Earnings Call
Chunghwa Telecom Co Ltd (CHT)
Earnings Call Transcript - CHT Q1 2020
Operator, Operator
Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's First Quarter 2020 Operating Result. 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 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'd like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead.
Angela Tsai, Director of Investor Relations
Thank you, operator. Hello, everyone, and welcome to our first quarter 2020 result conference call. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom. During today's call, Mr. Harrison Kuo, our President and Chief Financial Officer, will provide an overview of our business achievement during the quarter and discuss operating highlights. He will be followed by Ms. Fu-Fu Shen, our Assistant Vice President of Public Affairs, who will provide financial highlights. We will also have a Q&A session. Now I would like to hand the call over to President Kuo. Please note your safe harbor statements on Slide 2. Mr. President Kuo, please go ahead.
Shui-Yi Kuo, President and Chief Financial Officer
Thank you, Angela, and hello, everyone. Welcome to our first quarter 2020 earnings result call. During the first quarter of 2020, the COVID-19 pandemic continued to slow down overall economic activities. Our enterprise business and the international roaming revenue were affected by social distancing and work-from-home policies, as many international borders have been closed, and many people are in lockdown. However, we were fortunate to experience some pandemic business opportunities in the areas of cloud service, enterprise conferencing, and IPTV and multiservices. In general, the 5G services launch is coming, and the COVID-19 pandemic accelerates the development of digital application and the digital economy. We believe that with our leading spectrum resources, cutting-edge ICT technology, and leading market share in both enterprise and consumer segments, we will be in a better position to respond to future competition and business development. In the first quarter of 2020, our mobile revenue and subscriber market share continued to grow, reaching 38.3% and 37.2%, respectively, which provides a solid foundation for the upcoming 5G service launch in the third quarter. In the broadband business, we experienced ARPU growth, and we're encouraged to see that existing broadband subscribers continue to migrate to higher speed services. As mentioned earlier, the increasing demand for enterprise conferencing services and online may bring growth opportunities in this sector. In addition, our MOD business was also relatively resilient during the pandemic. In the first quarter, both MOD revenue and subscribers increased year-over-year. Although the 2020 Tokyo Olympic Games will be postponed to 2021, we will continue to introduce attractive content, including on-demand and OTT services, to enhance revenue and subscriber numbers. During the quarter, our ICT revenue decreased year-over-year, mainly due to a higher baseline in the first quarter of 2019. We expect most ICT revenue to be injected in the second half of the year. However, we were glad to see a continued increase in streaming revenue contribution from our ICT business due to the success of our in-house development services. Now allow me to walk you through each of our business lines. On Slide five is some updates on our mobile business. In the first quarter, our IoT subscriber numbers continued to increase, and our back-to-school initiatives continue to add bundled subscriptions at a higher ARPU than blended ARPU. We continued to experience a decrease in mobile service revenue among our peers quarter-over-quarter, mainly due to our efforts of guiding subscribers to adopt higher price plans. Slide six demonstrates the performance of our broadband business. We were glad to see continued ARPU growth in the first quarter of 2020, which reflected our success in migrating subscribers to adopt higher-speed fiber services. As of March 2020, the number of users signed up for plans with connection speeds of 100 megabits per second or higher increased by 11.4% to 1.62 million from the prior year, and the number of subscribers signed up for connection speeds of 300 megabits per second or higher increased by 82.6% year-over-year. Furthermore, as demand for work-from-home and home-centric applications increased, we see potential opportunities for broadband service adoption and the higher speed migration to mitigate subscriber loss due to mobile Internet substitution and is expected to further contribute to overall ARPU intent. Moving on to Slide seven. We are pleased to report that in the first quarter, our IPTV MOD platform remained the largest video platform in Taiwan with more than 2.08 million subscribers. Revenue increased by 2.9% year-over-year. Even though the expected benefits from the 2020 Tokyo Olympic Games will be postponed to 2021, our service remained to enhance overall MOD performance by accelerating 4K content offerings and OTT services, such as Netflix fully 4K channels and VOD Hollywood films to strengthen subscriber numbers and revenue. In addition, with growth opportunities from home-centric services, overall we are confident our IPTV business will maintain growth trajectory going forward. Please turn to Slide 8 for an update on our ICT initiatives. As we mentioned earlier, a large percentage of our ICT-related project revenue will be recognized in the second half of 2020. Major in-house ICT products, such as information security, iEN, and ITS are also expected to perform well in that period. In addition, due to COVID-19 driven lockdown, we saw increases in demand for IDC and cloud services from the gaming industry and video conferencing applications. We will closely monitor and acquire related opportunities going forward. At this point, I would like to turn the call over to Fu-Fu to review our financial results.
Fu-Fu Shen, Assistant Vice President of Public Affairs
Thank you, President Kuo. Now I will go through our financial results in detail. Beginning on Slide 10. Slide 10 provides highlights of our income statement. For the first quarter of 2020, total revenues decreased by 6.2%, and operating costs and expenses decreased by 8.1% year-over-year. Our income from operations increased by 1.2%. Net income decreased by 0.4% year-over-year. In addition, EBITDA margin increased to 40.19% from 37.33% in the same period of 2019. Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the first quarter of 2020 was mainly due to decreases in handset sales revenue, fixed voice revenue, ICT project revenue, and mobile service revenue. These decreases were partially offset by increases in data communication revenue and MOD revenue. The decrease in mobile service revenue was the result of market competition and VoIP substitution. Moving on to Slide 12. Our operating costs and expenses decreased by NT$3.31 billion or 8.1% year-over-year in the first quarter, mainly due to lower costs of goods sold, interconnection costs, and ICT project costs. Slide 13 shows the cash flow from operating activities for the first quarter of 2020 increased by TWD0.11 billion or 0.8% compared to the same period of 2019. This was mainly due to a decrease in income tax payment. As of March 31, 2020, we had TWD16.59 billion of cash and cash equivalents, decreasing by TWD20.64 billion or 55.4% compared to the same period of 2019. The decrease was mainly attributable to the payment of concession fees for the 5G frequency spectrum auction, which was partially offset by the increase in short-term bills payable. Slide 14 shows our operating results as compared to our guidance. In the first quarter of 2020, revenue was lower than our first quarter guidance. However, our operating income, net income, and EPS results exceeded our first quarter guidance. Lastly, slide 15. We are budgeting capex of TWD30.7 billion for 2020. We will continue to focus our capex spending on our growing and emerging businesses and solidify our market position. Major mobile 5G CapEx will be spent in the second quarter and third quarter in 2020. Thank you for your time. We would now like to open the line for questions.
Operator, Operator
Our first question is coming from Neale Anderson at HSBC. Please go ahead.
Neale Anderson, Analyst
Pardon. I was on mute. I had two questions, please. The first one relates to mobile roaming. Are you able to say what percentage of service revenue is made up of roaming revenue? And how do you expect that to look this year? The second question is also on the mobile business. It's really about the distribution and retail channel. Are you planning to take much costs out of this distribution this year? And how will this impact EBITDA?
Fu-Fu Shen, Assistant Vice President of Public Affairs
About the mobile revenue, as you know, the international, just like we mentioned earlier in the presentation, because here, a lot of nation border cross-border kind of lockdown, it's really impacting a lot of international roaming. We have some contracts. That's a minimum guarantee kind of setup. We need to resign those contracts, and that really has some impact. So although the service revenue impact for international mobile roaming revenue is kind of a percentage not really high, it still has some impact on the overall.
Operator, Operator
Thank you. Now I will hand it over to Neale Anderson.
Neale Anderson, Analyst
I didn't hear anything after your response to the first question. So, the second question related to the potential to take costs out of the retail distribution channel?
Shui-Yi Kuo, President and Chief Financial Officer
Our purpose to provide a digital shop is to provide our customers with a better experience and give a more convenient environment to access our services.
Operator, Operator
The next question is coming from James Wang, UBS. Go ahead please.
James Wang, Analyst
So, my question relates to the profitability of the ICT business. I just want to get a sense of how it compares to the traditional telecom business. So, for example, if you look at the first quarter, revenues are down but EBITDA is up. And I think you guys mentioned that part of it is because of lower ICT costs. So, I just want to get a sense of the ICT profitability profile. Second question is around the CapEx. So, for the full year, you're guiding to CapEx to increase, and yet first quarter, it's down. So, I'm just wondering how much impact did the COVID-19 situation have on the first quarter CapEx? And is this a result in a delay in your 5G launch by Q3?
Fu-Fu Shen, Assistant Vice President of Public Affairs
You see the first quarter, our ICT revenue was actually not really meeting our guidance. So that is why we have lower ICT costs than we expected. For the first quarter, yes. So, you mentioned how is the ICT profit compared with the traditional telecom business, right? I think there's quite a large gap out there because this is a totally different business. Yes. So that's why for Chunghwa, we've been putting a lot of effort over the past several years to gauge that difference, because we developed our in-house solution products to enhance our ICT projects to improve profitability.
James Wang, Analyst
I think Fu-Fu addressed my question about the ICT profitability. I’d like to expand on my question. Chunghwa has a significant stake in the enterprise ICT business, and I want to understand if the growth in that area is expected to lead to improved net profit growth as well. Additionally, regarding the CapEx in the first quarter, which has decreased, I’m curious about the impact of the virus situation during that time and whether you anticipate being ready to launch 5G by the third quarter this year.
Fu-Fu Shen, Assistant Vice President of Public Affairs
Are you asking about the enterprise ICT question?
James Wang, Analyst
Yes. Also, whether profit margin is better for you as compared to the traditional telecom business?
Fu-Fu Shen, Assistant Vice President of Public Affairs
I'm not sure if I fully answered your question. The stability of the line is uncertain at the moment. However, I want to reiterate that the profitability of ICT is typically lower than that of traditional telecom businesses. That's why at Chunghwa, over the past few years, we've been putting significant effort into improving that line by developing our own products and solutions. We aim to incorporate ICT-related projects to enhance our overall margin, which should ultimately boost the profitability of ICT.
Operator, Operator
Mr. James Wang?
James Wang, Analyst
Yes.
Operator, Operator
Okay, our line is still unstable, so please stay on the call. Mr. James Wang, do you have any other questions for our speakers today?
James Wang, Analyst
No. Just whether you'll be ready to launch 5G by the third quarter this year.
Operator, Operator
Mr. James Wang, I will put you back to the conference first.
Fu-Fu Shen, Assistant Vice President of Public Affairs
Operator, can you hear me? Hello?
Operator, Operator
Yes. I can hear you. Yes.
Fu-Fu Shen, Assistant Vice President of Public Affairs
Yes.
Operator, Operator
So we are now...
Fu-Fu Shen, Assistant Vice President of Public Affairs
Yes. I'm sorry, I think on our end, we've been dropping out of line. We really apologize for that. Okay. If anybody has any questions to ask, we'll see you in the conference room.
Operator, Operator
The next question is coming from Jack Hsu, Sinopac Security. Please go ahead.
Jack Hsu, Analyst
I have two questions. My first question is about, what's our goal about 5G subscribers at the end of 2020 and 2021? This is my first question. My second question is what are our rate plans for the 5G? This is my question.
Fu-Fu Shen, Assistant Vice President of Public Affairs
We don't have specific 5G subscriber shares for 2020. But we believe since we're going to launch, the schedule for 5G launch for this year is the third quarter. We believe that this year, the subscriber numbers should be kind of limited. The second year should be kind of major. But since the overall rate, right now, you got to know the situation. So, we still kind of depend on the upcoming kind of situation. We have not found yet. Okay? And I think yes.
Shui-Yi Kuo, President and Chief Financial Officer
About the 5G plan, for 5G pricing, we will refer to global first-movers model, future 5G application scenarios, and our customer demand to create customer value as our goal. However, we all know that 5G applications are diversified, so its pricing structure is not comparable to that of 4G.
Operator, Operator
The next question is coming from Ma at Fidelity Singapore. Please go ahead.
Unidentified Analyst, Analyst
Just a question on the side, right? So could you explain what is the main reason behind your relatively large 9% decline in operating costs as well as the 5% decline in marketing expenses? And will this be sustainable throughout the year?
Fu-Fu Shen, Assistant Vice President of Public Affairs
I think like we mentioned earlier, the first quarter because our revenue actually declined and didn't really meet our guidance, especially the ICT revenue. Our cost expenses, especially for the ICT-related costs, were lower than we expected. I think that's the major reason for that. As for the whole year, since we expect our major ICT revenue will be booked in the second half of this year, when that happens, the related costs will also occur accordingly.
Unidentified Analyst, Analyst
Yes. Just a quick follow-up on that. So your first quarter was better than your guidance, right? So does that mean your ICT business is negative in terms of margin? I mean you have the guidance. Your revenue missed the guidance, right? But your profit is better, right? So yes, in simple terms, my question is what is the major driver behind about 5% to 8% fleet in your profit, let's say, operating profit or net income? What is the major reason?
Fu-Fu Shen, Assistant Vice President of Public Affairs
I think ICT is just part of the reason. Actually, I did mention about the handset sales. Handset sales in the first quarter didn't meet the guidance. That's another reason for that. ICT, we still got margin. It's profitable. But hence, it's related to some handset subsidies and that kind of stuff. So that's part of the reason for that. So basically, revenue missed the guidance, but ICT still had margin.
Unidentified Analyst, Analyst
Okay. So you missed the revenue, but part of the revenue is loss-making because it's a handset subsidy, right? That is understandable. And that is a major reason for the first quarter profit. Is that a fair understanding?
Operator, Operator
Mr. Hansen Ma, please stay online. Could you repeat your question again?
Unidentified Analyst, Analyst
Sure. Yes. So I just want to confirm that the primary reason for the first quarter upbeat to your profit guidance is because your handset sales revenue was lower than expected. And obviously, handset sales had a negative margin because of the subsidy. Is that a fair understanding? Or is there anything else affecting the first quarter profit, such as greater-than-expected cost reduction, etc.?
Fu-Fu Shen, Assistant Vice President of Public Affairs
Yes, exactly. I think the major reason for the first-quarter revenue guidance is handset sales revenue. And second, the ICT, that's the secondary part of the reason.
Operator, Operator
Our next question is coming from Billy Lee, Crédit Suisse.
Billy Lee, Analyst
I've got a few questions. The first one, I think you may have answered that. I'm not sure if I caught that correctly. So I just wanted to know the 5G schedule. So are you going to launch it in 3Q'19 as planned? And is there any impact from COVID-19 on the schedule of the 5G rollout? That's the first question. Second question is, could you comment a bit on the current market competition in the fixed broadband segment? And the last question is around Internet revenue. Could you elaborate on why it is flat?
Shui-Yi Kuo, President and Chief Financial Officer
As I mentioned earlier, although the pandemic continued to impact the global economy, currently, we still continue our 5G network deployment, and we aim to launch our 5G service in the third quarter of 2020. There's no change.
Fu-Fu Shen, Assistant Vice President of Public Affairs
Your second question about the fixed broadband market competition, right? Yes, fixed broadband market competition. Regarding the fixed broadband market competition, I think right now, we will still face cable modem competition. That's still continuous kind of competition. But for Chunghwa, if you look at our fact sheet, we continue to lose some customers. But the good thing is if you look at our broadband access revenue, I think this quarter, we have some performance. We have some growth comeback. That's because we've been doing pretty good in migrating our customers to higher speed service. Because of COVID-19, we really see some opportunity, and we migrate people to higher-speed service. We see incremental ARPU happening. I think over speaking, we defend the market pretty well. Let me put it this way, okay? As for your third question, the Internet revenue. Why it is flat? Of course, this is most likely due to our emerging services supposedly included under this segment. But right now, some of them, we are still working on them, like for example, IDC, information security, and cloud, most of them are still growing, but not the big ones, but hopefully, they will get bigger lately. So hopefully, this can happen. And of course, in this COVID-19, we do see some opportunity. But this is not just in this one or two quarters. It's going to happen in the future. And the digital age is coming, and we do see some opportunities, like our pricing you know present in our overview page. We mentioned about the future opportunity. Hopefully, we will inject new avenues for this segment.
Billy Lee, Analyst
I see. Just a quick follow-up. And I really intend that under the Internet revenue business, this large chunk of the business comes from broadband which is accounted under data communication?
Fu-Fu Shen, Assistant Vice President of Public Affairs
Yes. You mean the broadband, actually, partially is urban access, right, that under our domestic, that's broadband fixed. And another part is actually Internet, right? Under the data, we call the data communication, yes, on the Internet.
Shui-Yi Kuo, President and Chief Financial Officer
Our broadband revenue performance was very good in the first quarter. But some ICT projects from public sectors were postponed a little bit to the second quarter or third quarter. So the Internet segment revenue was flat in the first quarter.
Fu-Fu Shen, Assistant Vice President of Public Affairs
When you say the large chunk of business comes from broadband, which is under data communication. I would say that, actually, when we're talking about the application under the Internet, that's actually the emerging business, especially we are looking at in the future. So hopefully, this is something going forward. We would like to see it will continue to increase. So, probably this quarter, we have a small hiccup, but hopefully, we're really expecting some growth in the second quarter.
Operator, Operator
Our next question is coming from Sara Wang, Morgan Stanley. Go ahead please.
Sara Wang, Analyst
So, I just have one question on 5G pricing. So it seems, currently, all big three operators are offering early bird 5G plans at around 13.99, but there are some smaller operators offering much lower prices. So can we ask Chunghwa's strategy on the official 5G pricing? Or do we see any pressure to actually lower the price from the early bird pricing level here?
Fu-Fu Shen, Assistant Vice President of Public Affairs
I think we will stick with our 13.99 strategy. You see, for example, like we recently, when we launched Samsung S20, we actually included this kind of offer in the contract for customers subscribing at 13.99 if they can sign with us with the option for 5G plans. But out of 90% of our customers actually signed up with 5G plans, which means, once we launch the 5G service, those customers can automatically migrate to 5G. So customers see that there is interest in 5G service. We believe this is still a good strategy. We will stay with this. Our goal is not only for speed and data usage; we really would like to see some innovative applications to be included for use in new experiences when they migrate to 5G service. Thank you.
Operator, Operator
The next question is from Amber Lee at Yuanta. Please go ahead.
Yufang Lee, Analyst
I believe last time Chunghwa indicated that you still expect a decline in mobile service revenue for the full year 2020. Given the early 5G offerings in the market and looking at the initial adoption pace along with client feedback, do you still anticipate a decline in service revenue for this year? Or do you foresee a return to a growth trajectory starting this year?
Fu-Fu Shen, Assistant Vice President of Public Affairs
We still expect mobile service revenue in 2020 to experience a decline since the subscription for 5G in the initial stage remains quite limited. This year, we view the early bird offering primarily as a trial, but we aim to keep our high-end customer retention and preserve the user experience. Therefore, we anticipate the overall declining trend to continue this year. As we mentioned, next year is hopeful, as we expect 5G to show some positive performance.
Yufang Lee, Analyst
Okay. And to follow up on the realities in your first question. Should we conclude that handset sales itself actually generate negative margins? Or is it just a lower-margin business instead of negative?
Fu-Fu Shen, Assistant Vice President of Public Affairs
Margins from handset sales are indeed lower, but not necessarily negative.
Shui-Yi Kuo, President and Chief Financial Officer
I answer your question. Because under IFRS 15, the handset sales and our telecom service revenues should be allocated together. So the handset sales usually have a negative margin, but this number is not very big. And I add one more information about your question number one. I think the 5G will take time to educate this market, and we will stimulate our customers to use 5G services. Our goal will be to provide more and more innovative services and applications to customers. So I think in the long run, 5G will boom. Thank you.
Yufang Lee, Analyst
Another one for me on payout. I think this year, for 2019, we have seen a little uptick on the payout ratio as the EPS coming down. If the declining trend in earnings persists, should we expect a potential uptick in payout ratio in the coming years?
Operator, Operator
Ms. Amber, would you please hold on a second?
Yufang Lee, Analyst
Okay.
Operator, Operator
Lee, would you please repeat your second question?
Yufang Lee, Analyst
Yes. My question is on the dividend. This year, the announced EPS implies a payout of roughly 100% compared to below 100% in the past, I think, over five years. If earnings continue to decline in the coming years, should we expect the new normal of payout to be above 100%?
Fu-Fu Shen, Assistant Vice President of Public Affairs
Basically, our payout is in line with the earnings, okay? So the ratio usually depends on the regulation. It's related to the IFRS stuff. So it's really hard to say. Every year, we have some different minor differences, okay? Sorry for that. So as for the payout, the dividend level still depends on we will kind of review it every year. So we cannot give you any firm answer for that. Sorry for that.
Operator, Operator
The next question is coming from Billy Lee, Credit Suisse. Go ahead, please.
Billy Lee, Analyst
Just one more from me. I have a question on the MOD segment. I noticed that in the first quarter, you are seeing a Q-o-Q decline in the MOD segment despite an increase in MOD subscribers. So does that mean there's increased competition in the MOD segment? And what are you seeing there to justify such an interesting trend?
Fu-Fu Shen, Assistant Vice President of Public Affairs
That the fourth quarter, we actually involved some advertising revenue. The first quarter has a little bit slower that part, but we actually have some review for the upcoming second quarter. We believe during the second quarter, we will get back to the growth path. Yes. Thank you for that question.
Operator, Operator
If there's no further questions, I will turn it back over to President Kuo. Go ahead, please.
Shui-Yi Kuo, President and Chief Financial Officer
Thank you for your participation. Goodbye, everyone.
Operator, Operator
Thank you. Thank you, President Kuo. 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. Goodbye.