Earnings Call Transcript - CHT Q2 2022

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Second Quarter 2022 Operating Results. During the presentation, the lines will be on listen-only mode. 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'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. This is Angela Tsai, Director of Investor Relations for Chunghwa Telecom. Welcome to our second quarter 2022 results conference call. Joining me on the call today are Harrison Kuo, our President, and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing an overview of our business in the second quarter, followed by a discussion on segment performance and financial highlights. After, we will move on to the question and answer portion of the call. On Slide 2, please note our Safe Harbor statement. Now, I will turn the call over to President Kuo. Please go ahead, President Kuo.

Harrison Kuo, President

Thank you, Angela, and hello everyone. Welcome to our second quarter results conference call. I will now provide an update on our robust performance in the second quarter. Let's begin on Slide 4 for an overview of our mobile business. In the second quarter, Taiwan's mobile market concluded its momentum as the three major operators focused on 5G migration, which benefits mobile service revenue growth. Market consolidation will be fulfilled in the near future, and we remain positive about the result as it will help the market maintain steady and profitable. Under this landscape, we were pleased to report our market shares in both revenues and the subscriber number continued to increase year-over-year, reaching 39% and 36.2%, respectively. We are confident that we will continue our market leadership going forward. Our market-leading position is backed by our 5G network deployment that has advanced and stayed ahead of our peers. The renowned international institute Speedtest awarded us the Fastest 5G Operator in Taiwan for the first and second quarter of 2022, recognizing our leadership in 5G coverage and quality. This is the fifth year in a row to affirm our comprehensive mobile network as number one in Taiwan. Slide 5 presents the detailed achievement of our mobile business. In the second quarter, total mobile service revenue increased by 6.1% year-over-year attributable to growing subscriber numbers and the 5G contribution, as well as an increase in text messaging usage due to COVID-19 related projects. In addition, as many countries relaxed their border restrictions for global business travelers and tourists, we are going to see the international revenue begin to pick up in the second quarter. As for our mobile subscriber numbers, excluding IoT SIMs, there is a 0.7% year-over-year increase. In addition, our postpaid ARPU growth rate reached 4% year-over-year, maintaining its upward trend for five consecutive quarters. Meanwhile, we observed an average 37% uplift in monthly fees attributable to consumers who migrate from 4G to 5G. Taken together, we outperformed our peers in terms of year-over-year change in the number of postpaid subscribers, mobile service revenue, and ARPU, suggesting that we remain the customers' first choice of telecom service provider in Taiwan, in spite of industry consolidation. Moving on to Slide 6, we take an overview of our fixed broadband business. In the second quarter, our fixed broadband business continued its upward trend for 11 consecutive quarters. While subscriber numbers kept stable, fixed broadband revenue and ARPU both achieved a year-over-year increase of 4% and 3% respectively, benefiting from digital opportunities in the middle of the month. Notably, our subscriber number for services of 300 megabits per second or higher maintained its high growth rate of 37% year-over-year to respond to customers' demand in a more aggressive manner following the digital lifestyle, including increased video conferences. We drew out our promotion packages to incentivize high service adoption of 300 megabits per second and 500 megabits per second and above. We are excited to see over 70% of package adopters choose the 500 megabits per second service and above, reflecting the success of our strategy of enhancing upsell through speed upgrades. In view of the opportunity of the promotion packages, we anticipate further growth of our ARPU in the market share. Now let's move on to the performance of our customer-centric business group. Slide 8 presents revenue of our Consumer Business Group or CBG. Consumer Business Group revenue in the second quarter increased by 3.3% year-over-year, reflecting our success in satisfying customer needs during the quarter. Mobile service revenue for the Consumer Group grew by 5.43% year-over-year, mainly due to an increase in postpaid subscriber numbers and the 5G migration. In addition, fixed-line service revenue increased by 1.9% year-over-year, attributable to digital opportunities under the new normal, including work from home, gaming, and video services, among others. In the second quarter, we saw that Taiwan's Professional Baseball League games and the Internet Celebrity shows were especially well received on MOD and Hami videos. Sales revenue increased by 2.1% year-over-year despite the handset supply chain disruption issues stemming from COVID-19 and the typical seasonally ahead of the new iPhone launch. Slide 9 further illustrates our Consumer Business Group highlights. In the second quarter, we continued encouraging subscribers to adopt our mobile, fixed broadband, and Wi-Fi services altogether. The well-received promotion program reported a 13.2% quarter-over-quarter growth. In particular, our home Wi-Fi device subscription number doubled on a year-over-year basis, boosting our subscription-based revenue and the popularity of home-centric applications. In regard to our media business, we are delighted to report subscriber numbers of MOD and Hami video, which are traded in monthly fees on a yearly basis rather than one-time sign-ups, increased by 6.6% year-over-year, mainly due to the Hami video sign-up growth driven by stronger operations in international badminton games. In the second quarter, we also announced our investment in local channels and movies to expand the video business, as we plan to continue our content investments and strategies to further enhance subscriber stickiness. We remain confident about video service performance, with many popular sports events expected to take place, including the FIFA World Cup coming up in the fourth quarter for which we obtained exclusive broadcasting rights. Please turn to Slide 10 for an overview of our Enterprise Business Group performance. In the second quarter, Enterprise Business Group revenue increased by 9.4% year-over-year, mainly due to the increase in the number of projects completed, particularly the large smart energy projects of solar farms and the electrical enhancements. Our enterprise ICT business revenue increased by 31.7% year-over-year. Meanwhile, enterprise mobile service revenue continued to increase attributable to 5G migration and increased demand for text messages as a result of COVID-19. Digital transformation demand from enterprises and schools continues to drive up revenues from data communication and broadband access, which offset the decrease in enterprise voice revenue during the second quarter. Slide 11 demonstrates our Enterprise Business highlights. We are pleased to report strong growth momentum of our emerging enterprise applications. In the second quarter, our total enterprise emerging application revenue increased by 43.5% year-over-year. As all of our major applications demonstrated strong year-over-year growth rates of about 20%. AIoT revenue increased by 70% year-over-year in the second quarter, serving as an important growth driver, thanks to our success in smart energy, building, and surveillance deals. In fact, in the consumer sector, AIoT applications are also well received to carry out digital life, bringing in revenues particularly from smart hospitals and smart healthcare services. We remain confident in its future development. For IBG, cloud computing, and the information security businesses, we will continue to see strong demand from both domestic and global clients, and we are glad to report year-over-year revenue growth of 24%, 25%, and 29%, respectively. Additionally, 5G private network revenue has outpaced its growth year-over-year, driven by an increase in project numbers, which stream project revenue as well as recurring revenue. We are pleased about the long-run contribution from big data and message revenue. We saw 125% year-over-year growth which contributed to project revenue. During the quarter, we are pleased to announce the rollout of our advanced industry-leading portable 5G private network solution, which supports satellite and mobile communications and is the first exclusive portable solution in Taiwan, working on both non-standalone and standalone architecture. We also integrate our 5G AIoT sensing devices, AI technology, domestic 5G open range equipment, and the 5G private network to offer 5G AIoT smart healthcare services at hospitals in Kaohsiung applying automated reality technology for elderly care. Slide 12 illustrates our international business performance. In the second quarter, it is exciting to see our International Business Group revenue increase by 17.9% year-over-year. This is attributed to the growing demand for IDC and cloud services from global clients, particularly online global OTT service providers. In addition, as COVID-19 pandemic restrictions were relaxed and cross-border activities continued to resurge, we were glad to see international volume, inbound revenue, and international IoT revenue increase year-over-year. As we look to Southeast Asian markets, we are glad to share that we signed an MOU with Thonburi Hospital in Thailand during the second quarter to develop smart hospital solutions. We introduced our technology of cloud, AI, and medical IoT and expect to expand our successful 5G private network solution in the Asian region.

Yu-Shen Chen, Chief Financial Officer

Thank you, President Kuo. Good afternoon, everyone. I will now walk you through an overview of our second quarter financial results. Let's start with Slide 13, which provides highlights from our income statement. For the second quarter of 2022, total revenues increased by 5.7% on a year-over-year basis, mainly due to more ICT project completions and higher core business revenues from mobile and broadband services. Meanwhile, operating costs and expenses increased by 5.4%, also an increase in manpower expenses and depreciation expenses on 5G network deployment. Income from operations increased by 6.6%, while net income increased by 8.1%, EPS increased by 0.01% to 1.25% compared to the prior year period. In addition, our EBITDA recorded a 5.5% increase year-over-year, while EBITDA margin remained stable in the second quarter. Please turn to Slide 15 for balance sheet highlights. Compared to December 31, 2021, total assets increased by 13.59 billion or 2.7% mainly owing to increased cash and cash equivalents, as well as the rise in negotiable certificates of deposits to prepare for the dividend payments and the issuance of sustainable bonds. Total liabilities increased by 38.78 billion or 25.3% mainly attributable to increases in dividends payable. The debt ratio was approximately 29%, and net debt over EBITDA was minus 0.26, suggesting our balance sheet is strong and enables us to maximize shareholder interest amid economic uncertainties. Slide 16 illustrates our cash flow summary. Cash flows from operating activities for the first half of 2022 decreased by 0.9% year-over-year to 27.43 billion, mainly due to income tax payments owing to an increase in net income. In terms of capital spending, as far as CAPEX peaked in 2021 with accelerated 5G construction, mobile CAPEX for the first half of 2022 decreased year-over-year as expected. Moreover, free cash flows increased by 23.2% in the first half compared with the prior-year period. Altogether, our strong balance sheet and operating cash flows allow us to steer through economic turbulence and support business expansion. On Page 17, you may find a table that compares our financial results with forecasts. As you can see, in the second quarter of 2022, our performance measures exceeded our proposed guidance. Revenue net guidance was mainly attributable to higher revenues from ICT business related to smart energy and AIoT applications, as well as better performance of core business resulting from growing subscription numbers and 5G migration. Operating costs and expenses were higher than our second quarter guidance due to higher project business costs. EBITDA and net income forecasts were boosted due to better-than-expected ICT gross margin and performance. That concludes our financial highlights. Let's move back to our President.

Harrison Kuo, President

Thank you, Yu-Shen. In the second quarter, we became the first and only company among Taiwanese operators to adopt Internal Carbon Fees to help reduce carbon emissions and achieve our GHG reduction targets. We have also invested in an ESG Venture Capital Fund targeting clean energy and related projects, including cloud AI, 5G satellite, and EDGE Computing application services and digital transformation in healthcare. We also received multiple recognitions from several stock exchange companies for our corporate governance. We believe these new developments are key to our success in long-term growth, and we will continue to focus on ESG development going forward. Thank you for your attention. Now I would like to open the floor for questions.

Operator, Operator

Thank you. Our first question is coming from HSBC's Neale Anderson. Go ahead, please.

Neale Anderson, Analyst

Thank you, good afternoon. I have two questions, please. The first relates to the normal recovery that you reported in the second quarter. Are you able to quantify how much of mobile service revenues that is and how much more could it grow by if it returns to levels prior to COVID? That's the first question. The second one relates to the slide on that enterprise applications, the emerging applications. So you're reporting strong percentage growth. And I guess that's partly because these are still starting from a low base. But which one of those do you see as having the greatest potential, which could be the largest in a year or two? Thank you.

Harrison Kuo, President

To answer your question, the contribution from the recovery to the second quarter, the major mobile business growth is not due to COVID-19, and its major from our customer migration and our customer base increase.

Yu-Shen Chen, Chief Financial Officer

Let me address your question. According to the factsheet we provided, we have witnessed growth momentum in postpaid subscribers. Specifically, we have seen an increase in postpaid subscribers for 18 consecutive months. Additionally, the postpaid average revenue per user has reached a 13-month high, and it has grown year-over-year for 15 months. Overall, this indicates strong growth momentum in our mobile business. While it's possible that COVID-19 had some impact, it represents only a small portion of the overall growth.

Harrison Kuo, President

And to answer your second question, our Consumer, Enterprise, and International Business Group all have great potential in the future within one or two years because many smart solutions applications are deployed in the next quarter or the next half. We have seen our successful applications from our Consumer and Enterprise and International fields. So there are many business opportunities in all of our business segments.

Neale Anderson, Analyst

Understood, thank you very much.

Operator, Operator

Thank you. Our next question is coming from UBS' Sara Wang.

Sara Wang, Analyst

So just wondering about the margin profile of the enterprise business segment. We noticed that there are certain cloud data centers, as well as the business growth is quite rapid. So what's the margin profile of these new initiatives? And what's your view on overall EBITDA margin, say, in the mid to long-term?

Harrison Kuo, President

So for the gross margin for our enterprise segment, it's about 25% and it's quite stable. Yes, we think with the new applications like AIoT and 5G private networks, the growth will be moderate but increasing. It is hard to predict at this point what kind of growth we expect in the long-term to intermediate term.

Operator, Operator

If there are no further questions, I will turn it back over to President Kuo. Please, go ahead.

Harrison Kuo, President

Thank you all for your participation. Bye.

Operator, Operator

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.