Chunghwa Telecom Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 6 speakers on the call.

Operator

afternoon, ladies and gentlemen. Welcome to Junghwa Telecom Conference Call for the company's Q3 2023 Operating Results. During the presentation, all lines will be in a listen only mode. When the briefing is finished, directions for submitting your questions will be given in the question and answer session. For your information, this conference call is now being broadcasted live over the Internet.

Operator

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 Cai, the Director of Investor Relations. Thank you.

Operator

Ms. Cai, please go ahead.

Speaker 1

Thank you. I'm Angela Cai, Assistant Vice President of Financial Department of Zhonghai Telecom. Welcome to our Q3 2023 results conference call. Joining me on the call today are our Chairman, Harrison Guo Preston, Ivan Lin and Vincent Chang, our Chief Financial Officer. During today's call, management will begin by providing Chairman's message, our business overview and followed by a discussion of our segment performance and the financial results.

Speaker 1

And then we'll 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 Guo, please go ahead.

Speaker 2

Thank you, Angela, and hello, everyone. Welcome to our Q3 results conference call. Zhonghua 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 asset. One of our solid advantages to sustain our leading position and the growing momentum in post merger landscape.

Speaker 2

Currently, we are the number one 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 faster mobile speed for our customers outstanding us in the industry. In addition, as we have the most mobile base stations nationwide, we are also the operator acknowledged with the largest mobile capacity and the widest coverage in Taiwan. On top of that,

Speaker 3

our leading

Speaker 2

capabilities have exclusively complete the 2 carrier aggregation of 3.5 gigahertz and the 2.1 gigahertz to provide faster 5 gs services. With theoretical peak speed of 2 gigabits per second, far beyond the industry's vendor. In terms of high band of 28 gigahertz, we are now with 600 megahertz at hand, which is next to the unsold slot that can use for satellite services. As we are immediately ready for low earth orbit satellite services, we will monitor the update of spectrum releases and is confident to make another consecutive spectrum at 28 gigahertz, contributing to the always broadband connected environment we commit to customers. To sum up, we are confident to maintain our leadership going forward given our better spectrum asset and the outstanding network quality.

Speaker 2

Another unique strength of our powers and the significant highlight during the quarter was the expansion of our international footprint to Europe. We are proud to announce our strategic collaboration with Exotel 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 aligning with our strategy to replicate Taiwan's success abroad, but also solidifying our overall success and the leadership in Taiwan's telecom industry. Now I would like to hand the call over to President Lin, the business overview in the Q3.

Speaker 3

Thank you, Chairman Guo and hello everyone. Now please flip to Page 5 for the update of our performing mobile business. In the Q3, we successfully achieved remarkable milestone by acquiring more than 14 percent of the revenue share in the Taiwan mobile market and widening our leader against our peers. At the same time, our subscriber share also outperformed in the industry by increasing to 13, 7.1 percent. The incremental exit revenue share above our subscriber share reach and the same percent.

Speaker 3

We are confident in accelerating our lead in the post consolidation landscape due to our better revenue generation capability and healthier and custom structure. Let's go back and review the outperforming the metrics of our mobile business. In the Q3, our mobile service revenue delivered above 7% year over year. Increase maintaining its growth for 13 consecutive month. Owing to the upsell result from the 5 gs In addition, the postpaid ARPU report 5.1% year over year increase.

Speaker 3

Continuing, it's a consequentive growth for the 10th quarter for customers who migration from our 4 gs to the 5 gs. We observe and average the 14.4% uplift in the later month mobile monthly fees, maintaining and inspiring up trajectory. Let's move on to Slide 6 for an update of our fixed broadband business. In the Q3, we are glad to see the positive performance performance in the fixed broadband sector is the revenue and ARPU increased by 2% and 1% respective. And on year over year basis, mainly attributed to the increase of the higher speed service adoption in the Q3 and size up for our service of the 300 megabits per second of the higher, which is currently the mainstream amount or the speed mix and maintaining its high growth rate of the 14.1% year over year.

Speaker 3

In addition to stable growth of the high speed service adoption, we are on to set up the speed upgrade of the lower services subscription to optimize our service profile. We roll out attractive incentive during the quarter and successful encourage the customer with the speed below the 100 megabits per second to transition to the higher speed above the 100 megabit per second. As a result, we achieved an 11% year over year increase in the size of feed flow service at 100 megabits per second or higher. Now lastly, move on the performance of our customers' entry business growth. Slide 8 presents the performance of our CVG group.

Speaker 3

In the 3rd quarter, the total CVG revenue increased steady by 2.8% over year over year, mobile service revenue growth by 6.8% on year prepared by stable 5 gs migration and the increase of the postpaid subscription numbers. In particular, international roaming revenue continue to recover and brought in contribution. Fixed line service revenue decreased 0.7% due to the voice decline. And while fixed broadband revenue growth by 2.7% year over year, the sense to effective promotion. In addition, by the end of the 3 by end of the third quarter, popular iPhone 16 series and demonstrated 20 7% increase in sales of the volume compared with the light of iPhone 14 series and the CVGs and the sales revenue in the Q3 increased by the 3 year over year.

Speaker 3

Despite CPG revenues increased about 3% year over year, if the income before tax keep freight because of the higher base of the recognition of the government subsidies in the same period last year as well as the increase of the manpower and the electricity expenses and purchase the renewable energy. Slide 9 further present our consumer business to the high line. In the Q3, our multiple players package continued to be well received. The subscriber number of the mobile 6 broadband and Wi Fi service altogether demonstrated a 16.4% quarter over quarter growth. Home WiFi subscription numbers increased by the 13% year over year, along with the fixed broadband promotion package flow out during the quarter.

Speaker 3

In addition, our video subscription boost and delivered 5 point 8% year over year, the increase mainly due to broadcasting of the existing Asian games on both MOD and Harmony Video, which also brought in revenue injection. As Harrison said, we will continue to invest in the producing quality content and the teams up with the local content industry and the major international production and companies with the goal to strengthening our content asset, expand our video platform and prepare Taiwan and content in industry onto the global stage. Moreover, we also invest in the KK Company Technologies for innovative business models and the service to further expand the digital ecosystem. Please turn to Slide 10 for an overview of our enterprise business performance. In the 3rd quarter, EVG report 11.8% year over year decrease over its income tax before, mainly due to fixed voice decline of the enterprise cost and clients and the higher base result from the recognition of the government's subsidies at the same period of last year.

Speaker 3

Loss factor also resulted in a 4 0.4% year over year decrease of the total revenue of the EVG. In spite of ICE revenues and other revenue that decreased in the 3 and the 3rd quarter because of higher basis had a base of the recognition of the largest smart energy projects, the mobile service revenue continue increase attributable to the 5 gs upselling and the recover of the international roaming revenue. Fixed line revenue slightly decreased year over year, mainly due to the voice that declined as I mentioned above, where data communication revenue and broadband revenue continued to grow as expected. Despite above the decrease this quarter, we maintain carefully the optimistic outlook on our enterprise business performance throughout 2023. Slide 11 present our enterprise business with high end lines.

Speaker 3

In the Q3, our IDC and cyber Security business and still demonstrated robust growth. Where the total Imagining Enterprise Business revenue of our major application decreased by 6.8% year over year due to higher basis for REDEC, keep to smart energy and smart health project revenue recognition last year. In terms of the details, IDC business in particular achieved 13 0.7% growth, owing to growing a project number in the long tail and recurring revenue injection. And revenue from the cyber security also achieved 7.4% growth due to increase in the demand from our enterprise client. Furthermore, despite our cloud service, the revenue decreased on a year over year basis due to 1 10 smart health project of recognition last year.

Speaker 3

We are glad to see that our recurring revenue from the international public cloud service continued to grow strongly by about 20% with increasing and demand sometimes. As we continue to invest in developing the 5 gs private network, we acquired National Cultural Project to speed ARVR technology in immersing a performance and expand an opportunity in offshore wind power field construction and application. In addition, we continue to expand our IDC with the high quality to cater to increase the demand, which further and the drying up the recurring revenue contribution to reflect our leading ICT capability. And Slide 12 present our international business performance in the 3rd quarter. Income before tax of IDG decreased by 3.6% year over year only to the non operating expenses such as the foreign currency, the variation, the loose and the layer and the increase of utility expenses It's putting the impact IBG continuing to experience positive year over year the growth in the profit.

Speaker 3

Total revenue of the IBG increased by about 13% on year, mainly driving by the growing the emerging business, including IDC and car service from global clients and recover roaming the revenue. For the international business highlight, we are delighted to share our footprint expansion in Europe and Thailand in July. We signed MoU with the ExtraTel and Telecom from Poland. The corporation will be focused on emerging business, include 5 gs and the private networks and the smart city solutions. In September, we also signed a MOU with the Overbrook Hospital in Thailand for the cooperation of the telemedicine.

Speaker 3

We expect our service offering in the overseas market include U. S, Japan, Southeast Asia and Europe and continue to trade. Now I would like to turn the call to Vincent for our financial highlights. Thank you, President Ivan. Good afternoon, everyone.

Speaker 3

I will now provide a financial summary of our Q3 results. Let's begin with Slide 14, income statement highlights. During the Q3, total revenues increased mildly compared to same quarter last year. The main reason is growing mobile service revenues offset decreased voice revenue and the recognition of a one time government grants income from same period last year. Income from operations and net income decreased by 5.9% and 2.9% on year respectively, mainly due to an increase in electricity expenses and manpower costs.

Speaker 3

Overall, for the 1st 9 months of the year, total revenues increased by 2.6% year over year, primarily fueled by strong growth of our mobile, ICT and broadband services, which offset declining voice revenue and the recognition of a one time government grant income. Net income grew by 2.1% on year, mainly due to our growing ICT business. EPS rose by 2.1% on year to 3.69%. The growth of EBITDA remained in positive trajectory and EBITDA margin remained at about 40%. Now move on to Page 15 for balance sheet highlights.

Speaker 3

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, debt ratio decreased slightly and net debt over EBITDA remains 0. Taken together, these debt related ratios demonstrate the robustness of our balance sheet. Page 16 provides a summary of our cash flows.

Speaker 3

Our cash flows from operating activities remain robust, which increased by 5.7% on year. Capital expenditures decreased by 6.6% compared to the same period last year, of which mobile related CapEx model was reduced by 28.4%, whereas non mobile CapEx increased by 12.9%. The latter was primarily attributable to greater IDC investments. On top of that, free cash flows was up by 14.9% on 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.

Speaker 3

On Slide 17, the table presents financial results against management guidance. During the Q3, revenues slightly fell short of our expectation due to declining ICT business revenues, while net income and EPS meet our expectations, mainly driven by strong performance of mobile and broadband services. For the 1st 9 months of 2023, all revenue and profit measures beat our forecast as a result of outperforming core and emerging businesses. That concludes the overview of our Q3 financial results. Let me turn the call over to Chairman Harrison.

Speaker 2

Thank you, Vincent. On Slide 18 is our awards and ESG recognitions received in the Q3. In October, the ASET, a widely recognized business news and the research organization announced that we won the JED award, the highest level of the ESG Corporate Awards for the 3rd consecutive year. We are the only company in Taiwan to stand out from the cross industry and the cross country selections for our extraordinary ESG efforts. Moreover, we are glad to share that our efforts in ESG and the widely recognized and received by investors as we are the only telco includes as one of the top 10 constituents by Financial Times SE For Good Taiwan ESG Index.

Speaker 2

Meanwhile, we were honored as the most outstanding company in Taiwan within the communication services sector by Asian Mining, 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

Thank you, Chairman Guo. And ladies and gentlemen, we will now begin our question and answer And our first question will be Neil Anderson of HSBC. Go ahead please Neil.

Speaker 4

Thank you. Good afternoon. I have a question relating to the government subsidies in the Q3 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.

Speaker 4

I'm just trying to work out the pressure on profit from that because you also mentioned some other cost increases, electricity, etcetera. Thank you.

Speaker 3

Okay. So regarding the government grants income, so that's because of the second line subsidy. So the amount is about $400,000,000 So for this quarter, actually the last year same quarter because we recall this amount, so that will affect our income, our bottom line for this quarter because of the higher base.

Speaker 4

Thank you. And that split between the consumer and the enterprise business group, is that correct? Are you able to give any detail on the split?

Speaker 3

Yes, because the customer is mainly for the enterprise customer. So it affects heavily on the EPG performance. And this is a one time effect, yes.

Speaker 4

Right. Okay. Thank you. 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.

Speaker 4

So could you give a little bit more detail on that? What's happening there? Are people moving to IT based services or businesses, I should say, moving to IT based services and that's resulting in lower revenue?

Speaker 3

So basically, during the pandemic period, so the people stay home, so they use more voice call to connect with their relatives or their customers in the post pandemic period. So people return to work and they are out of their home And so they use more on the wireless on the broadband. Yes. So in the during the pandemic period, so at that time, the voice revenue actually is still declining, but the rate actually is lower. It's about like 4%, 5%.

Speaker 3

But now in the post pandemic, actually the declining rate is greater. So revenue and also our income, yes.

Speaker 4

Got it. Thank you. Perhaps just finally on the deal with the Polish operator, I think Exotel. Is that to support Taiwanese businesses in Europe? Could you give a little bit more detail about how large or the geographic scope of that business?

Speaker 4

Is it Poland specifically or is that when you're aiming to service this business more broadly?

Speaker 3

Okay. So we are still in talks with our counterpart, our partners. We may collaborate in various areas. Yes, it's not only in the ICT or maybe extend to other areas. And we don't give out of the possibility to extending the collaborations to other regional partners in Europe.

Speaker 3

We will keep you posted once we have more details and when the deal is more confirmed.

Speaker 4

Understood. Thanks very much for your help. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Thank you. If there's no further questions at the moment, then I'll hand the call over to the management team to take the questions from the webcast page line. Thank you.

Speaker 1

Okay. Now we see a question from the webcast. It's about the Zhonghua's light is up light developments of their low earth orbit satellite services? And is there any cooperation playing with specific operator? Thank you.

Speaker 2

Thank you for the website questions. The deployment of low air base satellites primarily complements ground communication networks, aiming to expand overall communication network coverage and enhance network resilience. We adopt an open approach, actively exploring cooperation opportunities with multiple international low orbit satellite operators and we're willing to participate in domestic proof of concept projects. However, due to non disclosure agreement, specific details of the collaboration cannot be disclosed at this moment. We have obtained licenses for Geo Synchronized orbit satellites this year.

Speaker 2

1 for 1,000,000 Earth orbit and one for low Earth orbit. In addition to ongoing negotiations with satellite system operators, we are actively preparing for applying commercial frequency license, network setup and etcetera. In accordance with regulations, our goal is to introduce commercial services for low earth orbit satellites in Taiwan as soon as possible. For OneWeb, we have NDA. There is not much to share for now.

Speaker 2

We will do announcements as the agreement is finalized.

Operator

Ladies and gentlemen, we are now in question and answer Thank you. Thank

Speaker 2

you.

Operator

And on the call, we have the next question is from Rajesh Banjwani, JPMorgan. Go ahead please.

Speaker 5

Hi, thank you for this opportunity to ask this question. I think you when Neil asked this question, I think you answered it, but I couldn't properly get the figures. So can you the government subsidies project, because of which the revenues were lowered this quarter versus last quarter, can you just repeat how much was the amount impact on both revenues and operating profit because of that?

Speaker 3

Yes. The amount is 0.4 $1,000,000,000 and it's about $400,000,000

Speaker 5

Okay. And this is a revenue impact?

Speaker 3

Yes. Okay. Basically, it's a subsidy. So basically, the revenue is mostly the owner profit.

Speaker 5

Okay, got it. Thanks. And the second question is in general like there is further consolidation going on in the industry. But do you expect that your competitors will become relatively stronger going forward as they add to more base stations, more spectrum. Are you concerned about that going forward?

Speaker 2

We recognize NCC's conditional approval of the mergers among our peers as the resulting change is expecting to be positive to the overall mobile market development in Taiwan. We welcome the regulators' decision to require our peers to dispose the excess bandwidth acquired with the mergers, which uphold fair market competition and in line with the original policies and the rules made during the course of the spectrum auction. Our goal and the position not only to shape ourselves as the enablers to form and expand digital ecosystem, but also to expand overall value for customers, shareholders in the ecosystem and us. For example, to upgrade migrate our customers' services to higher speed bandwidth services. And as mentioned as I mentioned earlier, we have the most base stations nationwide in Taiwan.

Speaker 2

So we have confidence to have to lead in the Taiwan's telecom industry. Yes.

Speaker 3

So if I may add, so let me provide some financial numbers to show we are quite confident that we will still remain our lead in the post merger markets. If we look at the mobile markets, right. So for the mobile service revenue, our annual growth is around 6% to 7% in the past 9 months. But if you look at our peers, so their gross revenue their gross rate is about 3% to 5%. So we are so it kind of shows our strategy is quite correct.

Speaker 3

So that we can we meant to acquire clients and also we can grow our mobile service revenues and for our broadband services. So if you look at after we draw out this speed upgrade promotion, so our broadband service revenue also maintain a very healthy growth trajectory. So for the year, so our broadband service revenue, the growth rate is about 2% to 3%. And actually our the subscriber has been increasing. And if you look at our ICT business, so for example, our emerging application services, so if you look at the IDC, cybersecurity and also have been doing very well also for the 5 gs network, the AIoT and for the and other emerging application, they have been done very well.

Speaker 3

And most importantly, if we look at the ICT profit margin, actually it has been steady goes up. So we think these are the good plan. And looking forward, because we see the market has turned positive and the medical condition is getting better and better. And we also know that digital demand has been growing dramatically. So we believe our ICT business has a good potential to grow.

Speaker 3

Yes, this is what we see. And because we have a very good network and we provide a very good quality to customers in a consistent manner. So we are quite confident that our customers will stay with us and actually found a churn rate. We are the lowest among our peers and is as low as 0.4%. And we are quite comfortable about this number and we believe we can further improve it.

Speaker 3

And we also have a research lab with a team of 1,000 staff engineers, they actually provide excellent research support. So that's why we can as I just mentioned before, that's why we can support our expansion in our ICT business because we can focus on high value added application services. So that's the supplementary information provided from me.

Speaker 5

That is very helpful. Can I ask one more question on your overseas foray, you're doing this in Poland? Now will this focus primarily be on ICT and Enterprise Services? Or would you also look at investing in the networks? And would you be open to taking stakes in telcos outside Taiwan?

Speaker 3

So basically, for now, we as we just mentioned, we collaborate with our Polish partner in various aspects. So ICT enterprise are the main business collaboration we are talking about now. And we may collaborate in other dimensions. But for details, we will reveal as soon as the things is getting clear.

Speaker 5

Thank you very much.

Speaker 3

Thank you.

Operator

Thank you.

Speaker 1

Okay. Now we have 3 questions.

Operator

Yes.

Speaker 1

Now we have 3 questions from the webcast. The first is, will BBG revenue decline again year over year decline again in the 4th quarter?

Speaker 3

So for the EP2 revenue, basically it's affected by the decline of the voice revenue. Because in the post pandemic period, the people's behavior and the customer behavior has changed back to normal. So they use their voice services. And the other key reason is the one time government grants income. So as I mentioned, because last year during the same period, we recorded $400,000,000 in revenue, also profit.

Speaker 3

So that heavily affects our revenue and our bottom line. And on top of that, also the electricity expense because at the early this year because there's electricity, there's a greater rate in electricity. So that also affect our income. So these are pretty the reasons that mainly affect the revenues and the income in the EPG segment. But as I just mentioned before, for in terms of the business outlook and turn over the taking we have.

Speaker 3

So basically, we are still very confident that the EPG performance will perform in line with our expectation.

Operator

Thank you.

Speaker 1

Okay. The second question is what is the 5 gs penetration rate?

Speaker 3

So currently for the 5 gs subscribers, so now it's over 3,000,000 subscribers. And actually the growth rate has been quite a steady.

Speaker 1

The next question is, is there a 5 gs penetration target for this year?

Speaker 3

So actually for the 5 gs penetration, as I just mentioned, actually, the growth rate is quite steady and we are quite comfortable with the number. And in terms of the 5 gs, the migration uplift is over 40%. So we think the growth pattern is good, it's healthy and that's what we are care about and that is our expectation.

Operator

Ladies and gentlemen, we are now in question and answer

Speaker 1

Now we have another question from the webcast. The question is that what percentage of EVG revenue is

Speaker 2

from voice?

Speaker 3

For the voice revenue, it accounts for about 20% of the revenues in the EPG performance of the fixed voice fixed line. For the fixed line revenue, for the voice, it accounts for 20% in

Operator

Okay. If there are no further questions at this point, I'll turn back turn the call over back to the Chairman, Guo. Thank you.

Speaker 2

Thank you for your participation. Goodbye.

Operator

Thank you, Chairman Guo. Ladies and gentlemen, we thank you for your participation in Zhonghua Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht.com.cw/ir under the IR calendar section. You may now disconnect.

Operator

Thank you and good

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