Earnings Call Transcript - CHT Q2 2024

Operator, Operator

Good afternoon, everyone. Welcome to Chunghwa Telecom's conference call discussing the Company's second quarter 2024 operating results. This call is currently being broadcast live online, and a replay will be available within an hour after it concludes. You can find the replay on the CHT Investor Relations website under the IR Calendar section. Now, I would like to hand the call over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms. Tsai, please go ahead.

Angela Tsai, Assistant Vice President of Investor Relations

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Department for Chunghwa Telecom. Welcome to our second quarter 2024 results conference call. Joining me on the call today are our Chairman and CEO Harrison Kuo; President, Ivan Lin; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the CEO's message and our business overview of the second quarter, followed by a discussion of our segment performance and the financial results. After that, we'll 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, without further delay, I will turn the call over to our Chairman. Chairman Kuo, please go ahead.

Harrison Kuo, Chairman and CEO

Thank you, Angela, and hello everyone. Welcome to our second quarter 2024 results conference call. We are pleased to announce our continued success in expanding our lead in Taiwan's telecom market during the second quarter. Amidst the three-player market landscape, our revenue share in Taiwan's mobile market has steadily grown from 40.4% to 40.5% quarter-over-quarter, and our subscriber share has seen a slight increase to 37.7%, maintaining growth in the new market landscape. For six consecutive quarters, our postpaid mobile ARPU has shown the highest year-over-year growth in the industry, highlighting our ability to grow. Consequently, our total revenue in the second quarter has reached a new high for the same period since 2018. Furthermore, our strategy of leveraging content investment to enhance our video performance has proven successful. In August, during the first week of our exclusive 2024 Paris Olympic Games broadcast, our video platform subscriptions surpassed 3 million, marking a milestone that further solidified our lead among all video platforms in Taiwan. As the games heat up, we are optimistic about our Olympic Games broadcast performance. Another area of investment is AI development. As Chunghwa Group holds the largest IDC market share in Taiwan, we are well-positioned to extend our leading IDC and cloud experiences to build AI data centers and the GPU cloud. We provide our enterprise customers with the option to leverage the GPU cloud to create their own sovereign AI or utilize our GPU as a service. Additionally, we are targeting the extensive opportunities in AI-driven applications by developing the CHT AI Factory. This initiative aims to create various customized AI models, AI-driven operational processes, and AI agents for enterprise customers, aiding them in their AI transformation. We believe this market holds significant potential. Lastly, to strategically enhance our group's value, we are excited to announce that our subsidiary, Chunghwa Telecom Security, Taiwan's largest managed security service provider, will become a publicly traded company this month and will pursue its main Board listing next year. Following that, another subsidiary, International Integrated Systems company, will focus on opportunities related to government projects, smart city, fintech, and digital healthcare. We are also actively seeking potential M&A targets to create synergy and improve our agility in driving growth and boosting market value. Now, let's move on to the business overview of the second quarter of 2024. We are pleased to report another quarter of market share gains. According to the industry's market consolidation, our revenue share of Taiwan's mobile market remained around 40%, reaching 40.5% by the end of June, thereby further widening our lead against our peers both year-over-year and quarter-over-quarter. Our subscriber share was at 37.7%, reflecting a stable year-over-year increase. The difference between our revenue share and subscriber share was 2.8%, indicative of our robust growth. Our postpaid subscriber net adds continue to outperform peers alongside increasing 5G migration and steady international roaming contributions. Consequently, our mobile service revenue and postpaid ARPU rose by 3.5% and 2% year-over-year, respectively, maintaining their growth for 39 consecutive months and 13 consecutive quarters. In the second quarter, the average monthly fee increase from customers migrating from 4G to 5G showed a 39% uptick, indicating a healthy momentum. Now let's discuss the fixed broadband business. In the second quarter, fixed broadband revenue and subscriber numbers grew year-over-year by 4.4% and 0.6% respectively, resulting in an expanded gross margin compared to the previous quarter. Our strategy of promoting speed upgrades has been successful, with 300 megabits per second or higher becoming mainstream service offerings. Sign-ups for these services increased by 24% year-over-year in the second quarter, maintaining double-digit growth and contributing to a 2% year-over-year increase in fixed broadband ARPU, which is commendable. Now let me hand the call over to Ivan Lin for the performance of our customer-centric business groups.

Ivan Lin, President

Thank you, Chairman Kuo, and hello everyone. Now please flip to Page 8 for an update on our CBG performance. In the second quarter, total CBG revenue increased by 2.6% year-over-year, driven by the increase of mobile service revenue from ongoing 5G migration and more postpaid subscribers, steady growth for fixed broadband revenue, and the strong sales of the iPhone series due to effective promotions. Although the CBG delivered promise in the business performance, its income before tax decreased by 1.6% year-over-year, mainly due to the increase in talent investment, including salary rises. Slide 9 further illustrates our consumer business group highlights. In the second quarter, our multiple-play package, which provides subscribers with a combination of our mobile, fixed broadband, and Wi-Fi services altogether, demonstrated 80% year-over-year growth in line with the growth of the CBG's core business. In terms of individual and home-centric applications, we saw a 5.2% increase in our video platform subscriptions mainly from Hami Video stemming from the pre-promotion of the 2024 Paris Olympic Games in the second quarter. In August, we introduced AR and multi-camera replay functions to broadcast the Summer Olympic Games for the first time, which successfully created an exciting new viewing experience for customers and attracted new sign-ups. We expect subscriptions to continue rising as the games become more intensive, leading to greater revenue contribution. In terms of the well-received consumer cybersecurity service, we are pleased with its growth momentum as the sign-ups increased by 15.3% year-over-year in the second quarter, making a meaningful revenue contribution. Please turn to Slide 10 for an overview of our enterprise business growth performance. In the second quarter, EBG's total revenue decreased by 3.7% year-over-year, mainly due to decreased ICT business revenues resulting from last year's high base from large projects and the deferred revenue expected in the second quarter. Notwithstanding these factors, our ICT business remained on track as expected. In addition, although revenue from EBG's mobile services decreased slightly, excluding the impact of prepaid card projects, mobile revenue from 5G, roaming, and text businesses continued to increase year-over-year. For EBG's fixed-line business, despite the continued and steady growth of broadband access revenue and data communication revenue from clients' speed upgrades, the decline in fixed voice revenue significantly offset these gains. This was the main cause of the 9.6% year-over-year decrease in EBG's income before tax for the second quarter. Slide 11 illustrates our enterprise business highlights in the second quarter. Our IDC and cybersecurity business continued to demonstrate robust growth. IDC revenue achieved 6.6% growth year-over-year due to growing project numbers and the long-tailed recurring revenue injection. Meanwhile, cybersecurity revenue exhibited 6.9% growth year-over-year, driven by rising demands for consulting services and network security products, particularly the zero-trust related offerings, making cybersecurity revenue achieve growth for 10 consecutive quarters. In spite of the encouraging performance in IDC and cybersecurity business, EBG's total emerging enterprise application revenue decreased by 5.9% year-over-year in the second quarter, mainly due to the aforementioned higher base from a large ICT project in the same period last year. It's worth noting that although our cloud service revenue decreased year-over-year due to one-time project recognition in the base period, we are pleased to see our recurring revenue from international public cloud services continued to grow strongly by 42% year-over-year. Additionally, our limited racks priced at a premium in Banqiao IDC designated for the financial industry were sold out quickly after their launch in the second quarter, reflecting the strong demand for IDC service. In the meantime, to meet future demand, we continue to invest in the construction of AI data centers, aiming to offer various AI-enabled functions and GPU as a service. Looking into the second half of the year, as the revenue deferred from the second quarter is expected to be recognized and with a healthy pipeline of orders, we remain confident in our full-year ICT performance.

Vincent Chen, Chief Financial Officer

Thank you, President Ivan. Good afternoon, everyone. Now, I will present a financial summary of our second quarter results in 2024. Let's begin with Page 14, income statement highlights. Revenue for the second quarter of 2024 was around TWD 54 billion, the highest for the same quarter in seven years. This is a 1.2% increase from the same quarter last year, primarily driven by higher mobile service revenue, increased broadband service revenue, and growing ICT business revenue. Income from operations and net income decreased by 2.7% and 1% year-on-year, respectively, largely attributed to higher personnel and utility costs. EPS for Q2 is TWD 1.27. EBITDA margin continued to stay above 40%. Overall, in the first half of the year, revenue increased by 1.3% compared to the same period last year as a result of higher mobile service revenue, increased broadband service revenue, growing ICT business revenue, and greater handset sales revenue. Income from operations and net income decreased by 2.4% and 1.8% year-on-year, mainly due to the high base from one-time government compensation related to the ST-2 satellite last year and higher personnel and utility costs. Excluding the one-time item of government compensation, year-over-year changes in net income have remained positive, demonstrating the healthy growth momentum of our core and ICT businesses. EPS is TWD 2.48. EBITDA and the EBITDA margin exhibited stability. Now move on to Page 15 for balance sheet highlights. Total assets increased by 2.4% as of June 30, 2024, compared to the year-end of 2023. This increase was largely attributed to higher current assets, mainly driven by other current monetary assets, which offset a decline in property, plant, and equipment. Total liabilities expanded by 23.4% relative to the year-end of 2023 and increased by 1.9% year-over-year. The rise was primarily due to dividends payable. Excluding the effect of dividends payable, debt ratio is 22.79%, indicating a healthy financial position. Page 16 provides the summary of our cash flows. Cash flows from operating activities increased by 3% year-on-year, mainly due to a rise in unearned revenue from ICT projects. Capital expenditures, CapEx, experienced an overall 12.8% decline year-on-year. Specifically, mobile-related CapEx decreased by 51.1% while non-mobile CapEx increased by 6.7%, primarily attributed to the deployment of FTTH and submarine cable. Additionally, free cash flows increased by 14.1% year-over-year. In summary, our strong balance sheet and robust operating cash flows provide the foundation needed for business expansion and the pursuit of digital opportunities amid economic uncertainty. On Page 17, let's turn to the table that shows our operating performance relative to the guidance. During the second quarter of 2024, revenue was in line with our projection. Performance measures, such as income from operations, net income, EBITDA, and EBITDA margin all exceeded our forecasts by modest margins. For the first half of 2024, revenue was about as expected. However, income from operations, net income, EBITDA, and EBITDA margin all outperformed our guidance. The better-than-expected results were primarily driven by the steady growth of the core business and the enhanced profitability of the ICT business. This wraps up our financial results for the second quarter. Let me hand it over to Chairman Harrison.

Harrison Kuo, Chairman and CEO

Thank you, Vincent. On Slide 18, you can see our awards and ESG achievement highlights from the second quarter of this year. First of all, in our pursuit of global sustainability initiatives, we have successfully passed the greenhouse gas emission Net-Zero Targets review by SBTi in July. Our goal is to achieve the reduction of Scope 1 and Scope 2 greenhouse gas emissions by 95% by 2040 compared to the baseline year of 2020. We've also published the inaugural TNFD English report as the first Taiwanese telco, reinforcing our dedication to transparency and biodiversity, in line with global best practices. Besides, I would like to report that Chunghwa has been recognized among the top 2% of the world's most sustainable companies by TIME Magazine and included in the FTSE4Good Taiwan ESG Index for the eighth consecutive year. We've consistently ranked in the top 5% by Taiwan Stock Exchange's corporate governance evaluation for the ninth time. These comprehensive achievements underscore the company's commitments to lead the telecom industry through sustainable governance. Moreover, I'm glad to share that we've been honored with five top awards from the Asian Excellence Awards for our exceptional leadership in sustainability and investor relations practices. Additionally, we won the golden prize from the Taiwan Sustainable Investment Awards this year. As the sole telco awardee, we are the first Taiwanese telco to issue a bond in 2022 and fully utilize the raised funds for initiatives for sustainability within two years. We will continue to mutually benefit the environment, society, and stakeholders to achieve a sustainable vision. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

Operator, Operator

The first question will be from Neale Anderson from HSBC.

Neale Anderson, Analyst

I'd like to ask about the potential M&A that you mentioned on Slide 3. So could you give any more details about which sectors or areas you'd be looking at and also which countries? I presume that you'd be looking at countries where you have an existing presence or edge. If you could say any more about that, that would be great.

Vincent Chen, Chief Financial Officer

Okay. So related to the questions on M&A, actually we focus on the areas related to our three pillars of ICT business. ICT, basically the AIoT, IDC, cloud, and cybersecurity. But we are also quite open-minded and open to any areas that can enhance our core and our more business. In terms of the country we are looking at, we keep the option open for any suitable targets in any countries. However, for cybersecurity, we are more open to targets in other countries because of our CHT Security. For our CHT Security, we have an ambition to explore and expand our footprint overseas. Thank you.

Operator, Operator

We focus on several key areas of our ICT business, including AIoT, IDC, cloud, and cybersecurity. We remain open to exploring additional areas that can strengthen our core business. Regarding potential targets, we are considering opportunities in various countries. However, in the realm of cybersecurity, we are particularly interested in targets outside our home country due to our ambitions for CHT Security. We aim to explore and expand our presence internationally. Thank you.

Angela Tsai, Assistant Vice President of Investor Relations

Before we move to the internet questions, I have three questions from online. The first one is regarding the CBG and EBG developments and the targets for the second half of this year. The second question is about AI: What is the CHT AI Factory? What is it used for, and how does CHT develop the GPU capability and construct the CHT AI Factory? That’s the second question. And for the third, yes, those are the two questions. Thank you.

Vincent Chen, Chief Financial Officer

So the first question about the outlook for the CBG and EBG. For both segments, we still maintain a positive outlook for the second half of the year. For the CBG, we have been able to effectively migrate our subscribers from 4G to 5G. You can see that for our mobile service revenue continues to grow. For our broadband services, the growth rate for our broadband service revenue keeps between 4% and 5%, and our subscriber base has been going up. We believe our effective promotion package, along with our strategy to promote our products, will help us ensure the CBG performance maintains its momentum. So this is for the CBG. For the EBG, we still maintain a positive view for our EBG services. Our focus is on the ICT business. For the typical pattern for the ICT business, the revenue distribution between the first half and second half is about 40% and 60%. Therefore, for the full year forecast for the ICT business, we are quite confident that we can achieve the full year forecast. So that's our view on the performance for these two segments in the second half of the year.

Ivan Lin, President

About what is the difference between AI and transition of IDC? I think AI data centers require a lot of GPUs and data to operate. They internally require high power supply, efficient cooling systems, low bearing flow, and high external bandwidth and data security, and so on. We have overcome this challenge with our extensive experience and our confidence to deliver high-quality products and services. We have been operating the high cloud service for a long time, supporting the information systems of our enterprise clients, especially in solving cloud applications. The GPU cloud, we call it upgraded hicloud 2.0. It's a newly designed version based on the original hicloud service featuring the number of GPUs and AI Factory, the necessary assistance to address the needs of the AI-driven information systems. Our target customers include both public and private sectors across various fields that require digital and AI transformation. To achieve AI transformation, an enterprise needs to develop several different key information systems such as AI models. For example, the large language model, AI chatbots, or AI agents which require GPU computation, the software developer, and model training, and so on. We have consolidated all these resources into a standard product mechanism we call AI Factory.

Operator, Operator

There are no further questions at this point, so I will turn it back over to Chairman Kuo.

Harrison Kuo, Chairman and CEO

Thank you for your participation. Goodbye.

Operator, Operator

Yes. Thank you, Chairman Kuo. And ladies and gentlemen, 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 disconnect now. Thank you, and goodbye.