Earnings Call Transcript - CHT Q1 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom's conference call for the company's first quarter 2023 operating results. This conference call is being broadcast live over the Internet. A webcast replay will be available within an hour after the conference concludes. Please visit the CHT Investor Relations website at www.cht.com.tw/ir under the IR Calendar section. Now I would like to hand it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please proceed.

Angela Tsai, Director of Investor Relations

Thank you. This is Angela Tsai, Director of Investor Relations for Chunghwa Telecom. Welcome to our first quarter 2023 results conference call. Joining me on the call today are Harrison Kuo, our Chairman and CEO; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the highlights in 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. I'd like to please note the safe harbor statement. Now I will turn the call over to our Chairman. Chairman, Kuo, please go ahead.

Shui-Yi Kuo, Chairman and CEO

Thank you, Angela, and hello, everyone. Welcome to our first quarter results conference call. As this is the first time I'm speaking to investors as the Chairman and the CEO of Chunghwa, I would like to thank all our investors for your long-term support over the past years and I am looking forward to continuing our relationship going forward. Chunghwa Telecom is truly a trustworthy company with growth opportunities and strong corporate governance. Now please flip to Slide 4 for the highlights of the first quarter. To begin, we would like to bring to your attention that NCC, our regulator, received conditional approval of the mergers among our peers in the first quarter, which we believe is a positive move for promoting healthy market competition in Taiwan. Based on the steady 5G penetration and the future industry landscape, we expect stable mobile market development that will further support our revenue growth momentum going forward. For the results of the first quarter 2023, we were pleased that we beat all financial targets despite the uncertainties in the macroeconomic context. Thanks to the vibrant growth of our three business groups, which all delivered positive year-over-year increases in each segment's revenue and profits. In addition, with our consistent business strategies that drive our mobile and broadband services, our telecom services continued to deliver robust performance in the first quarter, including our 6.6% year-over-year mobile service revenue growth, which outperformed to lead the industry, as well as the increase in fixed broadband subscriptions of high-speed 300 megabits per second and above, which exceeded the record of 1 billion. Our technology capabilities also continue to fuel the performance of innovative applications. As a result, EBG's emerging enterprise application revenue demonstrated strong growth and was up by more than 40% year-over-year. For CBG, subscription and advertising revenue from MOD and home video accelerated due to our 5G + 4D multi-angle broadcasting capabilities utilized during the broadcasting of the World Baseball Classic in the quarter. Now let's move on to a closer look at our mobile business on Slide 5. In the first quarter, we were delighted to report that we expanded our leadership in subscriber share and revenue share in Taiwan's mobile market, climbing to 36.8% and 39.7%, respectively, with growth on a year-over-year and quarter-over-quarter basis, confirming our sustainable leading position in Taiwan. We are even more pleased to see our revenue share exceeded our subscriber share by 2.9%, reflecting a healthier subscriber structure compared to our peers. Our mobile service revenue also took the lead in the industry with a 6.6% increase, maintaining its growth for 21 consecutive months on a year-over-year basis, owing to the upsell resulting from 5G migration and the rise in postpaid subscriber numbers. For those who migrate from our 4G to 5G, we observed an average 43% uplift in their mobile monthly fees. Additionally, supported by revitalized cross-border activities, our roaming and prepaid revenues continued to ramp up in the first quarter. Total mobile subscriber numbers, excluding IoT SIMs, increased by 4.2% year-over-year, backed by rising prepaid and postpaid subscriber numbers, maintaining its upward trajectory for the eighth consecutive quarter. In April, we launched Line Mobile Taiwan to leverage digital capabilities on both sides to jointly enhance the quality of customer service. We will continue our value creation strategy to expand our ecosystems going forward. Moving on to Slide 6, you may find an update on our fixed broadband business. We rolled out a speed upgrade promotion package in the second half of 2022, which was very well-received and exceeded our expectations. Following the speed upgrade momentum, we are delighted to announce that our accumulated subscribers adopting 300 megabits per second and above surpassed the threshold of 1 million in the first quarter. This success affirmed our strategy of focused resource allocation on attracting high-speed service adoption. Going forward, we will continue to shift our resources towards growing 300 megabits per second, 500 megabits per second, and giga-level subscriptions. In the first quarter, total fixed broadband revenue increased by 2.5% year-over-year, driven by digital trends and their opportunities. Fixed broadband ARPU also continued its growth trend for the 14th consecutive quarter, increasing by 0.8% year-over-year. Now, let’s move on to the performance of our customer-centric business groups. Slide 8 presents the performance of our CBG Group. In the first quarter, income before tax of CBG grew by 3.3% year-over-year, mainly due to the enduring growth of telecom services. Total revenue of CBG rose by 4.1% year-over-year while mobile service revenue increased by 7.2% year-over-year, propelled by stable 5G migration and the increase in postpaid subscriber numbers. Fixed-line service revenue was flat while fixed broadband revenue maintained its upward trend due to successful upselling along with the speed upgrade and strong growth of home Wi-Fi services. Sales revenue increased by 4.4% year-over-year, mainly due to the stabilized iPhone supply during the quarter. Slide 9 further illustrates our Consumer Business Group highlights. In the first quarter, our multiple-play package continued to support the growth momentum of our CBG business. The subscriber numbers for mobile, fixed-broadband, and Wi-Fi services all showed a 17.6% quarter-over-quarter growth. Particularly, our Home Wi-Fi subscription numbers increased by 1.5 times on a year-over-year basis, boosting our subscription-based revenue and sustaining the popularity of home-centric applications. Video subscription numbers increased during the quarter, thanks to our attractive content and effective marketing strategies. MOD’s revenue and subscriber numbers rose due to our successful bundled plans promoting MOD and fixed broadband together. Hami Video sign-ups soared due to our well-received broadcasting of the World Baseball Classic held in Taiwan. We demonstrated our 5G + 4D panorama broadcasting technology and provided excellent viewing experiences. The success was also reflected in the growth of our advertising revenue. We will continue to invest in sports events and exclusive content to maintain our video platform's leading position in Taiwan. Please turn to Slide 10 for an overview of our enterprise business group's performance. In the first quarter, EBG reported a 3.7% year-over-year increase in income before tax, demonstrating its robust growth momentum. Year-over-year, total revenue of EBG increased by 8.2%, primarily driven by strong growth in our ICT business. Revenues from 5G private networks, IDC, cloud, cybersecurity, and big data services all reported double-digit year-over-year growth. Additionally, other revenue from EBG increased by 32.6% year-over-year due to the recognition of ST-2 satellite compensation from the government. Mobile service revenue was flat in the first quarter, primarily attributable to the continued 5G upselling and the growth of international roaming revenue driven by the recovery of international business activities and tourism. Furthermore, we were pleased to see the digital transformation trend and its opportunities continue to enhance our data communication and broadband access revenue, although fixed line revenue decreased year-over-year in the first quarter, impacted by decreased voice revenue. Slide 11 illustrates our enterprise business highlights. In the first quarter, on a year-over-year basis, our total enterprise emerging application revenue increased by 31.5%, as most of our major applications demonstrated a double-digit growth rate. Notably, 5G private network and big data analysis applications displayed strong market potential, doubling their revenues on a year-over-year basis. In fact, we constantly leverage 5G technology to advance smart medical applications. In the first quarter, we successfully facilitated a 5G private network in a hospital to create an immersive AR environment for da Vinci surgical training via 3D technology assistance, marking a milestone for our hospital partners. Additionally, our AI platform solutions, combining cutting-edge AI and big data analysis capabilities, are being well-received by customers. We continued to acquire projects involving chatbots and image analysis in the judiciary, power-saving practices, and the security industry. We were also excited to see our cloud, IDC, and cybersecurity services achieve significant year-over-year revenue growth in the first quarter, yielding 39%, 39%, and 32% growth, respectively, due to increased demand driven by the digital transformation trend and its opportunities. Slide 12 illustrates our international business performance. In the first quarter, our international business group revenue increased by 24.3% year-over-year, mainly driven by emerging business revenue and fixed broadband revenue due to strong demand for International Private Leased Circuit, IDC, and cloud services from global clients. In the first quarter, our subsidiary in Japan made great strides as they successfully received the green light to acquire large-scale ICT construction projects in Japan by obtaining Japan’s Specific Construction License for the telecommunication construction business. With the license, we anticipate business expansion in Japan, particularly in large ICT projects and 5G private network construction areas. Now I would like to turn the call to Vincent for our financial highlights.

Vincent Chen, CFO

Thank you, Chairman Kuo. Good afternoon, everyone. I will now walk you through our first quarter financial results. Let's start with Slide 14, income statement highlights. For the first quarter of 2023, total revenues increased by 5.7% to TWD54.21 billion from TWD51.30 billion compared to the same quarter last year. The increase was primarily driven by robust mobile service and ICT revenues. Income from operations grew by 4.4% to TWD12.17 billion, mainly attributable to higher profits from the ICT business and government compensation related to ST-2. EPS increased by 6.4% to TWD1.24 from TWD1.17 on a year and EBITDA also grew by 3.3%. EBITDA margin continued to stay above 40%. Now moving on to Page 15 for balance sheet highlights. Compared to the end of 2022, total assets on March 31, 2023, grew by TWD1.38 billion, mainly due to an increase in current assets. Total liabilities were tied by 6.4%, primarily attributable to the decrease in accounts payable. This brings our debt ratio down from around 24% to 23%. On top of that, net debt over EBITDA remains zero. Altogether, this ratio showcases how robust our balance sheet is. Page 16 presents the summary of our cash flows. Cash flows from operating activities decreased by 5.2% on year, mainly due to the settlement of salary payable and payments to suppliers and maintenance contractors. As for capital expenditure, the total amount of cash outlays increased by 3.6%. Specifically, mobile-related CapEx was lowered by 35% on year, whereas non-mobile related CapEx increased by 33% on year, mainly due to IDC investments. Additionally, free cash flows decreased by 12.2% on a year-over-year basis. Overall, our strong balance, together with robust cash flows from operations, lays out a solid foundation for us to navigate through economic uncertainty and remain committed to driving operational growth and creating long-term value for our shareholders. On Slide 17, the table reports financial results against our financial guidance. In the first quarter of 2023, all performance measures, including revenue, income from operations, net income, EBITDA, and EBITDA margin exceeded our financial forecast. Notably, profit-related performance measures, such as income from operations, net income, and EBITDA, exceeded our guidance by a modest margin due to continuously strong performance in core and ICT businesses. That concludes the overview of our Q1 financial results. Let me turn the call over to Harrison.

Shui-Yi Kuo, Chairman and CEO

Thank you, Vincent. On Slide 18 are our awards and ESG recognitions received in the first quarter. In the Sustainability Yearbook 2023, we were awarded the prestigious Top 5% S&P Global ESG Score, competing against over 7,800 companies worldwide. Our impressive performance also placed us in the top 5% and took the 3rd ranking in the Telecommunications group. At the FinanceAsia Awards, we proudly received three Gold Awards for Best Overall Company, Best Telecommunications Company, and Best Corporate ESG Strategy. I would like to thank investors again for your encouraging support. Moreover, our commitment to corporate governance excellence was acknowledged by the Taiwan Stock Exchange, recognizing us as one of the top 5% companies. This marks our 8th time receiving awards for best corporate governance among Taiwanese companies in 2022. Our subsidiaries, Chief Telecom and Chunghwa Precision Test, also received acknowledgment for their corporate governance, showcasing the consolidated strengths of the CHT Group. These achievements solidify our position as a leader in the telecommunications industry and exemplify our unwavering commitment to sustainability, ethical practices, and corporate excellence. Guided by responsible business principles, we remain dedicated to delivering long-term value for our stakeholders. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open up our conference call for questions.

Operator, Operator

And our first question comes from Neale Anderson of HSBC. Go ahead, please.

Neale Anderson, Analyst

Thank you. Good afternoon. Two questions, please, on the International Business Group. So the revenue growth was quite good. Do you expect that to continue through this year? I'm trying to understand how much is seasonal or how consistent and recurring you expect that to be? And the second one relates to the Japanese subsidiary and the possibility of large telecom construction projects in Japan. I understand that's a pretty competitive market. So I'm just wondering what you feel Chunghwa's competitive edge is in Japan and in other markets outside Taiwan? Thank you.

Vincent Chen, CFO

So for the first question about the International Business segment and whether their performance will be consistent and how we expect it in the future. What we can share is that we are still very optimistic about the performance of our IPG. We have two strategies, which are bringing the world to Taiwan and bringing Taiwan to the world. So far, we think the business in terms of the combination is quite strong, and we expect both strategies to persist and continue to grow in the future. Regarding your second question about the Japanese construction license, our advantage is being able to provide a more comprehensive ICT solution to our customers. This will definitely benefit our Taiwanese customers who explore business opportunities in Japan. As long as we establish our reputation in Japan, we can foresee more opportunities from global clients. Thank you.

Neale Anderson, Analyst

Thank you. Understood.

Operator, Operator

Next question is from JPMorgan. Go ahead, please.