call back over to Chairman Kuo.

Harrison Kuo, Chairman and CEO

Thank you, Vincent. On Slide 18 is our awards and ESG recognitions received in the second quarter. To highlight our overall commitment to sustainability, we officially joined Renewable Energy 100 in May, committing to achieving 100% renewable energy usage by 2040. We have also set greenhouse gas reduction near-term targets approved by the SBTi. Our goal is to reduce Scope 1 and Scope 2 greenhouse gas emissions by 50% compared to the base year of 2020. Furthermore, we are among the first companies in Taiwan to commit to achieving a Net Positive Impact on biodiversity and No Net Deforestation by 2030. Additionally, our ESG practices and other achievements have received global recognition. We were awarded an upgraded AA rating for MSCI's ESG rating, placing us in the top quartile among telecommunications industry peers. These achievements solidify our position as one of the global leaders in sustainable development. Thank you for your attention. At this time, I would like to open the conference call for questions.

Operator, Operator

Thank you for your participation. Goodbye. Thank you, Chairman Kuo, and 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.