Earnings Call Transcript - CHT Q3 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Third Quarter 2023 Operating Results. During the presentation, all lines will be in 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. 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, Assistant Vice President of Financial Department

I'm Angela Tsai, Assistant Vice President of the Financial Department of Chunghwa Telecom. Welcome to our third quarter 2023 results conference call. Joining me on the call today are our Chairman, Harrison Kuo; President, Ivan Lin; and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the Chairman's message, our business overview, and followed by a discussion of our segment performance and the financial results, and then we will move on to the question-and-answer portion of the call. Slide 2, please read the 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

Thank you, Angela, and hello, everyone. Welcome to our third quarter results conference call. Chunghwa Telecom has been committed to staying ahead in every aspect during the ongoing market consolidation. Before our business overview, I would like to highlight our dominant spectrum assets. One of our solid advantages to sustain our leading position and the growing momentum in the post-merger landscape. Currently, we are #1 when it comes to the ownership of the mainstream sub 6-gigahertz spectrum. All of the 290 megahertz sub 6-gigahertz spectrum is in use to provide the fastest mobile speed for our customers, outstanding us in the industry. In addition, we have the most mobile base stations nationwide. We are also the operator with the largest mobile capacity and the widest coverage in Taiwan. On top of that, our leading capabilities have exclusively completed the two-carrier aggregation of a 3.5 gigahertz and 2.1 gigahertz to provide the fastest 5G services with theoretical peak speeds of 2 gigabits per second, far beyond the industry standard. In terms of high band of 28 gigahertz, we are now with 600 megahertz at hand, which is next to the unsold slots that can be used for satellite services. We are immediately ready for low-earth orbit satellite services. We will monitor the update of spectrum releases and are confident to make another consecutive spectrum at 28 gigahertz, contributing to the always broadband connected environment we commit to our customers. To sum up, we are confident to maintain our leadership going forward given our better spectrum assets and outstanding network quality. Another unique strength of ours and a significant highlight during the quarter was the expansion of our international footprint to Europe. We are proud to announce our strategic collaboration with EXATEL Telecom from Poland. This partnership allows us to join, exploring emerging business opportunities, develop network infrastructure and assist our clients in expanding their presence. This step marks a significant milestone, not just aligned with our strategy to replicate Taiwan's success abroad, but also solidifying our overall success and leadership in Taiwan's telecom industry. Now I would like to hand the call over to President Lin for the business overview in the third quarter.

Chau-Young Lin, President

Thank you, Chairman Kuo, and hello, everyone. Now please flip to Page 5 for the update of our performing mobile business. In the third quarter, we successfully achieved a remarkable milestone by acquiring more than 14% of the revenue share in the Taiwan mobile market and widening our lead against our peers. At the same time, our subscriber share also outperformed the industry by increasing to 37.1%. Incremental exit revenue share about our subscriber share reached 43%. We are confident in accelerating our lead in the consolidation landscape due to our better revenue generation capability and healthier customer structure. Let's go back and review the outperforming metrics of our mobile business. In the third quarter, our mobile service revenue delivered above 7% year-over-year, maintaining its growth for 16 consecutive quarters owing to the upsell from the 5G migration. International roaming recovered, and we saw an increase in the postpaid subscriber numbers. In addition, the postpaid ARPU reported a 5.1% year-over-year increase, continuing its consistent growth for the tenth quarter for customers migrating from our 4G to the 5G. We observed an average uplift in mobile monthly fees, maintaining and expanding on this trajectory. Now, I move on to Slide 6 for an update of our fixed broadband business. In the third quarter, we are glad to see positive performance in the fixed broadband sector. The revenue and ARPU increased by 2% and 1% year-over-year, respectively, mainly attributed to the adoption of higher speed service in the third quarter and sign-ups for our service of 300 megabits per second or higher, which is currently the mainstream among our speed mix and maintained its high growth rate of 41% year-over-year. In addition to stable growth in high-speed service adoption, we have set up speed upgrades for lower service subscriptions to optimize our service profile. We launched attractive incentives during the quarter and successfully encouraged customers with speeds below 100 megabits per second to transition to higher speeds above 100 megabits per second. As a result, we achieved an 11% year-over-year increase in the size of subscriptions for services of 100 megabits per second or higher. Now, let's move on to the performance of our customer-centric business group. Slide 8 presents the performance of our CBG group. In the third quarter, the total CBG revenue increased steadily by 2.8% year-over-year. Mobile service revenue rose by 6.8%, supported by stable 5G migration and the increase in postpaid subscription numbers, in particular, international roaming revenue continuing to recover and broaden contribution. Fixed-line service revenue decreased by 0.7% due to voice decline. Meanwhile, fixed broadband revenue grew by 2.7% year-over-year, thanks to effective promotions. By the end of the third quarter, the popular iPhone 15 series demonstrated a 27% increase in sales volume compared with that of the iPhone 14 series, and CBG sales revenue in the third quarter increased by 3% year-over-year. Despite CBG revenue increasing by about 3% year-over-year, income before tax decreased due to a higher pace of the recognition of government subsidies in the same period last year as well as increases in manpower and electricity expenses and purchases of renewable energy. Now I will further present our consumer business highlights. In the third quarter, our Multiple-Play package continued to be well received. The subscriber number of the bio 6 broadband and WiFi service demonstrated 16.4% quarter-over-quarter growth. Home WiFi subscription numbers increased by 34.0% year-over-year, along with the fixed broadband promotional package launched during the quarter. In addition, our video subscription grew and delivered +5.8% year-over-year. The increase was mainly due to broadcasting the existing Asian Games on both MOD and Hami video, which also brought in a revenue injection. As Harrison mentioned, we will continue to invest in building a quality content team and team up with local content production and major international production companies with the goal of strengthening our content assets, expanding our video platform, and preparing Taiwan's content introduction on to the global stage. Moreover, we also invested in KK Company technologies for innovative business models and services to further expand the digital ecosystem. Please turn to Slide 10 for an overview of our enterprise business performance. In the third quarter, EBG reported an 11.8% year-over-year decrease in income before tax, mainly due to fixed voice declines from enterprise paths and clients and a higher base resulting from the recognition of government subsidies during the same period last year. These factors also resulted in a 4.4% year-over-year decrease in total revenue for EBG. Despite the declines this quarter, we maintain a cautiously optimistic outlook on our enterprise business performance throughout 2023. Slide 11 presents our enterprise business highlights. In the third quarter, our IDC and cybersecurity businesses demonstrated robust growth. The total emerging enterprise business revenue of our major applications decreased by 6.8% year-over-year due to a higher basis leading to smarter energy and smarter project revenue recognition last year. In terms of the details, the IDC business achieved a 13.7% growth owing to both growing project numbers and recurring revenue injections. Revenues from the cybersecurity sector also achieved 7.4% growth due to increased demand from our enterprise plans. Furthermore, despite our cloud service revenue decreasing on a year-over-year basis due to one-time smart health project recognition last year, we continue to see our recurring revenue from international public cloud services growing strongly by about 20% driven by increasing demand from clients.

Vincent Chen, CFO

Thank you, President Ivan. Good afternoon, everyone. I will now provide a financial summary of our third quarter results. Let's begin with Slide 14, income statement highlights. During the third quarter, total revenues increased mildly compared to the same quarter last year. The main reason is growing mobile service revenues offset decreased voice revenue and the recognition of a one-time government grant income from the same period last year. Income from operations and net income decreased by 5.9% and 2.9% year-over-year, respectively, mainly due to an increase in electricity expenses and manpower costs. Overall, for the first nine months of the year, total revenues increased by 2.6% year-over-year, primarily fueled by strong growth in our mobile, ICT, and broadband services, which offset declining voice revenue and the contribution of a one-time government grant income. Net income grew by 2.1% year-over-year, mainly due to our growing ICT business. EPS rose by 2.1% year-over-year to $3.69 billion. The growth of EBITDA remained on a positive trajectory, and EBITDA margin remained at about 40%. Now move on to Page 15 for balance sheet highlights. As of September 30, 2023, total assets compared to the end of 2022, decreased by 2.1%, mainly due to the decrease in current assets, PPE, and intangible assets, which offset the increase in other financial assets. Total liabilities decreased by 2.7%, primarily attributable to the decrease in accounts payable. Additionally, the debt ratio decreased slightly, and net debt over EBITDA remains at 0. Taken together, these debt ratios demonstrate the robustness of our balance sheet. Page 16 provides a summary of our cash flows. Our cash flows from operating activities remained robust, increasing by 5.7% year-over-year. Capital expenditures decreased by 6.6% compared to the same period last year, of which mobile-related CapEx was reduced by 28.4%, while non-mobile CapEx increased by 12.9%. The latter was primarily attributable to greater IDC investments. On top of that, Free cash flow was up by 14.9% year-over-year. Collectively, our strong operating cash flows, along with the robust balance sheet, enable us to be future-ready and create sustainable and long-term value for our shareholders. On Slide 17, the table presents financial results against management guidance. During the third quarter, revenues slightly fell short of our expectations due to declining ICT business revenues, while net income and EPS met our expectations, mainly driven by the strong performance of mobile and broadband services. For the first nine months of 2023, our revenue and profit align with our forecasts due to the strong performance of our core and emerging businesses. That concludes the overview of our Q3 financial results. Let me turn the call over to Chairman Harrison.

Harrison Kuo, Chairman

Thank you, Vincent. On Slide 18, our awards and ESG recognitions received in the third quarter. In October, we received the Jade Award, the highest level of The Asset ESG Corporate Awards for the third consecutive year. We are the only company in Taiwan to stand out from cross-industry and cross-country selections for our extraordinary ESG efforts. Moreover, we are glad to share that our efforts in ESG are widely recognized and acknowledged by investors as we are the only telco included as one of the top 10 constituents by the Financial Times SE4Good Taiwan ESG index. Meanwhile, we were honored as the most outstanding company in Taiwan within the communication services sector by Asia Money, reflecting our high-quality telecommunication services, excellent governance, and great ESG initiatives acknowledged by global investors. 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

Thank you, Chairman Kuo. And our first question will be from Neale Anderson of HSBC. Go ahead, please, Neale.

Neale Anderson, Analyst

Thank you. Good afternoon. I have a question relating to the government subsidies in the third quarter of last year. Is it possible to give the amounts that were booked? It looks like they were booked in both the Consumer business group and the Enterprise business group? I'm just trying to work out the pressure on profit from that because you also mentioned some other cost increases, electricity, etc. Thank you.

Chau-Young Lin, President

Okay. So regarding the government grant income, that's because of the satellite subsidy. The amount is about $0.4 billion. For this quarter, actually, last year's same quarter, we recorded this amount. So that will affect our income on the bottom line for this quarter because of the higher base.

Neale Anderson, Analyst

Thank you. And that's split between the Consumer and the Enterprise business group. Is that correct? Are you able to give any detail on the split?

Chau-Young Lin, President

Yes, because the customer is mainly for the enterprise customer. So it affects heavily our EBG performance. And this is a one-time effect.

Neale Anderson, Analyst

All right. Okay, thank you. And if I could follow up though. So in the press release and also in your presentation, you mentioned in the Enterprise business group, there was a decrease of fixed voice after the pandemic. So could you give a little bit more detail on that? What's happening there? Are people moving to IP-based services or businesses, I should say, moving to IP-based services, and that's resulting in lower revenue?

Chau-Young Lin, President

So basically, during the pandemic period, people stayed home, so they used more voice calls to connect with their relatives or customers. But in the post-pandemic period, people returned to work and used less home services. So the voice revenue has been declining. During the pandemic, the voice revenue was still declining, but the rate was lower, about 4%-5%. Now in the post-pandemic period, the declining rate is greater, and that affects our revenue and also our income.

Neale Anderson, Analyst

Got it. Perhaps just finally on the deal with the Polish operator EXATEL, is that to support Taiwanese businesses in Europe? Could you give a little bit more detail about how large or the geographic scope for that business? Is it Poland specifically, or is that the European partner, and you're aiming to service its business more broadly?

Chau-Young Lin, President

Okay. So we are still in talks with our counterparts, and we may collaborate in various areas. It's not limited to ICT; we may expand to other areas. We don’t rule out the possibility of expanding collaborations with our regional partners in Europe. We will keep you posted once we have more details and when the deal is more confirmed.

Neale Anderson, Analyst

Understood, thanks very much for your help. Thank you.

Chau-Young Lin, President

Thank you.

Operator, Operator

If there are no further questions at the moment, I will now turn the call over to the management team to take questions from the webcast page. Thank you.

Angela Tsai, Assistant Vice President of Financial Department

Okay. Now we've received a question from the webcast. It's about the joint class developments of their low-earth orbit satellite services. Is there any cooperation planned with a specific operator? Thank you.

Chau-Young Lin, President

Thank you for the website questions. The development of low-earth satellites primarily complements ground communication networks, aiming to expand overall communication network coverage and enhance our network resilience. We adopt an open approach and are actively exploring cooperation opportunities with multiple international low orbit satellite operators. However, due to a nondisclosure agreement, specific details of the collaboration cannot be disclosed at this moment. We have obtained licenses for geosynchronous orbit satellites this year, one for medium-earth orbit and one for low-earth orbit. In addition to ongoing negotiations with satellite system operators, we are actively preparing to apply for commercial frequency licenses and network setup, etc. Our goal is to introduce commercial services for low-earth orbit satellites in Taiwan as soon as possible. For now, due to NDA, there isn't much to share. We will make announcements as the agreement is finalized.

Operator, Operator

And on the call, we have the next question. It's from Rajesh Panjwani at JPMorgan.